The Reflation Trade

2013 has been a year of consolidation for hard assets. Silver is down over 50% and Gold has backtracked from around $1,800 to $1,200 an ounce. The stock markets have been at near record valuations with general optimism on all the TV financial network channels. The momentum is definitely with the stock market, however the saying "be greedy when others are fearful and fearful when others are greedy" would apply aptly to both stocks and precious metals at the moment. Prices are always subjective and get distorted over time. When Gold hit record highs many said it was at the peak of its bubble rationalising on the headline price, however you need to account for price inflation over a 30 year time period. If you account for this then of course Gold was not at a record level. Also if an asset is in a bull market and fundamentals are still in play then generally the price target of the asset moves, allow me to explain. If Gold is now around $1,200 at a time when Governments are in the midst of a money printing bonanza, the price target moves further. Inflation is still here and it will only get worse which moves the end Gold price higher. Inflation will catch up for one simple reason - Interest Rates.

Talk of Interest Rates rising are just that - talk. They will only raise these to real levels when it is too late. Debt is so high that even if they went up only a few percentage points - which would still be at historically low levels - the Government and public would have to default on large parts of debt. This in turn means private banks go bankrupt requiring bailouts to stop mass financial collapse. Its a debt bubble and one the Central Banks can not stop that is now in play. They will keep rates too low for too long; this is the move Central Bankers took.

A better price metric for Gold is the Dow to Gold Ratio over the past hundred years. As the above chart shows, stocks and commodities (in this case Gold) have been counter-cyclical. This is the price metric I use to assess what value both asset classes really have. The general idea is that an once of Gold should have the same value as the Dow stock market index. Currently that ratio is high, near 15. The stock market in around the year 2000 represented a low for gold with the Dow trading around 40 times more than Gold. Since then Gold has gained back some of that ground, but over the past year has re-traced some of this.

If I didn't own Gold I would be using this as a good price indicator. Gold may go down some more - I don't know, I don't trade as there's better things I like to do with my time (markets are too efficient anyway!). Like many I invest in Value and Fundamentals with a buy and hold mentality. So if we check the fundamentals, have Governments solved their debt problem? Have trade deficits corrected? Have Interest Rates returned to real levels? Then check the value which is the Dow to Gold Ratio, explained from a historical perspective. Both Value and the Fundamentals from my view are in a good state for precious metals.

Mini cycles always occur in long term bull and bear markets, the bull and bear traps as they are known. Prices rise, people get interested, buy, then demand dries up, with professional traders liquidating from the market. Prices fall, people get less interested and stop looking. Then the next stealth phase occurs. Investors notice the value, buy back in with prices slowly rising again. At some point the parabolic stage is when everyone starts jumping into the asset. It goes on longer than expected and its at that time to bail. The recent pullback is just like the one in the mid seventies for Gold or the 1987 Stock market crash - the fundamentals were still there but it just corrects along the way, setting up the next stealth bull phase.

Gold stocks also look very undervalued, again beaten down with no one paying them any attention. I also believe Gold will go to much higher levels from its present level, a target of $5,000 to $15,000 per ounce within the next ten years. In my opinion this is actually a conservative price as the Dow currently stands at 16,000 (of course in 10 years $10,000 may not have the same real worth as $10,000 now). Silver has even more potential, but with more volatility.

If you haven't got any of your assets in precious metals now may be the time to reconsider that position. Why? Because no one else is paying them any attention. The reflation trade in the stock markets can't go on forever.

Nelson Mandela

Another great political myth. 

Crypto Currency Part 2

Its Gold 2.0

Winklevoss Twins

It's been a year that I last posted about the crypto currency known as Bitcoin, since then its been on quite a bull run. From a price of around $10 per coin to now over a $1000, more interest from the public has caused the price to continue to rise. China has taken particular interest and the recent senate hearings in the US has praised its innovation and how it could be of great use. Even Richard Branson has begun accepting it should you wish to fly into space. It's recent price rise is nothing new, its part of Bitcoins short history. The recent run has definitely overshot its medium to long term trend but it will still make a good investment moving forward. So how valuable could Bitcoin become? The quick answer, very valuable indeed. I've broken this post into sections to detail some important topics on the subject.

Its a ponzi scheme

This charge is raised all the time by many. People look at the price rise from nothing to hundreds and conclude that this must be a bubble. Now Bitcoin may collapse tomorrow with a flaw that no one has seen yet. However Bitcoin is not a bubble. Its a revolutionary concept, one that will more than justify its current price over the long term. 

Before refuting the bubble hypothesis lets first accept, for arguments sake, that it is a bubble. Now when bubbles happen the masses never call it a bubble, its the financial acute amongst us that call bubbles. Its the public, not investors, who are calling it a bubble. When was the last bubble you know of that was identified by the media and the public? The Dot Com Boom? Housing? The complete opposite was said for these genuine bubbles at the time. Your mum who has as much economic knowledge as John Prescott was calling it "a new era", "prices will rise forever", "whats a bubble?". Until your mum is saying that, it ain't a bubble. My mum still doesn't know what a Bitcoin is.

Some look at people in finance such as Peter Schiff who say it is a bubble and conclude it must be, however Peter Schiff doesn't like Bitcoin because you don't need to go to his brokerage firm to buy some. He doesn't get a cut. Its puts finance at the hands of everyone, even people in the third world. A last thing about bubbles - they always go on longer then people think, usually years after the first person called a bubble. 

We can use history as a guide. When the internet was created there was one very large problem. How are people going to find the information they want? There was no central registration system where web sites had to register with (thank god the Government didn't know about it - they probably would have tried to do this!), so search engines appeared. Now at the time in the nineties no one knew if there was a business model behind such a thing, allowing people to search the internet for free. It was also a vastly complex computer science problem to solve and some of the industries best minds set to work to solve such problems. Google was around then, but it was tiny. The big guys were DEC with AltaVista, Yahoo, AOL etc. Of course you would have made money if you bought their stocks but the real winner would have been what has become the market leader since, Google. It came from nothing and made Multi-Billionaires. Even after the Dot Com bust its value has still increased. Why? Because the internet wasn't a bubble, it really was a revolutionary concept. Its price went too fast in the short and medium term but the dollar worth of the Internet is far greater than 10 years ago.

So if we compare search engines altavista was once a leader who used centralised large computers to process the internet which was beaten out by Google's superior infrastruture which used lots of cheap computers all seemingly working as one. Their innovations such GFS and MapReduce in what would be published and create the field BigData. So will Bitcoin be the leading crypto currency in ten years? Probably not.

Alternatives to Bitcoin

There are many alternatives already appearing to challenge Bitcoin. As Bitcoins protocol and source is open anyone can now create their own currency. The value that bitcoin has over the others is its eco-system - the services, the entrepreneurs  the user-base  however that doesn't mean it will be a leader forever. Here are some "flaws" that other currencies could take advantage from.

• Relative long transaction times (10 minutes for verification)
• Hard limit of 21 million
• Proof of Work (the mining you will hear of)
• Ever expanding Block Chain public ledger

There are others, in fact there will be flaws we haven't even thought of. Remember this was the first crypto currency that was truly distributed and solved the double spend attacks that has now revolutionised finance and payments forever. But it will carry this baggage.

Transaction Times

Currently it takes around 10 minutes to confirm a transaction for it to be added to a Block in the public ledger. This is phenomenally quick compared to traditional finance, however you wouldn't want to pay for a quick cup of coffee and have to wait 10 minutes to get confirmation. Other alternatives such as Litecoin have slashed this to 2.5 minutes. Others further, Primecoin down to a minute. There is no doubt there will be further innovation in this area. Who knows what currency will come about that offers quicker times?

Hard limit of 21 million

Now the creator did this so it would be a deflationary currency and the currency does go down to around 8 decimal places, however I think he didn't account for the fact that people loose their coins and once they are gone, they are gone. If Bitcoin did make it Global then along with coins getting lost I don't think the currency will be divisible enough. A fork of the protocol would be difficult.

Proof of Work

Known as mining to many, however the coin rewards will eventually cease to be. The belief is that people will want to pay transaction fees in order to secure the network. I'm not too sure on this one. Miners are incentivised to secure the network because the current lottery system gives them some form of guaranteed payout. In the future this however may not be the case and the network could become susceptible to a 51% attack.

Ever expanding Block Chain

By all accounts the block chain is currently Gigabytes in size, however this will go to Terrabytes and beyond at an ever increasing rate. They don't have a solution to this yet. If people want to have a local wallet they are not going to want a public ledger of that size.

The alternatives of interest I have seen so far:

• LiteCoin - 2.5 minute transaction times
• PeerCoin - Proof of Stake and Proof of Work
• PrimeCoin - 1 minute transaction time

The last two are of interest. They were created by a developer called Sunny King, probably an alias like Bitcoins creator Satoshi Nakamoto, he is by all accounts another genius and a very motivated developer. PeerCoin in principle can eventually work under a proof of stake to secure its network. The has a number of advantages over Bitcoins Proof of work:

• It requires less energy - People don't have to run dedicated hardware to mine. They just hold their coins.
• A 51% attack is less likely - In order to do this someone would have to obtain half the currency. However this would cost a lot as market forces would drive the price higher (assuming over 50% of the current holders wish to sell). Then if the attacker wished to compromise the network their holding would decrease as their 51% stake would devalue. Compare this to Bitcoin; an attacker would have to get the hardware but they could re-sell this hardware, thus the costs of the attack are not as great. For a large currency the hardware costs less relative to half a global currency.

PeerCoin has been earmarked as a future savings account. It has a 2 Billion coin limit (although in practice it will never get that high) and fixed transaction costs, thus making it expensive to pay for small items, but with the proof of stake could be potentially more secure.

PrimeCoin is by the same developer, this would be used for regular payments, as the transaction times are very fast and the fees are lower.

Ultimately I can see people will hold multiple crypto currencies and will not be limited to one. They will still hold their national currencies, their credit cards and even cash. 

How High?

So how high could Bitcoins price go? They are already at $1,000 a coin, that was easy, I mean you still can't buy anything with them! What about $10,000 or $100,000 or even $1,000,000 per coin. That is not as high as you may think. Bitcoin has no barriers at all, it only requires an internet connection. More people have access to the internet then access to a bank account. The global population is 6 billion. 3 Billion people can't use conventional banking. The Global economy is worth Trillions. Bitcoin has a limit of 21 million coins. Warren Buffet can still comfortably buy every bitcoin in current existence  Thats why $1,000 is nothing. When Bitcoin becomes usable a price of $1,000,000 could become a reality. 

In the short term I'm convinced Bitcoins price will crash. It will probably go back down in the $100-$200 range killing all the recent interest and people feeling vindicated that they called the bubble (when did the masses ever call a bubble?). In between the spikes Bitcoins price has been remarkably stable for a new currency, but like all new things it has these wild swings as more interest and potential is unleashed.

Of course Bitcoin could crash tomorrow. Its experimental. Its cutting edge. No one knows for sure whats going to happen. All I know is its been one hell of a ride so far and its only going to get more interesting. Got Gold? You bet, thats got bags of history. Got Gold 2.0? It could be the one asset you buy that could change your life. Even if you don't buy, it will change all our lives for the better.

Fracking

People bemoan fossil fuels. At the same time the very same people bemoan "energy poverty", with many on low incomes paying a substantial proportion of their income towards their bills. So far the cheapest energy we have is fossil fuels. Its cheaper than wind, solar, nuclear and a number of other such alternatives and can also scale and meet our demands. We all take energy for granted. Our dishwashers, cars, TVs, computers; heat and light with a flick of the switch. Many of our fellow human beings would marvel at such convenience. From what I can see fracking is a technique that could help meet our energy needs and help alleviate energy bills for people on low incomes. Instead many want to ban it, just like we should all drive electric cars (despite how unworkable it would be in the short/medium term) or the naive belief that wind and solar can meet all our energy needs. Think again. We would all love an unlimited, clean and effortless power source but we constantly battle with the laws of thermodynamics. Its hard to generate energy. It took us a long time to perfect the techniques we have today. 

The last thing we need is destruction of human creativity. Horizontal Fracking is human creativity to meet a consumer demand for more energy with prices diverting economic resources to solve such problems for society. If companies cause grievous damage then the law should take care of them. Of course I'm all for free speech, if people wish to protest and represent an alternative viewpoint then they should be free to do so but not by infringing private property and other peoples rights. I and many others have the freedom to get lower energy bills. Blanket banning fracking would violate such rights, just like a blanket ban on smoking or driving a car would violate individual rights. Energy nurtures progress and makes all our lives more enjoyable. Lets not stifle it.

Global Poverty - We have a solution

Many people like to bad mouth free market capitalism in the West. It makes such individuals feel better about themselves. However without it as the basis for an economic system we would all live in abject poverty. It's driven progress at an increasing rate, which will get quicker during the 21st Century. Want to solve poverty? Economic freedom, not Government Planning, is the solution.

Tory Election Boom

"The panic appears to be over. Now is the time to get worried."

William Keegan, Author and Journalist

It's been over three years now since the formation of the UK Coalition Government between the Conservatives and Liberal Democrats. Austerity was supposed to be on the agenda but the reality differs, there is still budget deficits, increased spending and lots more debt. Private debt still remains at historic high levels. As all politicians always do, with an election due in less than two years its time to engineer a boom based on a policy of reckless monetary and fiscal policy. Public debts are over 1 trillion pounds, yet mainstream politics has a consensus towards further spending.

The conservatives have recently announced the "We'll help you buy a house" scheme to try and inflate the recently lagging housing market, creating the voter "feel good" factor. Monetary tightening is mentioned, as it has since the crash of '08, but words do not match the actions of our monetary overlords who continue with loose money and low interest rates. BoE recently appointed Governor Mark Carney is all for abandoning inflation targets, instead shifting the focus towards Growth, a move mirroring the priorities of the Federal Reserve. Janet Yellen has been given the the nod by another big spender Obama. Stuck within the confines of academia and Government agencies she makes a good choice to a leader who has not attempted to tackle the deficit and whose legacy will be a disaster for his successor.

The Eurozone still has too much debt, the plasters continue to hold but like any temporary measure are making the problems worse. America continues to raise the US debt ceiling as though it has validity. If they keep raising it at will then how can it be called a ceiling. Cuts from all corners of the Globe are hypothetical.

Fundamentals, as always, are key. A panic can reside but the fundamentals always come back into the picture. Golds bull market is not over, its just on its next leg, like it has been over the past decade plus with various ups and downs just like any Bull market. Governments can't defy economic reality of spending money they don't have - bond markets, currencies, commodities - will all catch up with their reckless spending. Running budget surpluses is hard work for Governments only when a party feels they require to obtain economic credibility from the electorate does a political institution follow such a path. With all parties in the UK promoting spend-onomics there will be no immediate return to that concept.

I never believed this current Government would sort the mess and they are doing what I thought they would, dodging the real issues, tinkering on the fringes with little progress to show for it. Expect more short term polices. Tackling long term issues are no good for politicians precious votes. Ironically the short term Tory boom will please Keynesian's who will proclaim our troubles are over. In reality the problems continue to compound. 

You are what you Eat

Throughout Human history starvation was always a constant threat. Now a new threat looms, the threat of obesity. People are getting fatter. Starting in the US this has now spread to become a worldwide phenomenon spreading to developing countries that have recently increased their citizens freedom. China, where millions once died from starvation due to the "wisdom" of past Socialist planners, now have the problem of expanding waistlines. Recently the UK Labour party detailed a Nanny State policy of controlling how foods are constituted in an attempt to control fat, sugar, salt and so forth. The last thing we need is more Government when they were one of the reasons we all got fat in the first place.

So how did this come about. This three part series details many factors that transpired to help make us fat.

Recently there has been a fightback by predominately libertarian minded individuals who were sceptical of what Government agencies told us to eat through their notorious food pyramid many of us would be familiar with. One such individual, Mark Sisson, is advocating that we retrace our routes to a more "primal" form of living. A lifestyle where people can reclaim their health by empowering individuals to think outside of what our overlords "the statists" tell us. There's no catch. No Ponzi scheme. This weight loss scheme is for real and the information is all freely available for anyone to implement. 

The site he runs is Primal Blueprint. A former triathlon runner, his website is full of useful information on diet and fitness. Being a former tri-athlete you would probably think there would be lots of high cardio exercise; on the contrary, its the complete opposite in fact he recommends against intense cardio as he's felt far better since he stopped. The basics behind the Blueprint are:

• Natural Fats are your friend (Olive Oil, Avocados, Meat Fat etc). Avoid man made fats.
• Avoid Wheat and processed starch (Bread, Pasta, Rice etc)
• Limit Carbohydrates to natural sources, non processed food groups.
• Have lots of Vegetables 
• Limit Fruit intake, due to high sugar content in our modern fruit
• Avoid anything pre-packaged
• For Exercise - Walking is the backbone, accompanied by the occasional sprint and lifting heavy things. No Gym membership required.

Weren't we told that Fats are bad? I thought whole wheat was good? Limit Fruit? No running on a treadmill for hours on end? It completely goes against conventional wisdom. Best of all you don't need to be a nutritional expert to understand it all, you can simply just try it and see the results.

Government and their relevant agencies have been misinforming people on nutrition for decades. Do we need the state enforcing what we should eat? After all they are the very ones who told us to eat wheat. They told us to go to the Gym. They were the ones who advocated the modern low fat craze, that has incidentally got us all fatter.

Fat became the enemy, however in reality it has been humanities friend throughout history. This came about because sugar and more recently high fructose corn syrup were too profitable for big companies so they looked for another scapegoat to blame for health risks, choosing fat. The problem with declaring a war and banishing fat is taste; specifically when you remove fat from food it tastes like cardboard and no one would want to eat it. In order to sell the food the companies turned to sugar and artificial sweeteners (which are incidentally just as bad as sugar). When you buy any low fat food you are getting high doses of carbohydrates in the form of sugars (artificial sweeteners may have zero calories but instead mess with your bodies chemical signals and trigger further hunger cravings).

Humans crave three tastes,

• Sweet
• Fat
• Salt

Mother nature gave us such a pallet in order to survive. Too much salt, as we have become accustomed to in processed food, is a bad thing however humans do need salt to live. We like fat as this is what we use for fuel (historically it was not carbohydrates) and our cells are composed of fats. The human body also needs sweet foods, in moderation and in a non processed form. Understanding this you can see why fast food is fatty, sweet and salty - they go for the whole taste pallet to get you hooked.

Many people are now questioning conventional wisdom. Why should I need to do endless pointless exercise to maintain a healthy weight? Is a Calorie a Calorie or should it be nutritional value we worry about? Why do we count calories? We don't count how many breaths we take or how often we go to the toilet. Our body just regulates these functions on its own. 

All Calories are not created equal. If two people were to live on a diets of 2000 calories a day, with one eating fresh vegetables and meats, the other just drinking Fizzy Drinks who would have the healthier diet? Calorie counting is flawed as it neglects what good food to eat and that everyone is different. Programs like Weight Watchers are generally wrong as they still try and let you believe you can eat the processed foods you want by just starving yourself and trying to suppress your bodies chemical signals. Sure you can loose weight by constantly starving yourself but its no fun and it doesn't do you any good. Many people just relapse back to bad ways and put the weight back on as they can't fight their bodies natural chemical signals. Even for the few who succeed life's too short to be miserable and constantly hungry.

If you eat the correct food your body will tell you when your full and when you need to eat. You don't need to go on some starvation plan or eat food that tastes like cardboard. Your tastes adjust. Vegetables no longer taste bland and you begin to experience the sweetness of tomatoes and peppers. You enjoy natural fats such as cream, natural oils, avocados, nuts,  fatty meats such as bacon, full fat cheese and yogurt. They keep you full and your bodies chemical signals in a correct state.

Historically we moved away from what we were genetically setup to eat caused by a number of factors that all compounded with one another. Governments, Regulators, the Food Industry, abundance, Nationalised Healthcare and most importantly us. We all eat the junk food that was been sold to us, yet all the time the correct food was always there available to us to eat. However Junk food is not as bad as you think. I highly recommend the Film FatHead.

What constitutes healthy foods are however a matter of opinion. There are some who don't eat meat. Others don't eat meat or dairy products. Others who only eat grass fed meat or free range chickens. Others don't drink tap water because they believe it to be harmful. It's all a personal opinion and can vary from individual. 

My view? To engage with the majority you can't go on some vegan rant about the dangers of tap water giving you cancer. With a message like this you will never connect with the majority. My own diet includes non grass fed meat, dairy and non organic produce and personally I feel great. I think meat is too nutrient dense to ignore and there is debate that humans do actually need it. Dairy such as butter and full fat cream tastes great on any meal and I include it as part of my diet. I have a price point so don't go organic. The key point is avoiding processed foods and eating lots of vegetables  This I believe would resonate most with people as it's not too restrictive and many could stomach such changes. That's why I like the Primal Blueprint, there's less fixed rules and more of an emphasis to eat real food.

Contrary to belief, it is very cheap to eat real foods. A 1kg of onions for 50p, a 1.5Kg of Carrots for 90p, 0.5kg Spinach for £2. Rather than pay full price for meats look out for discounts and freeze them for later consumption. What about Offal? In the past I would have turned my nose up at it, but I now think it tastes great and at only a fraction of the cost of meat yet still contains huge amounts of nutrition. 400g of livers for only 25p - if you wait for the discounts. These are just some example prices that I pay no doubt you could do better. Worried about cooking time? Don't, you will no longer need to go to the gym or run endlessly on a treadmill - lets face it who wants to do that for fun? People will blame fast food for being too cheap as a cause of their weigh issues, I'd argue real food is cheaper as illustrated above. There simply is no excuse, nutritious meals can cost pennies if you are shrewd.

Ultimately its how people want to live. If people want to eat junk food then they should be free to do so. If they like Coke then they should be allowed to drink as much as they want or can afford, with no Government tax (however this will no doubt come into force at some point). If the abundance of food was really an issue then why are the majority of millionaires not stupendously obese? In reality they generally live healthier lives than the rest of us, despite having the income to eat endlessly day and night. I enjoy occasionally eating out, takeaways, junk food, desserts (scones, clotted cream and jam are a favourite) - just not all the time. That's my choice.

Your choice is also what you want to do. Want to loose a little weight? Want to feel less depressed or less sluggish?  Give real foods a try. Its the ultimate liberation to know you will never have to worry about your weight. You won't regret it. Your personal health is the best investment you can make.