Reading The Dow v. Gold Ratio

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We drew upon analyst Russell Napier’s 2006 book Anatomy of the Bear in preparing our 2011 report on whether the bear market was nearing an end. Not exactly beach reading… but he does a masterly job pinpointing the factors at play at those moments when secular bear markets end… and secular bulls begin.

The bear market cycles identified by Napier don’t line up in lock step with our “fearsome foursome” chart, but after the crash of 1929, they line up almost perfectly. The inflection points Napier describes — when bear turns to bull — are in 1921, 1932, 1949 and 1982. And based on those previous market cycles, Napier’s book projected the next turn would come in 2014 — next year. (Which lines up with the 14½-year average for secular bear markets.)

But oh, what a wild ride we’d be in for between now and then. In a November 2012 presentation, Napier did not project a date… but he did say for the market to reach valuation levels equal to those earlier turning points, the S&P 500 index — currently above 1,500 — would crash to 450.

We beg to differ. Aside from the recurring pattern of lows smack in the middle of a secular bear — i.e., 1974 — we’ll cite Napier’s most compelling evidence. It’s the q ratio, or “Tobin’s q.”

This number is the brainchild of Nobel laureate James Tobin: Take the total market value of a company, then divide it by the replacement value of its assets (in other words, how much you’d pay to build the company from scratch).

You can apply the q ratio to a company or the entire stock market. Here’s our 2011 chart, updated to the present courtesy of Doug Short at Advisor Perspectives:

In every previous bear market cycle, the q ratio hit roughly 0.30 at each of Napier’s bear market turning points. Napier is convinced the next turning point will coincide with a similar reading.

We’re struck by the stratospheric reading the q ratio reached at the end of the 1982-2000 bull market — far, far higher than previous tops during the 20th century. We think it’s no accident. We think it’s the consequence of Alan Greenspan’s tenure at the Fed and his habit of loosening the monetary spigots at even the faintest hint of a crisis…

  • The 1987 crash
  • Saddam Hussein’s invasion of Kuwait in 1990
  • The 1991 recession
  • The 1994 “Tequila crisis,” when Mexico devalued the peso
  • The 1997 Asian crisis
  • Russia’s default in 1998
  • The Y2K scare in 1999

Couple that with all the money printing Greenspan and Ben Bernanke have done since 2000… and we suggest the q ratio might be moving up in a new long-term channel.

So what does that mean for the Dow, and gold and the ratio?

As we’ve written, we think the bottom is in. The level of 6,547 set four years ago this month will never be revisited. Beyond that, it becomes much harder to say. And once again, the Fed is to blame: Mr. Ritholtz says the Fed’s policies since the Panic of 2008 are a “wild card.”

Zero interest rate policy and quantitative easing “make it difficult to think of most gains as completely organic,” he says. “It also has made any comparisons to prior secular bull markets more challenging, as it introduces another variable.

“Under ordinary end-of-secular-bear market conditions,” he goes on, “I would like to see P/E ratios even lower and stocks even more hated/ignored. The Fed has disrupted those metrics, and that makes seeing the end of the secular bear all the more challenging.

“If you want a more specific forecast date for when I think it will end, my best guess is sometime between next Tuesday and 2017.”

We’ll stick our necks out a bit more in light of the Dow’s performance during previous secular bears, even as we acknowledge Barry’s caveat that we have “a decidedly small sample set” from the past century.

We reprise a chart of the bears and the bulls we published yesterday. In each of the last two secular bears, the Dow has a ceiling. We’re bumping up against the ceiling right now.

Look for a 20-25% downdraft sometime between next Tuesday and 2017. We have every expectation that the boomers who got sucked into stocks in the late ’90s… and again around 2004-05… only to get kicked in the teeth both times… and who are only now re-entering the market… will get kicked one last time.

That will knock the Dow to below 11,000… which at a 2:1 Dow-gold ratio, means gold jumps to $5,500.

Source: http://dailyreckoning.com/reading-the-dow-v-gold-ratio-part-ii/

What is Hyperinflationary Depression & Is It Possible?

Think Zimbabwe a moment. This is the most recent example of a hyperinflationary depression. Basically in Zimbabwe the black nationalists ejected the white farmers and replaced them with locals who could not farm, crashed the economy and started printing money. Hey presto! Rampant hyperinflation and a very depressed economy.

The problem with printing money to solve economic problems is that once started it is very hard to stop. It is always easier to print more than deal with underlying issues such as over-spending and a government-dominated economy. Democratic politicians like turkeys do not usually vote for Thanksgiving.

Fed Minutes

You could see the official concern mounting in the last minutes from the Federal Reserve’s main committee. The Fed is fully aware of the dangers of keeping interest rates too low for too long and printing money ad infinitum. But it only recently set a target of 6.5% unemployment before it will rescind QE money printing, is that now in doubt?

Money printing is also highly contagious. It sets off competitive devaluation and invites the same policy action by other central banks who can justify their policy by reference to their peers. Besides so many countries also have the humungous debts that money printing is designed to cure by the supposedly painless process of robbing savers through inflation.

Take Japan. Its new government is copying the Fed with gusto, just as the Japanese once copied American automobiles until they overtook them. Actually the risk is very similar, namely that the Japanese version of QE succeeds in damaging the US economy, this time through a lower yen and cheaper Japanese imports.

Could the Fed take away the punch bowl of QE while the Bank of Japan is liberally welcoming guests? And Japan is hardly alone. The Bank of England QE program is reckoned to have been the largest per capita of any nation. The European Central Bank is committed to bond buying to support the national debts of the growing list of struggling euro-zone members.

Odd Man Out?

Who is not printing money? We almost suggested the Gulf States but then all bar Kuwait have dollar-linked currencies so that is not true. You are left scratching around the global periphery and looking at countries like Norway and Sweden or perhaps Russia and sundry smaller Asian states.

But it is true that we have nothing like the Zimbabwe paradigm so far. Another earlier example was the Weimar Republic in the early 20s in Germany when war reparation debts were paid with paper. Could things get so far out of kilter this time?

You might be forgiven some skepticism. However, the Fed is taking a big risk in global bond markets. It cannot carry on buying its own paper forever. If the bond market crashes – and that will happen when inflation rises so high that all the remaining bond holders cash out – then how can the government finance itself except with the printing press?

Currency Devaluation

Money in that case quickly loses its value. The dollar has lost half its value against a basket of gold and silver over the past five years, so this is already happening. It is not a question of whether it might happen, it already has already started.

Can this process accelerate to the point where money loses most of its value, the credit system crashes and business activity slumps? That unfortunately is the destination to which present central bank polices lead us.

Investors have few places to hide in such a scenario. Gold, silver and some real assets are the way to go. We might avoid the fate of Zimbabwe but get uncomfortably closer before things could be turned around in a great global currency reset, and in that case real assets will still be the only place to be invested.

For a more detailed look at where to invest for the best returns in this economic climate our sister monthly investment newsletter has the top tips and is available now on special offer (subscribe here).

Low Inflation Figures

We know the instant rejoinder to the hyperinflation argument: show us the inflation. And it is true that headline inflation rates have stayed stubbornly low recently. However, these figures are manipulated to look lower than they really are and have been moving up sharply over the past year, whether you look at the US, UK or Japan.

The danger is that the central banks are being overly complacent about false figures while the trend is definitely up. Pump in more and more money, as all the central bank are doing and there is only one way for this inflation to go and that is up.

Crash the financial system and you end up with money printing to infinity and hyperinflation. Zimbabwe was once a low inflation economy.

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Encanto announces closing of $7 million convertible debenture and appointment of two directors

January 14, 2013 (Source: CNW) — Encanto Potash Corp. (“Encanto” or the “Company”) (TSXV: EPO and OTCQX: ENCTF) is pleased to announce the completion of an aggregate $7 million principal amount 5% secured convertible debentures.  The principal amount of the debentures are convertible in whole or in part at the option of the subscribers into common shares of the Company at a price of $0.25 per common share until January 14, 2015.

Provided the weighted average trading price of Encanto’s common shares are in excess of $0.50 for 20 consecutive days, the Company may prepay the debentures in whole or in part prior to the maturity date by providing 60 days written notice to the subscribers.  A finders’ fee of $300,000 was paid in connection with the financing.   The Company intends to use the proceeds to complete the Pre-Feasibility Study on the Muskowekwan First Nation property (“PFS”) in January 2013, initiate a Bankable Feasibility Study (“BFS”) and provide general working capital for the Company.  The securities issued in connection with this offering are subject to a 4-month “hold period” as prescribed by the TSX Venture Exchange and applicable securities laws expiring May 15, 2013.

The Company announces the appointment of Mr. Hamad Al-Wazzan and Mr. Aref Kanafani to the Board of Encanto.

Hamad Al-Wazzan is the Chairman and Managing Director of Arabian Motors Group and the Al-Wazzan Group of Companies headquartered in Kuwait. A 1979 graduate of Kuwait University, Mr. Al-Wazzan and his partners have a proven track record in the development of a variety of construction, petrochemical and natural resource projects inEurope and the Middle East. More recently, Mr. Al-Wazzan has focused his attention on acquisitions in the North American mining sector.  Mr. Al-Wazzan participated in $5 million of the offering and has invested an aggregate of$7.5 million in Encanto convertible debentures.

Aref Kanafani is a resident of Montreal and a graduate of McGill University. He received his Masters of Business Administration degree from Oxford University, England. For the past 7 years Mr. Kanafani has acted as the Senior Principal Advisor to the Al-Wazzan Group of Companies.  Mr. Kanafani’s career has been concentrated on strategic acquisitions and investments in petrochemical, infrastructure construction and natural resource projects.

About Encanto:

Encanto Potash Corp. is a TSX Venture Exchange listed and OTCQX traded Canadian resource company engaged in the development of potash properties in the Province of Saskatchewan, Canada, the largest producing potash region in the world. Through the joint venture agreement with Muskowekwan Resources Ltd. on our flagship property, Encanto has been successful in adding a 3.5 fold increase to the project land package, which now totals approximately 58,300 acres. A Preliminary Economic Assessment (PEA), based solely on the Home Reserve Lands (15,500 acres), was released in August of 2011 and an updated NI 43-101 report describing the increase to the compliant resource estimate was filed on May 10, 2012.

Encanto’s Muskowekwan First Nation property has a current NI 43-101 resource estimate dated May 9, 2012 titled “2012 Potash Resource Assessment for the Muskowekwan First Nations Home Reserve Project South Eastern Saskatchewan, Canada” containing Measured and Indicated resources of 130.7MMt grading 29.6% KCl or 18.7% K2O and Inferred resources of 234.7MMt grading 28.3% KCl or 17.9% K2O.

The Company has a 100% interest in two additional potash properties in Saskatchewan: the 55,000 acre Ochapowace/Chacachas property and the 91,550 acre Spar property.

The technical content of this news release has been reviewed by Ross Moulton, Vice-President of Exploration for Encanto, a qualified person as defined by NI 43-101.

For additional information about Encanto Potash Corp., please visit the Company’s website at www.encantopotash.com or review the Company’s documents filed on www.sedar.com.

ON BEHALF OF THE BOARD OF DIRECTORS

“James Walchuck”

Per: _________________
James Walchuck
President and CEO

NEITHER TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN THE POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

THE FOREGOING INFORMATION MAY CONTAIN FORWARD-LOOKING INFORMATION RELATING TO THE FUTURE PERFORMANCE OF THE COMPANY. FORWARD LOOKING INFORMATION IS SUBJECT TO A NUMBER OF KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD LOOKING STATEMENTS. SUCH RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THE ACTUAL RESULTS OF EXPLORATION ACTIVITIES, CHANGES IN WORLD COMMODITY MARKETS OR EQUITY MARKETS, THE RISKS OF THE MINING INDUSTRY INCLUDING, WITHOUT LIMITATION, THOSE ASSOCIATED WITH THE ENVIRONMENT, DELAYS IN OBTAINING GOVERNMENTAL APPROVALS, PERMITS OR FINANCING OR IN THE COMPLETION OF DEVELOPMENT OR CONSTRUCTION ACTIVITIES, TITLE DISPUTES, CHANGE IN GOVERNMENT AND CHANGES TO REGULATIONS AFFECTING THE MINING INDUSTRY, AND OTHER RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY’S FILINGS WITH THE CANADIAN SECURITIES ADMINISTRATORS (AVAILABLE AT WWW.SEDAR.COM). FORWARD-LOOKING STATEMENTS ARE MADE BASED ON VARIOUS ASSUMPTIONS AND ON MANAGEMENT’S BELIEFS, ESTIMATES AND OPINIONS ON THE DATE THE STATEMENTS ARE MADE. SHOULD ONE OR MORE OF THESE RISKS AND UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING INFORMATION CONTAINED HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE FORWARD-LOOKING STATEMENTS IF THESE ASSUMPTIONS, BELIEFS, ESTIMATES AND OPINIONS OR OTHER CIRCUMSTANCES SHOULD CHANGE, EXCEPT AS REQUIRED BY APPLICABLE LAW.

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