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Wartime Portfolio Strategy: Gold is the Answer; No Need to Ask Questions

Will history repeat itself or will it be different this time? The answer is yes. I think it will be a choose-one-from-Column-A-and-choose-one-from-any-of-the-other-Columns kind of a thing. And that's because there's a good chance of prolonged attacks on American soil this time. It's happened before and I'm not counting the two World Trade Center bombings, the Federal Building in Oklahoma City bombing, large-scale fires in the west and a few other incidents of suspicious origin. So, in the time-honoured tradition of profiting from another's misery steering investments through choppy waters, we'll be taking a look how to invest when the World is at War.

But first, a few thoughts on how the next attack on US soil will occur. In Column A you've got China and Russia, both of whom have sent nuclear subs to the Pacific and Atlantic shores, into the Gulf the US shares with Mexico and BP, and up a river on the West Coast just to prove they can and can do so without being detected until they feel like being detected. By the general public, anyway. Then there are the ready-to-pounce domestic Al-Qaeda members, who have infiltrated every layer of government. I'll stop there because I'm not ready to die yet, but how about that Hezbollah guy who was caught in Mexico and deported to the US a few weeks ago. He was a US citizen. Let's face it: there are a lot of people holding grudges and you can hardly blame them. The argument that at least China wouldn't do anything to hurt the value of its US$ reserves is not all that compelling. China, as well as Russia, has entered into international trade agreements using their own and local currencies and neither, especially China, is buying new US treasuries or rolling over existing holdings. Instead, they are buying hard assets with their US$, while those dollars are still worth something. It'd be funny if they spend those $ in the US; they'll have our stuff and we'll have our dollars back.

Something I've never given much thought to, nor has anyone else it seems, is what would happen if the current US$ is replaced by something else. US citizens are captives, but what about the holders of Eurodollars, Petrodollars, Wardollars, Cocainedollars and other US$ reserves? I bet they'd be mad. I wonder if they'd bomb us. We'd do it to them. More likely they're all in on it.

Now, this came as a surprise to me, only partially because I didn't know he was still alive. Ross Perot recently pointed out that a weak US may not be able to fend off a hostile takeover. No, not that kind of takeover, he meant an armed takeover by a foreign power. He thinks the US is weak because it's stretched too thin by the wars it is already involved in and its capacity to continue to borrow is limited. This sounds like legacy thinking to me. Didn't Bernanke indicate that QE will go on for as long as necessary and he'll maintain ZIRP at least until 2015? Doesn't the Fed step in when there isn't sufficient demand at Treasury auctions, which happens most of the time? Does it matter? The spread-too-thin part could have been a problem, but, apparently, Perot doesn't know about the many thousands upon thousands of foreign troops in the US including the 20,000 Russians that showed up this past summer for joint counter-terrorism training. They could be relied on to join in help us, right? There are more foreign combatants coming in every month across the Mexican border, so they say, although I think these are unequivocally the bad guys. Of course, that depends on whose side you're on.

And no, not all materiel has been sent overseas. Through the auspices of Homeland Security and other domestic agencies, tanks, weapons and ammunition have been purchased and stockpiled. More than a billion rounds of hollow-point bullets were ordered by Homeland Security and a few other government entities that have taken on peace keeping responsibilities, such as the Social Security Administration. A picture of one peace-keeping vehicle is below.

(Hey, are those gun ports I see on the side? Cool.)

Homeland Security's New Assault Trucks

While we're on the subject, take a look at the vehicle pictured below that was purchased by some town in Florida. Guess the snowbirds will think twice about overtime parking this winter.

Homeland Security's New Assault Trucks


Sector Analysis

The prevailing investment thesis has become owning physical assets. Physical assets include precious metals, farm land and, all of a sudden, fine art. I remember Jim Rogers as among the first to say he was investing in farmland and many others have jumped on the hay wagon since. How much farmland can the average investor buy? A few acres? Sounds like the makings of a new class of REITs with all kinds of fees and expenses layered on. Unintended consequences? Worldwide starvation. Apparently, they can live with that.

The fine art limited partnerships slay me. They're probably for accredited investors, but I'm sure they'll end up as mutual funds for retail investors the same way that hedge-fund investing was made available to retail customers via expense-upon-expense and fee-upon-fee-laden Fund of Funds. Who thinks these things up? Oh, I know, the same people who thought up the rest of the crap that's destroyed the world. I can see the fine-art dudes sittin' around after golf, in silent despair over how they're going to pay next month's dues and greens fees, pontificating about the gains they have, or could have if they were able to monetize the contents of their houses.

So, not only will investors continue to be fleeced by Wall St., now you're going to be shot if you visit a Social Security office or overtime park in Florida.


Real Estate:

Some say that real estate has bottomed in a number of markets. Maybe locally, but nationally, probably not.

Trends forecaster Gerald Celente thinks so and he bought three properties in Kingston, NY. I'm guessing he doesn't think NYC will be bombed again, or, since Kingston is upwind of the city, multifamily buildings would benefit from well-heeled refugees who manage to straggle upstate with their gold.

Kyle Bass, one of the hedge fund managers who scored big betting against subprime mortgages, is now Buying subprime mortgages. I find it hard to believe owning the debt of the least creditworthy borrowers---as the world sinks into a deeper recession---is a better idea this time around than it was last time. Aren't these the people Rick Santelli famously called deadbeats during one of his rants on the trading floor? I'm not getting this unless Kyle can sell the mortgages back to the banks at prices above where he bought them, which the banks, in turn, will sell at full face value to the Fed. I always thought Bill Gross had an arrangement like that in the early days of the current crisis, but no longer, if he ever did. He's buying gold these days. Kyle has a lot of gold too and a 1,000 acre fortress ranch, both of which he's had for some time.

I could be wrong, however, and they could be on to something. According to the Commerce Department, new-housing starts surged 15% MoM and 35% YoY in August 2012.

Civilian Employment-Population Ratio

Whoops, that's employment. I meant this one:

Housing Starts: Total HOUSTNSA

If that isn't a surge, I don't know what is. New-home starts are almost---not quite, but almost---at levels of the late 1950s. Wartime economies divert resources away from domestic consumption, especially housing starts. With war on US soil, some housing stock will be destroyed and then need to be replaced. Or maybe not. According to Zillow, there are still 15 million houses in the shadow inventory. Not all unintended consequences are negative.

NAR Total Existing Home Sales, US

I acknowledge this is an impressive uptick in existing-home sales; however, I seem to remember something like 50% of existing-home sales in the past year or more had impaired mortgages. Further, foreclosed houses are being pooled and sold to investors. So, yes, a lot of houses are selling, but not "regular" houses at "regular" prices. A friend in commercial real estate says there are a lot of buyers looking for yield and investing in multi-family properties. Take a look at that employment chart again; what could possibly go wrong.


Incredible, Inedible Precious Metals:

OK, I've mentioned it twice now: gold. In its favour, gold doesn't weigh much. Yes, I know an ounce of gold weighs the same as an ounce of silver, but the same dollar amount comes to a lot less weight in gold compared with silver. This makes gold one of the few so-called hard assets that those with the foresight to take possession can easily carry to their bug-out locations, or Gerald Celente's house. Something to keep in mind if you think you'll be taking a long walk with your PMs.

Last week, the circle of friends---all of whom are legendary---who hang out on King World News dot com reported a reversal of the massive speculative long position in gold to a massive short position. They warned of what would happen next. It happened on Monday with gold trading down to 1,730 intraday from close to 1,800 only a week prior. Unfortunately, the inside information full story wasn't available until Sunday when nothing could be done about it. Is it possible that the gold manipulators and the anti-gold manipulators are the same people? Buy and hold doesn't generate much in commission revenue after all.

Bill Gross, head of PIMCO with $1.3 trillion under management, in his most recent letter to investors, said that with the Fed's announced open-ended QE, "Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the "Ring of Fire." And he's buying gold. Quite the change of heart for the Bond King.

Ray Dalio, founder of Bridgewater Assoc. with $120 billion under management and one of Time Magazine's 100 Most Important People, is also buying gold.

Mr. Gold, Jim Sinclair, says gold is going to and through $3,500. No matter what.

 

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