HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
A Variety of Topics
Rather than have a prolonged discussion of one topic, I will address a variety of issues, allowing me to make many points worthy of your time and attention.
“If you truly believe we will have significant inflation, shouldn’t a person buy an asset with borrowed money and pay it off with cheaper dollars?—provided they can service the debt. This is counter to your recent advice”.
DH, Columbia, MO
RMD comment: What Dave suggests is correct strategy the vast majority of the time. Ex., there was significant inflation in the 1970s. People with a fixed-rate note, paying off their debt with dollars far cheaper than those borrowed, made out like a bandit.
To appreciate why my advice is now different, you must understand several concepts. Webster’s defines solvent as “able to pay all legal debts”. Liquidity is “consisting of or capable of ready conversion into cash”.
Back to Dave’s question: Presume the person is solvent. Also presume the person has adequately liquidity to service their debts. My concern as it relates to the current situation is: What if the entire system froze up and became illiquid? In the financial crisis of 2008, some firms were solvent (assets greater than liabilities), but were brought down because the system ground to a halt: their assets couldn’t be converted to cash.
The defining characteristic of our current mess is debt. The liquidation (paying off) of debt is deflationary: money is taken from circulation to pay off the debt. The more debt: the greater the deflationary pressures. Our government is fighting deflation by taking on more debt and printing more money. Assets appear to be “inflating” because of the increase in money supply, while the risk of system implosion increases pari passu.
Robert McEwen, President of US Gold (USGCF, Toronto Exchange), was interviewed Tuesday on CNBC. When asked where he thought gold and silver were going, he was very direct: “Gold will be $2K by the end of the year, and $5K in 4 years. Silver will be above $50 by the end of the year and $200 in 4 years”.
RMD comment: Certainly an aggressive prediction (see more below on gold). He could be right; we’ll see. Watch the US Dollar Index (chart, below): if it breaks below 70, he will be right.
The same day on CNBC: Prof. Robert Shiller, author of Irrational Exuberance I and II, and co-originator of the Case-Shiller Home Price Index, said “Home prices have fallen for 5 years. I’m not sure the trend is over”.
WSJ that day showed a graph of the Case/Shiller Index. From a baseline of 100 in 2000, the index rose to more than 200 by late 2005. It is currently about 140.
RMD comment: The well-known concept of “regression to the mean” suggests we still have a lot of “regressing” to go on home prices. I again advise that, unless the situation is very compelling, hold off on residential real estate.
I have CNBC on from when I wake up in the morning until suppertime. However, I must tell you, because of the often shrill talk and constant rah-rah, it is not uncommon that I have the mute on and just watch the tape. I turn the sound back on for CNBC regular Rick Santelli, and people such as Prof. Shiller, Barron’s Roundtable member Marc Faber, and Frank Holmes of US Global Investors.
I mentioned in the last issue that I received a letter from a new physician subscriber (she and her husband just finished their training) that contained so many good points that I would stretch them out over several letters.
“I can tell you one thing: after living in (LA) California for one year, I would not buy a municipal bond from this state. I have never witnessed more people living above their means. We were on a tight budget, so moved into an apartment not that nice. I was surprised to see lots of Mercedes, Lexus, BMW, etc., in the garage of our dumpy complex. Then I realized the cars were all leased. We were 4 blocks from a store which sells cowboy boots for up to $5K, and they are still in business. Nobody out here can stop spending money. It is appalling. I convinced my husband to move back to Nebraska where people actually care about being able to pay their bills”.
MAH, NE
RMD comment: Don’t worry about what other people have, just worry about what you have. I prefer to impress people with my character and my accomplishments rather than the car I drive.
Also note how people make observations and can draw their own conclusions (wouldn’t buy a California municipal bond because the state is full of spendthrifts).
$5K for cowboy boots: Our Central Missouri Food Bank can leverage 10 cents into 1 lbs of food. $5K could buy 25 tons.
This from another subscriber regarding my comments about credit cards and debt:
“While I am of a younger generation, I disagree that credit cards are inherently bad. While it is true you pay interest on the bills not paid in full, if you pay off in full each month, you are getting up to a 30-day loan interest free (cheapest short-term loan I know of). While your spending can be tracked by the company, it also allows you to track your spending. By using a credit card for most of my payments, it made it easier to identify excess spending that could be cut.
Having credit cards that are paid in full each month helps establish a good credit rating. In the hands of a responsible consumer, a credit card is a powerful tool in being thrifty and staying in the black”.
BC, OH
RMD comment: I agree. The point is that the responsible consumer doesn’t need to read my message and does. The irresponsible consumer needs to and doesn’t.
A real-life example of something which is good for some people but may not be for most: Shortly after it was reported that alcohol raises HDL (good cholesterol), a patient, who I liked his hooch a little too much, said “Doc, I heard that alcohol is good for your heart”. I responded (naively): “Yes, it raises HDL, which is good for your heart”.
I found out later he told his wife “Dr. Doroghazi says I can drink as much as I want because it’s good for my heart”. I never made that mistake again.
There was a very insightful post on http://www.321gold.com on 7/26 by Steve Saville entitled “Real Performance”, where he looks at prices adjusted for inflation.
1) The real prices of corn and soybeans are no higher than 40 years ago. The loss of purchasing power of the dollar is the reason current prices are high.
2) In June, 2011 dollar terms, the 1980 peak inflation adjusted price of gold is $2,600. Saville also notes that “During the current bull market the inflation adjusted gold price (has not) experienced the sort of spectacular advance that we would expect to occur prior to a major peak”.
3) “It’s very likely the inflation adjusted Dow (Jones Industrial Average) will make new multi-decade lows within the next two years”.
RMD comment: the last point may be the most important of this letter. As I have noted many times, I believe the data shows that bull and bear markets in financial assets and hard assets alternate in periods lasting 15 to 18 years. The current commodity bull market began in 1999, and the current stock bear market began in 2000, suggesting both have another 5-8 years to run.
I have continually emphasized the DJIA/gold ratio. In 1999, it took more than 43 oz of gold to buy the DJIA. In 11 years, the DJIA has lost almost 83% of its value in comparison to gold. In 2011, this ratio has fallen from 8.23 to 7.44, a loss of 10% this year alone.
Before this is over, it will take just 2 oz, maybe as little as 1 oz, of gold to buy the Dow. This is why I believe point #3 is correct. Plug in whatever number you want for the DJIA to see where gold will end up.
This is from a new subscriber:
“After practicing dentistry for many years, I stumbled through all the scenarios (in your book). Unfortunately, the dental school curriculum still doesn’t include any business advice”.
TR, MO
RMD comment: My greatest frustration is that the medical (and dental) establishment chooses to keep our hard-working, honest, young doctors and dentists “financially barefoot and in the kitchen”. Our superbly trained (and heavily indebted) doctors and dentists often have little idea how to manage their money, and can fall prey to every foolish scheme that comes along.
In last week’s letter, I said that with gold breaking to a new high, this could be just about your last chance to buy. I received an email from Stephen Davidson at Blanchard & Co., noting that for more than a week they have not been able to obtain any of the extremely popular Swiss 20 Franc coins (0.1867 oz of gold).
RMD comment: Silver and the miners (with the exception of Royal Gold (RGLD) have lagged, while gold broke decisively to a new high. One of the most popular small-denomination gold coins has disappeared from the market. Gold is just about the only thing going up. People want physical gold.
The market was spanked last week. I again suggest you watch XLF, an ETF representing a basket of the largest financial stocks (JP Morgan, Bank America, Citigroup, etc., see chart, next page), because it has lead the market on the way up and the way down. On Friday, it finished right at its recent lows. If it breaks decisively down, the broad market will probably follow.
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