Motley Fool Hidden Gems Investing - Motley Fool Money: 12.02.2011

Episode Date: December 2, 2011

The unemployment rate falls to its lowest level in more than two years.  Retailers report big sales numbers.  Pfizer loses its patent protection for Lipitor.  And pop music group Hanson taps into a new business opportunity.   Our analysts discuss those stories and share three stocks on their radar.  Plus, James Rickards discusses his book, Currency Wars: The Making of the Next Global Crisis.         Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill, Mötley Fool Inc.: Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Chris Hill, Mötley Fool Inc.: Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill. And joining me in studio this week, from Motley Fool, Hidden Gems, Seth Jason. From Motley Fool income investor, James Early. And from Million Dollar Portfolio, Ron Gross. Gentlemen, getting a lot of woos from you, Seth. I got the biggest one, though. Isn't that strange? That is strange how that works out. All right, we have got the latest from retail and big pharma.

We have got a guest who makes the case for gold going to $7,000 an ounce. And as always, we've got a few stocks on our radar. But we begin with the big macro. Unemployment fell to 8.6%. Ron, it is the lowest level in more than two and a half years. I'm going to start this off not being discouraged. You're not going to be Debbie Downing? It feels so good, Chris. This is not bad. Does it feel so good as you grit your teeth?

No, it's that good. I'm actually pleased. It's a good number. Even the real unemployment rate that counts everyone that would like to work but does not fail to 15.6% from 16.2%. We are adding jobs. It's mostly in the service sector. I would like to see the manufacturing sector pick up. I'm hopeful that will be down the road.

but this is probably the best report we've had in a very long term. Seth, what do you think? Yeah, let's see it. We actually, we'll talk about this in a second, but I'm seeing some decent response at some retailers that have been long languishing at well. And I was just speaking with Yervon, one of our colleagues here at The Motley Fool,

and we were both thinking that people are so afraid of, or have been afraid for so long, we think they're sick and tired of being sick and tired, and I think that we may see some of that reflected in the economic news. James, what do you think? less of a macro watcher than maybe these guys are, but even I'm mildly less apathetic than before, and I would say it's good. Wow!

Now, we should point out that one of the reasons the unemployment rate came down is that 300,000 folks left the workforce. Right. These are the people who just said, I give up, I'm no longer looking for a job. That does affect the math, and that does mitigate the joy, perhaps, we should take from these reports. But even having said that, it's still a positive report. Okay. So, taking all these mitigating factors into account, where you've got the unemployment rate dropping, but you also have people no longer looking, all of these revisions that go on, I want you to fill in the blank for me here. Investors should feel blank about

the latest jobs numbers. Ron? Cautiously encouraged. Okay. What a way to hedge. James? Curious. I think it's a good trend, but I don't want to run with it just yet. Seth, what do you think? Numb.

Numb? Numb. Wow. You can just pay too much attention to this stuff. Four out of five Reggie Middletons are very encouraged by this report. Time for This Week in Retail. Obviously, a lot going on. We had the record numbers from Cyber Monday.

We also saw some good earnings from retailers like American Eagle and Aeropostale. Seth? Well, I don't know if they're all good. The deal with Aeropostale, which is hidden gem stock, is you're just hoping, especially if you bought at recent lows, you're just hoping for not quite so bad, and that's what we got from them. American Eagle had a sales gain, and they also said that they had a good Thanksgiving weekend. And apparently it was a fairly brutal weekend at the mall. The management from Aeropostale talked about some competitors taking 50% off the entire store.

So it's really a cutthroat environment out there. but I'm still sort of cautiously optimistic that people are starting to spend and that some of these retailers are going to start turning around. Yeah, that's the buzz. A lot of these retailers made good numbers just by hook or by crook. Did anyone here go to the mall? No. No.

Stayed far away. I was at Harrods in London, actually. Really? I went to Radio Shack. That is some high-end stuff over there. Did you buy anything? I didn't personally. My son bought a little magic kit.

I have an entrance card for this. It says luxury washroom. You have to give them a car to go to the bathroom. It's very, very fancy. Wow. I don't mean to be- Dude, let's not get the rest of that story. You can't just walk into the bathroom.

You have to show them a pass or something. I'm more curious about Ron flying across the pond to juice the UK economy. Through magic purchases. We have American friends living there, and since they don't celebrate Thanksgiving, we went to celebrate with them so they would not be alone on such a wonderful holiday. And did you point out that in America we celebrate Thanksgiving largely because we left the UK? I didn't point that at large crowds, but it came up over dinner. Hey, drunken hooligan, let me tell you something.

Let's go back to the Black Friday numbers for just a second, because I'm wondering, in particular, Seth, what you think about this notion. There did seem to see in the financial media this growing optimism, great numbers from Black Friday, great numbers from Cyber Monday. Cyber Monday just cracks me up. But to what extent is that an indicator of a great quarter? Or to what extent is that just sort of like we're sort of front-loading the sales that we're going to happen anyway? I don't think it's possible to say. So much of it right now will depend on news over the next couple of months. If something weird happens in Europe, like say there's an economy on the edge in Europe, say, just for sake of argument.

Say there's some bad banks and there's some bad news. What's happening in this economic cycle is everyone just panics. And if something like that happens, people will say, oh, I don't know what's going on, and they'll button up the wallets. So I don't think this is an indicator of everything, especially as uncertain as the times are. Do you have a retail stock in particular that you like? Let's save it for stocks on our radio, shall we? Wow. Ron, you got one?

I'm always a fan of Nordstrom's. Just such incredible service every single time. And they let anyone into the nice bathrooms at Nordstrom. James, what about you? I always like limited brands off and on. It pays a decent dividend. Oh, I bet you it was Victoria's Secret you wanted to check out. Kato is a recommendation in my income investor service, which I'm sort of waiting

for the performance there. It's a lower-end retailer, but I like it. Kato? Kato. C-A-T-O is the ticker. It's sort of like B-grade strip malls in small towns in the U.S. It's sort of a low-price women's retailer. Budget fashion. Budget fashion. Got it. Not an oxymoron. This week, guys, Pfizer's patent protection for Lipitor expired. The drug used to treat high cholesterol was the first drug to do $10 billion in annual sales. James, obviously, Pfizer knew this day was coming. How much of a hit is the company going to take as a result of this coming off-time?

Well, Chris, you're right. I mean, everybody saw this coming, not just Pfizer, all the analysts, all the investors. Lipitor was very high margin for Pfizer, and that's going to be tough to replace, because while its pipeline is good, it's not good enough to replace it fully. It was doing about $8 billion a year in sales, up to a high of $13 billion a couple of years ago, so down a little bit. So, for perspective, that's sort of like 13 or 8 Avatar movies per year. And I use that analogy because the pharmaceutical industry has become more and more blockbuster dependent, just like the movie business. And to me, that's a reason I'm less keen on it than many dividend investors, just because I think we're seeing diminishing

returns in the chemical-based drug discovery method which these farmers use. So it's either buy or buy out. Well, so, I mean, when you look at things like this, I saw one thing this week from Forbes that in 2010, of the top 15 most prescribed drugs, 14 of them were generics. The one that cracked the top 15 was actually Lipitor. So with this trend, what is the play for investors? Is there a way to essentially bet on generic makers? Is it the intermediaries like CVS and Express Scripts and Walgreens and that sort of thing? Yeah, I would stay away from the big pharmas to begin with, the Pfizer's. The generics are probably a better bet, like Ranbaxy is an Indian company making this. They've had problems with

production quality and contamination, and that sometimes happens in that business. The scripts companies are an entirely different business, and that's subject to regulation. that can go any which way. Even the dividends of big pharma companies are not enough to lower you in? It's close, but I'm going to have to back away. Yeah. Seth, what do you think? I think something similar to those lines. I was going to say that I would maybe prefer some of the managed care companies because they might be a little bit more predictable if you think you can predict regulation. But also, you know, you could take a look at some biotech, but you sort of need to know what you're doing. And again, there you're relying on blockbusters and your success rate,

your percentage, your batting average is going to be pretty low. So you need to keep those positions small because you may get a 10 bagger, but you're going to get a lot of zero baggers too. And if you're like me and just the thought of chemistry makes your head hurt. Just buy some McDonald's stuff. Coming up, if you've been wondering when the next wildly inflated internet IPO was coming, then we've got good news. Details right after this. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in the studio with Seth Jason, James Early, and Ron Gross.

We've got Steve Roito, our man, on the other side of the glass, and also with Steve this week. We've got a couple of special guests in the house. We're having a couple of Motley Fool member events this week. Two longtime loyal listeners, Rick Massick, Marco Valverde in the house. Gentlemen, welcome. Matt Greer is raising the roof. It hurts my eyes. But thanks for coming, guys.

All right, let's move on. And we have got more details on Zynga's IPO. Zynga. Yes, the maker of online games like Farmville is planning to sell 11% of the company, with shares priced between $8.50 and $10. Ron? That seems reasonable. It's only $8 a share?

How can an object be $15 a share? Valuing the company at as much as $9 billion. With a B? What does a real video game company's market cap look like? Electronic Arts is, what, I think $7 billion. So, it's less than the nine. Chris, I've been in the business 21 years. Stories like this make me feel like I don't know what the heck I'm doing or that everyone else has completely lost their mind.

I understand it's growing quickly and it's a billion-dollar revenue company and they are profitable. That's great. Wonderful. The kids love Farmville. Nine billion dollars. Come on. Give me a break. I pray for them to fail because I'm so sick of seeing stupid Farmville and Frontierville updates.

And no matter what you do on Facebook, you can't get rid of them. I mean, your friends are playing these games. This is why I'm not on the Facebook. Oh, God. 160 times current earnings. You've got to grow quite a bit to catch up to that valuation. There are always more vills to create, right? Correct.

Yeah, and these are games that are like the quality of an Atari game. 15 years ago, was Atari around? And they're really pretty poor. But for some people, the story with Zynga is they managed to sell a lot of virtual junk to the players of these games. So, people are paying a dollar for a fish or for a rutabaga home or something. It's good money if you can get it. I don't begrudge them their profits, but it's just the valuation that I don't agree with. And they are diversifying away from Facebook because they must.

And whether that's successful, who knows? Shares of American Airlines down huge this week after the company filed for bankruptcy. James, is this just yet another nail in the coffin of don't invest in airline stocks? It would be hard to design a worse business in the airline industry if you tried. What's selling virtual rutabagas? This is my mind. One thing is obviously the pensions, and that's something that's not a now problem. That was a decades ago problem, and we're not going to see that much anymore.

The other interesting thing, though, is that when you put together high fixed costs, general competitiveness, and a lot of commodity price pressure, you get a game theory dynamic that makes it difficult for these airlines to charge, to pass through, let's say, higher fuel prices. And that's what they've been stuck with for the past couple decades. So it's good that they're doing it, and they had no choice to do this. I mean, they're bankrupt. But it's not a win for, you know, Delta or United or any of the major carriers. They went through their own bankruptcy before, yes.

America, they're just the last holdout. And they'll get another one again, right? Don't they? What is the schedule for airline bankruptcies once every five, eight years or something? Turn it over. Hanson, the trio of brothers famous for their hit song Mbop, have announced they are extending the Hanson brand to other merchandise, including a board game and, wait for it, beer. That's right. The new Mhop IPA will be released next year.

I want to read this quote from Zach Hanson. No. Who told reporters. Please, no. Oh, wait. You're going to love this. We, of course, make records. They are fundamental to what we do, but we wanted to create a brand so that our fans have a greater experience.

Who knew they still made records? Wow. That surprises me right there. Will you try the beer? I don't drink, but I might have to make an exception. I just signed a top, if you ask me. Good plan. Seth, you're a beer maker yourself.

I started making beer, and one thing about this, this sounds like the cart in front of the horse. It sounds like they're making an IPA because somebody came up with the hop, and an IPA is a very hoppy beer. And there's tons of them in the U.S. We don't really need another hoppy American IPA. What does IPA stand for? India Pale Ale. It's just an extra hoppy ale. But why?

These guys, are they listening? I don't think they're. No, I think that they have an inflated sense of their reach, their brand's permission. Let's stick with that inflated sense of self. If you had to put your name on a product, what would it be? Ron? The name Gross would replace everything with the name Trump. Ooh.

Ty's Steaks. Gross is all over the world. Gross failure. Gross Towers and Gross Steaks. It's going to be awesome. Gross Steaks. Gross Vodka. Nice.

James, what about you? This is a very penetrating question, Chris. I mean, I'm thinking along the lines of like a body spray or fragrance, I guess that's where I first go to. Michael Jordan did it. Yeah. Yeah. Okay.

My first one really was condoms. As you know, teen pregnancy is an important issue for me, and I am hoping that by putting my face on a condom wrapper, you'll really decrease. Think about me before you think about doing it, and you're probably going to go play Farmville. There are several jokes I could make, but I'm going to wait until we're off the air.

All right, it is time for the stocks on our radar, and we'll bring in our man Steve Broido with a quick question for each one of you in the time we have left. Ron, you're up first. I'll go back to the retailers and hit Arrow Postal, which we own a million dollar portfolio. I know Seth recommended Hidden Gems. They've been having their problems.

They're going through a lot of discounting to get rid of that inventory that was a bit of a misstep. But I think it's just so cheap here at like four times cash flow that it's really, as Seth said, if they just don't suck as much, it's going to be a nice stock. Did either of us point them out when they were like nine bucks a share four weeks ago? I hope one of us did because they've come back a long way. And what is the invent? This is like the booty shorts for 12-year-old girls or something? Yes. Is it one of those companies?

They had a few missteps, yes. And they are cheaper than the competition, which is a nice value proposition. And they run a concept that has some lower fixed costs. I think the stores are generally a little bit smaller. And so they get things turned around. They should be fine. And the market thinks they're going that way. Right.

Steve, question for Ron. Sure. Is there a signature product that Aeropostale has or could have or should have? I would say the T-shirt, the typical knockoff T-shirt that you can pay more at Abercrombie would be probably their main product. James, your stock this week? Chris, I am interested in a partnership called Stonemore Partners. The ticker is S-T-O-N. Alex Pape, who used to be an AI analyst, now he's a Motley Fool pro, found this company. It's 8.9% yield.

It's a cemetery business. and the accounting is very strange. So the cash flow numbers appear off, but it has more cash flow than you think. Obviously, a steady base of customers, not going anywhere there. And it's sort of like a three-year cycle, basically, as opposed to one-year cycle that it does as business. So its cash flow is better than it looks on the accounting statements. And that interests me. And it got whacked 12% thanks to a negative S&P report. Thank you for your use of the word whacked. Steve, question for James? Sure. How does the aging population, which will unfortunately equate to more deaths, factor into this business with real estate?

So more people are dying as more people are aging, and don't they need to find plots and more land? These guys apparently have 270 years' worth of land sitting already, just ready to go. Another thing, though, Steve, is increasing use of cremation, especially in the West Coast. So a mausoleum takes a lot less space, let's say, than a burial. A mausoleum? A mausoleum. Muslim, sorry. I don't use the word often. Potato, potato.

It sounds like a butter substitute. Somebody first taught me the word is mazollan, and then somebody else corrected it, but that's how I got it in my head. Wow, that's crazy. Now, remember that there's all those sort of abandoned housing plots out there in California, and that land is cheap. We're just waiting to get snatched up. We've got one minute left. Seth, what's your stock? I'm going to have to go back to Movado Group. Great earnings report, good top line growth, good earnings growth.

Stock jumped quite a bit this week on the news, but probably still looking good for the medium-term to long-term. And people just keep buying these watches across the price spectrum. We've seen it at Fossil. We're seeing it at Movado. And MOV is the ticker. Steve? Is Movado a top-tier brand? I don't think of Movado, Rolex, or something like that.

I think of Movado as sort of a second-tier brand. Am I wrong about that? Well, no. There's various actually defined price points in the watch world. And if I try to say them now, I'll get them wrong. But Movado does have a mark up in, it's called Able, which is up in that top tier, the very expensive tier. Movado is sort of in the middle third. And then they have various watches.

They don't play in the lowest tier. They play in sort of the top two or three. All right. Seth Jason, James Hurley, Ron Gross. Guys, thanks for being here this week. Thank you, Chris. Coming up, a conversation on the next war investors should worry about. Welcome back to Motley Fool Money. I'm Chris Hill. Barron's calls my guest this week,

a literate financier with a global view. Jim Rickards is an investment banker and risk manager. He advises the Defense Department, the intelligence community, and major hedge funds. And he's the author of a new book, Currency Wars, The Making of the Next Global Crisis. Jim, thanks for being here. Thanks for inviting me, Chris. Some really great stuff in the book. And it starts out with something that, I'll be honest, it kind of blew my mind a little bit. It's the fact that the Pentagon conducted a series of financial war games that you were involved in. You helped facilitate them. If you could just start by talking about how that came about. Sure. There's, of course, nothing to do about

war games and scenario planning. The Pentagon does that all the time. They imagine and sort to sketch out wars that fortunately have never happened, but as part of the, you know, obviously the Defense Department needs to be prepared. But what was different about this, it was the first time they ever did a financial war game, and we had rules that you were not allowed to use any weapons, so no missiles or invasions or, you know, other B-52s or anything like that. We had to use stocks, bonds, commodities, currencies, and derivatives to basically try to gain national power or inflict harm on the opponent.

So if we are in this currency war with China, with the European Union, help me out here. I mean, how does that boil down for U.S. consumers and investors? What does it mean for us sort of on the ground level? Well, unfortunately for consumers, it's not good news. And part of the book is economic analysis, but there are two chapters on the past currency wars. One that was fought in the 20s and the 30s, the other one in the 1970s and 1980s, and they both produced fairly disastrous results in different ways.

I mean, what is a currency war? A currency war is simply an exercise in cheapening your currency so that your exports are less expensive for somebody else. And imagine you're in a small town and there are four stores. There's a Walmart, a Kmart, and two others, and they're all competing. One guy decides to lower his prices to get more traffic. Well, that's what a currency war is. You cheapen the dollar relative to other currencies, and then the stuff we export,

so Boeing aircraft, Microsoft software, Hollywood films, General Electric, wind turbines, whatever it might be, that stuff gets cheaper if you're buying from Europe or Asia. That's the basic idea. So increase exports, increase the jobs that are associated with exports, and help the economy. That's the simple form. The problem is it never works. And the reason it never works is because, first of all, it's retaliation. The minute we cheapen our currency, other countries try to cheapen their currency also

because they don't want to lose their exports. So you get into these tit-for-tat devaluations. They pretty quickly morph into trade wars where you start putting on excise taxes and import surcharges that restricts the flow of trade. Or countries put on capital controls. They start to close their capital account and make it harder to move money in and out of the country. And in the case of the first currency war, it ended up in World War II, which was a shooting war. So they can have very disastrous results.

For consumers in particular, it means inflation because we're not just an exporter, we're an importer. So if we cheapen our currency, maybe our exports are a little cheaper, but our imports are going to be more expensive. We're going to pay more for all the things we get from abroad, whether it's flat-screen TVs, iPhones, German cars, you name it. And that's part of the downside of the currency war. So definitely look for inflation. One of the things you say in the book is that the U.S. economy is sort of resting on this, what you call a knife's edge between depression and hyperinflation. Those are obviously extreme scenarios.

There's a lot of middle ground in between there. Why do you think we're on such a thin edge? Because people talk a lot about the double-dip recession, are we in a double-dip or whatever, and that's important. But that's not how I think about the economy. We're in a depression. We're in a depression that started in 2007. It's going to run, who knows how long, but maybe 2014 or even longer, depending on policy.

It's every bit as serious as the Great Depression. And you can have growth in the middle of a depression. During the Great Depression of 1929 to 1940, we had periods of growth in 1934, 1935, unemployment decline. But, of course, it went from 20% to 14%. Well, unemployment declined, but it was still 14%. And the best description of depression economics I've ever heard comes from a line from a Paul Simon song called Allergies. And he said, you get better, but you never get well. And that's the problem with a depression.

We can get a little better, but we never get well. We never get out of it. And so I think that's really the state of the world today. And until we find some way out of it, until we find some way to generate growth through, you know, entrepreneurship, technology, and other ways, We're going to keep fighting these currency wars because the currency wars, basically cheapening your currency to help exports, is the only engine of growth that's left when you're in this depression scenario. You're listening to Motley Fool Money, talking with Jim Rickards, author of the book, Currency Wars, The Making of the Next Global Crisis. One of the things you write is this escalating currency crisis may require a return to the gold standard. What would that mean for investors and consumers?

Sure. And just to be clear, Chris, it's not something I advocate. My preferred policy would be what I call king dollar or a strong U.S. dollar. We had that in Volcker-Reagan in the early 80s. I'd like to see a return to that. The problem is we're not pursuing a strong dollar policy. We're pursuing a weak dollar policy. This is the meaning of so-called quantitative easing, QE1 and QE2, everything the Fed's doing, everything the Treasury's doing. It's designed to weaken the dollar. So that being the case, my concern is that at some point we print so much money and we weaken it to such an extent that people just lose confidence in the dollar across the board. And in that scenario, you could actually have kind of a run on the bank or a chaotic-type collapse, and the president would have to go to emergency economic powers to restore order, and that might involve some kind of gold standard.

The other thing is if the U.S. keeps cheapening its currency and generating inflation around the world, that at a minimum will send the price of gold significantly higher. There comes a time when the problem with the currency war, not everybody can cheapen against everybody else. If you want a cheap dollar, well, that means a strong euro. Or if you want a cheap dollar, that means a strong Chinese yuan. Well, the Chinese and the Europeans don't like that either. But there is one thing that everybody can cheapen against, and that's gold. This has happened before. It's happened twice.

I describe it in the book, 1933, when President Franklin D. Roosevelt devalued the dollar against gold, and 1971, when President Nixon devalued the dollar against gold. And that's the way the currency wars have ended up in the past. We sort of fight each other, cheapening our currencies, but nobody wins. And finally, the world says, ah, I know how to get inflation. I know how to cheapen the currency for everybody. let's devalue against gold. And you end up at that point, perhaps having to go to a gold standard to restore monetary order, but at a much, much higher level. You're not going to see, if the world goes

to a gold standard, it won't be at $1,700 an ounce, it'll be at $7,000 an ounce. You really think gold could be at $7,000 an ounce in a few years? Well, actually, I don't just think it. I mean, that's very clear from the analysis. And you know, Chris, when you say something like that, people say, oh, that's just a pie in the sky number. or, you know, you sound like the guys talking about Dow 30,000 or you're just trying to be provocative. That's not true. Every gold standard is simply some relationship between paper money and gold,

and we know how much physical gold there is in the world, and we know how much paper money there is in the world. So the math is really not that difficult. It's a very simple relationship. Now, to talk about a gold standard, you do have to answer a few questions. You know, I said it's a relationship between paper money and gold, but what's our definition of paper money? You know, we have technically we have M0, which is the money the Fed makes.

We have M1, which is the money the banking system makes. We have M2, which is when you include money market accounts. So you have to decide which definition you're talking about because they're very different things. M2 is about six times larger than M1, for example. So that's the first question. The second question is how much gold backing do you want in a gold standard? Some of the gold bugs would say it has to be 100%. I don't agree with that. Historically, England ran a gold standard with 20% gold backing, and historically, the U.S. was about 40%.

So you could have a different percentage there. And the third thing, quickly, is how many countries are in the club. If it's just the U.S., we actually have a lot of gold. We have 8,000 tons of gold. But if you bring in China, they only have 1,000 tons of gold, but they have a very large economy. So you would need a higher gold price there. So taking the three variables into account, what's our definition of money, how much gold backing do we want, and who's in the system, you get a range. At the low end of the range, it's about $3,000 an ounce. At the high end of the range, it's $44,000 an ounce.

Again, it's not guesswork. These are all just simple math. So my estimate would be it comes out somewhere toward the low end of the middle, about $7,000 an ounce. Now, you mentioned the gold bugs. At the other end of the spectrum are people like Warren Buffett, who's publicly stated he's skeptical about gold as an investment, and sort of used the example of essentially taking all of the gold in the world, you add it all up, he ballparks it at about being worth around $7 trillion, and saying for $7 trillion, you could have all the farmland in the United States? You could, you know, $7 trillion is like one-third

the value of all the stocks in the U.S., so you could have all this farmland, you could have companies like ExxonMobil, Apple, et cetera, and you'd still have, you know, some walking around money. Well, look, I have a lot of regard for Warren Buffett, obviously. His reputation and success speaks for himself, but I have two answers to that. Number one, you know, Warren Buffett poses the question, would you rather have all the gold in the world or all these, you know, productive assets such as farmland. My answer is I'd rather have all the gold, and then once I had the gold, I'd sell the currency and I'd buy all the other assets. I would own everything with a leveraged balance sheet, which is what a monetary system really is. So that's one answer for Warren

Buffett. But the other answer is, look, if I were Warren Buffett and I owned $80 billion worth of stocks, I wouldn't say nice things about gold either because it would trash the value of the stocks. But watch what they say. Sorry, watch what they do, not what they say. Two years ago, Warren Buffett bought the Burlington Northern Railroad, and everyone said, oh, Warren Buffett likes railroad stocks. Well, Warren Buffett doesn't like railroad stocks. He likes railroads. He bought the whole railroad. Now, what is a railroad? Well, it's land. It's right-of-way. It's rolling stock. You get mineral rights associated with the land. You get rail yards. You get all kinds of plant and equipment. And then how do railroads make money? They do it

by moving other hard assets, such as corn, wheat, cattle, oil, et cetera. So when Warren Buffett did that, he basically got out of it. Think about it in economic space. What he did, he got out of dollars, and he got into hard assets that move other hard assets. So, Warren Buffett's actions say that he wants a hard asset play. He just did it in railroad space instead of gold space. But the economics are very similar. You're listening to Motley Fool Money, talking with Jim Rickards about his new book, Currency Wars, The Making of the Next Global Crisis. I want to focus on the economic implications of the currency wars with regard to one company. And I'll go with Apple, because Apple obviously does a lot of manufacturing in

China. It's first or second in terms of market cap. What effect do currency wars have on a company like Apple? Well, Apple is a fascinating case, and I'm glad you brought it up. iPhones are made in China, and so when we buy an iPhone here in the United States, we're buying something from China. But what people don't realize is that the Chinese value added is only about 6% of the total value of an iPhone. Most of the value added in an iPhone comes from South Korea, Japan, and Germany. Toshiba in Japan makes the nice touchscreens that we like, and Germany makes components, and South Korea makes some of the processors as well. So if you were to cut the value of the dollar in half against the chinese currency it would only affect

the price of an iphone by three percent because there's only six percent chinese value out of it so when you have people like senator schumer you know banging the table about chinese currency manipulation i mean be careful what you wish for because uh i don't think that people who advocate that really understand the complexity of global supply chains these days if you want to affect the price of the iphone you're going to have to trash the dollar against every major currency in the world, not just the Chinese yuan. And, of course, I think that is what Bernanke and Geithner are trying to do. But, you know, Steve Jobs, before he passed away, said that he would love to put manufacturing

jobs in the United States. But it's partly because you can't get work permits. You can't get certain kinds of visas. The U.S. has a hostile business climate. The taxes are too high. The regulations are too strict. And so it's not all about the currency wars and exchange rates. It's about really the fact that the U.S. has a hostile business climate.

But it should be possible to get a lot of those jobs in the United States. I don't see why not. Coming up, more with Jim Rickards and a round of Buy, Sell, or Hold. You're listening to Motley Fool Money. You're listening to Motley Fool Money, talking with Jim Rickards, author of the new bestseller, Currency Wars, The Making of the Next Global Crisis. before we wrap up with a round of buy, sell, or hold, one more investing question. Because in terms of hedging against inflation, one of the things we like to do with The Motley Fool is

look to dividend stocks with a high yield, Procter & Gamble, 3M, Merck, these kind of companies. Let me just tap your advice. What is your advice on how best to hedge against inflation? Well, I'm not really bullish on the stock market. Let me be clear what I mean by that. I think actually stocks are going to go up. I think they're going to go up because of the money printing. But remember, your stocks are going up in nominal space. So in terms of dollar points or Dow points or S&P points, they may be going up.

But if the dollar is worth less and less in terms of gold, in other words, if the stock market goes up 30% but the dollar goes down 50%, did you really make any money? I think the answer is no. And so I like to look at things that are going to hold up in a world where there's massive money printing and a potential for hyperinflation. That would obviously include gold. But, you know, I recommend for the conservative investor about 10% gold, for the aggressive investor about 20% gold. I do not recommend 100% or even 50%. I don't think that's well advised. But, of course, most allocations are around zero.

All the major institutions in the world have about a 1.5% allocation to gold right now. So we're a far cry from my 10%, let alone the 20%. So there's plenty of room to grow there. But then a question I get from investors a lot is, well, okay, Jim, if you don't recommend more than 20% gold, what else should I do with the money? I recommend raw land in very good locations with development potential. And the idea there is if you get inflation, it's pretty clear that the land is going to go up in value. But if you get deflation, which is also a possibility, the land may go down in value, but the cost of construction will go way down.

So all the inputs, copper, lumber, wiring, glass, labor, et cetera, will go down a lot, and you'll be able to develop the property at a much lower price point and then kind of participate in the next wave up. So that's a good one. I also recommend a very large cash component. And people, again, they scratch their heads and say, wait a second, Jim, you're very bearish on the dollar or paper currencies. Why would you hold cash? And the answer is that I wouldn't hold it necessarily for a long period of time, but I'd have some now.

First of all, it preserves wealth. And secondly, it gives you optionality to pivot to another asset class once we get a little bit more clarity or transparency on whether inflation or deflation are going to prevail. So I think if people underestimate the option value of cash in the sense of giving you the ability to be flexible, And that's valuable. And also fine art is another category. Not everyone can go out and buy a Picasso, but there's some excellent fine art funds out there. So my model portfolio would sort of look, you know, 20% gold, maybe 20% land, maybe as much as 30% or 40% cash, and then some component of, you know, fine art and other alternative investments.

All right, let's wrap up with a quick round of buy, sell, or hold. Some have called for this form of currency to be abolished. Buy, sell, or hold the future of the penny. Buy because it's copper. Sorry, if it's a copper penny. The new ones, I think, are zinc, so you don't want those. But the old copper pennies are okay. Some have predicted that this currency is going away sometime soon.

Buy, sell, or hold the future of the euro. Buy the euro. Why is that? For the reason I mentioned, which is China and the U.S. are united in their desire for a strong euro, so the Europeans can afford to buy our stuff. They spent 50 years, not just the last 10 years, but 50 years building a super currency. They're not going to abandon it very quickly. This is what I call the fourth Reich.

This is really Germany's chance to exercise hegemony over Europe without firing a shot. They're not going to let it go. And finally, we've seen Internet companies that have IPO'd this year, companies like Groupon, LinkedIn, Zillow, et cetera. And this one is reportedly coming next year. Buy, sell, or hold the future of Facebook. Why is that? Again, I think the biggest problem is that their business models are vulnerable to changes in sentiment.

It's almost like last year's clothing. I mean, last year's hot sports car might not be the hot sports car of this year. So I think that, yes, they've done a fabulous job of generating revenues and coming out of nowhere. And the company's valuable at some level, but it's being priced as if it will always be there, as if they'll never lose market share, as if the barriers to entry are high. But the barriers to entry actually are not high. And so for all those reasons, I just would be a seller at that valuation. I'm not saying it's a bad company. Of course, it's a great company.

It's a great success story, and it's a buy at a price, but not at that price. The book is Currency Wars, The Making of the Next Global Crisis. It is on the New York Times bestseller list. It is a fascinating read. Jim Rickards, thank you so much for being here. Thank you, Chris. That's it for this edition of Motley Fool Money. As always, you can check out video highlights online at fooltv.com.

That's fooltv.com. Our producer is Mac Greer, our engineer is Steve Broido. I'm Chris Hill, thanks for listening, we'll see you next week.