Porterian

This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Wednesday, April 12, 2006

WHAT THE WSJ DOESN'T KNOW ABOUT GOLD

Gold is the only major commodity that isn’t produced primarily to be consumed in the economy – like iron, copper, pork bellies, or oranges – but simply to be owned and admired. It is too heavy, soft and rare to have many practical uses outside of electronics and dentistry. Yet it is one of the earth’s most prized objects, valued mostly because it is considered valuable.”


  • E.S. Browning, The Wall Street Journal page A1 April 12, 2006


Did you notice the circular logic? Gold is valued because it’s valuable.

How insightful...

There’s no other way Browning and his editors at The Wall Street Journal can describe gold’s utility. They look at the metal curiously, the way a dog looks at a carrot.

Mmmnnn, they ponder.

They describe gold’s unique attributes – the things that make it perfectly suited for use as money – without acknowledging any of them. In fact, to the Journal, these attributes are weaknesses. It’s too rare they say. It's too soft they say. It isn't consumed by industry they say.

They don't mention that its softness means it can be divided easily. They forget to mention entirely that it never tarnishes, which makes it a unique store of value. And, that gold doesn’t have any industrial uses means it's also in ready supply: all the gold that's ever been mined is still on the market...at some price. It’s timeless, eternal, and isn't someone else's liability, much unlike today’s paper money.

The Journal doesn’t mention any of this; in fact, the Journal doesn’t even reference the historical role of gold in the economy (as money) at all. Not once.

Late last year I met with about a dozen of the top private equity firms in New York, Boston and D.C. I was trying to buy another, large publishing company. I needed to borrow $70 million. It's funny. I had a hard time getting a $300,000 mortgage to buy a brand-new home on a piece of water-view property in downtown Baltimore that's easily worth far more than $300,000. But private equity firms were ready to hand me $70 million, to buy a business with no earnings and little tangible assets. Go figure. Our deal fell through, by the way, as the target company's share price ran away from us. Still, I have a feeling private equity investors are going to get what that deserve from these firms...not what they expect.

Case in point: gold.

During each meeting I usually made a point of mentioning that we publish research about gold and that we consider gold to be the only real money. I’d show them a promotional letter we published three years ago about the “secret currency” – which is rare gold coins. Each time gold came up in our meetings, these highly educated extremely polished money managers couldn’t hide their smirks or stifle their guffaws. Most of them openly laughed out loud. They certainly didn’t have any investments in gold mines, gold bullion or rare gold coins.

They will. Soon. And they won’t be laughing about gold anymore.

******

Epilogue: I distributed an earlier draft of this post to a close circle of friends and business contacts. Rick Rule, who has been the leading investment banker to the resource industry for more than thirty years, replied with the following comments about private equity managers.

"Wall Street hubris leads these morons to believe that they can master or hire the expertise appropriate to a wide variety of tasks, despite a historical track record unblemished by success. The set of circumstances that make me think exposure to bullion is neccessary, economic slowdown, monetary instability, political and social corruption, will decimate the cosy, mundane world of private equity, particularly given the balance sheets of the resultant entities.The Wall Street guys are very wise to ignore the gold and gold equity markets; those markets devour the uninitiated. These same Wall Street guys will become involved, to their clients chagrin, eventually [at the top of the market]."

Friday, April 07, 2006

FRAUD OR STUPIDITY

Here’s what’s troubled me about some (not all) of the prosecutions following the great bull market of the 1990s…

When someone commits a financial crime or a civil fraud, it’s usually easy to spot. Take the former CFO of Patterson Energy. Living in Synder, Texas and working for the only big company in town made it pretty easy to spot the extra $60 million or so he embezzled from Patterson. You can also see the clear link between his criminal intent (to steal), the actions he took (creating dummy corporations) and the benefits he gained (temporarily).

Likewise, when someone commits fraud, they end up with things they had no right to – usually profits.

So… what did Bernie Ebbers end up with? Nothing, he went bankrupt. What about Ken Lay? Likewise, nothing: he sold all of his Enron stock on the way down to cover margin calls. He was wiped out financially and his reputation has been destroyed. What about Martha Stewart? If she hadn’t sold the stock when she did, it would have been worth more money later. By taking Sam Waksal’s “tip” she probably lost money, not to mention losing her freedom for six months.

Other way I like to judge the amount of Federal grandstanding in these cases is to think about what would have happened if these “criminals” hadn’t been caught. If Bernie Ebber’s WorldCom hadn’t gone out of business, the way the company handled its accounting for local line access would have never been considered a crime. AOL did essentially the same thing for years during the late 1990s – the capitalized their marketing costs. Also, it’s important to note that the company’s accounting had nothing to do with its bankruptcy. The company went broke because it paid way too much money for MCI and it couldn’t afford the corresponding debt obligations. Bernie’s decision couldn’t have been criminal because who would intentionally bankrupt their own company and go broke in the process… It doesn’t make any sense.

Obviously, some of the era’s fraudsters don’t pass the “what if they didn’t get caught” test. Take the Solamon Brothers telecom analyst, Jack Grubman, who upgraded his rating on AT&T so that his firm would get part of the IPO business on the AT&T spin-off, AT&T Wireless. Emails show pretty clearly part of the reason Jack Grumman changed his rating on the stock was so that Citigroup Chairman Sandy Weil would help get Grubman’s twin boys into a prestigious kindergarten. If Grubman had never been caught -- if the telecom bubble hadn’t burst bringing him down with it -- he still would be guilty of accepting benefits in exchange for touting an investment he knew was actually low quality. He would have still committed a fraud.

What about Ken Lay? If Enron hadn’t gone bankrupt, would he be guilty of any crimes? He is charged with defrauding investors by telling them Enron’s finances were sound and that the company’s prospects were bright. Why would he have said those things if he didn’t believe them to be true? How did these “fraudulent” statements benefit Ken Lay? They didn’t. He was being forced to liquidate his Enron holdings because of margin calls. At the very worst, Ken was trying to save his company by rallying his employees in the midst of a terrible crisis. If he had succeeded, he would have been applauded. But, because he failed…should he be convicted of fraud…?

THE TOP OF THE BOND

Last week (on April 1st) in The Wall Street Journal, Edward Chancellor suggested the U.S. sell undated zero-coupon bonds.

“How about issuing an undated zero-coupon bond? Such a bond would have several attractions. Since it pays no interest and never redeems, it would save the Federal government a packet. It would also satisfy the apparent willingness of global investors to snap up low-yield, risky paper. Last, but not least, an undated zero-coupon security would be the ultimate expression of U.S. financial hegemony.”

I’ve tried repeatedly to contact both Edward and his editors to verify that this suggestion was not an April Fool’s day gag. If it was, WSJ was unaware that it was publishing humor.

That it’s even possible to posit as a joke that the U.S. government could sell a bond that will never be repaid and that carries no coupon tells me the top is in.