Podcast

Bob Fitzwilson: 2012 is the "Most Difficult Year Ever" for End-of-Year Financial Planning

Little time left to make big decisions
Saturday, December 8, 2012, 1:27 AM

"This is probably the most difficult end-of-year planning I have ever seen in my career"

~ veteran investment adviser Bob Fitzwilson

As the Fiscal Cliff looms ahead, as well as the implications of new legislation at both the Federal (e.g., "Obamacare") and state (e.g., California's Prop 30) levels, financial advisers are furiously working to calculate the impact these developments will have on their clients' net worth in 2013 and beyond.

Add to that the ugly macroeconomic environment of spiraling sovereign debts and deficits, currency devaluation, and underfunded entitlement programs. At this point, the prudent assumptions to make are that taxes will go higher over time, the money printing machines will run at maximum speed, and when the system really begins to collapse under its own unsustainability the rules will be changed. Perhaps that means capital controls; perhaps it means new restrictions on large asset pools like pension and retirement funds; perhaps it means wealth taxation. At this point, no one knows for sure.

No wonder this is such a difficult moment for end-of-year planning.

So, what to do?

Do you accelerate or defer income, and do you accelerate or defer deductions?

Nobody has any idea about what the tax rates are going to look like exactly for next year, so you kind of need to make a decision under extreme uncertainty. Traditionally what you would do is you would defer income and accelerate deductions. But if tax rates are going to go up a lot, then it may be better to accelerate the income and defer the deductions to a time when the rates are probably going to be a lot higher.

One area for that is in capital gains. If you believe what they are saying and you just look at the arithmetic of the deficit, these things are going to have to rise. So a lot of people are just booking the capital gains, even for short-term capital gains, because the tax rates have to go up dramatically.

So these are issues that people need to look at – and we only have until the end of the month to make these decisions.

In terms of positioning a portfolio for the trickier future ahead of us, Bob notes that tax planning will become increasingly essential. The same goes for estate planning, where understanding how to appropriately use vehicles like trusts, gifting, and family limited partnerships when relevant can make a big difference in intelligently and legally protecting one's wealth. Beyond that, his portfolio strategy emphasizes real assets including energy, water and food-related investments, and -- especially -- precious metals.

I actually think that this is the plan, and I think there is a group of people who have run the numbers, too. They are not stupid, and they know there just aren't the multi-hundreds of trillions of dollars to pay for all of these commitments. I do believe that a new currency is in our future, and so all the spending is a way to accelerate the end of the current monetary scene and do a reboot. They have to push the monetary system over the cliff so that they can do a restart; probably with a commodity-based currency, perhaps with just traditional gold.

The vast majority of people around the planet have little money, so I expect sometime in the future there will be a press conference where they will say something like, We are embarrassed about the decline in paper money and we are going back to sound currency. And 99 percent of the people on the planet are going to say that sounds really good.

So the people who are exposed are the ones who have accumulated wealth. And so there is a short time left; as we discussed before, you have to take care of your health and your family, food, your well being, and all that. But if you have accumulated wealth beyond that, you have to start protecting it in ways against that press conference, which I believe is in our future.

If after listening to this podcast, you find yourself interested in connecting with Bob and his team to learn more about their advisory services, please use the form here to do so.

Transparency note:  As a result of our public endorsement of Bob's firm, Peak Prosperity has a commercial relationship with them. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.

cheers,
Adam

It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and Bob are obviously unaware of) and should be obtained directly from a financial advisor you trust. Before acting on any of the statements made in this podcast, we advise you do just that.

Click the play button below to listen to Chris' interview with Bob Fitzwilson (38m:41s):

Transcript: 

Chris Martenson: Welcome to another Peak Prosperity Podcast. I am your host, of course, Chris Martenson, and today we are pleased to welcome back Bob Fitzwilson, founder and managing partner of the Portola Group, one of the financial advisory groups that we endorse here at Peak Prosperity.

I have invited Bob to join us again to share his expertise on how the average investor can design a portfolio around the three Es identified in the Crash Course, something Bob calls the “sustainable portfolio.” As I mentioned in my prior podcast with Bob, there is a business relationship between his firm and Peak Prosperity, the details of which are clearly spelled out in the write-up accompanying this podcast (at the bottom). Bob, I am really excited to have you back on the program to discuss end-of-year planning, too.

Bob Fitzwilson: Thanks, Chris. I really appreciate the opportunity. This is probably the most difficult end-of-year planning I have ever seen in my career.

Chris Martenson: Yes, I certainly want to talk about that because I know that there are year-end tax and investment issues that always apply. We will get to those, but perhaps we should start with a potentially new and disruptive feature this year, which is a so-called Fiscal Cliff. Today in the Wall Street Journal, I was just reading an article discussing that some Congress people are already speculating that it might not be too bad if the issues are resolved by the end of January, meaning the Fiscal Cliff provisions will be triggered and then resolved by month end or something. What are your thoughts here?

Bob Fitzwilson: To me, what this is really about is the debt ceiling. The debt ceiling is really a spending ceiling. The spending ceiling is getting in the way of more spending. I think it really comes down to a lot of people believing that the only way to keep this thing going is to keep spending like crazy. So I think the Fiscal Cliff discussion is designed to scare people, and they should be scared into letting the debt – you know, there is talk of even not having a debt ceiling. Call me crazy, but I do not know how that works out. If you are in a family and one of the family members says they are just going to go out with a credit card and just run it up forever, I just do not think that works at the personal level. I do not see how we are going to do it at the government level.

Chris Martenson: It is certainly something – I think you are right. A debt ceiling is a spending ceiling, as it were, and many do argue that maybe we should just get rid of the debt ceiling. It gets heightened almost automatically anyway, but this year it has got a little extra political football wrapped up with it. That is interesting, but I think the larger issue is being skirted here, which is, how much is too much? That is one level on the spending issue, and then the second is, how many years of stimulus does it take before you say this really is not working?

Bob Fitzwilson: I know. I am kind of thankful that I was born in an era where you could have an honest discussion and talk about these things, but it is like people are not being honest about what this means. I saw one statistic that said even if you did away with all the tax bracket reductions that were instituted in the Bush era, it keeps the government running for eight and a half days. So it is almost embarrassing to have and listen to these discussions when they are talking about an issue that extends the government by eight and a half days. There was also a study done years ago that showed that government – regardless of the tax rates, the marginal tax rates – the government managed to collect around 20 percent. So for most of our history, we would still be talking about it and what the problem is.

The money, the whole tax collection process, to me, is really is a sock puppet. We are borrowing 40 percent of what we spend and there is sort of this charade where the Treasury sells bonds and the Fed buys them back. So there really is no governor anymore. The whole tax raising and budgeting issues to me just have become irrelevant, which is not a good thing.

Chris Martenson: No, it is not, and there is not a lot you and I can do about the spending except notice it and observe what the trends might imply for investing going forward, but how about the other side of this Fiscal Cliff, the tax hikes that might come in? They apply to investments, income, all kinds of things. What are your thoughts there?

Bob Fitzwilson: It is going to be a disaster. In California, we just got a little taste of it with the passage of Prop 30. It was retroactive to the first of January. I have seen some of the revised estimates of tax liabilities for a few clients, and I think people are just going to be dumbstruck by the extra amount of money they are going to owe. That is just at the state level. All of these entities are essentially broke, and not just domestic. It is international. I saw an article that a woman who was managing a portion or of all of the Greek pension funds just said that they had to drastically increase their contributions and they physically attacked her at the meeting. So there just is not money almost anywhere.

So taxes are going to have to go up. And in an ordinary world, there would not be the taxes, because history shows that if you really try to overtax, you get less taxes. But what is very dangerous is this dissociation between spending and tax revenue. At least in the United States, we have the mechanism to just create whatever spending we want through the printing presses. History is really clear that there is an end to that, and it is not pretty.

Chris Martenson: Right. And here we are, as you mentioned, spending – I think 40 cents out of every dollar spent by the government right now is borrowed. Of course, it is just round-tripped back through the Federal Reserve. This is just, to me, completely shocking. If somebody five years ago told me, hey, Chris, in five years what is going to happen in 2013 is the Fed is going to print as much money in that year as had been generated during the first 240 years of our country’s history…what do you think? I would say you would be nuts. Not just nuts that such a crazy thought would be entertained, but that the dollar would be relatively stable and all of the asset markets would be relatively stable and everybody would just sort of be walking around investing and keeping their assets parked, as if this were somehow normal or unavoidable or everybody is doing it. I do not know. It just feels – it is surreal. I am going to use that word.

Bob Fitzwilson: I like history, and I was noodling this morning about these grand ideas that show up throughout history. If you are on the opposite of the idea, you think it is almost cancerous. So if you were King George and saw this founding of the Republic, you would have viewed that as a metastasizing cancer, and probably the people who had been in power up to that point saw it in that fashion. It was not a good 100 or 200 years for the kings and queens. So what we have now is this spreading belief that money is free. People do not know where it comes from. It just comes from the printing press. So it is like a cancer; it is metastasizing all over the planet. There is probably not a lot that we can do to stop it. It just requires, unfortunately, pain and suffering at the end. For individuals, we are just people. There is nothing we can do. We can only do things at the family level or at the community level. So I think that is what people need to focus on is just make a list of the uncertainties and the kinds of things that they have the capability to do and just tick them off one at a time and resolve whatever issues you can and then just hope for the best.

Chris Martenson: All right, so here we are facing the Fiscal Cliff as a first consideration. What are you doing to position for that right now?

Bob Fitzwilson: From a portfolio standpoint, it is a heavy emphasis on real assets, particularly gold and silver. As you know, we also like energy. We like food-related issues, water, things like that, the basics. From a tax planning standpoint, there are a number of issues that need to be addressed. Time is short. Some are state tax issues. Some are income tax issues. Some are retirement issues. We could talk about those.

Chris Martenson: All right, let’s do that. What is coming up? Where would you like to start on that list?

Bob Fitzwilson: The large number issue – I do not know how big it is. I mean, people are facing this, but there is this expiration of this 5,120,000 lifetime exemption.

Chris Martenson: For state taxes?

Bob Fitzwilson: For state taxes. And it is going to drop back under what people are talking about to a million dollars, I believe, next year. So for people who have those kinds of assets, there is this mathematical decision they are going to face about what to do, and it does not have to be the full five million each. It is whatever excess net worth that they would want to pass down that they would have to deal with. So one decision is, if you can do it, do you want to do it? That gets into the issues. If you gift these kinds of funds to your kids, for example, the question is, do you want to give them that kind of money? I have had these discussions where somebody has got a young child and they can afford to give a full ten million plus to their kids, but you do not know how your kids are going to grow up and what kind of people that are going to be. Oftentimes having that kind of money, let alone the appreciation on it, can cause problems – if not for them, for their spouses or their friends. So people have got until the end of the month to meet with their estate planning attorneys and talk about that.

Then the traditional forms of tax planning or issues: Do you accelerate or you defer income, and do you accelerate or defer deductions? Nobody has any idea about what the tax rates are going to look like for next year, so you kind of need to make a decision under extreme uncertainty. Traditionally what you would do is you would defer income and accelerate deductions, but if tax rates are going to go up a lot, then it may be better to accelerate the income and defer the deductions when the rates are probably going to be a lot higher. One area for that is in capital gains; if you believe what they are saying and you just look at the arithmetic of the deficit, these things are going to have to rise. So a lot of people are just booking the capital gains, and I would argue even for short-term capital gains because the tax rates have to go up dramatically. So that is an issue that people need to look at – and again, we only have until the end of the month to make that decision.

You can mitigate that by gifting to charity. You can give a long-term appreciated stock to charity if that is something that is – not everybody wants to do that, but if you are charitably minded that is an option. There are other vehicles, such as a charitable or major trust, that allow for large amount of gift and can generate a tax deduction and distributable – in effect – income from doing so. That is another option.

In general with estate planning there are two issues: There are fees, and there are taxes. The fees come from the resolution of estate; a lot of people call probate fees. If you think of sort of a T account on the right hand side, the fee question, the primary way to deal with it is common sense, like keeping well-kept records. There is a thing called a “living trust” that is also called a “revocable trust” and “inter vivos trust” and all of that. It is a living will. That is something people should talk to their attorney about, because it is relatively straightforward. It basically just organizes things and minimizes the transaction costs of settling an estate. Sometimes people confuse that with the tax issues, and my understanding is that the same tax issues can be dealt with in a regular Will and it does not have to be in the revocable trust or inter vivo trust. The main purpose of it is to minimize the cost.

When you go to the other side of the ledger, and that is taxes, it is a really simple question: Do I own it? Most estate planning techniques are about not owning things; gifting them. There are all kinds of techniques, and a sharp estate planning attorney can virtually give away your entire estate, and so the first place to start is, do you have enough money? We talked about that in a prior podcast; we have proprietary technology that figures out how much is enough, and if you do not have enough or you are just at the level where you have enough then you probably, regardless of all of these topics and issues, you probably should not make the gifting. But if there is an excess, then the question is, you have the ability to gift, but do you want to give it, and how much? Most of estate planning is about giving away things in various formats.

Chris Martenson: That all sounds very reasonable. I am sure that anybody who is looking at this pretty steep potential fall-off from five million to one million has got to be thinking about this. Because it turns out, in today’s world, it is not that difficult to accumulate a million or more in assets, particularly for people who own small businesses or business of any form. How do you advise people who have assets that are not as liquid? Say, I have got a family farm, or something like that, and it is over a million, clearly, but there is not an easy way to parcel that off and hand it out to children. How do you handle something like that?

Bob Fitzwilson: Well, there is a technique called the “family limited partnership.” In the right circumstances and properly done it can accomplish a lot of things. It goes back to the early days of limited partnerships, from what I understand. People invested in real estate partnerships, and when they passed away, they owned a percentage of a big partnership. The IRS position was that if the person owned 1%, he would take the value of the real estate times one percent and that is the value of the estate. The people on the other side said no, it is 1% of the partnership, but it is illiquid. So there has been a battle over this for probably 30 years, but I think done properly, it does work.

What you get is, you not only transfer in a variety of assets, and illiquid real estate is a good thing to put in there, and you wind up getting a discount. So you are not only able to give in X amount of dollars, but you are able to get more money, more value at least, because the assets going in are considered to have a discount. It also allows for control. So, the parents, they can set up a family limited partnership transfer in illiquid assets, and I think they can still own as little as 1% but still maintain control of how it is managed and all of this. So a family limited partnership can, in the right circumstances, be great and accomplish a lot of things, but it cannot be abusive, of course. People have gotten in trouble where they try to take ridiculous discounts and things like that, and that is not going to fly, but properly done it is a great vehicle.

Chris Martenson: All right, on a more mundane side of investing, what are other considerations are usual for this time of year?

Bob Fitzwilson: Well, we are getting lots of calls about the retirement assets. It is now on the table, at least behind the curtains, that there are proposals to change things around dramatically. And some are as extreme as forcing people to exchange their retirement assets for a new form of retirement, the government-guaranteed annuity. So everything is up in the air. One of the issues is, do you even fund these things anymore? I had an interesting conversation with a client this week about this. He is putting a small amount of money to fund this year’s contribution to his SEP IRA. It was his words not mine, but he said I am 70 years old. In 30 years I will be gone, so I would rather have the tax savings now, and I probably will not spend what I have in there. I thought about it, and if you already have a retirement plan and it is a large amount, then whatever is going to come down the pipe next year, it is going to affect the bulk of it anyway, and so the current contribution is not that great.

If you do not have a large amount, or you are not at his age, then you have to consider whether you want to defer income at low rates and then have it come back at higher rates, let alone being forced to convert it into a new government annuity. So there is some flexibility as to when it has to be paid. What we concluded with his accountant is the accountant said that he did not have to make the full contribution until he filed the return, so he was going to put in a small amount and then gross it up once the final number was in.

Another thing is Roth conversions. Booking the income now – meaning paying the tax up front – given the rules that we understand now, it means you will not get the higher rates down the road. All of these things – that is why I said it was the most difficult year ever, as basically Congress can do anything, and so there is almost no rule that they cannot change. So the best thing you can do where you can handle it is to generate some certainty by booking the taxes and paying it.

I mentioned last time that the healthy way to look at this is, you really are in partnership with the government when you fund these retirement plans. And it is like having a business partner who has a percentage of the account but also has the right to change the percentage at any time they want. So at this time it may be best just to cash out with your partner and say thank you very much. It is extreme uncertainty everywhere you look.

I used to program the tax code for almost 20 years, and it is not a logical thing. It is not an architected program, and so you cannot apply logic. The way to do any kind of tax or estate planning is you need to say, if I do not do something, here is the effect, and if I do something, here is the effect and then the difference between the two is the marginal effect on whatever you are considering doing, both income and deductions. You cannot approach it from a high-level conceptual level. You have to sit down with your accountant and your lawyer and you have to work through the numbers specific to your situation and then make a tough decision.

Chris Martenson: I know there is never very much certainty when it comes to taxes. However, given where we started this conversation, around debt and spending at the federal level that the seeming inability of our crop of leadership – both at the state levels in many states and at the federal level – to really reign in prior expectations and spending habits and all of that, it seems like the odds of the tax code being amended to increase tax rates and overall fees, burdens, levies, surcharges, excise taxes, whatever they are calling these things in the future, it seems like the chance of those going up is much, much higher than the chance of them remaining flat or going down. Would you concur?

Bob Fitzwilson: I think it was Friedman that said taxes are what the government spends. So that is why it is sad, but when I look at all of these discussions about marginal brackets and fiscal cliffs, they are all just sock puppets. They are diversions from what is really happening. What is really happening is, this transition from actually collecting taxes and having budgets to just we will print whatever it takes.

There is a book about France’s experience called Fiat Money. In France, it was the second time they blew up their financial system in the late 1700s, and you hear the politicians made these comments that if we stop, we have to keep printing. And I think the German politician said at the end of World War I that we have to print, otherwise the thing will collapse. Hello, we are doing the same thing, and it does not work long term. So for me, we have to play the game and play along and we have to pay our taxes and deal with whatever degrees of freedom we have, but the big picture issue is that we have transitioned from money and taxes to electrons and printing.

Chris Martenson: It is the same thing however we term it. However, I think you just made a great point, which is that once you begin down the road of printing – I think I could agree with the assessment of the French in the late 1700s and the Germans in the early 1900s – it is the same as the situation we have today, which is, once you start down that road of printing, it is true, if you stop, there is going to be an extraordinary amount of pain, if not a collapse of a sort or whatever term we are going to use. But I think the Fed is really boxed in, and they are going to have to keep doing what they are doing, and they have not disappointed me in four, what are we going on, five years of printing now. It is just remarkable. I do not see any way out of this. So it seems to me that printing is part of it, and governments are going to need more and more revenue, as well because that is just the nature of the beast.

Bob Fitzwilson: You see, I actually think that that is the plan. I think there is a group of people who have run the numbers, too. They are not stupid, and there are not any multi-hundreds if trillions of dollars to pay for all of these promises. I do believe that a new currency is in our future, and so the spending is a way to accelerate the end of the current monetary scene and do a reboot. Whenever somebody will say well, we need to spend X number of billions or trillions, they get upset about that. To me, they are getting upset at what in aggregate is the plan. They have to push the monetary system over the cliff – that is what is going over the cliff – so that they can do a restart probably with at least a commodity-based currency, perhaps with just traditional gold.

The vast majority of people around the planet have no money, so I expect sometime in the future there will be a press conference where they will say things like, we are embarrassed about the decline in the paper money and we are going back to sound currency and 99 percent of the people on the planet are going to say that sounds really good. So the people who are exposed are the ones who have accumulated wealth and so there is a short time left. As we discussed before, you have to take care of your health and your family, food, your wellbeing, and all of that stuff, but if you have accumulated wealth beyond that, you have to start protecting it in ways against that press conference, which I believe is in our future.

Chris Martenson: Hard to predict when, but I do not know. History does not suggest that there is anything else besides that press conference in our future. I cannot think of a single example where a country went down this path of printing and came out of it with its currency sound and intact.

Bob Fitzwilson: In your Madrid speech, you talked about the one country that climbed about of a pit somewhat similar, but I think we are going to be in a far worse pit than even those people. To me it is just arithmetic. I mean if we are all adults about this, there is no resolution other than we need to do a reboot.

Chris Martenson: That one example was England, and they had a sound currency at that point in time and they stayed on it. They actually just went ahead and paid their debts back. They got into a debt hole that was about 260% debt-to-GDP. Of course, our own is allegedly only at 100 % here in the U.S. right now, maybe 80 if you only count the debt held by the public, but when you include all the entitlements and whatnot, the numbers range anywhere from 450% to 1,100% of GDP. So those numbers have never been recovered from things like that.

You and I had a really interesting discussion the other day where you were asking me about my near-term thoughts on gold and silver, which is one way, I think, to avoid a reboot of the system moment. I was really intrigued with your thoughts there as well. Maybe we could recreate that conversation here for our listeners because I think it was pretty instructive. Share your thoughts why you think precious metals might be poised for a run from here.

Bob Fitzwilson: So we went through this historic period where we have gotten away from gold and silver. Silver is a wonderful metal that has had burgeoning uses, and it tends to be used in small quantities. And so it is out there somewhere in the environment, but we have pretty much used all of the above-ground stocks that we have accumulated over time. From what I read, the estimate is about a billion ounces available and with the price of silver at $32, $33, any large entity if they could get it could swallow up the entire supply at a time where there are medical uses, solar uses, all of those. So forgetting all of the money-printing aspects; I just think that long term, the supply and demand of silver is phenomenal.

As far as gold, I believe that most of the gold did go East, like it has done throughout human history, and so we are in this period where the central banks are realizing that they need to have this wonderful asset that has proved for 6000 years that it can hold its value, but it takes time to mine it and accumulate it. I think we are in this phase where I do not expect the price to skyrocket in the short term, because I think it is in the interests of powerful people to keep the price right where it is while the rebuild their stocks that they have been giving up over the last 20 or 30 years.

We also talked about the miners, and the miners are in a tough spot. Not only are their costs going up, but the people that run the countries in which they have their mines, they are a lot more sophisticated than they used to me. So not only energy and labor costs are going up, but just the extraction-related costs are going up. With the price in this trading range, it is squeezing them. So I think for pure gold and silver investors and for investors in the miners, it could be a wait. But ultimately my belief is that once everybody has got the restored levels of metals, then everybody is going to want the price to go up. And so there will come a time when instead of being in a trading range, everybody is going to be on one side of the table, all scrambling to try to buy this stuff. So there will be a rocket ship moment, but it is anyone’s guess as to when that is going to happen.

Chris Martenson: You and I, when we were talking, this was three days ago, compared to when we recorded this podcast. At that time, I noted the Commitments of Traders Report to the CBOT showed that there was a record of short positions in the commercials, and those are always associated with a downward price spike in metals going forward. Sure enough, just a couple days later, there was a raid that started on gold that started at 12:45 a.m. in the morning, classic time for a big trader to unwind a position if you wanted to use CNBC’s explanation for that move, but the people who I know who have exchange data looked at that and said, yeah, that was just somebody coming in and just dumping with an idea of pushing the price around. Thin market and this is just a game that has been going on. I do not really think anymore that gold or silver are singled out.

I see the same behavior in the oil markets. It happens in grains. It happens in certain equity issues. It is just sort of the game that we have going on. I have had this conversation before where you are of the mind that they can go ahead and play those games. What they do is they actually create opportunities for people who are aware of the underlying fundamental trends. Because these price movements that I just noted, they do not have any to do with supply and demand on the markets. They have to do with a trader’s book and how they are exposed, and can they make money by really dumping in the futures market but owning the other side of the trade in the options market or something like that.

At any rate, I truly that believe that, like you mentioned with silver, with only a billion ounces available, $32 billion total dollars’ worth out there, that is less than a month of Fed printing. It is an absolute bargain at this price given its utility and scarcity even now and increasing rarity as we go forward given mine yields, ore grades, things like that. So I am just of a mind that they can go ahead and play their games all they want and I will thank them for these wonderful low prices while I continue my own accumulation program.

Bob Fitzwilson: So two comments. One is that I was thinking about the holders, and it is only like one percent of the people own any gold and silver. I just had this image of animals in a cage in a zoo. So these gold and silver holders are in this cage, and the powers that be left to poke a stick in the cage to upset them, and the goal is to show the other animals not in the cage that they had better behave themselves or you could be in the cage, too. So people need to ignore the sticks coming through the cage. You just, as you said, treat it as opportunities.

The other thing is, in my mind, if I really step back and look at what they are doing, they are creating money out of nothing, and what they are doing is they are buying up all of the real assets. They are buying Treasurys; they are buying real estate; they are buying mortgages; they are buying stocks; they are buying metals. So what really is somewhat disturbing is that they are doing what we and your listeners should all be doing, which is getting rid of the stuff that they are printing and playing along with them and buying real assets. There is this term called “seniorage” – which is the right of kings to make money, print money – and seniorage now is 100 percent. My advice to everybody is do as they are doing, and do not hold the paper assets, and buy real assets along with them.

Chris Martenson: This is sort of the cornerstone of your sustainable portfolio idea, too, right? We mentioned the trends before. You have got food, water, energy, precious metals, real things, that this is an age where owning the real stuff makes a lot of sense. Just let me know if I have mischaracterized that at all, but for me the idea if we were printing trillions and trillions of dollars – on the one hand we have an economy that seems mired in low growth. I have my own reasons for why I think that is a permanent condition. And if that is true, when you are shoving markers against the economy – which is money – you are just shoving that just at extraordinary amounts of it into an economy, hoping the economy comes back to life. But the economy cannot come back to life; you are just creating the pressure points between which two things exist. There are fewer goods and services, and there is more money and money-like equivalents floating around. That is the world we live in. So far it has been fairly resistant to spilling over into the real world, but in terms of prices for real goods and services – it will, at some point, is my view.

I do not know if you saw this. This just came out, somebody who adds up how much it costs to buy the 12 days of Christmas, the Christmas carol, right? This year for the first time ever, it broke into six digits. They said – you would be surprised – it was not the gold that drove it. It was the “12,” it was the geese.

Bob Fitzwilson: That is surprising.

Chris Martenson: Yeah, because the price of all kinds of all feathered things have gone up just extraordinarily on the back of the food inflation that has happened. It was up 6.1 percent over last year. So that is an alternative marker of inflation we might think is closer to reality. But at any rate, inflation is part of our lives, and at some point it will be an extraordinary part of our lives if these pressures I have articulated continue to grow without some way of releasing them.

Bob Fitzwilson: So a couple thoughts while you were talking. One is that people should not take what we are saying to just be a bunker mentality. From an investment stand point, there are always people making money. There are always good businesses around the world, and so what it means is that you have to not invest in the adjectives as I described before. You have to do your own gumshoe work and you have to find these companies. There may be zero economic growth, but there are companies out there that will always be vastly feeding that.

The other thing in terms of sustainability and wealth preservation – I had an interesting conversation with somebody about a thing called an “umbrella policy.” An umbrella policy is it sits on top of a person’s automobile and housing coverage, and it is cheap because the housing and auto policies are, in effect, big deductibles, but the person that said that – she thanked me for bringing up the topic and said that it was a form of wealth preservation. I had never thought about that before, but wealth preservation just is not about the value for money, it is making sure that you are tax-efficient, that somebody does not sue you and steal it. It is really even more holistic than I had even thought about it myself.

Chris Martenson: Oh, that is interesting. It is going to take all kinds of tricks, gimmicks, and sophisticated approaches to maintain our wealth and wealth preservation. This has really got to be one of the most extraordinarily difficult times, leaving aside some of the larger trends and demographics and energy and environment and things like that. Any time you have a committed concerted global program where money is being printed out of thin air with the express purpose of driving up asset prices, be those stocks or equities or bonds, with everybody chasing the same yield, everybody thinking there is a big safety net under everything, it is just going to drive your returns down and concentrate risk as well.

Bob Fitzwilson: I am never going to give up on the fact that there are returns out there if you just do your homework, but you will not get it by standard asset allocation and investing in adjectives and all of that stuff. So it really is a bare-knuckle fight for your money, your retirement, your future, all that, and people need to get actively involved and educate themselves and do a lot of work.

Chris Martenson: This is precisely what I had in one of the closing chapters of my book, where I expressed the opportunities. I said the opportunities in your field, in the financial services field, are still going to be specifically in getting back to fundamentals, that doing technical analysis, chasing momentum, all of these other fancy arbitrage, whatever the glamour trading strategies du jour happen to be, I thought that there are diamonds out there. You have to find them. You have to do it the old way, get shoe leather involved, and I agree. There are always values to be had out there. It is just we have to work at them a little bit harder and have to find them.

Bob Fitzwilson: Yeah.

Chris Martenson: Excellent. Bob, we are at the end of our time. I really want to thank you so much again.

We have been talking with Bob Fitzwilson, founder and managing partner of the Portola Group. They are just an excellent firm. Bob, you are great guy. Thank you.

Bob Fitzwilson: Thank you very much. It is my honor and pleasure.

About the guest

Bob Fitzwilson

Mr. Robert Fitzwilson is the President and Director at The Portola Group, Inc. He founded the firm in 1979. Mr. Filtzwilson has invested in more than 25 companies and founded several software firms. He is a Director of SOMA Networks. Mr. Fitzwilson obtained a B.S. degree in Industrial Engineering from the Purdue University and an M.B.A. from the Stanford University.

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37 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
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Posts: 2342
Rocket Man.

"Ah knew itty".

I am glad that I hung in there because the good stuff came at the end.

How did I guess that that was coming?  A government seizure of the Pensions and they give it back to you as an annuity. Here in Australia the Govt has forced us to "save" into a pension fund, not dissimilar to Al Capone's. The pool is now $1.4T. The Government can't help themselves, they are already begining to nibble around the edges.

If you had not corresponded with your fund for a year they confiscated it. There was no outcry, so they decreased the time to 3 Months. If you haven't communicated with the fund for 3 Months they consider the fund "Lost" and they had better look after it.

On investing. If you know that you are out of your depth then you are ahead of the pack.

The fuse has been lit for the Silver Rocket but we don't know how fast it burns. I am betting that it burns faster and faster.

RJE's picture
RJE
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Posts: 1369
Adam and Chris your timing is always well thought out...

...and frankly brought to us well in advance of when most think about Tax liabilities and that is year end. Only here at our site PP do we get this.

Ironically I have a couple hour meeting with my accountant on Monday. It is a strategic planning session and we will run expiration of Bush tax cut scenarios etc...More an accountant straightening up some of my assumptions, and bring me up to speed with some of the rumors out there. Additionally and we have discussed this that we have no idea how even after a Fiscal Cliff passing and nothing is done we still won't know what these Folks in Congress will do. We don't know if we take the cash this year whether we could retroactively go back and redeposit these funds, and take no cash (I understand I have 30 or 60 days with regards to IRA but who knows after the 1ST, and after I took it what Congress will do). Just a very crazy time but then again just business, and it is better to discuss our plans well ahead of time than to wait until the last minute. Better a month early than a day late, and in keeping with Chris's simple and correct logic here.

I must give a hat tip to my Lady as she makes everything so easy as her income and benefits are more than enough to live on and routinely purchase the Gold and Silver (mostly our Estate shopping purchases of Silver, our hobby) we have for 4 years now. This on top of a core physical position I jump all over back in mid 2009 and 2010..

I cannot say how much this site means to me, and the challenges it motivates me to get a grip on.

Professor, in researching Hyperinflation I have yet to find one country that was Reserve currency that did fail completely that had the laws and consumer protections that we do.. In researching further I haven't run into one where the lawful options to Bankruptcy and other Debt destructive measures that didn't have as a benefit the fact that you can Bankrupt all Debt yet keep all retirement accounts segregated, and not subject to confiscation during Bankruptcy. Plus you get to keep your home and have less of a burden to renegotiate the terms of your 1st mortgage, and just completely rid yourself of a 2ND mortgage. As you may know, I see this as a stay ahead of the game type strategy, and one I would have no issues with personally. I would have no issues advising any family members either of this materials as I see no reason they should lose it all when a few hundred bucks changes their lives immediately.

I have NO DOUBTS that printing is the future and a new currency but I have NO DOUBTS that Bankruptcy is a viable option for the individual as the laws and rules are written now. As we go forward the public will see more and more how laws are circumvented ny the Elite, and will chose the legal way out before those Bankruptcy rules are changed too. I just don't see where you can trust anyone in politics at this point. With Bankruptcy I apply the same logic you use here, and that is if you are really in serious Debt then Bankrupt NOW because the options and rules are known now so why wait. I base this on the end of the Bush years before Obama, and the rules changes made with regards to bankrupting credit cards.

This Hyperinflation could be 5, 10 years out still or we could just Bankrupt a great deal of our problems away too as there is a tipping point for the private/consumer household too. My thoughts are Debts could out pace any Inflation, and a Recession or two are still in the cards as we wash, rinse, and repeat the ups and downs of Oil prices (Oil I use because I understand it best), and just add to our other physical holdings with the profits.

I will research this further but this implies that at least Bankruptcy as an option is a rather good place to reboot, and then create a new financially responsible life.

Adam and Chris, thank you again for this Podcast as the next few weeks can cost us a great deal of cash value depending on what Congress does or doesn't do.

My strategy is to sit tight, leave all cash where she sits, and deploy this cash for what will be a very profitable 2013 as Recession will most certainly hit our economy regardless of what happens in Japan, Europe, UK, or China. I believe my Oil E&P's for instance will benefit greatly to a 20, 30, or 40% correction in the market. It's coming are my thoughts and worth the risk to hold onto all the cash I can, and then jump back in to get the extreme upside.  I have more than dabbled in shorting Oil and have the kinks worked out on that strategy I will deploy also.

An unlimited spending budget, really, are we nuts or what?

Respectfully Given

Happy Holidays

BOB

RJE's picture
RJE
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Posts: 1369
Arthur, good morning and to add to your observations...

...John Mauldin and friend:

By Ed Easterling, Crestmont Research

December 7, 2012
 All rights reserved

"There are numerous problem-solving and decision-making processes in the military and civilian sectors. All of them start with a common first step: Identify and define the problem. Get the first step wrong, and there is no chance for success.

Public employee retirement systems across the nation have a major problem. Yet the issues are not isolated to investment portfolios managed in the basements of cold, dark government buildings. Nor is the impact limited to retirees or near-retirees of those programs. The tentacles reach out to the taxpayers that backstop those plans and the people served by the government workers in those plans.

Pension plans are simple programs. They are set-up to receive contributions from employers and employees to be distributed later back to the employees as retirement benefits. But the plans expect to distribute more than the contributions that go in—and it almost always can. Down in the basement, the pension plan invests the contribution money over many years to produce a return. The return and the contributions combine to meet the obligations promised to the workers upon retirement. However, if that combination of funds is insufficient, then the taxpayers are expected to make up the shortfall.

So there are three components to the pension machine: contributions, returns, and distributions. Two of them can be easily and accurately estimated. The third component is an assumption—a very important assumption.

PENSION ANALYSIS

Most often, the process starts with an estimate of retirement benefits. For each worker that the pension plan covers, the analysts (called “actuaries”) estimate the expected years in retirement, the time to retirement, and the inflation rate across the entire period. This exercise is not very accurate for any single worker, yet it is surprisingly accurate across a population of workers.  The total of all expected retirement payments is known as the pension plan’s liability.

Contributions are also easy to estimate because they relate to a percentage of workers’ wages that are covered by the pension plan. The same actuaries grind numbers in big computers with good accuracy. They estimate the expected total contributions to the pension plan as well as the ultimate distributions for retirement benefits. The accumulated total of the past contributions is known as the pension plan’s assets.

This is where the third component comes in. The contributions alone are never sufficient to cover the liabilities. Pension plans expect the contributions to earn a return while they wait in the basement between employees’ working years and the retirement years. And, as they say, there is the rub.

What is a reasonable assumption for returns?

Well, it’s complicated. The return assumption should reasonably relate to the types of investments that are used by the pension plan. The mix of investments depends upon the risk profile that the pension plan is willing to accept.

IT’S YOUR RISK

Actually, the pension plan is not accepting the risk. The pension plan is just a conduit, a legal entity that stands between the retirees and the taxpayers. Most states have laws that provide some or complete protection for specified benefits promised to retirees. Therefore, the ultimate risk falls upon the taxpayers—not on retirees or the pension plan itself. It is more accurate to say that the mix of investments depends upon the risk profile that pension plan managers are willing to place on the taxpayers.

The Social Security trust fund invests exclusively in bonds and securities issued by the U.S. Government. These investments are considered to be virtually risk-free and have little risk of loss. As a result, taxpayers bear little risk from a loss in the value of investments in the Social Security trust fund.

In 2005, there was an effort to change the investment mix for the Social Security trust fund to include stock market investments. That initiative failed because the public rejected the additional risk that it represented. The stock market was considered to be far too risky for nation’s largest retirement plan. Taxpayers refused to accept the risk associated with potential losses from stock market investments.

Nonetheless, states have convinced taxpayers to accept stock market risk for their government retirement plans. Ironically, the national plan would have had national taxpayers accept stock market risk for virtually everyone’s potential benefit; the state program has state taxpayers accepting stock market risk for plans that are limited to state and local government workers.

REASONABLE RETURNS

State pension plan investments are not limited to the stock market. They include corporate bonds, U.S. Treasury debts, real estate, private companies, hedge funds, commodities, and a wide variety of other investments. This mix of investments enables state pension funds to justify the assumption of a higher rate of return.

This is critical because a higher rate of return means that state pension funds can contribute a significantly smaller amount of upfront contributions based upon worker’s wages. If state pension funds were investing in less risky, lower return state and federal bonds, the states would have to contribute a lot more money at each payroll.

It’s the Big Tradeoff: contributions vs. returns. Lower expected returns means that higher contributions are needed so that the combination of contributions and returns can pay for retirement benefits. By assuming and hoping for a higher rate of return, the amount of contributions is less because the states expect for investment returns to make up the difference.

To illustrate the tradeoff, assuming typical pension plan assumptions—including an expected annual return of 8%, the combined contribution between employee and employer is approximately 19% of the payroll.  That’s about 8% or 9% of the employee’s wages paid by each of the employee and the employer.  It’s not too far from the rates that have been used by many states and public employment plans.

But if the outlook for future annual returns falls to 4% (as current conditions warrant), the required contribution rises substantially to 68% of the payroll—more than three times typical current contribution rates. The reason is the power of compounded returns, the eighth wonder of the world that so enamored Albert Einstein. Unachieved or underachieved returns significantly reduce the ability of public pension plans to meet retirement promises in the future.

To illustrate the effect that investment return has on supplying funds for retirement benefits, consider the following example. Assume for simplicity that the time horizon is thirty years. That’s about the amount of time from the first dollar of wages to the first dollar of retirement. It’s also about the time from the last dollar of wages to the last dollar of retirement. Clearly there are other considerations including wage gains and retirement benefit adjustments, yet thirty years provides a representative example.

One dollar grows to just over $3 after thirty years of investment returns at 4%. But, the same dollar grows to more than $10 after thirty years when returns are 8%. That is more than three times the assets to pay retirement benefits. Investment return does not change the amount paid in retirement benefits, it only changes the amount of funds provided by investment returns. The difference must be provided through additional contributions.

Clearly, taxpayers have a strong interest in the riskiness of the investment portfolio and the reasonableness of the assumption for returns. The only investment that assures its rate of return is a U.S. bond. Beyond that, the rate of return from investments generally increases as the chances of investment success decreases. Risk is not a knob that can be turned for higher returns. Instead, as investment risk increases, the odds of investment success decrease. Taxpayers accurately read the situation with Social Security and rejected accepting the risk of reaching for higher returns; yet they are now on the hook for substantial risk at the state level.

Why? And what can be done about it?

The “why” goes back to the assumption for returns from investments. Pension plan administrators know that higher return expectations make it easier to appear to meet the retirement benefit obligations. Despite the well-known tenant that “past performance is not an indication of future returns,” state pension funds rely upon the results of past years to set the expectation for future years—the rate of return assumption for the pension plans.

CONDITIONS CHANGE

The reason that past performance is not a reasonable indicator is that conditions change. For example, as recently as five years ago you could walk into a bank and receive 4% on a certificate of deposit; the U.S. Government paid 5% for investments in its short-term notes. Today, with the same money, the interest rate is less than 1%. It is not reasonable to assume yesteryear’s rate of return for the future.

Yet that is exactly what the public pension plans are doing. They continue to assume that their investments will average around 8% annually despite the change in conditions.

Bonds held by public pension plans return far less than 8%. Real estate and other non-traditional investments struggle to achieve 8%. Finally, the largest part of the portfolio for most public pension plans, investments in the stock market, has not been priced to return 8% for more than a decade!

What? Conventional wisdom attributes the 2008 recession and stock market losses to current pension plan shortfalls. How and why could this discussion relate to the past decade?

This leads to the most important point in this discussion—defining the problem. If the current shortfalls for public pension plans are the result of a unique gap created by the 2008 recession, then the solution is to refill the gap over time. Many states are attempting to do this by increasing slightly the level of contributions over the next ten or twenty years to plug the hole.

But instead, if the shortfalls are the result of a trend that was merely recognized by the 2008 recession, then the current and future gap is destined to be ever-widening. That is the $4 trillion question.

Markets go up and down, especially the stock market. The stock market has historically gone up or down by more than 10% each year during almost seventy percent of the years; it has gone up or down by more than 16% each year about half of years. That is a lot of up and down.

More importantly, for long-term investors like pension plans, the combination of ups and downs across the decades is not driven by good or bad news. Nor is it a random walk of years that provides some constant average rate of return. Instead, longer-term returns from the stock market vary depending upon the starting point. As a result, longer-term returns from the stock market are quite predictable.

To understand the predictability, consider that the average long-term annual return from the stock market has been almost 10%. Yet the so-called “long-term returns” refers only to one really long period, typically 1926 to present. Instead, consider long-term returns across each and every ten-year period since 1900.

As it turns out, the average annualized return for decades of ten consecutive years is also near 10%. But the range for decade-long returns is quite wide and few of them deliver near 10% returns. Almost eighty percent of the decade-long periods over the past century ended with annualized stock market returns either above 12% or below 8%. So the odds-on bet for stock market investors is an outlook of well-above average or well-below average.  Average is a bad assumption.

Why can we say that long-term returns from the stock market are relatively predictable? The thirty-five percent of periods that averaged 12% or more have a common element—they started with the stock market having a value that was fairly low. The value of the stock market can be measured by comparing its price to the amount of annual profits generated by its companies. This is known as the price/earnings ratio, or simply P/E.

The forty-four percent of periods when returns averaged 8% or less started when the stock market had a value that was fairly high.  In general, the higher the starting value, the lower the decade-long returns. This is particularly relevant because today’s stock market on a normalized basis is priced fairly high. It was very, very high after the market bubble in the late 1990s. Since the early 2000s, the stock market has been treading water—with normally dramatic ups and downs—as its value has settled from very-high to high.  But it is still high. And that means that future returns from today are destined to be below-average.

Here’s where it gets tricky. As we know from history, at some point in the future the stock market will again be cheap. That will enable new, future contributions to be invested at lower prices with the expectations of higher returns. But, and it’s an important but, current investments are destined to deliver low returns when measured from today. Returns from existing assets are baked-in at current prices.

So not only will today’s bond investments fall short of the current assumptions currently used by state pension plans, stock market investments will also fall short. The level of shortfall is dramatic. Bonds can be expected to contribute 2% to 4% annualized returns. Stocks can be expected to contribute 0% to 6%, depending upon the future inflation rate and the level of economic growth. Real estate and other non-traditional investments could reasonably be included at 4% to 10%. All in, depending upon the relative mix of investments that are used, the blended rate of return will more likely be 3% to 5% instead of the 7.5% to 8% currently assumed by most state pension plans.

The result is an ongoing gap of near 4% annually that will cause an ever-widening shortfall for state pension plans.  The problem is not a gap created by a unique event in 2008, but rather it is the result of an environment that started about a decade ago.

That gap, moreover, will not move at glacial pace presenting a subtle 4% shift each year. Rather, with the force of an earthquake, periodic market declines will reveal large chasms. Subsequent surges may cure much of the hole until the next plunge. Yet over time, the gap will never seem to close and will attract excuses for why it is widening. Hope will spring eternal as the ship slowly succumbs to drowning waters.

CONCLUSION

The implications are significant.

First, public pension plans have very large gaps to fill as well as ongoing shortfalls. Solutions must be dedicated to shore up the plans. Policy makers must resist the temptation to use pension reform as a way to fund obligations outside of the plans.

Second, solutions will require additional contributions that will further challenge the budgets of state and local government employers. The magnitude of the additional funding will only increase with delay. Every year that additional funding is missed compounds and concentrates the problem into fewer future years. Further, state and local governments will be able to make much better decisions about sourcing additional funding if they are aware of the full magnitude of the problem. Likewise, the participants in these retirement pension plans will experience less change and will have more time to plan if their part of the solution is decided and implemented sooner.

Additionally, there are significant implications for citizens. Budget shortfalls at the state and local level will drive higher taxes: income, property, sales, and other taxes. Higher taxes among the broad citizenry to fund retirement benefits—where the benefits are greater than in the private sector—may generate resentment and unrest. Such emotional responses often result in less-rational solutions. Higher taxes and social anxiety can lead to slower economic growth, which can reduce standards of living over time. The last comment is intended to recognize a significant risk with the hope of encouraging solutions; it is not intended to be a foresight.

Finally, there are significant implications for investors. Some municipal bond issuers that appear solvent under current investment return assumptions will fail under the more realistic assumptions. Caveat emptor. Investors also tend to be targets for higher income and wealth taxes, which can lower net returns from their other investments.

The solution to public pension woes is not a stopgap series of contributions; it will require fundamental reform to address the ongoing effects of the existing conditions. A successful solution requires an accurate assessment of the problem. An inaccurate assessment begs disaster. Without a comprehensive solution, the likely actions will be marginal plugs introduced with hope that ultimately result in ineffective results."

Hey Arthur, anyone really, are you noticing that we are talking a Trillion here a Trillion there, print a Trillion,there a Trillion everywhere a Trillion! Honjestly this is truly "nuts" as Chris would certainly say, I would guess.

Happy Holidays Folks

BOB

Ed Easterling is the author of recently-released Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles.  Further, he is President of an investment management and research firm, and a Senior Fellow with the Alternative Investment Center at SMU’s Cox School of Business where he previously served on the adjunct faculty and taught the course on alternative investments and hedge funds for MBA students.  Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.

 Like Outside the Box? Then we think you'll love John's premium product, Over My Shoulder. Each week John Mauldin sends his Over My Shoulder subscribers the most interesting items that he personally cherry picks from the dozens of books, reports, and articles he reads each week as part of his research.

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Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1507
don't worry; not a "fair use" issue

And to anyone who wondered at RJE pasting an entire article in full, John Mauldin's policy is you can repost an article as long as you repost IN FULL and add all the links and atributions at the bottom of his articles.

RJE's picture
RJE
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Posts: 1369
Thank you Wendy, and a huge

Thank you Wendy, and a huge assist by Adam that is a certainty. Thank you both.

Happy Holidays

Bob

David Phillips's picture
David Phillips
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Posts: 45
Commodity-based currency

Dear Bob,

When you say that we will probably restart with a commodity-based currency, do you mean a preexisting one like Canada or an entirely new one?

Economic Constitution

RJE's picture
RJE
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Posts: 1369
Economic Constitution....

I don't remember ever volunteering how this would work out. I am not the one with strong views on this EC. I happen to think we have what we will have in the short to medium term (5 to 10 years). I believe the Reserve Currency, the Dollar, for a good while yet. I know others here have other thoughts but I could immagine Gold as a part of a basket of currencies. I like the Canadian Dollar very much but I have no expert convictions or understanding frankly. This is the Professors domain as he is most qualified to answer this for you. He has expressed his opinions on this and perhaps he or Adam would direct you to a past article or Podcast where Chris could show a well written opinion on this. I wish I could have opinioned better but I just cannot.

Have a Great Day EC

Happy Holidays

BOB 

RJE's picture
RJE
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EC wasn't talking to me...What a knucklehead...

...anyways, I have read many previous reports by John Hussman this weekend and Dec.3RD was just very enjoyable. The math is over my pay scale but I understood a great deal because he is a master at explaining his thoughts.

A couple of quotes he attributes to a friend/mentor of his: “Among the things you can give and still keep are your word, a smile, and a grateful heart.”...“Confidence is going after Moby Dick in a rowboat and taking the tartar sauce with you.”

There are many gems like this and I have them now tact to my office map that I will view often.

The full article for those who haven't read this weeks addition. Enjoy as I did.

http://www.hussmanfunds.com/wmc/wmc121203.htm

Celebrating my 58TH birthday today with those I would die for in a moments notice. Have a great day Folks. 72 days before the catchers and pitchers report for spring training. Cool

BOB

westcoastjan's picture
westcoastjan
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Posts: 466
commodity based currency?!?

Hey Bob - Happy Birthday! Hope it is a good one! yes

EC, what in tarnation are you talking about - Canada has a commodity based currency?!?!? That is news to me! Our economy is largely resource based, and the rise in commodity prices, most notably in oil, of which we have large exports, contributed to the increase in our dollar the past few years. Our dollar is fiat money, just like all the others who abandoned the gold standard. The Bank of Canada largely allows the market to determine the value of our dollar, with minimal interventions. Right now our dollar is showing strength in global markets due to the perceived economic stability of Canada during this crisis. That is not to say that we don't have our deficit/debt problems too. Perhaps the one thing we have going for us is that we seem to have a pretty rock solid banking system. But I personally am concered about what kind of exposures our banks have to the derivatives markets - that is an unknown that could tilt the tables in a bad way.

Jan

NJINEAR's picture
NJINEAR
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silver quantity

there is way more than 1 billion oz of silver.  this would be only 32000 tons or so, whereas there are 164000tons of gold.  so a reasonable guess would be between 20 billion and 100billion oz of silver., worth in the neighborhood of 1T$

westcoastjan's picture
westcoastjan
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Posts: 466
what is your source dave?

Hi Dave,

Do you have some stats or sources for us so that we can decide if there is validity to your statement re the quantity of silver?

Jan

Jim H's picture
Jim H
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Dave Blau

Jan,  Mr. Blau already cited his source:  Reasonable(in_his_mind)Guess.com.  I don't use that website much myself.  

At this point in time, registered, deliverable Silver at the Comex is 40.4 M Oz., and all Silver (including that held by customers but not for sale) equals 146.5 M Oz. Given that the 1 Billion Oz figure is usually described as, "total investable Silver", i.e.  that which could be bought.. I find the figure credible.  Most Silver that is used industrially ends up dispersed to such a degree that recycling is not presently practiced.. Maybe if Silver were $250/Oz more recylcing would become economic...but not today... so for all practical purposes that Silver is gone.  Dave Blau can try to wave his magic guess wand and induce you to believe that there is 30x more Silver out there.. which is certainly a narrative that the Bullion Banks would like you to believe.. but I think you would be foolhardy to forego further Silver investments based on a lie.  Dave is apparently a paper bug type... he argues that there is lots of Silver so that you hold on to your rare, valuable, paper instead.

By the way, come 20 or 30 years from now.. there will be almost no Silver coming out of the ground anymore.... what will it be worth then?   Look at the rate of ore grade depletion implied by SRS Rocco's chart in the attached post;

http://www.tfmetalsreport.com/comment/244233#comment-244233   

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westcoastjan
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thanks Jim

I appreciate your clarification on that. As I am of the belief that the only real silver (or gold) is that which one holds in their hands, I will continue my planning around that. Paper certificates are just paper backed by a promise, and we all know how well things backed by promises are going these days...

Thanks Jim

Jan

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markf57
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Investment in things - An RV?

One of the recurring themes in the investing podcasts is to invest in "things". Hard assets.

It seems to me that although and RV (recreational vehicle) is a hard asset, it has flaws such as being a depreciating asset as well as the need for gas (or diesel) to operate. However, it has a lot of utility and it is very easy to be nearly self sufficient in an energy sort of way.

I was wondering what others here think of trading dollars for an RV or even highly financing it and watch inflation reduce the debt to near nothing.

Mark

Doug's picture
Doug
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markf57 wrote: One of the

markf57 wrote:

One of the recurring themes in the investing podcasts is to invest in "things". Hard assets.

It seems to me that although and RV (recreational vehicle) is a hard asset, it has flaws such as being a depreciating asset as well as the need for gas (or diesel) to operate. However, it has a lot of utility and it is very easy to be nearly self sufficient in an energy sort of way.

I was wondering what others here think of trading dollars for an RV or even highly financing it and watch inflation reduce the debt to near nothing.

Mark

Whenever I think of any kind of vehicle, the question of fuel comes up first and next the assumption that roads will be open and passable.  Although RVs are supposed to be for camping, they can't get anywhere I ever go camping.

Doug

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EC? OK, I like it. Let's go with EC.

My original post was intended for the speaker on the podcast Bob Fitzwilson.  Hopefully he will read this and respond too.

RJE Bob, thank you for your responses.  I look forward to looking through the material you suggested when I get time.  Happy Birthday.

Westcoastjan,  I got the idea of Canada being a commodity currency from the book Currency Trading for Dummies.  (I am still  learning so please be patient with me.)  In the currency traders world, Canada, New Zealand, and Australia are considered commodity currencies because their countries have an abundance of resources such as oil, metals agricultural and mining industries.  As paper money loses value, some investors put their money into the resources that humanity needs itself and that includes investing in commodity currencies.  The author, Brian Dolan, points out that in recent years there has been a correlation (not causation) of commodity currencies and the commodity values themselves.

In the past week I have heard talk on both CBC and BNN news of the Canadian dollar becoming a researve currency.  Thus my question.  When Bob Fitzwilson talks about a resource-based currency in the podcast, is he talking about a commodity currency like Canada's becoming a new researve currency or is he talking about a new type of currency based on resources altogether?  

Good news.  Canada never deregulated its banking system and did not allow the same exposure to derivitives that the US did.  That is why Canada did not suffer the same crisis and why Canada now has the soundest banking system in the world.  Canada is producing about four times as many jobs per capita as the US and most of them are full-time jobs with benefits.  The OECD recently released a report saying that Canada will lead G7 growth for the next 50 years.  Yes, Canada is playing the same fiat money game and will suffer if the system collapses, but it is not nearly as deep into the problem as the US.  I think Canada will do better than most of the other countries.

I certainly hope so because after studying Canada for around nine years I decided to migrate there myself.  I just retired from teaching in the southeastern US and moved my family to British Columbia.  I guess that makes me west coast too.

EC

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Hey, Markf57?

RV's, or recreational vehicles do not strike me as a good investment. Mostly, they sit in you driveway.

Around here, we call them "guest cottages."

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no worries!

Hi EC,

Welcome to the west coast - a darn great place to live, but shhhh, don't tell too many people.

No worries re the terminology on currency names. This is a learning curve for me too, big time. I just did not want you or anyone else to think that we had a secret thing going up here and we are really back-stopping our bucks with something other than hot air.

I am glad to see such a great cheer-leader for Canada! I am optimistic too, but that optimism is tempered by the fact that we are, and always have been, joined at the hip with our good neighbors to the south. What happens there can and does affect us, strong Canadian banks not withstanding. And again, there is that domino effect re the derivatives scene. Everything is so interconnected now there is just no telling where the fires are going to flare up...I remain cautious in that regard.

Sorry if I came across too hard - that is a problem with the written word - nuances, tone and meaning are easily misinterpreted. I have to remember when I write cuz what is going on in my mind, which might be a humourous take on something, is not  necessarily how it is being received on the other end. My bad if I offended you :(

Jan

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No Worries

No worries.  I just turned 50 and taught teenagers for the past 20 years so I have a pretty thick skin.  It could be thicker though and this site seems like a place to obtain that considering the people here have well grounded (energy, energy, environment) wisdom.  I have learned a lot from this site and have even showed part of the crash course (the part about net energy) to my students.

Yeah, I'm a cheer-leader for Canada.  I researched the migration like crazy and the move turned out better than I had hypothesized.  The best part is moving into a reason-based democracy as opposed to a greed-based democracy.  It is like stepping out of the sunset of the currupt Roman Republic and into the sunrise of the Athean golden age.

As you can tell, I am optimistic too.  Too optimistic really and in need of tempering.  I look forward to tempering my ideas with the wisedom of the people on this site.

EC

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Canada..

Hi EC..I appreciate your posts and your rationale for moving.  I was just with some like-minded friends this weekend here on the East coast (NY) and we were talking about possibly setting up shop together for retirement/bug out in Nova Scotia since it is reasonably driveable from our current location.  Do you have any opinions on the East coast of Canada?  I assume all of the political benefits are the same as for you in BC.     Thanks, Jim

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Bug out to Canada?

I've always liked Canada.  All other things being equal (and they aren't), if I could live anywhere in the world it would be Toronto.  Two issues have caused me to cross Canada off my list to bug out to: 1) I can't bring any guns, and 2) I can't bring any precious metals without paying about 30% tax on their value.  Of course, there's always smuggling, but that adds a dimension of danger and uncertainty (at an extremely vulnerable moment) that I just don't want to deal with.

Tom

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Most all of my coins are

Most all of my coins are Canadian and stored in Canada (60%-w/40% near me). I live 20 minutes from the border, and know this part of Canada pretty well. Toronto is just beautiful but I still feel most comfortable not having so many people in and around me during crisis.

Happy Holidays

BOB 

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each province is different

Hi Jim,

A short quick answer while on my coffee break... Nova Scotia and BC are quite different in many ways. If you want to avoid winter you might want to avoid Nova Scotia... You will find each province in Canada has different leanings in politics, and each province, like your states, have differing types of economies, different taxation set ups, health care set ups and so on. We are similar, but different, if that makes any sense. So it does pay to do your homework. I'd be happy to give you more info if you are interested....

Jan

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Gold in to Canada

Just as a point of discussion.. although seemingly arbitrary, I thought that pure Gold (.999 and greater) coins like Buffalos and Maples (but not Eagles)  could be brought in to Canada tax free...   Here is one reference;

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precious metals imports into canada

Hi Jim and everyone else who is curious about bringing PM to Canada,

I was under the impression that you can bring in <$10,000 in personal financial instruments without a problem. Anything in excess of 10 grand must be declared, as it is in most of the world, to protect against money laundering. I am pretty sure of this, but not 110% so here is a link that may help you to get more info:

Http://cbsa-asfc.gc.ca/publications/pub/bsf5073-eng.html

I hope that helps a bit.

Jan

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silver qty

see http://www.gold-eagle.com/editorials_05/zurbuchen011506.html

i think i am a pretty good guesser.  i certainly think a dismissive set of remarks is uncalled for.  the qty of silver would have to be vastly greater than gold to suppoirt the price difference

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Talk data.. not guesses Blau

Although you made the argument that there must be 20 -100 Billion ounces of Silver "out there"... the article you cited does a pretty good job of quantifying ALL Silver ever mined, and comes up with the following statement, mainly as a means to substantiate the basis for the historical Gold-to-Silver ratio, which today's price ratio is out of sync with;

44.55 billion ounces of silver/ 4.25 billion ounces of gold = a 10.5 to 1 ratio

Hmmm…This says nothing of the silver deficit and yet the ratio already reveals that at today's prices ($9/ounce vs. $540/ounce) silver trades at an 82.5% discount to gold, or conversely, it could be said that gold is overvalued by about 570% in terms of silver. Of the two ways of looking at the comparative price, I'll most certainly choose the former as I believe both silver and gold will be going up wildly in price in the coming years. Most would agree that neither gold nor silver is undervalued in terms of the dollar, so the only way to look at this situation is to say that silver is undervalued in terms of the dollar and gold. This means that I expect silver to far outperform any gains seen in the price of gold, even if gold doubles or triples in price within these next 2 years. The ratio will shrink, and silver will rise much faster, drawn up, as if by a vacuum in space, a vacuum created by the long-term market manipulation, short selling, and government dishoarding.

So we don't have to guess... 44 + Billion ounces (that was 2006 data) have been mined in history.  Silver has industrial uses.. much of the older Silver went into photography.. more recently it has been consumed and dispersed via electronics uses, including most lately solar panels.  The statement that there are somewhere in the range of 1 Billion ounces of investable, tradeable, available Silver right now is entirely plausible, in part based on data that I referenced in the earlier post.     

If you research it further, you will find that there was in fact a large strategic stockpile of Silver held in the US prior to the 1980's, but it was dishoarded and eventually the US abandoned the idea of stockpiling at all. 

reference:  http://about.ag/StrategicStockpile.htm

Metal prices are based on supply vs demand.  Gold has primarily investment demand.. Silver primarily industrial.. for now.  There is no basis to say that Silver's current low price means there must be craploads of it sitting around somewhere.  If though, you were to cite the fact that the level of short Silver Comex contracts is higher relative to yearly production than any other commodity, then you might be getting warm as to the real reason that Silver is underpriced.    

Here is another reference that suggests < 1 Billion ounces available;

source:   http://www.monex.com/prods/silver.html

It is estimated that more than 95% of all the silver ever mined throughout history has already been consumed by industrial use. That silver is gone forever, unrecoverable at any price. In 1900, there were approximately 12 billion ounces of silver in the world. Today, that figure has fallen to about 300 million ounces of above-ground, refined silver. This means that at current prices, it would only take about four billion dollars to purchase all of the above-ground silver in the world today.

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Above ground silver

dave blau wrote:

see http://www.gold-eagle.com/editorials_05/zurbuchen011506.html

i think i am a pretty good guesser.  i certainly think a dismissive set of remarks is uncalled for.  the qty of silver would have to be vastly greater than gold to suppoirt the price difference

dave,

I was curious as to the basis for your suggestion, so I followed the link you provided and read Part I of Mr. Zurbuchen's essays. He uses several sources of data to conclude that since the beginning of time through 2004, man has mined 44.542 billion ounces of silver and 4.25 billion ounces of gold. I was curious enough to click on the link to his website - silverinscripture.com ... The site doesn't exist. So, I put the name "David Zurbuchen" into a Google search and found a link to http://www.safehaven.com/article/4688/the-silver-deficit-1942-2004. (This is Part II of the series.) He admits that a silver deficit exists and attempted to quantify it. I agree with his logic, but can't say how close to reality his numbers are. At the end of this essay, he has a preview to Part III of the series. Here is the preview:

Quote:

A Preview of Part 3:

From the CRA Report: Silver Stocks Around the World
An independent study conducted in 1992 by Charles River Associates

(Totals as of year-end 1991)

Total Silver that remains above-ground (all forms): 19.06 billion ounces
Total Silver contained in silverware and art forms: 16.48 billion ounces
Total Silver contained in bullion form: 1.40 billion ounces
Total Silver contained in coin and medallion form: 1.18 billion ounces

Updating the Data

1992-1994: World mine production of silver during this period totaled 1.373 billion ounces (Minerals Yearbooks)

1995-2004: World mine production of silver during this period totaled 5.639 billion ounces (The Silver Institute)

Total World Mine Production from 1992 to 2004 = 7.012 billion ounces

Combining this number with the CRA Report's estimated total above-ground supply of 19.06 billion ounces, we arrive at 26.07 billion ounces of silver remaining above ground.

Here then is our new gold to silver rarity ratio based solely upon relative rarity. 4.25 billion ounces Au /26.07 billion ounces Ag (see Part 1) = 1 to 6.13 (Gold vs. Silver)

This means that based on relative abundance, silver should be trading at around $91.10/ounce (using a gold price of $558.5)

Please note that this doesn't even take into account the large deficit formed since the CRA Report was conducted in 1992. But we'll deal more with all of this in Part 3. This was just a taste.

I will be using the CRA Report as a yardstick with which to compare my findings in Part 3 of this series. If the numbers are similar, then we can be fairly certain these findings are accurate.

He is updating the mined amount from 1992-2004, but not the consumed amount. If patterns that existed since 1942 (silver in deficit) continued through 2004, the total available would be less than 19 billion ounces, not more. Even less is available in 2012. Also, the majority of the silver above ground (16.48 million ounces in 1991) are tied up in silverware and artwork. Although technically available, it will take a much higher price to bring much of it to market and more work (energy) for refiners to separate the silver from silverware, making it less attractive than bullion or coins. It isn't an apples to apples comparison. To be fair, any gold that has been used in art or plating would be in the same category. I don't know what those ratios are.

dave blau wrote:

i think i am a pretty good guesser.  i certainly think a dismissive set of remarks is uncalled for.  the qty of silver would have to be vastly greater than gold to suppoirt the price difference

Finally, tuck your feelings away. You need to support your arguments much better around here if you don't want to be casually accused of erroneous thinking. I don't know why silver is trading at around 50:1 with gold. Could it be that people have been trained to think that is the appropriate ratio? Could it be that the silver users are manipulating the price using paper ounces? I don't know. You can keep a beach ball under water, but it squirts out quite violently eventually. I'm overweight in silver because I believe that the ratio is about an order of magnitude out of kilter.

As far as I'm concerned, silver is on sale.

Grover

PS - I started writing this, read the articles and got caught in search mode and posted this before reading Jim's reply.

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Canada

Jim,

Canada wants immigrants to help support its aging population, more specifically people with certain skills or businesses to offer.  The critical age is 50.  Above that, they are not interested.  I think there are still ways in, opening a business for example, but I am not sure.  Many of the immigration rules have changed since I was accepted, so much of my knowledge is dated, but I do know that the best way in is with a skilled worker visa.

I became a resident with a skilled worker visa, which allows us to be like every other Canadian, except we cannot vote or run for office.  We even get to apply for jobs as a Canadian.   The visa last 5 years and we are allowed to renew it if we reside in Canada for 2 of those years.  If we live in Canada 3 out of 4 years we qualify for Canadian citizenship and get a Canadian passport. 

US citizens are allowed duel citizenship with Canada.   I will even be allowed to vote in both countries, doubling my little bit say-so in the future fate of humanity.   What is that worth?  Can you even put a monetary value on that?

I will pay the higher Canadian rate for taxes, but it will be split between the US and Canada.  For my particular situation, the extra money I pay in taxes is about equal to my savings in health care cost.  In the US, I was paying about $1k/month plus deductibles, plus copays, plus hours spent disputing denial letters.  In British Columbia I am paying $32/month per person with no deductibles and no denial letters to dispute.  There are still copays in the form of medications, dentists, and other extended services that are not covered by the basic system.

Treat the propaganda you hear about the horrors of the Canadian health care system with the sort of skepticism that should have been shown to those who told us that the Iraq war would pay for itself.  I injured my shoulder in one of the very nice and affordable recreation centers here.  (Wave pool, 4-story slide, lazy river, and high diving boards for $3.50 a person.)  The next day, after a five-minute wait, I was talking to a doctor and had an ultrasound ordered.  Three days later, and another 20-minute wait, the ultrasound was done.   If I had needed surgery, it would have taken some time, but it would not have cost me extra.  It is better than being a member of the 60% of US citizens that are forced into bankruptcy for medical reasons.  Consuming 19% of GDP, the US certainly has more advanced medical treatments, but the Canadian system is certainly more affordable at only 10% of GDP.

Each province is different on healthcare.  Due to its oil wealth, Alberta residents pay nothing for health care.  I have no idea what residents in Nova Scotia pay.

When I did my research several years ago the breakeven point on income was $70K per year.  As far as taxes go, the average person making less than $70k is better off in Canada and better off in the US if income is above $70k.  That is before you figure in college tuition, which is typically a third the cost in Canada.  National and provincial taxes are combined in British Columbia and the top tax rate of 43% kicks in around $70k.  Corporate and capital gain tax rates are less.

Estate taxes are also much less in Canada.  About 900,000 people moved to Canada following the Iraq War, one of the country’s largest immigration periods.  Surprisingly, the rate of immigration increased with the election of Obama.  Why? Apparently, the affluent see the US coming after their wealth to pay off its debt.  To protect their wealth from estate taxes, they are establishing Canadian residency, divesting their US assets, reinvesting in Canadian assets, and denouncing US citizenship.  In Canada, there is more like a 1.5% probate fee.  Note:  Denouncing US citizenship is not my plan.  My goal is duel citizenship so that we can live in either place.  Despite its predicament, the US is too important to the fate of humanity.  I consider my vote there too valuable to sacrifice.

I don’t know much about Nova Scotia; all of my research was directed toward British Columbia.  One place to start your research is www.migrationexpert.com.  Just click on Canada and take one of their surveys.  I filled out one in 2003 and found out I qualified in 15 minutes.  It is just one of many companies that offer assistance through the process.  You can apply to Canada directly, but don’t expect much help.  I found their services to be very helpful and worth the cost.  I suggest you just take the survey and then shop around for yourself because my experience with them was nearly a decade ago.

Good luck on your search.  I am curious to learn what you find out.

EC

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On gold in Canada

You are required to report anything worth over $10k when crossing the border.  It is better to cross with gold coins instead of bullion because sometimes gold coins are valued at the value printed on the coin.  I bet there is site somewhere that will better describe how the coins are valued at border crossings.

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On firearms in Canada

Surprisingly, Canadians have as many firearms per capita as the US, but they are all for hunting.  Personally, living in Canada makes me feel much safer.  I lived in the southern US where I regularly hear people advise me get a gun and stock up on ammunition to prepare for the upcoming race war.  Or complaining that crime rate is going to go up because the town will not allow people to carry handguns on the greenway.  These people are angry and misled.  (The violent crime rate in both the US and Canada are at 40 year lows.)  Considering the number of angry, irrational, and well-armed people in the south, I feel much safer in a country that offers a more rational approach to things and where the people are not so angry.  

EC

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RJE wrote: Most all of my

RJE wrote:

Most all of my coins are Canadian and stored in Canada (60%-w/40% near me). I live 20 minutes from the border, and know this part of Canada pretty well. Toronto is just beautiful but I still feel most comfortable not having so many people in and around me during crisis.

Happy Holidays

BOB 

Hey Bob.  What's with the Canadian coins and storage?  I thought you were RED, WHITE, AND BLUE.  Look like some maple leaves are growing in the cracks, lol.;-) 

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ao, I laughed with you. Hey,

ao, I laughed with you. Hey, don't forget Mom, apple pie, and BASEBALL!!! Canadians are a special breed of Folks. They just chill and wear their emotions on their sleeves. My kind of Folks. I played so much hockey with them as kids because in Detroit (Windsor) I was 10 minutes by tunnel and 2O by bridge. Now I'm 20 minutes by bridge again (Quebec) only North of Detroit. Then baseball in the summer. I almost fell in LOVE with a Canadian girl in Up North Michigan one summer at 17, I was the type who just fell in Love quick but distance killed that romance plus I met my wife after that summer, fell hard again, and that was that. I drink very little but I'll take Barb (wife) and we'll spend a weekend in Niagara Falls, go to the same pub we go to year in and year out and we drink, dance, and have a great time. Usually with the same people year after year from Canada eh!, and it's great.

When I was making my plans in 2009 Chris was very happy with Canada and I did my research, and thought if things were really bad where could I go and feel comfortable, and be close to home. Up North Michigan was my first choice and Canada was my second. One is nearly 6 hours away (my Michigan spot) and Canada (farming district) was 20 minutes so I went close. Honestly, I have no real attachment to Gold except what it would mean. My plans for it are to take care of as many family members in food, clothing, and shelter for as long as it lasts. I have a huge family, and I am more worried about them than myself. I am cool, and this Gold was basically tithed in honor of my parents to the family. I don't know if anyone out there has a similar story but when you're raised with 12 other Brothers and Sisters you feel a bond that is unbelievably strong, and then you add their kids, and their kids, and you just prepare a little harder.

ao, this was nice just BS'ing.

Peace

BOB

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ao
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what?

I almost fell in LOVE with a Canadian girl in Up North Michigan one summer at 17

/quote]

And where in tarnation is "Up North" Michigan because if it's where I think it is, you better be callin' it somethin' else, lol.

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...LOL...my property is about

...LOL...my property is about an hour South of the Mackinac Bridge, and I met her on Mackinaw Island. I have no clue if you are familiar with this area but it is truly the most beautiful place in the world. Look at the mitten of Michigan, and it's the very tip and then the bridge, and Mackinaw Island. Amazing visuals, hunting, fishing, and skiing. 1 person for every 10000 acres or some such large number.

Peace

BOB

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Canada is my backup.

Enjoyed reading all the comments about Canada. It is our (wife, daughter, and me) backup plan as well. My wife is a dual citizen CA/US which makes my daughter as well. I grew up in Grand Rapids, MI (prior to GR, 8 years in Buffalo, NY...cold!!). Our backup plan has nothing to do with leaving the US but rather where our family lives. Have to give them credit, they are in a good position to weather a global meltdown.

Thank You

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ao
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***'s country

RJE wrote:

...LOL...my property is about an hour South of the Mackinac Bridge, and I met her on Mackinaw Island. I have no clue if you are familiar with this area but it is truly the most beautiful place in the world. Look at the mitten of Michigan, and it's the very tip and then the bridge, and Mackinaw Island. Amazing visuals, hunting, fishing, and skiing. 1 person for every 10000 acres or some such large number.

Peace

BOB

Bob,

I'm not only familiar with the area but I live there ... and it's called "da YooPee".  And it is beautiful.  But as far as most beautiful in the world, you need to get out more my friend, lol.  We do indeed have great scenery, fishing, hunting, skiing, people, etc. and a low population density but your figures are a little off.  It's more like one person per 35 acres rather than 1 per 10,000 acres.

And while you may fire that shotgun from the hip at your own risk, don't be firing that .308 that way.  We don't need rounds arcing up here from troll country, lol.

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