The Mailbox

Every now and then, I receive a thoughtful response to the newsletter (in this case, the April 25 one entitled “Magical Kingdoms”) which requires some follow-up. I cannot do this in every case, but a number of you have inquired about gold and growth stocks recently, so here goes...

John,
I wanted to thank you sending me your well written and well informed news letter. I finally had a chance to read it today, a lot has been going on around here and I had kept it in my in box since you sent it to me. I thought your insights into the gold/dollar markets were right on, and I was wondering if you could elaborate on your thoughts any further on the Disney theme park/Disney stock relationship? Of course we all know that Disney is involved in many other ventures (i.e. Pixar to name one), but if their main source of income are their parks (and this could be an erroneous assumption), then why do you think the stock has done so poorly?

Regarding gold, do you think that because gold has risen so dramatically recently, that anyone who hasn't taken advantage of the move has missed the boat (by the way this is not a question because I have any interest in speculating on gold), and if so isn't there still time to short the dollar?

Those are good questions. I do not speculate either—I spend a lot of time on trying to figure out long term  secular trends and I only adjust tactically at inflection points around business cycles within the trend.

My thesis is that the bond/stock bull market that began in 1982 finally ended in 2001 and that the run was only extended by the massive liquidity that central banks injected post 9/11. The trend we are in looks like 1968-1981, where “stuff beats paper”—commodities, energy and metals (and derivatives thereof) will outperform, and that we are about midterm in the trend. Another part of the thesis is that global companies that create “service and distribution” platforms are well suited to perform well in the trend period. Not surprisingly, a number of my bets are international, with emphasis on Eastern Europe and Asia, where a tremendous amount of GDP growth is occurring. Now to those questions.

Disney. I spent a chunk of the ‘90’s at JP Morgan helping run the US TMT business (Telecom, Media Technology). My suspicion on content companies then and now is that those who produce it with an eye on cost controls win the wars. DIS has a ton of attractive properties, for sure: ESPN, ABC, the parks and a top 10 brand. However, those properties require huge expenditures (think of talent and production costs), and advertisers are fickle. The latest research on wealthy Americans (top 5% in assets) asserts that over 90% begin their major purchasing decisions online. Thus, there is a premium on speed, flexibility and market analysis—not long suits of the large content production companies. Think about the life cycle of a corporate studio production—by the time an interesting creative project, say in reaction to a current event hits the network/screen, the event itself has been endlessly dissected on blogs, chat forums and parodied on endless web casts. Opinions and the influences on them are set—the result is that ABC’s “Exciting Story on the___” (a sensational recent event) is no longer recent or sensational to a vast demographic. So here is how Disney has fared:

That is not exactly the chart of a growth company in the entertainment and information business. A better pick for the content/advertising model would have been Yahoo. They have low production costs and have stayed away from the blockbuster production vehicles that characterize some of the traditional media companies. Here is that chart:

The real issue for many of the traditional media companies (DIS, VIAB, NYT, etc.) is that people watch and read less of their product than they use to, and the advertisers are adjusting accordingly. The internet has claimed a lot more regular viewers than anyone forecasted five years ago, and the costs of producing in that medium are a fraction of the other distribution outlets (network and print).

Gold and the Dollar. Gold has had a good run, and yes, its rise has been mostly accompanied by lags by the US$. Modern gold runs are sparked by fears of inflation. That, of course, would not account for the steady rise we have seen in the last five years. My view is that inflation is only kicking in now and that the dollar’s demise has been directly traceable to the record deficits that we have been running. If I am right, there is a big spike left in gold and a big gap down in the dollar, still to come. Here is one way to look at it:

At first glance, it looks like we are in record territory already, so why not play it safe, stay away from gold, and go long the dollar. The reason to do the opposite is mainly historical---gold usually spikes at structural turning points (think of the 21% prime rate in 1979), and we may be reaching one with oil and the deficit. “Structural Turning Point” is a polite way of describing the inevitable economic fallout that follows any large mean-reverting event. If housing goes up too fast and too far relative to the historical mean; if technology stocks; if oil; if gold--We have observed this time and again in the markets where important asset classes or indexes rapidly appreciate. Often they appreciate initially for rational reasons—1% interest rates to explain housing; the internet boom and productivity for tech stocks; demand from emerging economies for oil; and, in gold’s case, rational fears about future inflation. Large market movements always attract speculative momentum until the underlying rational reason goes away.

So, does Gold have more to run and the dollar more to fall?

(Agora Financial, LLC)

...well, in “real” (inflation-adjusted) terms you could make a good case for buying gold right now. Moreover, as long as the US$ is the de facto reserve currency, it cannot go up if gold is still trending up. Many commentators are predicting the imminent demise of the dollar. While I do think there is a long-term transition of economic power to Asia, I believe that there are currently many rational reasons to invest in the U.S., first among them being a free political and economic environment. Nevertheless, if we continue to cheapen our currency through poor economic policy and planning (sorry, Mr. Cheney, deficits really do matter), then we run the risk of accelerating that shift of economic power. We all can do the math—let us see, in 2020, Social Security goes bust and...

Thank you for your interesting questions.