Mr. Rule has dedicated his entire adult life to many
aspects of natural resource securities investing. In addition to the
knowledge and experience gained in a long and focused career, he has a
worldwide network of contacts in the natural resource and finance worlds. As
Director, President, and Chief Executive Officer of Sprott US Holdings, Inc.,
Mr. Rule leads a highly skilled team of earth science and finance professionals
who enjoy a worldwide reputation for resource investment management.
Mr. Rule is a frequent speaker at industry conferences,
and is interviewed for numerous radio, television, print and online media
outlets concerning natural resource investment and industry topics. He is
frequently quoted and referred by prominent natural resource oriented
newsletters and advisories. Mr. Rule and his team have long experience
in many resource sectors including agriculture, alternative energy, forestry,
oil and gas, mining and water. Mr. Rule is particularly active in private
placement markets, having originated and participated in hundreds of debt and
equity transactions with private, pre-public and public companies.
Rick Rule, the world’s most respected Credit Analyst, of ‘Sprott Global Resource Investments‘
sits down with Maurice Jackson of ‘Proven
and Probable‘ to discuss his concerns regarding the United States 1)
Debt, 2) Bonds, 3) the Politician’s Solution, 4) and why precious metals is
the option that investors need to consider. Investors will greatly benefit
from Mr. Rule’s 40 years of industry insights as he conveys the challenges
that are ahead for the United States and how investors can preserve the
capital.
Video:
Transcript:
Maurice Jackson: Welcome to Proven and Probable. I’m your
host, Maurice Jackson. Today, we have an exciting show for investors as we
will be having a discussion with the world’s most respected credit analyst
regarding the United States debt, the politician’s solution and the
investor’s choice. Joining us today is Rick Rule of Sprott Global
Resource Investments, which is the preeminent name in the natural
resource space. Rick, thank you for joining us today.
Rick Rule: Pleasure, Maurice. Thank you for having me on.
Maurice Jackson: Rick, before we begin today’s
discussion, please share with listeners why a discussion with Sprott
Global Resource Investments will be a prudent move for natural resource
investors.
Rick Rule: Well, I suspect that we’re in the early stage
of both precious metals and broader natural resource bull market and I humbly
suggest that in the micro-cap natural resource space and small-cap natural
resource space, that is, natural resource investments with market caps below
a billion dollars that Sprott is by now probably the most confident
and best-known investment adviser on the planet aligning yourself with
investment experience in a cyclical sector that’s experiencing a cyclical
upturn as historically been one road to wealth. I would also suggest that
most investors on a global basis, perhaps not your subscribers but most
investors on a global basis are substantially under-investing both in
precious metals and in natural resources, and I think that that needs to be
addressed by people.
Maurice Jackson: Thank you for sharing that. You know,
Rick, your work and repute is legendary as a credit analyst. I would like to
begin today’s discussion with a simple question, and that is if I as an
individual borrowed from everyone in town for the last 3 to 4 decades and
still have not repaid my obligations, based on those circumstances, would you
think of me as a good credit risk?
Rick Rule: I get your point, Maurice, and I guess that depends
on what assets you were able to collateral with and how much income you had
available to service your debt. The fact that you have been a serial borrower
tells me one of two things, either that you are an extraordinarily good
credit or that you are an extraordinarily good salesman. Your point with
regards to the US dollar and the US government, this credit is one that I
suspect that knowing you we’re going to explore in more detail in this call.
Maurice Jackson: Absolutely, because taking this discussion
now from an individual to a nation, in this case, the United States, of
course, why do you believe investors cannot discern the difference as they
continue to deploy capital into bonds that will yield them negative returns
in essence?
Rick Rule: I think there’s two reasons for that, Maurice,
although I have to admit if you press me to honestly, that the behavior
mystifies me. But my experience is two-fold. My experience tells me that a
lot of big investors are really afraid of the equities markets that they—and
I’m not saying they’re right or wrong. I’m just describing their motivations.
They see an equities market where margin growth has continued although sales
growth is stalled and they don’t see the economy as being strong enough that
future earnings justify current prices, which is to say they’re nervous about
an equities market collapse. And I think some of those very large investors
like what they think of as the certainty with regards to payment from
sovereign issues. If the government doesn’t the money in tax, it can simply
print it. And they believe that losing 2% on bonds is better than losing 30%
in the equities market. That’s the first part of the answer.
The second part of the answer is more pernicious, Maurice, and that is
that—and I’ve seen this as an investment adviser for 3 decades. A person’s
expectation of the future is set by their experience in the immediate past,
and we’ve been in a bond bull market since 1982. So, for 35 years, we’ve been
in a bond bull market. The benchmark bond, of course, is the US 10-year
treasury. And in the 35 years that we’ve been in a bull market, the yield on
the treasury has fallen from 14.6% to 1.4%, a legendary bull market indeed, a
90% decline in yield which suggests a 9-fold escalation, if you will, in the
price.
Now, the truth is that towards the end of bull markets, the narrative
becomes established by the performance of the instrument. That’s how bull
markets work. Market becomes the most crowded and the most seemingly
attractive when the risk is the highest, and my own suggestion is with the
yield having fallen from 14.6% to 1.4%, that bull market is much closer to
the end than to the beginning. But the truth is that the narrative is
particularly strong because it’s worked for 30 years irrespective of whether
it can continue to work.
So in answer to your question, two things, the fact that sovereign
investors know they’ll get some of their money back more than they might in
equities markets and also simply because the trend has worked so long that
they’re comfortable with it.
Maurice Jackson: Well, thank you for conveying that to
us. You know, switching gears here, let’s move on to politics. And, Rick, can
you provide investors with a rendition of what I believe was Ambrose Bierce’s
definition of politics?
Rick Rule: Yeah, I can. I think it was Ambrose Briece.
There’s two quotes I have and I’m uncertain really if it’s Ambrose, but I
think they were Ambrose Bierce. My favorite, of course, is the one about
elections being best understood as advanced auction on stolen property
describing the fact that politician’s job in terms of getting elected is to
represent subconstituencies that are motivated to steal other people’s wealth
and protect their own wealth from theft, hence, the description advanced auction
on stolen property.
The other is of less determinate origin. It’s suggesting you understand
the process of politics by looking at the root of the world. “Poly,” of
course, from the Latin for “many” and “tic” from the English colloquial for
small, bloodsucking insect. If you look at the word as being “many small
blood-sucking insects, then you understand the nature of the word “politics.”
Thank you for giving me the chance to regale your audience with that.
Maurice Jackson: Thank you for sharing that. And there’s
so much truth in that statement. The reason I bring that about is because
bonds are one way to pay for the debt. The second is a subject that we like
to discuss as well which is confiscation—I’m sorry, theft. I’m misreading my
notes here. Taxes, taxes. That’s what it is. The second way to satisfy these
debt obligations is taxes. Let’s delve on that subject matter a little bit
further here as we discuss the future options we have here before us with
Clinton and with Trump. As a credit analyst, what are you views on either
party taking the nomination and how does that affect us as a nation?
Rick Rule: I don’t think that the difference between
either candidate with regards to the viability of the current fiscal
situation in the US is very good. Neither party would seem to me to be
committed to cutting government expenditures, freeing the economy, abandoning
Central Bank manipulation of the interest rates, lessening quantitative
easing or reducing tax. I would suggest that the difference between them in
any of those regards is nil. So the choice really is Tweedle dumb and Tweedle
dumber. I have my preference between the two in terms of not being personally
repugnant, but I’ll keep that to myself. The truth is that I don’t think it’s
possible that a candidate who would subject himself or herself to the intense
scrutiny and humiliation of running for President, I don’t think a person
would do that if they weren’t such a—so power-hungry and so demagogue that
the power obviated any pain associated with the process. So, I’m very
skeptical about whether we could in this country induce someone to run who
was suitable to the office ironically.
Maurice Jackson: Well, you know, regarding politics, you
know, the United States in essence has 3 options, and for the record, Gary
Johnson and the libertarian option is my option. And the reason I say that in
particular is that one of the concerns I have, Rick, is that people or
citizens, they vote with their wallets and not on the merits of the
constitution. So, my concern—and I think a lot of our listeners’ concerns is
that this debt obligation that we have, the way we’re funding it is going to
continue to grow and grow and grow. And I think you’ve just clarified that
position in essence for us.
Switching gears, can you please convey why having stewardship in something
that is payment in full, analog, and has never gone to a value of zero such a
prudent decision for investors based on today’s discussion?
Rick Rule: Sure. Obviously, for people who have herd you
before, what you’re talking about is physical ownership with precious metals,
a medium of exchange that simultaneously a store of value. The truth is that
precious metals that function as money is a medium of exchange for centuries
because they are promised to pay, they represent payment in and of itself. If
somebody gives you gold, you don’t have to trust them and you don’t have to
trust the instrument that you have been given, if you view that in
juxtaposition to other forms of payment. Fiat currencies is an example.
They’re not really payments. They’re promises to pay, and they work well as
long as social trust remains. How long will the trust remain? Well, hopefully
for my lifetime and your lifetime too, but hope is a very poor
investment strategy.
Let’s return to the central theme of your question, which is, of course,
the debt. Somebody who is a buyer of US sovereign debt and, by the way, of
course, the dollar bill is a different form of sovereign debt, has to concern
one’s self with society as represented by the US governments, balance sheet
and income statements. And, in both cases, there are cause for concern.
You’ll recall, Maurice, the narrative in 2009 after the 2008 liquidity crisis
where the narrative went that US on-balance sheet sovereign obligations at 15
or 16 trillion dollars were unserviceable. They were thought to be
unserviceable, of course, because people were afraid as a consequence of
events the occurred in the immediate past.
Well, today, that same account is 19 trillion dollars in deficit. In other
words, we’ve gone from a 15 trillion dollar obligation to a 19 trillion
dollar obligation. And because the events of 2008 are in the distant past,
people believe that 19 trillion dollars in obligation serviceable in 15
trillion dollars in obligation. I don’t know if this goes to the state of
mathematics education in the United States or something else.
The next place that we have to go, of course, is to the off-balance sheet
obligations. If my memory serves me correctly, the off-balance sheet obligations
according to the congressional budget office—and by the way, look at my
picture, I’m 63. I am an off-balance sheet obligation. The off-balance sheet
obligations have increased from about 60 trillion dollars to some number in
excess of 100 trillion dollars. And, one has to ask one’s self whether the
income statement, that is, the private income of all Americans, not the
sustaining capital investments, is sufficient to pay off 100 trillion dollars
in off-balance sheet obligations and 19 trillion dollars in on-balance sheet
obligations before we take into account private obligations, the obligations
of state and local government, and a myriad of unfunded public pension
obligations. And my suggestion is, well, I don’t know what the answer is. I’m
very afraid of what that answer might be. We would seem as a society to be in
the range of 4 times as indebted as we were 12 or 13 years ago without a
concomitant increase in either GDP or much more importantly the margin
generated by the economic activity that generates GDP.
Maurice Jackson: You know, thank you for conveying the
GDP. One of my concerns there is net exports. I can’t recall the last time it
was in a surplus. It has to have been—was it the ‘80s? Am I mistaken on that?
Rick Rule: I don’t know the answer to that, although the
deficit isn’t as bad as it looks when you bring back in financial flows and
service exports. It’s odd that at the same time that we seek to reduce, if
you will, the value of our franchise, our franchise becomes more important,
which is a different way of saying as unpleasant is the situation in the
United States is, the situation in the United States is better than the
situation of many of our competitors. And the consequence of that as Doug
Casey says that there is ironically a strength in the US dollar merely
because it’s the prettiest mare at the slaughterhouse. If you compare the
dollar with the Renminbi, with the Yen, with the Euro, all of a sudden, by
contrast, the US dollar looks pretty good as opposed to absolutely good.
Maurice Jackson: Well, thank you for sharing that. And,
Rick, last question in reference to precious metals here. Your avocation for
precious metals is obvious, but is it limited to just gold and silver, or do
you include platinum and palladium in that as well?
Rick Rule: I absolutely include platinum and palladium.
They’re sort of hybrid metals. What’s interesting about platinum and
palladium from an investment thesis is two-fold. One, the stock gets used. It
gets used in catalytic conversion, in auto catalysts and a variety of
applications, which means that the stockpile gets smaller. It doesn’t get
shuffled from one bank vault to another. And about 60% of the world’s
platinum production by my view is uneconomic at current platinum prices. Now
ironically, that number hasn’t changed much in 4 years as a consequence of
the devaluation of both Rand and the Ruble, the 2 countries that produce
most. When those currencies fall, the cost of producing the material in those
countries decline. But the truth is that the industry can’t continue to
produce metal for too much longer for less than the cost of production. And
if you juxtapose that with the fact that above-ground inventories get used up
in fabrication applications, it becomes a very attractive investment
proposition.
Maurice Jackson: Very well noted. Rick, we’ve covered a
lot of ground here today. Last question for you here, what did I forget to
ask?
Rick Rule: I think you’ve done a fairly good job,
Maurice. I think it’s important that your viewers and listeners understand
that irrespective of the attractiveness of various forms of bullion relative
to various forms of government obligation, that it’s incumbent on investors
to maintain liquidity both in bullion and also in dollars. Important because
in a period of volatility and in a period of where equity markets—I’m not
saying will, but could stumble, having liquidity will give you the tools and
the courage to take advantage of market circumstances like those that
occurred in 2008 rather than being taken advantage of by those two
circumstances. So, yes, on bullion and also maintain non-bullion liquidity
too even though the real cost of owning that insurance, if you will, is
relatively high.
Maurice Jackson: You know, Rick, for investors that
subscribe to this thesis that have the courage and convection, do they—does Sprott
Global still offer a portfolio review?
Rick Rule: We absolutely offer a no-obligation portfolio
review with the caveat that that’s limited to your natural resource stocks
where our advice might have some value. You can avail yourself of that
opportunity by emailing me directly, rrule@sprottglobal.com. Put in the text
of your email—not as an attachment—in the text of your email both the name
and the symbol of the stock and I will return your email with a no-obligation
ranking of your natural resource portfolio holdings.
Maurice Jackson: You know, for investors that take the
opportunity to contact Mr. Rule, please put in the subject line “Proven
and Probable” to help streamline those emails. And, Rick, on behalf of
everyone, we want to thank you for that opportunity.
Rick Rule: Maurice, it’s a pleasure. Thank you for taking
on the obligation of spreading the word as you do.
Maurice Jackson: Rick Rule of Sprott Global Resource
Investments. Thank you for joining us today on Proven and Probable.
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Maurice Jackson of ProvenProbable.com
has a mission to provide high net worth investors with the merits of value
investing throughout the Natural Resource Space.
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