Vancouver Investment Advisor Ritch Wigham

A Quote From John Stephenson

John Stephenson is “Portfolio Manager” for First Asset funds.

When someone says it all in a very short form, I will always pay attention. This is what John said recently on his outlook for Canadian markets:

“As the world begins to grow, a bull market in Canadian equities is about to wash up on our shores. Banks, high-technology companies and our much-maligned resource sector will move sharply higher as global growth resumes, led NOT by North America, but rather by Asia. While this growth will occur in fits and starts, the long term trend is one of higher growth and greater prosperity for Canadian investors”

I suggest that for all those who have sat on the sidelines for a very long time, now would be a very good time to give us a call and see just where some of these very exciting Canadian opportunities’ are going to “GROW” from.

Talk to you soon

Ritch Wigham

Research Capital Corporation (RCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-RCC website please understand that it is independent from RCC and that RCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by RCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Research Capital Corporation (“RCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor RCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to RCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

The Great Inflation!!

By Ritch Wigham

In the last piece I wrote on the gold bear argument I used the term “The Great Inflation”.” What the heck does that mean”, I was asked by a friend.

Let me try and explain:

Back in the old days of the late 1970′s and early 1980′s interest rates were taken into the stratosphere and reached into the high teen’s and low twenties for borrowers in North America and Europe. It wasn’t pleasant. They reached these levels because the world was caught in a spiral of ever increasing costs directly related to ever increasing wage pressures. If it costs me more to feed my family, you must pay me more and therefore it costs more now to produce the product that my company sells. This nasty circle created a time when everyone went on strike for a “fair” living wage. It is when “cost of living” clauses were introduced into almost everything. Consequently,” The Great Inflation” became the economy’s greatest test.

In Canada wage and price controls were tried for a period but ultimately it was the use of interest rates to sky-rocket that was the mechanism that brought inflation back into check. This of course shut down the economy and a recession ensued that can be argued lasted until the great expansion of the nineties. Productivity was crushed and inflation finally receded.

See the following report. (opens a .pdf)

If you look at the charts from the link above you will see a very close correlation from 1980 onward between the CPI (consumer price index) and the bond rates in the U.S. The interest rates were how the Federal Reserve and the Bank of Canada here in Canada were able to finally get inflation in check. At different times the economy suffered but it was realized (or at least believed) that short term interest pain was much better than longer term price pressures that were more economically deleterious. So the balance between price and interest rates has dictated what has happened since roughly 1980. So far that balancing act has been relatively successful with the central banks world wide collectively patting them selves on the back for their collective interest rate policy.

Gold and the present

Sooooo, this is why the gold bugs are saying that gold prices are going to the MOON. The theory is that the central banks will no longer be able to control inflation through monetary policy (interest rates) without throwing the entire world into a deflationary recession. Raise interest rates, stop the economy or allow rates to stay low and allow inflation to rear its ugly head and recreate the wage/price/production cycle of the 80′s but on steroids. What has been left out of all of this is the effect that these rates have on the currency markets.

Normally low rates happen when your currency is strong and getting stronger. Everybody else is “buying” your currency and consequently rates on your financial instruments decline. Hence lower rates. But if inflation is causing your currency to “cheapen” or decline, so you have to raise interest rates to support your currency and make yourself more attractive to foreign investors. i.e. Give them a better rate of return on your financial instruments (T-bills, Bonds, Corporate paper)

Well the problem has been that we have effectively no interest rates on anybody’s financial instruments and the currencies of the world (in general) have been appreciating against the U.S. dollar anyway. So the price of gold has gone up, and so have most other commodities relative to the U.S. unit since most world commodities are priced in U.S. dollars. The problem that the gold bugs have is that inflation may seem to be happening in the U.S. but it is not happening in everybody else’s terms.

The really big question is how long this balancing act can continue were the currency market in effect is enough of a proxy to keep inflation in check.

The simple answer is as long as money continues to plow into the American bond market. There is effectively no return on this money at this time, and as I have said before, coverage on U.S. bond auctions has been stunning. This means that if you are buying these bonds it must be that you think your “safe” return will be made up from an appreciating U.S. currency. And if you believe this than the appreciation in gold will come from tightness of supply and not inflation on the near term. This last week saw gold go back under $1000/ounce the stock market slightly decline, and the U.S. dollar to appreciate against most currencies. Sooooo,”Where is the GREAT INFLATION”?

Talk to you soon,

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Thought Du Jour

Thought Du Jour from the Globe and Mail:“If ignorance is bliss, there should be more happy people”

Attributed to: Victor Cousins

Research Capital Corporation (RCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-RCC website please understand that it is independent from RCC and that RCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by RCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Research Capital Corporation (“RCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor RCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to RCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

The Gold Bull/Bear Argument

From the desk of Ritch Wigham..

First of all, EVERYONE HAS AN OPINION. I will quickly try and give a reasoned response to a subject that can start fist fights and insults to your mother.

The first thing to remember is that gold is a commodity. So ultimately supply and demand is the first factor that you need to deal with. As we all know from being informed over and over again is that something like 80-90% of all the gold ever mined is still potentially in circulation somewhere. Either in central bank depositories or held privately by individuals for what ever reasons they may individually have. So the question is:

Is there enough gold in current supply?

I don’t believe there is. The pace of replacement coming from the ground like all other commodities is in decline. It has been in decline for some time(a number of years). New discoveries like almost everything else from sulphide nickel to copper is not being discovered at a pace that would safely cover current off take from mining sources. The few discoveries that are being made are relatively small or have inherent difficulties in the processes needed to liberate the gold from the other elements that are there. For example, most of the Alaskan gold in large deposits has expensive processing or climate problems. Heap leaching as a source works in Nevada because it is hot and very dry; it doesn’t work as well in Alaska on lower grades because it is colder and much wetter. This is simplistic, but I am just trying to make an illustration. In essence new discoveries in safe political places are becoming more and more problematic. So if demand only keeps pace with current levels the price should by nature drift higher all on its own. So supply is a problem.

What about inflation?

What about it. There is none and there is not the prospect of any real inflationary pressure in the near term. Sorry “bugs”, but it just isn’t happening. The economies of the world can’t afford it. With the current decline in the flows of money that is not being lent and put into circulation, money supply is actually contracting, and not expanding, at the pace that would create inflationary pressure. This is of course contrary to what the loudest gold bugs would have you believe.

But does gold really need inflation to appreciate in price?

Here’s the kicker; “NO IT DOESN’T” It would take me quite some time to dig back into my archives for exactly where you can find this little know point, so please bear with me and accept this next statement. My understanding is that if you look historically at the price of gold it has always been more likely to appreciate in times of stress much more than during inflationary periods. That doesn’t mean just wars it means in times when one area is depreciating relative to another area. The GREAT WARS are an example of where gold had greater importance as a hedge against currency concerns if you where say French during 1940 or German after 1944. Weimar “inflation” was because of currency collapse in Germany not from price increase necessarily for goods and services. (No it is not the same thing).

We are actually in kind of a similar currency environment. The U.S. dollar isn’t collapsing as did the D-Mark, but it is drifting inexorably lower relative to just about every where else. As a currency hedge there has yet to be a better vehicle than gold to compare your currency to that which gold trades in. Namely the U.S. dollar. Even if there is some mechanism to create some other reserve currency you still have to compare,” your stuff against some one else’s stuff”. As long as that is the case(there has to be a yardstick to measure against) and consequently gold will hold that elite position.

In the time I have been in this business gold has been very high and then it has been very low. It is in assent ion again as we go forward in this new financially challenged world. Gold has always been my friend when I didn’t like the U.S. dollar. It has never been my friend when I thought it would go up for some other reason beside either supply and demand or a hedge against the policies in Washington. Or the mess the Americans have managed to inflict on the world this time around. If you were long gold during the eighties you were pulling your hair out because it just didn’t co-operate, and go up with price increases(Inflation), same for the nineties.

Am I a gold bull or a bear? Well, that depends on what I think of the “GREENBACK” over the next short period. Longer term I am definitely a bull.. Short term I would be looking to solidify profits as the U.S. dollar has probably gone down enough against the Euro, as parts of Europe appear to be coming out of recession quicker than the U.S.

Either way it isn’t because I believe that THE GREAT INFLATION is upon us.

Yours,

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

SPEAKING of NUMBERS and the MARKET

By Ritch Wigham

The other day I was talking to a client and he told me that the money market fund that was being suggested to him by another advisor (presumably a mutual fund person) was returning something like .2 or .3%. He said he worked it out and it would take something like 350 YEARS to double his money. BUT IT WAS SAFE!!! I was then talking to a good friend of long standing that also happens to be a broker, he tells me he got a report

from some fund company stating, that if you bought Canadian t-bills and rolled them at current rates that it would take 275 YEARS to double your money. Now I haven’t worked out the numbers myself but I do know that it is an egregiously long time to get any kind of return on your money. Why do I bring this up, you ask? The stock market.

Coming into September if you had listened to all the hype and crap out there you would have sold, been on the sidelines and be waiting for a correction that is not coming right now. Our statisticians and talking heads suggested and reported and slammed down everyone’s throat that September statistically is the worst month of the year! Sell my god you will buy it back cheaper in October. Wrong, wrong and wrong. I cannot predict the rest of the month from here, but my bet is that if there is this long awaited correction it isn’t yet and won’t happen this month. Why do I say this? Read paragraph one again please.

To everyone’s great surprise and the relief (can you hear the collective exhale) of the U.S. government. Bond auctions in the U.S. have had significantly higher coverage than one would have expected with the un-relenting supply of paper from the U.S. treasury.

Simply put “If you print it, we will buy it”. So far the coverage on 3 to 30 year bonds being auctioned every week has been exceptional. Two or even three times coverage for every issue. What this means is that the Federal Reserve doesn’t have to raise rates to attract the buyers needed to fund the U.S. budget deficit. The world is willing to fund these short falls with almost no return on its investment. Why???

1.Fear. Economic uncertainty. The U.S. is still the safe haven for the world.

2.The weak currency.

3.A bet on the U.S. recovery.(technically a currency bet)

4.A place to park money that is safe until you want to deploy it elsewhere

What all of this really means is that we haven’t gotten the huge flood of money into the stock market, that is out there, yet, but we get enough all of the time to keep the whole thing moving forward every time there seems to be enough weakness to offer a buying opportunity.

As I have said before and will re-iterate now.

“Markets like low interest rates and low bond returns. Money needs to make money or you loose over time and duration, and the only place to do this consistently is the stock or commodities markets.”

It would appear that the storehouse of funds is growing in U.S. treasuries. If it continues to be deployed quietly over time as it has been for the last number of months,

Any correction should be bought because, it will be, by the population still on the sidelines.

If it takes literally generations to make a return on your safe money, that money will find a way to make itself a higher return than inflation. Real estate, stocks, gold (commodities) pick your poison, but it will happen.

Yours,

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Consumers in the U.S Recovering?

This was in today’s globe. It is coincidental that it covers the Consumer in the states “NOT” leading the recovery. I would like to emphasize if I could that I wrote this last piece just before this Globe published the same thing in essence that I said on Saturday morning.

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Numbers aren’t always what you think!

The other day I got a call from a friend who is also a broker of long standing (20+ years), he asked me to talk to a young fellow who he felt would be good, and should be encouraged to be a broker. Being that we have been friends for many, many, years I relented and said sure “have him give me a call”. It was an education for me.

I don’t know what it was for this guy in his twenties (with a good level of education by the way) but I know that he thinks differently today than he did on Tuesday morning.My re-education revolves around the revelation that the thirst to parse the market into small levels of minutia is prevalent more and more with the aging of the investing population. It took me probably 10 “who cares” to this fellows barrage of questions about every silly number that comes out every day from varying government departments. Now don’t get me wrong I am a bit of a junkie myself for the vast array of economic indicators that we are inundated with, but I learned a long time ago that you must take most numbers in context and not necessarily what you think they mean on face value. This is a theme not dissimilar to my little continuing rant about the financial news networks need to shock and awe whenever they get the chance (That’s both to the bull and the bear reactions). Buy/sell/buy/sell/buy/sell, depending on what minute you are turning on and tuning in.

Apparently they have managed to convince everybody that if you don’t know what” that number means” you are missing the most important thing in the market. After talking to my little friend I now realize just how unfortunate this is.

My background is commodities and therefore it is by nature numbers and what they mean. Reserve size for a copper deposit, carryover ending stocks for grains, what an API number means to the potential for a new oil discovery. I can go on, but I think I am making my point. Not all numbers mean what they seem. Many numbers have more important numbers hidden in them, (consumer spending for example, where spending on clothes or for food or gas has an impact, and quite different meanings) many more numbers need to be looked at as to where they fit currently in the scheme of the current market environment.

My little friend got himself hung up on “consumer credit” in the U.S. WHO CARES!!

He didn’t like that. “What’s wrong with you” he says. “This number is saying there is still no consumer spending” he says,” you must care, because the U.S. economy can’t recover if the consumer isn’t spending their money” he says. “We should be selling the market” he says “WHO CARES” I says, he didn’t like it even more. So I asked him, “What sector of the economy do you think will lead the recovery and continue to strengthen the overall market place?? What will lead the stock market higher” I says?? He thought for a moment (to his credit) and says that he feels that commodities and then also the tech sector and exporters such as Caterpillar would be the best places to be. O.K. I say,” then WHO CARES about the American consumers credit. All of these areas are predicated on either continued consumption from the BRIC countries or spending by business to upgrade their competitiveness (tech spending). So what if the lower numbers for expanding credit are because the American consumer is saving more money and paying down their consumer(read credit card) debt?? I says. “and what if that means there is actually expanding capacity for Americans to take on more debt???”

He thought about that for quite a while. “So you’re saying that I am putting to much emphasis on that number, consumer credit” he says quietly. “No I says, you are however looking at it in the way you were told what it means by either your professor at school or the talking head that you just watched deliver the number on T.V”. “I’m confused” he says, “The numbers don’t always mean what you think they do” I says. “Talk to you soon, I think I got it” he says.

Could we please always remember this before we jump and make the wrong move. Short term numbers can, and do, have a very real effect on longer term investments but to react to all of them is nothing short of folly!

Yours,

Ritch