Stansberry Radio Interview Series: Resource master Rick Rule: What really, truly worries me today

Welcome back to the Stansberry Radio Interview Series.

As you know, every Saturday the Stansberry Radio Network is bringing you the most valuable ideas from the most intriguing guests from all of our shows.

This week, in part one of a two-part series, Frank Curzio interviews Rick Rule, founder of Sprott Global Resource Investments, Ltd.

Rick has 35 years of experience in natural resource investing. He’s a well-recognized expert in mining, energy, water, forest products, infrastructure, and agriculture.

A popular public speaker, Mr. Rule is a featured presenter at investment and industry forums around the world. This year he is hosting his brand-new Sprott Vancouver Natural Resource Symposium from July 22-25.

In the following interview, Rick talks about the current state of the resource sector. He tells Frank that the bear market we’ve experienced over the past few years is analogous to a natural resource sale.

He explains to Frank how he has “become a very, very, very wealthy guy simply by understanding that bear markets are the authors of bull markets.”

Anyone looking to succeed in the resource arena should read on… It’s information that you won’t hear anywhere else!

Regards,

David Newman
Senior Producer
The Stansberry Radio Network

 

Originally aired on the Stansberry Radio Network on April 30, 2014

Part I

Frank Curzio: Today we’re talking to Rick Rule. He’s been analyzing and investing in resource stocks for 40 years and is certainly a legend in the industry.

Rick, thank you so much for being on the S&A Investor Podcast.

Rick Rule: Frank, thanks for the opportunity. I always enjoy it.

Cuzio: Rick, a couple weeks ago at the Stansberry Spring Editors Conference in the Bahamas, we talked about different areas of the market, and specifically, your area of expertise… commodities. I wanted to start out today with your macro view.

We’re seeing weakness among emerging economies – Russia, Brazil, China, India. We’re seeing slower growth in all of them. Consequently, those stock markets are getting hammered. It definitely seems like it’s been influencing the price of commodities, but what do you see going forward?

If these markets bottom out and start doing well, could we see a lot of commodities – maybe even copper, iron ore, even gold – move considerably higher?

Rule: Yeah, that’s a great big question; so let’s attack it bit by bit by bit.

The recovery that we see in Western markets – Western Europe, Japan, United States – we see as mostly a financial recovery. I’m leery about a recovery that doesn’t include capital spending or jobs, which describes the so-called recovery in the U.S. And without either emerging markets drivers or Western markets drivers, the parts of the commodity complex that are associated with a strong economy – base metals, industrial metals, and energy – would normally be expected to be weak. And in some aspects of those markets – coal, iron, and copper as an example – the markets are quite weak.

What’s interesting to me is that in the face of global weak demand, some prices, in particular energy prices, have stayed strong. That tells me that despite the rebound in U.S. energy production, there are supply constraints among all of the economies. If you see a recovery in Western European demand, North American demand, Asian demand or frontier and emerging markets demand, I think that the upside associated with commodity prices will surprise you.

I think the second part of your statement, which has to do with very weak equities prices in emerging and frontier markets around the world, is a function of three things…

First, it’s a function of volatility in global debt and equity markets. Volatility often causes people to withdraw from the fringe assets like emerging markets and retreat into so-called defensive markets – the U.S. and Western Europe.

I think another thing that it reflects is a retreat from the really heightened expectations associated with the emerging markets in 2009, 2010, and 2011. The expectations for the BRICs [Brazil, Russia, India, and China] for example, were set so high that it would be impossible for them to have attained those expectations. And what we’re seeing right now is the normal reaction to the disappointment that’s a consequence of an overblown bull market.

And I think the third set of situations that you’re seeing in the frontier markets is a bit of a retreat from the liberalization that those countries enjoyed over 20 years. The fact is, when you allow people to become a little bit freer, the people respond by becoming a lot richer… which is to say that the retreat from liberalization in markets like China and Brazil, for example, has slowed the economic growth. It’s my hope, of course, that the leadership in those countries or the citizenry of those countries will reverse the trend toward less liberalization and allow people to become freer and richer.

So I would say on a global basis, the outlook for resources is mixed and tied to economic growth.

What surprises me is about the equity markets is that the North American equity markets, in particular, are performing in a way that would suggest that the recovery’s well in hand. And if that is true, if the set of circumstances that are propelling the S&P 500, for example, are true, then you will see a striking commodity market 18 months or two years from now. That’s because strong commodity prices, even when demand is weak, is a consequence of the fact that supplies have been constrained and constrained for ten years.

It’s a very, very interesting world we live in with regard to major market equities and resource market equities.

Curzio: Yeah, it is interesting. And you use an important word there. You said if this recovery’s for real. Do you think it’s for real in the U.S.?

Rule: Well, Mr. Buffett always points out that anybody who bets against the United States loses in the long term, and I’m always reminded of how miraculous the cult of technology and achievement is in the United States. You know, you get a couple of pimply-faced kids from Harvard to drink too much coffee and Facebook comes out of it. That’s wonderful.

The problem is that we don’t seem to be willing to get out of our way collectively. You set this incredible innovation and hard work against federal on-balance-sheet liabilities of $17 trillion, and off-balance-sheet liabilities of $65 trillion, let alone municipal and state deficits, and it is… Let’s just say it’s an interesting paradox.

The second set of circumstances you have to deal with in this country is that we have a recovery that hasn’t generated very many high-paying jobs. Yeah, maybe they’ve added half a shift at McDonald’s, but at the same time that the unemployment rate – as reported – has declined a little bit, the number of Americans not even bothering to look for work is at record highs.

Maybe I’m old-fashioned, but I don’t understand a recovery that doesn’t include jobs. But probably more challenging for me is a recovery that doesn’t see any uptick in capital spending or any uptick in investment, because the way that you raise workers’ real wages is you have the workers employ more capital. And here we have a whole bunch of problems…

Maybe it has to do with investor confidence, but I think a lot of it has to do with the U.S. tax code.

Say that you and I were building a steel mill or some heavy manufacturing facility in the United States. For some of the functional equipment we have a 12-year depreciation schedule, and for the physical plant, we have a 30-year depreciation schedule. In some places, like Sweden, allegedly a high-tax place, we’d expense it. But the politics of envy in the United States – the politics of confiscating private productive wealth in favor of redistributing consumer expenditures – is absolutely crippling the U.S. economy and constraining the recovery. And that’s the thing that really, truly worries me.

Curzio: Now, the last macro question here, I promise. You’ve lived through many boom and busts, and you travel to all these emerging markets. Do you think, as a contrarian investor, it’s now “blood in the streets”? Should you start investing in them or are you still staying away from emerging markets?

Rule: I am going into emerging markets. I’ve gone to frontier markets for my whole career, and the improvement in living standards in frontier markets over the last 30 years has been absolutely incredible. Little villages that I would visit where the kids were literally naked and had no shoes… where people lived in mud shacks… you now see people reasonably dressed with enough to eat. The foundation is in place as a consequence of gradual political liberalization, and these markets are – in some sense – very oversold.

I have to admit to your listeners, who will probably question my sanity, that I am tiptoeing into the Russian market. It’s a market that treated me extraordinarily well in the early-’90s. I mean, extraordinarily well. Added a zero to my portfolio there. It’s a market that I understand because it’s a resource-centric market. It is a market that has made really remarkable progress in the last 15 years.

In terms of governance standards, they’ve gone from nonexistent to merely bad. It’s a market with a very educated labor force, and it’s a market that was off by 55 percent before Crimea and the Ukraine, and is now off by another 25 or 30 percent. This is truly, unfortunately, a blood in the streets situation and one that I can’t personally, as a speculator, resist. It’s not unlikely that the market falls 15 percent more, but when Russia recovers, my suspicion is that, like the early part of the decade of the ’90s, I’ll be able to add a zero – a digit – to my Russian portfolio. I can’t resist opportunities like that.

Curzio: Rick, you said another interesting thing just then. You said you could see 15 percent downside. You’ve been doing this for such a long time, and when you look at these markets, what do you see?

How do you explain to investors that it’s going to be incredibly volatile, but if you can withstand the volatility, the end result almost always seems to be really, really good?

Rule: Well, I think you put your finger on it, Frank. I’ve lived through enough of these cycles in cyclical and volatile industries that I understand that bear markets are the authors of bull markets. One would hope that you could time them, but I think I’m living proof that you can’t.

On the other hand, I have become a very, very, very wealthy guy simply by understanding that bear markets are the authors of bull markets. Listen, Buffett famously said nobody should buy a share of a company where they didn’t know enough about it that they wouldn’t be delighted to see it fall in price 20 percent the week after they bought it, so they could buy a bunch more cheaply.

Now, unfortunately, I’ve tested that thesis dozens of times in my career. I wish I would have bottom-ticked every trade, but the truth is that the process over the last 35 years has been extraordinarily good for me, and my suspicion is that I am coming into an up cycle in both resources and frontier markets that will be the most dramatic of my career… the best of the best times that I’ve ever enjoyed. And as you know, I’ve enjoyed some very good times in past recoveries.

Crux note: Next Saturday we’ll continue Frank’s discussion with Rick. You’ll learn Rick’s top three resource picks today… and much more. If you just can’t wait, the entire interview is available for free on Stansberry Radio, right here.

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