HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
I read recently that all the gold in the world would only fill two Olympic-size swimming pools. Remember the specific gravity of gold is 18.3 (times heavier than water). In equal water volume, this would be 37 swimming pools.
An Olympic pool is 50 meters long, 25 m wide and at least 2 m deep. It thus holds at least 2.5M liters of water. Thus there are about 5M liters of gold in the world (All of these numbers are estimates, but you will get the point). There are 7B people in the world, so there are about 0.7 cc of gold per person. Take this times 18.3, and there are 13 grams, about 0.45 (Troy) oz, of gold per person. At current prices, this is about $615 of gold per person backing all of the paper money in the world.
That is not much. The price of gold will rise; it has a long way to go.
Last Wednesday, Scott Colbert, Chief Economist and Director of Fixed Income at Commerce Bankshares (CBSH) in Kansas City spoke here in Columbia. His talks are always insightful, but the slide entitled “Why Does the Recovery Feel like a Recession?” really fascinated me.
The “traditional” business cycle is about 5 years long: activity peaks, there is a recession; then good times return and activity again peaks. Scott’s slide showed that in the previous recessions following WW II, the economy bottomed about 5 quarters after the previous peak in business activity, and in another 5 quarters (10 quarters after the peak) was, on average, more than 5% higher than the prior peak. The point; the economy comes back even stronger after the recession. This compares to the current recession; 10 quarters after the previous peak, we haven’t even gotten back to baseline; we are still down 1.3%.
RMD comment: I believe this can be summed up in two words: Government Interference.
Capitalism has been referred to as creative destruction. During a recession; there is retrenchment; the excesses of the previous cycle are purged. The poorly-run businesses are liquidated, some never to return (buggy whips and butter churns). When prices have fallen enough, the well-run businesses, the ones that made it, start to expand and redirect capital to more efficient uses, starting the next up move. People like me, who were careful with their money, start to spend again. Recessions are painful (they usually mirror the froth of the previous peak); but they set the stage for the next expansion. I submit this recovery is so slow because of government interference; the politicians won’t let nature take its course.
We were due for a recession in about 1996, when Alan Greenspan gave his famous “Irrational Exuberance” speech. He recognized the froth but let everybody “party on”. By early 2000, the stock market, from my reading, was (at least) twice as over-valued as compared to 1929. We had a recession, and the market dropped to about DJIA 6,500 in the fall of 2002. That’s when the really big mistake was made. Instead of letting nature take its course (the market probably would have gone down to 3-4,000), the flood gates were opened, leading in several years to the greatest housing bubble and credit bust ever. Government intervention keeps delaying the price that must be paid for the prior excesses, putting off the final reckoning.
If the government/Federal Reserve stopped interfering, here’s what I believe would happen. 1) Home prices would fall another 10-20% (just a regression to the mean). 2) The stock market would fall by 50-60%, resulting in a dividend yield of more than 5% and a P/E of less than 10 on the DJIA. These are the numbers at traditional secular bear market lows.
Would it be painful? You bet, but not as painful as if we had had a more severe recession in 2002-3, and much more painful than a recession in 1996. Would it be “cruel” or “unfair” to let this happen? No!! We would just be paying our dues for the previous binges, and, more importantly, setting the stage for the next recovery.
This is what we would see: Young people, who have been priced out of the home market for years, could now afford a home. The businesses that are sitting with more than a trillion dollars on their balance sheets would find bargains galore, and invest that money in new plants and technology.
(Now I hope you are sitting down when you read this). Bob Doroghazi would sell all of his paper gold and silver (but not my physical metal), and invest it in the stock market, because the bull market of the next 20 years would have started.
If we keep interfering, if we don’t stop trying to let things take their course, the US dollar and the finances of our government will be shot.
I highly recommend Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down…and Why They’ll Take Us to the Brink Again (McGee, Crown Business. This is the best book I’ve read so far about the financial crisis of 2008/9. The history is solid, and it analyses why things occurred and makes recommendations.
“Let’s assume that the compensation policies that prevailed on Wall Street in 2006 were the rule in medicine. A surgeon would be paid for every operation…regardless of risk to the patient. Indeed, the higher the risk, the greater the fee…as long as the patient survived for at least a few months…and he could convince more patients to go underneath the knife. Should half of the patients die the next year, the hospital might fire him, but he’d probably leave with a golden handshake…He could move to another hospital or set up his own practice and attract new patients.
The problem with Wall Street’s asymmetrical compensation is actually worse. A surgeon has to buy malpractice insurance, footing the bill for his errors…Alas, Wall Street doesn’t have to purchase malpractice insurance; there isn’t even a sense…of…duty to the patient…Taxpayers ended up footing the bill for Wall Street’s errors of judgment”.
RMD comment:
1) A basic problem was people were playing with OPM (Other People’s Money). In the first edition of my book (went to press in 2004, came out in 2005), I noted that bankers were being too loose because they weren’t loaning their own money.
2) The Boards of Directors are supposed to impose disciple and look out for the long-term interests of the shareholders. They should all be canned.
3) A basic tenet of capitalism is to direct capital (money) to its most effective use. Rockefeller, Carnegie, Ford and Gates became rich by creating industries that made the US the envy of the world; that created true wealth and hundreds of thousands of jobs.
Over the last two decades or so, our capital has been directed to Wall Street. By shuffling paper, which I submit doesn’t create any goods or services, people make tens or hundreds of times what physicians make. Compare this to the Chinese, who use their capital to construct trains, roads, bridges and manufacturing facilities.
4) We don’t need complex rules that stifle innovation. All we need are simple rules that are strongly enforced.
5) The book notes that most of those who experienced the previous crisis have retired by the time the next crisis comes along. The painful memories have been forgotten. This is why it is so important to read history.
RMD
I’ve mentioned before I try to be as efficient as possible. If you shop at a place such as Sam’s, where the items are bulky and all check out is done by scanning; put the items in your cart so all of the bar codes are facing out. That way you don’t have to unload and re-load your cart when checking out. It also saves the clerk time.
I don’t know how much longer or deeper this correction in the precious metals has to go, but I believe it is just a correction. The bull still has years to run. In fact, corrections are a good time to add to your positions if you are so inclined.
Last Saturday, we attended a nice event for the Friends of Music, the patrons of the School of Music here at the University. This spring the Opera Department will put on Franz Lehar’s “The Merry Widow” (Die lustige Witwe), which played in Vienna and Budapest from 1905-1908.
Grandma Nagy (my maternal grandmother) was born in Hungary in 1901. She made 3 trips back and forth to the US before about 1908. She saw the original production of the “Merry Widow” and would sign the waltz (in Hungarian) all the time.
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