As my long-time followers know, I have the UTMOST respect for Jim Sinclair. His feel for the future is beyond logic. It is very disturbing then, to see him write the following today:
According to Dean Harry Schultz, the way to live your life involves the following:
Money in one country – Citizenship in a different country – Body in another country where neither your citizenship nor money resides.
I have resisted this sage advice from Harry for many years knowing that the day might come when his genius proves true.
That day has come.
Seriously consider this advice.
My daughter and her youngest daughter, a junior in high school, arrive on Friday afternoon. They will stay with us until the middle of next week. My son Andy, his wife and three children arrive next week, when my daughter leaves. We will have “guests” until April 3rd. It’s been like that around here since we arrived last fall – the Hotel Schectman, my wife likes to call it. It is wonderful to be able to enjoy so much quality time with the family. It takes me away from the day-to-day emotion of the markets.
Speaking of the “day-to-day” emotion of the markets, last evening Susan and I were invited to drinks and dinner with a lovely couple at their penthouse on the 18th floor at the Fontainebleau. It’s still a hotel – except for two suites that have been turned into condos. The last time Susan and I were at the Fontainebleau was in the late 1960s. We were on vacation in Miami and went there to see Aretha Franklin perform. My first shock was the cost to valet our car. It cost $36, before the tip. I don’t know if this is another example of “inflation,” or if it’s just Miami?
But getting back to my point about the day-to-day of the markets, the gentlemen we spent time with, who is very, very bright, and wealthy, retired around the same time I started in the precious metals industry, in the early 1980s. He is my age and has written several highly acclaimed books on American history and is on the staff at Yale, although he is not a history teacher. He is very pro-Obama and has 100% of his sizeable net worth in Massachusetts Municipal Bonds, yielding he says, an after-tax 4.58%. His primary reason for having all of his money in Muni Bonds is because he never worries about his capital. He sleeps very well every night and knows that short of the “end of the world,” he will get his money back. I have often said that “sleep” is the most important thing when it comes to investing. If you can’t be comfortable with your investments, what good are they?
Richard, that’s his first name, and I are polar opposites. I am fully invested in gold (and silver) and he is fully invested in dollar-based Muni bonds. He was quick to point out that gold’s “performance” is tied to the time-frame that you use to discuss it. He is correct. But then so is the “performance” of Richard’s bond portfolio. When he retired some 30-years ago, in retrospect, the perfect investment was bonds. Interest rates were sky-high and would trend down for most of the next three decades, so the value of his bonds trended up and his portfolio (he sold a successful business and had substantial funds to invest at the time) threw off enough cash flow that he could live a very comfortable life and never had to sell his bonds and, in fact, was able to re-invest the excess interest payments back into more bonds. He is the perfect example of what Richard Russell says is the road-to-riches – compounding. Russell calls compounding “the eight wonder of the world.” But that is only when it is working for you. When it goes against you it is catastrophic – as in our ballooning National Debt.
Using the Rule of 72, Richard’s portfolio has doubled twice in the last 30-years (72 divided by 4.58% compounded, doubles every 15.7 years). Starting with a large number, which he did, it leads to an impressive investment, especially because, as he pointed out, he never once had to check on the market or look at prices, and he slept well knowing nothing short of the end of the world would shake his finances. Me – I check the damn gold and silver prices every hour, every day and as you all know, it is a very bumpy ride, this gold bull market.
Well, maybe “the end of the world,” at least financially speaking, which to Richard is unthinkable, is about to pay him, and all of us a visit in the near future. When Richard pointed out that the numbers I gave him – gold’s performance for the last 11-years – looked good only because of the timeframe I chose, I could have said the same thing to him about his bond portfolio (though I was too polite to do so). But I fear (for Richard) that the cycle is about to turn against his portfolio, maybe not enough to devastate him, but certainly to cut deeply into the real value of his savings. If interest rates are near zero and really can’t go any lower, then they can only go higher and that is where I am certain we are headed. If interest rates, driven by inflation, ever return to the level they were at in the early 80s, the “value” of his bonds will be cut to shreds. And his ability to live comfortably off of the interest will change his “sleeping patterns” as he watches his wealth implode. We don’t even want to think about what double-digit interest rates would do to the real estate market, the stock market, the bond market and the economy!
At the very time that Richard invested his substantial net worth into Muni Bonds, I was starting a new career in the precious metals industry and didn’t have a buck to my name. Although I was successful from day one in my industry, I still had to fight the head winds of the BEAR market in gold and silver that lasted from the time I started selling and accumulating gold and silver, until things changed in 2001. Richard had a 20-year head start on me. Actually he was astute enough to realize that and said to me, “I have one advantage over you, and you may have several over me, but I had 30-years of compounding that you did not have.”
True enough, but it took Richard 30-years to double his portfolio and for me, gold is up five and a half times and silver even more since I started investing all of my income into this area 11-years ago. I have doubled my net worth since 2008. In four years, I did as well as he did in 30. Well, not exactly because his gains are after tax and mine are pre-tax, so I have to go back to 2006 to level the “net” gains playing field.
So here we are, Richard and David. Each of us is invested fully in a totally opposite asset class. Both of us are happy with the performance of our portfolio (for now). Which one of us is right? Ah, that is the question! It depends on the Time Frame. Every asset class has its “day in the sun.” Starting in the 80s, after the end of the last gold bull market, and at the height of interest rates, bonds were the perfect choice. Richard not only bought himself “sleep,” he invested in the perfect asset class, at the right time. But starting in 2001, when I threw all caution to the wind and invested all of my money and income into gold and silver, interest rates were just starting to come down and a new bull market was coming to life – the gold bull market number 2, last seen in the 1970s.
If there is a “bubble” to avoid now, in 2012, it is, in my opinion, the bond market. And conversely, gold is still in the relatively early stages (financially speaking) of its bull market. We are ships crossing in the night, Richard and I, each going in exactly opposite directions. Richard better hope – no, we all better hope that a form of hyper-inflation, aka Argentina in1992, or worse, does not pay us a visit. But I believe there is a very good chance that that is exactly where we are headed. If Jim Sinclair and Martin Armstrong and Bob Chapman are to be believed, the dollar’s days as the world’s Reserve Currency are coming to an end. When that happens, the inflation and rising interest rate environment that I am referring to will be here with a vengeance.
Funny thing is, I sleep very well at night with my portfolio totally invested in gold and silver and Richard still sleeps like a baby with his bonds. One of will be terribly wrong, over the next five years. Shouldn’t logic dictate that each of us should “hedge” our bet and buy some portfolio insurance in case we are wrong? We should, but neither of us will. One of us is going to outsmart himself.
When I told Richard about Harry Schultz’s Permanent Portfolio, which is designed to maintain its value through either inflation or deflation, he wasn’t interested. Neither am I, at least not yet, but give me another double or two in my gold and silver and I suspect I will be.
Yes, it was a very passionate and interesting evening highlighted when I asked him what he thought of Obama. Let me just say that our views on our current President are as opposite as our portfolios, and leave it at that. But, in spite of our difference of opinion on gold and the President, it was a really nice evening and we will get together again.
We did share one common interest, audio and music. Plus he and his lovely wife Ann, were wonderful hosts. Ann and Susan got along famously, and that is enough for me. Time will sort out the rest.
By the time Obama finishes his next term in office (it looks like he will be re-elected), there should be little to debate about his accomplishments or gold’s performance. The next four years will be as important as any period in my life and they will certainly be “interesting times.”
Bonds or gold? Which will it be for you? Your choice will be one of, if not the most important choice you will make. I hope you get it right.