Greg Weldon: Turbulence Is Coming

Washington D.C.'s political will to make the needed changes to the federal government's out-of-control spending is completely absent. That does not mean, however, that there aren't ways for an informed investor to capitalize on opportunities to profit.

Interviewed by Louis James, Editor, Casey International Speculator

Louis James: Welcome, ladies and gentlemen. Here with us is Greg Weldon of Weldon Financial, who has just given a talk. Why don't you give us the quick version for our viewers who didn't make it today?

Greg Weldon: The quick version of the hour speech I just gave in 35 minutes? Yes. Well, the speech is "the recovery: is it a reality or is it not?" The recovery is a perception that has been generated by trillions of dollars added by the central banks to the system – and I think the answer is a little bit of both. I mean, the reality is that they've added trillions of dollars to the system and this has successfully reflated asset prices.

Unfortunately it has not successfully fixed any of the fundamental problems, particularly in the US – housing, labor. Labor is not healthy; housing is not healthy. I don't care what the pop media wants to tell you – it's not. The real facts are that there are nine million chronically unemployed people in this country that are not being put back to work. You can't even generate employment growth that meets the population growth. Without that, and if you don't generate real income growth, there's really no housing market reflation to be had. That doesn't mean housing can't move sideways, but it's not growing, it's not generating wealth for the owners of homes.

Nothing is fixed, and the second central banks stop adding liquidity, markets run into a little bit of turbulence. This is problematic going forward, in terms of having become addicted to this central bank liquidity, and if you don't have it, running into trouble keeping asset prices inflated.

Louis: Wow, that was a quick version.

Greg: That's the quick version.

Louis: Okay. So Bernanke has spectacularly done nothing the last couple of times he's opened his mouth. The Beard has not come charging to the rescue. What does that mean for us?

Greg: Well, he's still verbally intervening, essentially. You're right: They've done nothing, and this is actually what we've written. It's funny, because he will come out and say something and the markets want to respond to quickly, and when you break it down, they're doing absolutely nothing. The balance sheet at the Fed is contracting, in fact – as it is now at the ECB. This is problematic in the context that they have a soverign debt crisis in Europe that is not solved. Spain's already in crisis. France is on the tipping point. It is a political crisis to boot.

So, yes, they've worked some magic – they've been able to circumvent a debt crisis in 2007-2008, saved the banking system, so on and so forth. But again, without fixing the fundamental economic problems, this is an ongoing game of chicken and its amplitude of volatility will continue to increase.

Louis: Do you think those problems are actually fixable? We know there are things that could be done to put our house in order, but none of them seem politically viable. You can't get elected promising that kind of pain.

Greg: Unfortunately the time for fixing them is past us, I think. So this is the problem. It wasn't academically correct to do some of the things we've already done. You can take this back to 1990-'91 – at the very least 1997-'98. So each crisis evokes a greater monetary response, because it's a credit bubble. It's a credit bubble that goes back to the delinking of the dollar from gold. This is a fundamentally flawed system. You can't live beyond your means without having to pay someone back or default. It's that simple. Europe's facing that reality right now. The US has a similar reality down the road on our fiscal side. We talk about fixing things and they can't even fix the fiscal situation, which continues to rupture – more bonds coming due, issuing more bonds, public borrowing going through the roof. It's not sustainable, so it's problematic.

Louis: When you talk to people from the mainstream… People accuse us of being gold bugs. I'm not sure we really qualify, but okay, not this audience [at the Casey Recovery Reality Check Summit]. If you talk to mainstream people, do they get this? Do they see that Europe has this problem and it's not being fixed and it's not so different from where we're headed, or are you "the lone voice in the woods" out there?

Greg: I think mainstream gets it. I think mainstream gets it more than people give them credit for, because they're not focused on Europe, so that doesn't mean that they're disassociated. What it means is they're directly associated with their own situation, which is not always good. I think they get it to a point of being acutely aware of it. That is reflected in consumer-confidence numbers. It's reflected in plans to buy appliances, plans to buy cars.

There really is a souring sentiment. The Conference Board just published data on Friday… You get all these headlines that employment is getting better – the consumer doesn't believe it. Main Street gets that the headlines on US labor market are faulty, that the reality is that the labor market is still in crisis. They get that. They're the ones without the jobs – that's the nine million chronically unemployed people, so they absolutely get it.

The one bright spot for consumers is equity prices. It is one of the most bullish readings on equity prices in the history of the survey. That's troubling because, of course, the consensus is so strong now and you want to be a countertrend thought process here, particularly when central banks aren't adding liquidity. You take that away from the consumer – they don't have wealth creation in their homes, they don't have income reflation in their jobs, and all they've had is stockmarket reflation – and the central banks pulling back while the market starts to wobble could really harden the cocoon that the consumer is already in.

Louis: There's a temptation to think of this – the stock market – as a balloon looking for a pin. On the other hand, the response to any more turmoil has to be more inflationary stimulus or whatever you want to call it: more pumping liquidity into the system. It seems like that's bound to show up in the stock market. So, perversely, is the stock market actually a good buy because of what the politicians are likely to do? Or is it so high that it's looking for a fall? Where do you come down on that?

Greg: It's a great question. That's the question everyone wants answered, and it's a hard question to answer because it's about timing. Really, it becomes "the chicken and the egg." Does it take a stock-market decline to provide a catalyst for central banks to step up? When you look at the degree of percentage increase in money supply that they've facilitated in each of the last crisis periods, it's pretty consistent.

What isn't consistent is the number of dollars it takes to generate that percentage increase. Because as the money supply grows, we know, mathematically, you have to keep pumping more money in. Will they have the political will? In the most recent episode, the six-month growth in money supply peaked at $919 billion – almost $1 trillion in 52 weeks. You need $1.2 trillion next time to get that same percentage increase. Will the Fed have the will to pump another $1.2 trillion into the system when gas is at $4? So it's not just about the stock market. I think it takes a decline. It takes pain before they will be justified politically, internationally, morally, ethically. Every one of these potential "I object" dynamics – you want them clear. And to be clear is when people are hurting, and the stock-market decline could be the catalyst for that.

Louis: All right, but that's not entirely timing, then. What you're saying that it's probably got to go down before the next wave goes up.

Greg: Yes. But figuring out when that's going to happen is difficult. I think you're in a time period now when the markets are at risk. The central banks are kind of hampered in the fact that the ECB has limitations legally, let alone politically. The Fed has limitations in an election year in an international sense. Domestically, politically, they're under fire for adding what they already added that drove gas prices to $4. It's not going to be easy to get the mandate publicly that they probably would need. This is what creates this window where you could have turbulence.

I think the stock market is a little bit out of control in the last month or so, thinking that the real economy was going to pick up the slack and be a driving force for equity prices when the Fed is absent. I think we're very quickly finding out that's not going to work.

Louis: I wonder what they were smoking, but never mind. Investments – how do you play this? What are your favorites? Any broad classes or any specifics that you might want to mention?

Greg: It's difficult because if you're talking to a retail long-term investor type, it is a little more tricky. I'm a trader by nature, a speculator, so I'm in and out. I like to take advantage of the volatility. I want big moves – if they come quickly, that's fine. So it's tough for me to dole out advice on individual stocks or individual holdings. It's a length of time, how long you're going to hold it. There's no buy and hold anymore. There's nothing you're going to go out and buy and hold for the next 20 years. No "It's going to be the greatest thing."

Having said that, there are things that you can do to theoretically implement a buy-and-hold strategy. Trading advisors are a way to go. Getting professional help with managing your money. I think that to the degree that financial advisors in the equity market have gotten a bad name, it's justifiably so. A lot of them don't want to do their own work. A lot of them want to give it to the firm: "What product can I make the most money off of?" This is part of sentiment now too; surrounding the stock market is this distrust of professionals in the market. There're a lot of good trading programs out there. You need to be diversified – don't put all your eggs in one basket. We have actually developed a trading program specifically designed to take advantage of this intensified volatility on a buy-and-hold basis. We've tracked this for a couple of years now. We've back-tested it over 20 years. It's provided really stellar returns and it's not leveraged, and it's commodity specific.

If you ask me what certainty can I give right now, the certainty I can give is that the volatility of commodity prices is only going to stay or get more intense. I'm okay with that because I'm in a position now to try and help our clients to take advantage of that.

Louis: We like volatility too: volatility is our friend. As speculators we like that. Most people, however, are very nervous about it. Actually this kind of gets back to the mainstream question. Most people, you tell them, "Seek professional advice," and they get a mainstream advisor, and most mainstream advisors don't like volatility. They're not prepared to deal with that. So when you say "seek help," who should they talk to?

Greg: It's hard. It's an individual need. Everyone has their individual goals. This is where financial planners – a whole different animal – come in. It's a great service: they take care of your mortgages, take care of your life insurance, all the things that go into planning your financial life. That's good, professional help that everyone probably has or should have without a doubt. A financial planner helps you to define your goals. Is your goal wealth appreciation? Is your goal wealth protection? Is your goal income? There's all different avenues that people look at this from, and I think that that's important to do.

Our firm doesn't offer planning. Our firm doesn't offer low-volatility, "buy and hold to save your money" type of things. There are plenty of avenues to do that. I never think there's anything wrong with holding cash. I think there's never anything wrong with holding physical gold or silver. So depending on what your anxiety level is and what your risk tolerance is, that determines what you're going to seek to do.

People who want wealth generation and have an appetite for risk or at least a greater tolerance for risk could invest with commodity-type advisors. Someone who's looking to protect their wealth… That's tough too – you want to retire, you need to grow wealth. It's very difficult right now, and the Fed doesn't help by having interest rates at zero. It hurts the savers too, so it's hard.

So to me, age is a big factor. All the dynamics and demographics that go into a life plan. If you're younger, take advantage of maybe embracing a little more risk to try and generate some wealth. Now I'm just a trader, so I'm up and down every day. It doesn't necessarily have a big impact on where I'm going to go unless I lose a lot of money. But for older people it's really tough. You want to build your nest egg towards retirement. And this is why you see more people over the age of 55 working, it's part of what's happened too. It's part of why the labor market's broken.

Louis: Let's skip any specific stock picks, then. Are there other sectors that you want to talk about? You mentioned gold. Do you also buy gold stocks or other metals or energy or...?

Greg: I think there will be a great opportunity coming in junior mining, the gold shares. I'm not a gold bug and I'm not a gold mining guy. I'm a macro monetarist. Having said that, I feel that when you take some of these small venture caps – the exploration companies that sit on big deposits of metals and minerals, but particularly the precious metals, gold and silver… And they're not even mining them. They don't really have the capacity to mine them. They're always looking for strategic partners and so on. I think after we go through what's probably a next down wave – and we are kind of seeing that, gold and silver teetering a little bit here. Gold anywhere between $1,300 and $1,450 to me is probably a really good value. I think you can make a case that gold is undervalued at that point, relative to all the money that's been printed. So if that's the case and you get a big decline in the AMEX Gold Bug Index or some of these mining shares, I think the next phase of this will create a frenzy around potentially trying to accumulate assets, even assets that are in the ground that aren't being mined.

Another offshoot of Fed and ECB printing money is the liquidity that funds have too, so there's a lot of trading going on. There's nothing that would stop a hedge fund from taking over the entire float to some of these mining companies. If and when you get to the next phase of money printing, metals rising, currencies being debased – I think that's when you might be in a sweet spot for your really risky speculative venture-capital mining shares.

Louis: Okay, mining. Moving to other sectors – anything else that your fund is looking at?

Greg: We trade the commodities, so it's more short-to-intermediate-term stuff. Longer-term, there are all kinds of opportunities in some of the rare earths. There are all kinds of opportunities in my opinion in biotech and nanotechnology. That's just a personal opinion. I see great opportunities and growth in those areas. Health care is another one. It is one of the only areas of the US economy that has generated job growth throughout this recession, throughout '07-'08. Health care is growing – every sector of health care from nursing to ambulatory care to doctors' offices, every sector in the demographic in the US.

Louis: You've got the Baby Boom working its way through, so that's baked in the cake, right?

Greg: The demographic is great there. Whatever you want to talk about – assisted living, retirement homes – all of that is very valid. I'm not an expert on some of the stocks, whether they are pricing in some of this growth already or not. I think they're going to be good on a case-by-case basis and that's not really what we do, but I like those areas.

Louis: Well, as a trader, do you actually trade the volatility in the commodities themselves? If you think gold's gone up too much, you sell, if it's down too much, you buy…

Greg: We try and play the swings, and we're not necessarily countertrend traders. Recently, gold has been in an uptrend. We'll be very aggressive at periods where we think it's going to accelerate.

I wouldn't say it's short-term stuff. Always our best trades are the ones that we hold the longest, but the duration of holding a trade has certainly come down with the way these markets have started to move, let alone the fact that the contract sizes are so large now that the same percentage daily swing is a much bigger dollar figure. So this has made it much more difficult even from a professional trader's standpoint to manage the risk. It's a great case in point.

I'll give you two examples in how money has been debased, one that applies directly to what we're talking about in trading and one that applies to everyone out there. For me as a professional trader, the minimum for a managed futures account used to be $500,000. That's 2006-2007. Gold was trading $450-$500, oil was just started to break out of $40-$50. The contract sizes are still $40,000-$50,000 per futures contract for gold or oil. Gold's tripled, so managing that same risk with $500,000 means you can take one-third as much risk. We can't trade a third of a contract, so our minimum is now a million – not because of any other reason than the contract sizes and the daily swings on a dollar basis have become so intense. They've debased money to where $500,000 is not even a tradable account in the futures markets anymore.

Louis: Wow.

Greg: The other example would be if you took $1 million and invested in a five-year Treasury bond five years ago. Everyone loves Treasury bonds: they're safe, they're guaranteed, you know you're getting your money back. It's a meager return, 2 or 3% at the time for a five-year bond – but it's 102 or 103%, because you're getting your money back. This is why people like it: it's a safe haven.

The problem is, you invest $1 million in a five-year bond, you get your million dollars back in five years plus your 2 or 3% interest and you go and you buy one-third as much gold with that $1 million as you would have five years ago. Your money has been devalued by two-thirds relative to gold. That's a great illustration for what's happening and likely to continue to happen, which is one of the reasons we like buying gold.

Louis: Okay. I'm going to ask you a nasty question, but we won't hold your feet to the fire as a consequence. Short term… You know, "the shorter the term, the harder the prediction." There is a lot of concern about this summer. Will "sell in May and go away" pressure be really vicious this time around? There's a lot of bearish sentiment, particularly in our resource sector. Any sense of the near-term?

Greg: I think the near-term is problematic. I think it's going to be problematic until the election is out of the way in the US. I think this keeps the Fed in check. They can be verbal at times and have some impact, but generally speaking that liquidity is not being provided. That's the bottom line. Since the end of last June it's been an issue. Had the ECB not stepped in with $1.4 trillion worth of euro creation out of thin air, we'd be in a much different position right now. My concern is that the ECB is kind of done – they're limited in what they can do. If not for the People's Bank of China, really, nobody would be pushing right now. I think that creates a short-term problem; and I think it's a short-term dynamic for the central banks, particularly in the US. So I see turbulence coming.

Spain is already in crisis. France is on the precipice. We've talked about this. This will come to the fore. The political situation in France, the political situation in the US, a slowdown in Asia. You've got high real interest rates in a number of countries in Asia – you don't have that anywhere else. You have interest rates that are negative but becoming less negative because inflation is falling. It takes away some of that stimulus for monetary policy. I think that conspires to create a problem in the next three to five months for sure.

Louis: All right, on that note – that cheerful note – we should remind our viewers that a problem is actually an opportunity if you see it coming. Thank you very much.

Greg: Yes, my pleasure.