Rick Rule: Bonds or Precious Metals - Maurice Jackson

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September 20, 2016

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.




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, 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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