JohnPod.com “What Does John Think?”

Whoa it has been almost a year since I wrote on my blog. A lot has changed since then. Here is a brief rundown.

The subprime crisis has been even more of a calamity than I predicted. We see Fannie Mae and Freddie Mac stocks sitting at single digits. Yikes.

The 4 regional bank stocks that I pointed out are pretty much done now with Indymac (shutdown by the FDIC) and BankUnited, FirstFed Financial and Downey Financial just about done.

Barack Obama and John McCain are the two nominees for president, which was the two candidates I did no think would win the nomination.

Oil prices have gone up to $140 a barrell and the United States risks hyperinflation, with the government continuing to print dollars to fund the war in Iraq and other deficit spending and also to backstop financial institutions from failing.

Bargain hunting in this market is treacherous. Stick with companies that make real tangible profits, which are energy, infrastructure and certain segments of technology. Also mining stocks work great as a hedge for a weak currency. Financial stocks do look interesting, but except for a trade, nobody has made a dime owning them long. Any profits that companies like Bank of America and AIG state needs to be taken lightly because when you are a company with billions of bad debt exposure, how much money are you really making?

Skyrocketing oil prices have made a financial recovery much more difficult. We have the US airline and automotive industries teetering on bankruptcy. Same goes with many homebuilders and regional banks. We have deficit problems in many states and the annual federal deficit continues to run crazy at 500 billion a year (that’s with a ‘B’). Nobody sees a light at the end of the tunnell in the financial crisis or the War in Iraq.

Obama and McCain have no solutions to this problem. Their goal is to cut taxes and increase spending. Also to open the borders between the US and Mexico and legalize everyone here already. That will put the nail in the coffin in our already faltering public services which include education, healthcare, welfare, and transportation.

Perception vs Reality? Are things really that bad? On paper it is really that bad. The stock markets are in turmoil, we have a financial crisis of epic proportions. But salaries in the NBA, NFL and MLB continue to inflate like there is no tomorrow. A closer in baseball (a guy who pitches one inning in 2 of every 5 games) makes 12-15 million dollars a year. A decent basketball player can expect to make 12-15 million dollars a year. The CEO of a financial institution that makes no profits can expect to make around 25 million dollars a year (Ken Lewis of Bank of America, Dick Fuld of Lehman Brothers). Rush Limbaugh is making 50 million a year paid for by terrestrial radio, an industry we thought was dead.

Government employees which include police, firefighters, postal workers, bus drivers, scientists, bureaucrats make a median salary of around $75,000 a year plus an overly generous healthcare plan, paid time off, and disability benefits. In addition they stand to collect pensions of 75%-100% of their pay after 20-30 years of employment. And they get a guaranteed cost of living increase, not to mention an increasing scale of pay each year. What does this mean? It means that the government is on the hook for ungodly amounts of liabilities in the future and will always spend $60 on something that can be done for $5. A lot of these government workers will be more than happy to make 35k a year, but their union contracts will make them earn 80k instead.

So what is wrong with paying government workers an upper middle-class or lower upper class compensation? We’re paying them with money that we don’t have, and promising them pensions we cannot realistically keep. We need to print trillions of dollars to continue to cover the liabilities in pensions, social security, medicare, and debt repayment which means that the US dollar will continue to sink.

So as only some people are feeling the pain, I feel we are only in the 4th inning of a 9 inning calamity. In a true and blue recessionary downturn…everyone suffers. The rich, the poor, the middle class, athletes, CEOs, actors…nobody is exempt. But what we had so far is a selective recession where the majority of Americans are feeling some pain, but a significant minority is doing better than ever before. So if you are suffering, how can you hedge yourself against further pain?

Ron Paul has an interesting idea. To have gold reinstated a partial standard, and as a secondary free floating currency. Right now if you convert dollars into gold, it becomes an investment, meaning if it increases in value and you cash out, you have to pay taxes on it. As a secondary currency, you would be able to use gold interchangeably with dollars and not have to pay taxes on profits, because it is not an investment.

Gold is becoming increasingly interesting. As the United States and European nations continue to spend recklessly and be on the hook for trillions of dollars in liabilities, you can own gold and be freed from that pain.

If you own gold, continued reckless spending by the US government will increase its value. Every bank that fails will increase its value. Natural disasters, wars and other calamities will increase its value. Ultimately a dollar is a piece of paper backed by the faith and credit of the United States. Gold on the hand has always been a “hard currency” which has had real value since beginning of mankind.

I am not saying go out and buy gold and then bet against the United States economy. I am just saying that unless we have a visionary leader who can get us out of the funk we are in, the value of dollar will continue to depreciate, oil will continue to appreciate and gold is a way to play that trend.

I personally am long gold by owning a Gold Mutual Fund and a Gold Exchange Traded Fund.

If you don’t want to go out and buy stocks or try to profit by shorting…just buy some gold. The easiest way to do it is with the GLD (which will entitle you to a stake in a pool of gold bullion held in trust) or with GDX (which will give a basket of gold mining stocks, denominated in mostly canadian dollars).