Helping James Altucher Understand Gold and Economics
Wednesday, September 28, 2011 at 11:35AM In recent months a few people have forwarded James Altucher's blog to us saying it is a funny, creative read. And, they're right. It is quite creative and the man puts out interesting content like Krispy Kreme puts out heart attacks.
James AltucherIt's worth reading if you are looking for interesting ideas or creative ways of looking at things or are just plain bored. His style is charmingly self-deprecating. Most of his blogs lead off with him talking about his seemingly countless failures and how he has gone broke at least a few times in the last decade. However, after having read his blog for a while now it has become very clear why he keeps losing money. Below, we will try to explain to Altucher the basic flaws in his views on economics and investing and will try to save him from himself in the coming decade.
GOLD ISN'T AS FIAT AS CURRENCY
Altucher regularly does an "Ask James" blog and twitter event where he answers people's questions. Given his investing background it is rather shocking that people would even ask him for his views in this field. Unless, of course, they were just going to do the opposite of what he recommends.
But, the man is offering free advice... so people are trying to get their money's worth.
In his most recent "Ask James", @ginger_gal asked, "With Europe about to default, high employment, gold (the ultimate fear metal) on the rise, why should anyone still be bullish?"
Altucher had a fairly lengthy and detailed response, but he started off his response on Twitter with, "Gold is just as fiat as paper. The global economy is bigger than gold. I bet on innovation and not a rock."
Wrong. So wrong. And, right off the top too!
You see, if you've followed Altucher's blog you've probably heard about many of the times he lost money including during the 2008 crash. His problem? First of all, he believes that we are living in normal times. He believes the "green shoots" and "we are in a recovery" stuff that the TV keeps shouting. Altucher seems to think we are just in a standard correction/recession and doesn't seem to be aware that the entire US dollar based financial system is collapsing.
His ignorance of this fact is shown when he says "gold is just as fiat as paper". How he can even begin to justify that statement is hard to imagine.
Here is the definition of "fiat money" according to Investopedia:
Fiat Money: Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.
How, by this or any definition of fiat money, is gold "just as fiat as paper"? Gold is certainly not declared to be legal tender by any government on earth. And if the fiat paper were backed by gold then it wouldn't need to be fiat anymore. You wouldn't have to force people to use it.
Now, to be fair with James, in any situation other than the current ongoing US dollar based financial system collapse that we are ensconced in, we'd generally agree with him.
Our position in gold right now is because it is serving the role of traditional money. It is holding its value. By saying that we are mostly invested in gold and silver bullion (30% of our current TDV portfolio) what we are saying is that we are heavily in cash at the moment. Not fiat cash. Real cash.
We love capitalism (real free-market capitalism, not US style corporatism) and we love all the innovations that technology has and will bring us. We would be thrilled to be in an environment where we felt it was safe to invest in up and coming technologies. But in an environment where all of the worlds currencies will not exist in their current form any time between 0 and 60 months from now and where the Greater Depression is a 100% certainty (whether we get hyperinflation or massive government default we will get a major depression in the western world either way) we can't justify having any of our capital invested in technology.
ALTUCHER'S DOW 20,000 PREDICTION
James Altucher also predicts the Dow will hit 20,000 within 18 months. He said that in June with the Dow at 12,000 so he is already well-offside. But we will respond to each of his 10 reasons why the Dow will go to 20,000 to show the holes in his understanding of what is going on in the markets.
1. The effects of stimulus usually lag by 6 to 18 months. Therefore, QE2 won’t help the economy until the end of 2011.
He is correct on the timing but he is dead wrong on it "helping" the economy. 'Stimulus' is just currency debasement. Sure, the Dow could go up in the coming months and years. The Dow could even go to 20,000... or, heck, 100,000. But by that time a Big Mac will cost $150. By the time the Dow hits 1,000,000, Federal Reserve Notes will be used to light fires to keep the millions of homeless warm. Just look at a chart of the Dow versus gold (that rock James can't justify owning) for the last 10 years to see how well the Dow has performed in real terms.
2. The market has been supported by the extension of the Bush tax cuts, and Mr. Obama is using the boost in the stock market to help him get re-elected.
This is typical tax slave talk. He is just repeating what the propaganda on TV tells him. If he thought with his brain he wouldn't think in these terms. Bush tax cuts? Giving a few crumbs back to the slaves while taking away in numerous other areas are not "tax cuts". He should be looking at the US Government and the Federal Reserve as massive criminal organizations that are destroying the entire economy of the US.
3. The multiplier effect of the stimulus could be up to 10 times the original $600 billion as its positive effects spread throughout the economy.
Ah, the good old multiplier effect. Again, Altucher has been brainwashed by the US school system and government into believing in this witchcraft. The "multiplier effect" is Keynesian style nonsense that has been completely debunked by Austrian economics. Frank Shostak put this myth to bed years ago (read here: The Myth of the Magic Multiplier).
4. Non-financial companies are cash rich thanks to their fear of a double dip and they can put that money to work if it never comes.
Double-dip? You still believe that nonsense, James? The US has been in a depression since 2000. It's been a highly inflationary depression and has fooled a lot of people. Look at real unemployment figures (23%) and amount of people on food stamps.
Don't listen to the government GDP numbers. GDP numbers are a fallacy. And, yes, many companies have a lot of fiat cash. A fiat cash that is devaluing, currently, at nearly 15% per year (that is the current growth of the money supply). By the time those companies and their standard trained CFOs figure out that the US dollar will soon be worthless it will be too late.
5. Companies are already starting to buy back their stocks and when supply goes down, price goes up.
We'll give you this one. But this is the only legitimate reason you've given so far as to why anyone should buy stocks. One reason isn't enough.
6. Unemployment numbers may not look very good right now, but temp worker trends are pointing to an improvement.
You believe the numbers given to you by the government on the state of their system? Poor, poor slave. Do some research James, the US Government figured out how to take all of the unemployment out of the unemployment figures years ago. Bill Clinton's group of thieves and liars made quick work of that statistic. Shadowstats.com calculates unemployment the way it used to be calculated in the 90s. Calculated the way it was then, unemployment today would be 23%.
Are temp workers showing some improvement, James? Well then, maybe everything will turn out alright!
7. If S&P profits come in just a little higher than the current consensus of $95 and you put a 20x multiple on that, you get an S&P target of 2000, which likely equates to Dow 20,000.
We are headed for total collapse of the financial system. During the last two near collapses, in the 1930s and 1970s, PE ratios hit lows in the low single digits. The only way you will see Dow 20,000 is in a state of hyperinflation.
8. Many of the large cap stocks are trading at very conservative multiples.
See #7 above.
9. The financial crisis didn’t kill innovation – at least not for Apple.
We aren't betting against innovation. But we feel the risks far outweigh the rewards in almost any investment except hard assets for the next few years. Not to mention that the US Government has all but outlawed innovation with all their rules, regulations and taxes. And, by the way, "the financial crisis" isn't over. It hasn't even really started yet. Let's see how Apple handles the next few years.
10. Major demographic changes will affect the markets over the next 25 years.
Okay, this is #10 so he can be excused for reaching a bit here. Major demographic changes HAVE affected the markets since the beginning of markets. This global population chart shows that. We hope James isn't counting on this for his Dow 20,000 call.
GOOD LUCK JAMES
James will probably get a hold of this article and feel that we are attacking him. That isn't our intention. In fact, we feel a bit sorry for him and the hundreds of millions of others who have been brainwashed and propagandized into not seeing the true economic reality.
We are hoping this will help enlighten him to some of his misconceptions about the economy and that he won't continue to go broke so much in the future because of it. Although, we submit, this could have disastrous results for his blog. If James starts writing about how he has been making fortunes on gold and gold stocks and how he's been riding around in limos and taking exotic vacations it probably won't be such a good read.
After all, if he had listened to TDV Senior Analyst, Ed Bugos, ten years ago and bought gold instead of frittering it away on numerous tech escapades he wouldn't be such a lovable ne'er-do-well today.
The October issue of The Dollar Vigilante is out on October 1st. Subscribe today to get news, information and actionable information on how to protect yourself and profit from the ongoing collapse of the fiat monetary system. In the coming issue, Ed Bugos has a near-term producing gold stock with excellent upside potential and we will have in depth information on how to easily get a 2nd passport in one of our favorite South American countries, easily and cheaply.
Reader Comments (13)
lets just hope that all the jobs don't go abrouad for the western world and everyone does not expadriate. I still cling to the beleif that it will fix itself however we may get a few defaults along the way. If you are right and the US defaults, my god I hope I have made enough money again to take your advice :)
The idea of deflation being bad is that future revenues will erode.
BUT, can you explain to me the inflation/deflation thing. Inflation is usually measured by rent prices instead of housing prices. What would happen over the past few years if you measured it by housing prices instead of rent prices. I think we would have SCARY deflation numbers. That's what worries me for now. That's what worries Middle America that is losing their homes. I don't subscribe to any school of economics. But it would be nice if there was a policy in place that would help people feel less scared about deflation so we don't get into a Japan-situation.
Go try to buy physical silver right now (today)... It's like pulling teeth with tweezers (I know because I'm waiting on a phone call to go buy 10 Morgans @ $30 a piece)... Finding bullion is damn near impossible... Morgans are $10+ over melt... Junk is 30+x face...
The reason we're seeing these prices and demand is because small time investors who got cleaned out on Wall Street in 08 (myself included) took what was left and have invested in purchasing physical... now the general public are starting to wake up and are purchasing silver and gold instead of investing in their 401k.
In Jan. 09 I bought my 1st 100oz of physical silver for just over $11 an ounce and have continued steadfast... In 3 years from now people will be saying "I sure do wish I would have got in on Silver when it was under $40 and ounce and Gold while it was at $1600..."
A huge misconception about Gold and Silver is the "Spot Bid." Spot Bid carries very little weight in the physical demand market right now... it's about what people will pay... physical people don't care about a December delivery date, it's about right now... Furthermore, prices in precious metals have been suppressed and keep getting suppressed until the rich (millionaires are wealthy, not rich) can hedge against the crash of all fiat currencies... MSM is making gold and silver look like worthless scrap metal/ junk... James, I feel you've fallen victim to this brainwashing... Just because people HAVE TO sell because of a margin call DOES NOT mean they don't want the metal... The same demand is there, the same conditions that created the demand is there, it just costs more to own..
James, so TDV doesn't have to educate you again, start by educating yourself by following gold and what the Rich are doing with it, not the MSM... ie... South Korea buying 25 tonnes of gold for the 1st time in almost 15 years... Goldman Sachs telling all of their investors to buy Gold and Silver last year while predicting gold and silver prices within a couple of dollars of where it is today... China shifting its foreign holdings from USD to Gold...
The Rich rule the world and MSM... Fiat currencies were brought into existence to transfer wealth to the rich, not to make everyone rich...
As for inflation/deflation... yes, this is a very confusing issue to most people. You have to forget everything you've been told about it by the mainstream media and university economics professors. This one definition alone has been used to confuse the masses. Inflation is simply this: an increase in the money supply. Deflation is a decrease in the money supply. When you increase the money supply one of the things it does is cause an increase in prices... however, it can take a while to work its way through the economy so this is why the Federal Reserve always uses it, because they can confuse people as to what is happening. Gasoline, for example, can still be bought for 2 dimes... the catch is that it has to be pre-1965 dimes (they were silver then). The price of gasoline has not risen at all.. the value of the dollar has collapsed. This is a look at the true money supply of the US: http://mises.org/content/nofed/chart.aspx. Note it is skyrocketing. The US Government's CPI has all been skewed (same as the unemployment numbers) to take all of the inflation out of their inflation statistic. As for people being "scared of deflation", they aren't. They may be scared of the price of their home going down, but thats not inflation... the price of US homes are going down because of a past inflationary boom that caused a bubble in homes... but true inflation right now is running near 15%... as well, Japan NEVER had deflation. This is yet again another myth propagated by the establishment and the media. Japan has had decades of LOW inflation... people think that is terrible but it isn't... and because GDP doesn't actually measure growth of an economy and mostly just measures growth of the money supply, Japan looks like it has been growth-less for decades... it may not have grown.. but the US has been shrinking in size for 10 years. You say you don't subscribe to any 'school' of economics but I HIGHLY recommend you read up on Austrian economics. Start at mises.org. From there you will begin to see the reality of what is really going on in the economy. Austrian economics is 'free market politics'... government does nothing but destroy the economy with any action it takes... but, thanks for having an open-mind and not taking offence to our criticisms of your views on the economy! Cheers!
Using rent prices and home values to try to determine inflation and deflation is like using a Ouija Board to predict when you're going to die...
The value of homes and/ or prices of rent have nothing to do with the amount of dollars that have already been printed (real money supply)... It does play a factor into fractional reserve money supply (money made out of thin air based on bank reserves)... Which, fractional reserve money supply does nothing but lead to inflation because it's creating real money supply from nothing.
Definitely not the way to gauge inflation...
Somebody please correct me if I'm wrong on this...
Altucher expressed scepticism about climate change in an article for the New York Post, stating that the world has been cooling since 1998. Altucher advocates legalizing insider trading,[7] arguing that "it would force asset prices to more quickly attain their 'true value'", and that the crime is extremely expensive to detect and prosecute. He is also an advocate of the idea that one shouldn't send one's kids to college[9] and that one should never own a home.
I agree with ALL of his views on the following as I have stated here: http://www.dollarvigilante.com/blog/2010/10/14/global-cooling-red-hot-gold.html and here: http://www.dollarvigilante.com/blog/2011/5/17/debtucation.html . As for his belief to legalize insider trading, i believe the SEC should not even exist... so, yes, I agree to remove not only insider trading but all government financial rules.
As always, I am totally in agreement with you. You're like my long lost twin brother. I've read Altucher's blog (since somehow it is being pushed on LRC as if it has any economics in it?), but found it to be pretty much empty as far as sound economics goes, but I have to admit, I like James as a person and his creative ways of finding optimism.
Mark,
No, fiat is not backed by future taxes. "Backing" means inability to do precisely what our government has since "scientificated" as their main purpose: to inflate.
When you back paper with gold, it becomes just as un-inflatable as gold is (as far as your trust in government accountability can take you).
Taxes do nothing for backing, nor does oil (another popular misconception). Our government inflates (devalues money in your pocket) at a rate of 15% a year right now, and that is only as much as they tell us. I am sure there is much more inflation that is simply not reported (how are you going to know if Bennie prints few trillions from say, Guantanamo? In principle, because this government demands secrecy which is a total abomination of a principle, - an employee can not possibly demand ANY secrecy from an employer). More over, my suspicions have been relatively proved by pas experience with any dictature, and specifically by the fact that many economists have been mistaken lately about the inflationary effects on prices Bennie's printing would create, and I point out that this was because they are SIMPLY NOT AWARE of the total money supply, because , like Gary North, they use government statistics!!!!!!) Bennie, of course, can't tell them that he needs much, much more to achieve said inflationary effect!
And thus, how are the taxes back anything right now? One USD does not create ANY specific claim on any future output. Backing proper must do that (see Reisman, Capitalism [free download while he is alive]).
The relatively intrinsic property of gold (properly an extrinsic one)(property, not value, as there can be no such thing as applied to many people) is in the fact that gold can not be created by the government at the costs below it's exchange rate to other goods.
Frankly, I am amazed of how good a job the government has done to so carefully hide this simple fact about gold. It is not about it's shine, although it makes it even better. It is about choosing a unit of accounting for services rendered that can not possibly be decreased or increased (almost, as far as gold goes). Even shit would do, and we would figure out the way of packing it, if it had that property.
Government main effort is to always offer us something they can easily make, so that only suckers have to work.
Even today alot of businesses ( if you spoke to the owner ) would exept Gold or Silver as money but he would also exept any other valuable thing as money too ( trade ) so in a way anything of value can also be money. I think that is what he meant when ( the Fed chief ) he said Gold has traditionally been used as money.
The ironic thing is that the Governemnet stops other currencies but maybe the reason in a way is that Gold will always represent money anyway so in a way we have two currency systems in place. Gold in the prevate market and fiat money in the oublic market. If Ben actually agreed with me sure would see Gold find a new base around 2000, but it looks like it will find a new long term base around 1200 in my opinion.
I do suscribe in some way to some Austran economic principals but after studying keynesian economics and other disaplins I can see how there is a small chance that Keynesian is right. I hope he is as we may avoid all the turmoil that we may have if you are right. It is good that you are warning people though , maybe some economists and politians will take note and pay more attention to other forms of economic thought. It is rather ignorant that Keynesian economists will not pay attention or try and study some Austrans Economist just in case they are correct because in a way they are warning people that we could be in for some bad stuff when Keynesians are proven wrong at times.
The people that fail to realize that his musings are just "his musings" really need to just quit and go back to reading newspapers or something. I suspect that he might be an out-of-wedlock bastard child of LewRockwell's or something, with the way Lew pushes his articles.
Experience, intelligence and critical thinking skills dictate where we get our "news" from and no matter how much we wish to give our resulting wisdom to others... Unfortunately, it just doesn't work that way.
anyone believe or not?