Commentary: Ned Goodman and the ‘Botox Economy’

Ned Goodman, president and CEO of Dundee Corp., spoke about the perils of quantitative easing at the Toronto Resource Investment Conference on Sept. 12. He made the following remarks, as recorded by The Northern Miner:

Ned Goodman: I have a lot to say and I will give you my biases, no problem there. I believe I’m a sensible man. And as a sensible man I’ve been told by my mother, actually, that even though you don’t know the hour or the place of your demise — you do know, that without a doubt, it’s going to come.

So as a sensible investor, I’m ready for the day that the U.S. Empire crumbles, and that’s a hint as to where I’m going . . . I know that nothing lasts forever and the environment that we’re in could change. But we do not know anything other than nothing lasts forever, and right now it looks like whatever is happening is speeding up, not slowing down. I expect and hope to be here to watch it happen.

The slide that is on [the auditorium screen] is nothing more than to show you that the fixed income market since 1962, which is when I started my career, has had some unbelievable long runs. We’re not talking of short-term things, we’re talking about long-term things. And I’ve watched interest rates from 1962, when I started my career, I’ve watched interest rates go up to 15.8% in the late 1970s; lived through those inflationary days in the late 1970s; and then watched in absolute amazement that bonds outperformed stocks for over 30 years.

So nothing is going to happen to fix what we’ve got right now in a short period of time. Something is going to happen, I don’t know what it is, but when I think about what’s going on amidst the global and Middle East chaos that we have, and the violence around the world, and problematic economics that are in existence, and the financial news that emanates from the U.S., Europe and the U.K. — our world is all screwed up. It’s screwed up in a manner that I don’t think we’ve ever seen before. So the traditional economist has a lot of trouble, and that’s why you see so many different views.

So without any certainty, or reason for optimism or confidence of investors, yet the stock markets of the world appear to be blind to the news of the day. Nevertheless I’ve not been more concerned about the future for overall investment at any time in that entire period that you see there since 1962. While I definitely remain an optimist by nature, there are times when rationality takes over my psyche and questions optimism.  I remain positive towards those kinds of investments that will retain inflationary protection like infrastructure, real estate and other hard assets such as gold and commodities.

We are fortunate and unfortunate that we live next door to the richest country in the world, and supposedly the most democratic, as established by its Constitution, but not necessarily by its president. But if you search through economic history books, you’ll never find another instance similar to the U.S. currently. This is all brand-new stuff. With their dollar serving as the world’s reserve currency, while backed solely by paper on which is written “In God We Trust — You Should Too.” I trust in God, but not the paper.

In addition to today’s environment, we have a new country — I’m calling Europe a country — with its own currency, which they promised when they put it out that they would never print any more, but it has the same kind of backing as the U.S. dollar has. Nothing other than the backing of these currencies is that “Don’t worry, if we need any more, we’ll print some more. And therefore you shouldn’t worry, you’ll get your interest because we’ll just print some, and when you need to get your money back we’ll print more.” The British are all confused about it, and maybe that’s why they had to reach out to Mark Carney, and maybe he’s going to help them. But at the same time, the Chinese are collecting U.S. dollars and gold. And what are they doing with it? They are spending it as fast as they can. They have hired or brought into the system prominent businessmen, non-political businessmen, giving them the actual advice that it’s important that they find some place to spend these U.S. dollars —  $3.5 trillion.

I was fortunate enough to have a private luncheon meeting with Warren Buffett and a few other people and the question came to Buffett: “What is going to happen when the Chinese want all their money back? And they’re going to ask to have their bonds cashed in?”

And Buffett let out this huge guffaw, drinking his cherry coke, and he said, “It’s never going to happen.” And the questioner asked, “What do you mean?” He said there’s no way that the Chinese, who are very, very smart people, are going to take a piece of paper that says so long as you hold this, we will pay you 3% interest in our dollars, in exchange for a piece of paper that tells them they should trust in God and get nothing. And that’s not what is happening. The Chinese are cashing in their bonds to other countries who are using it as currency.

When he visited the U.S. in 2011, the then-president of China, Hu Jintao, said the current international currency system is a product of the past. The monetary policy of the U.S. has a major impact on global liquidity and capital flows, and therefore the liquidity of U.S. dollars should be kept at reasonable and stable levels. He then commented on the 2008 financial crisis, which is the crisis we are all living with right now. It hasn’t ended. And just like 1929 is a date that everybody remembers, as I remember when I graduated from university and told my mother I was going to become an investment counselor and she said: “Do you know what happened in 1929?” Yes I did, but she lived through it.

So Hu Jintao went on and said that the global institutions had failed to fully reflect the changing status of developing countries and the world economy and finance. He went on to suggest that what China and most of the G20 [want] is a reliable, disciplined and apolitical unit of account for global trade. Let us not forget that he was the leader of the country with the largest holding of global foreign exchange reserves and effectively speaks for China and another 143 members of the International Monetary Fund who have accumulated in excess of $5.5 trillion in U.S. currency, $3 trillion of which is held in U.S. dollars directly.

So as we look forward into the future and see the kinds of things that are going to happen, we wonder about a lot of things. This is the Big Mac versus the CPI chart. You can see that starting in 1985 McDonald’s hamburger used to cost a buck and a half. Today that same McDonald’s hamburger costs $4.35. If we used the phony inflationary numbers that are put out by the U.S., put out by the Federal Reserve and whoever does the calculation, it should be $3.35. Now that is minor compared to what John Williams — Dr. Williams who writes Shadow Stats — says that the current rate of inflation in the U.S. is not 2%, as Mr. Bernanke tells us every day, but it’s more like 8–9%, and maybe even higher when you play around with it. So what you’re getting from the U.S. is a bunch of lies.

This is an undervalue–overvalue [chart] for the S&P 500. You can see the S&P 500 is in fair-value territory. It’s not being undervalued, it’s in fair value. This is the Toronto version of it, likewise in fair value territory, that’s everything. Now look at the Canad
ian 30-year bond [chart], and it is a little overvalued. Bonds should not be in your portfolio, quite simply. Buffett said it two years ago — they’re dangerous to your wealth. Now here’s the materials [chart], and this is where you lump in all kinds of fertilizers, all kind of metals, and everything — it doesn’t have a big enough chart to get to the undervalue [portion] where it really trades at. It gets better. This is the diversified mining and metals [chart], and it too is in grossly undervalued territory.

Now this is the banks [chart]: Now, some of you probably saw the newspaper article that said “Ned Goodman sold all his banks and is buying gold.” Well now you know why. It was an easy decision. The banks are overvalued, they are a protected species. And they make money under any circumstance, but they are overvalued and they pay dividends, and people are frightened of everything else. So the banks are overvalued and gold is grossly undervalued — grossly undervalued, very undervalued.

And there is my view about the commodities model . . . you can see that big, blue line is headed up for commodities, and it goes back to 1932, and gold is at the top of it. I am comfortable that we are still in the supercycle for commodities, and I’ll tell you why.

Ayn Rand told us that as individuals we have innate mobility, and our highest duty is to flourish by realizing our potential — and we’ve got tremendous potential in this country and the people in this country. She also told us that we’re able to develop and/or join a culture that maybe is outside the norm, and create wealth in profoundly different ways.

So I believe gold is scarce. It is hard to find. It is difficult to extract. And it is valuable. The world needs a new gold standard in order to provide us with a true, positive outlook for the world’s investment climate, which today is in very, very, severe disorder. Its ability to create monetary stability, predictability and investment objectivity would be a boon and a blessing. And this from Jim Grant. We could have a monetary system whose exchange rate would be fixed, and business could be conducted on a global basis without even concern and guessing about what the politicians and policy mavens are going to do with the value of our money.

More than five years have passed since the Great Recession. The so-called Great Recession of 2007 and 2008. And at least three years have passed since what the U.S. has been calling a recovery. And there is no recovery. There’s been a lot of back-patting stuff going on in Washington . . . but it’s all a farce. It’s illusion. It’s all illusions of someone playing with numbers. Von Mises talked about illusions, and I’ll talk about that in a minute.

 The market has been stubbornly testing new, nominal, so-called highs for months, and is up over 85% from the bottom. They have made a big change to the Dow. The Dow is a 30-stock index. They’re going to take out three of them . . . and put in new names into the Dow. [The three-lowest priced stocks that were dropped were Bank of America, Hewlett-Packard and Alcoa, and they were replaced with Goldman-Sachs, Visa and Nike.] But what happens to ETFs these days is the automatic necessity for the ETFs to bring their portfolio back to where they say it’s going to be. So they buy all the new ones that have been put in and they sell all of the old ones that have been taken out, and guess what? The Dow is up over 100. And then down a little. And the Dow is going to go up, and I’m sure we’ll hear, “The world is great! The Dow went up! Look, through all this trouble the Dow is going up, we should be happy!”

The market has been stubbornly testing these so-called highs for months, but when you take your eyes off the stock markets and corporate profits for just a second, you find everything is falling apart. Cities are going bankrupt. Pensions are going to disappear from coast to coast as soon as the bills come due, roads are crumbling, bridges are collapsing, the U.S. is living in a police state that has spent nearly $17 trillion of its future wages.

The Americans don’t even have a high-speed rail train. If you go to countries like Korea you have high-speed trains; if you go to China they have high-speed rail trains. The U.S. doesn’t have them. They’re living in 100 years ago. The official unemployment rate is supposedly dropping, while in fact fewer Americans are employed than at any time in the last 30 years. How do they do it? Simple. You get unemployment insurance, you are deemed to be unemployed. As soon as you can’t get a job after a certain period of time, you get taken off the unemployment payments and now you’re counted as “employed.” Still unemployed.

So the unemployment numbers are totally phony, they are not real. If you average the monthly gains for jobs, you get around 179,000 jobs added. But 225,000 is what they really need. So since the recession began in December 2007, there are 5.8 million fewer full-time jobs and 2.8 million more part-time jobs. In other words, anyone who finds full-time work is an exception to the norm. Seventy-six percent of Americans are living paycheque to paycheque. Fifty percent have less than a three-month cushion. Forty-six percent have less than $800 in savings. Twenty-two percent have less than $100 to their name. And 27% have no savings at all. And this is all happening while corporate earnings, of course, are going up.

Why the disconnect? Well, the politicians and the Fed have abandoned their constituents to cater to lobbyists and donors, etc. So, while corporations are doing well, the people aren’t. The share of the economy being paid in wages is small. As it falls lower and lower, it goes to owners and to boardroom salaries and directors. We’re seeing the results of a nation and President Obama’s focus on making corporate health look good at the expense of everything and everyone else.

Now it’s time to give you a bias. One of my biases is that I think  President Obama and his position will turn out to be the worst presidency the U.S. has ever had in its whole history. I think his total plan is to get rid of the Republican Party. Now, I have to say, they’re helping him, because if he gets rid of the Republican Party, and if he keeps taking from the rich to give to the poor, and the poor are the ones who vote for you, you will have more votes, so you’re going to keep taking from the rich to give to the poor.

The other thing that happens when you keep taking from the rich to give to the poor is that the rich become poor and they’ll vote for you too. So this is a design. And some will say, well, he can’t become another president, he’s served two terms and the Constitution says you can only serve two terms. But his wife can serve. His wife can run for president in 2016. She’s smarter than he is and a hell of a lot better looking than he is, and she will get not only the black vote but the entire womens’ vote. And the entire democratic vote. So I think that’s his whole plan. Now it’s a bias, I have no proof, it’s just a gut feeling. I hope I’m wrong. But we’re in a recession.

David Stockman wrote a book. He worked with Ronald Reagan and he wrote a book called The Great Deformation, and he said that his view was that we are at the shadow era, the Keynesian endgame of a failing, bankrupt, paralyzed state. The fact that so many voices of the establishment are at pains to shut him down provides me with the view that he might be right.

Will the U.S. dollar collapse? The pressure on the dollar will reflect not only the financial crisis inflicted on us and the
U.S. in 2007 and 2008, and further to the president, but also includes the significant weakening of the U.S., a change to the negative on geopolitical status. It is said that God rules in heaven, and that’s part of “trust in him.” Money rules on earth. But even the devil dances for gold.

So temporary prosperity at the cost of long-term prosperity is what the U.S. is going through right now. Federal pension plans are un-funded. The country is running large deficits that don’t do much good for the economy. He spends it somewhere, running monetary policies that improve conditions today, but will worsen future conditions as a result. Social security and Medicare are unsustainable programs created by the grandparents of the country, sustained by the parents of the country, but will kill the young people with their costs. The Obamacare is not going to help the country. Obamacare’s front-end loaded taxes and back-end loaded benefits are not going to do their job. States and municipalities have played with their pension assumptions for years, often in generous benefits they could not afford. Tax policy encourages debt rather than equity, creating industries that over-borrow, and there are many of them. So the country is in a mess. The world is in a mess.

— Part II of Ned Goodman’s speech will appear in next week’s issue.