Rick Rule 26:16

You know, sometimes I get lucky. We book a guest and then all sorts of stuff happens in the marketplace, which is why I'm normally so pleased to talk to Rick Rule. But especially at this time when we've had the level of market turmoil, obviously, we've been experiencing since just over a week ago. Rick, first of all, appreciate you taking the time. I'm sure you're I hope you're not tired of answering questions, but I bet there's been plenty of them.

Well, Mike, thank you for having me back. First of all, I enjoy visiting with your audience. And yes, this is a time where keeping people's attention is pretty easy. Their attention certainly has been aroused by the events of the past week.

Well, I always remind people too, they say, well, I don't own stocks or something like that. And I go, well, actually you do. It's called the Canada pension plan, or it could be in the U S and social security, or you're lucky enough to be part of a private pension plan through your work, et cetera. So yeah, we all are impacted on by this. So that's why I think it's important for people to pay attention to this. Uh,

Obviously, the size of the decline, we've been talking about that. I mean, I'm still, you know, I needed a neck brace after I had a look at what went on in Japan. I guess it was on Monday their time, you know, 12.4%. You know, I looked at their bank stocks, by the way, down 27%. I mean, my goodness gracious. I mean, that was shocking to me, the size of the move that way. But were you surprised by that sort of corrective move? I thought in Japan it had to happen. I didn't know when.

But the Japanese carry trade and in fact, the manipulation of the Japanese, the deliberate manipulation of the Japanese currency lower and the ability to subsidize their banks by allowing them to borrow in Japanese yen in a currency that was depreciating and buy higher yielding assets in a currency that, while it wasn't perhaps appreciating, was appreciating against the Japanese yen in the circumstances had to change.

The aggregate Japanese debt of GDP was also too high to be sustainable, particularly in a world, their world, with very bad pension demographics, many retiring workers, not so many active workers. My suspicion, by the way, is that the unraveling of the carry trade situation

And the imbalance in the Japanese pension economy isn't over. I'm not so sure that the next adjustment will be as violent. I suspect, though, that this circumstance will continue. And I suspect that the circumstance of the declining availability of Japanese capital in outside markets, particularly the U.S. market, is also a trend that hasn't ended. Remember, Mike,

The prices are set on the margin. And if the Japanese institution is three or four percent of the market, but that three or four percent is absent. The fact that prices are set on the margin means that this will continue to act as a drag on asset classes that the Japanese have been active investors in. As an example, the U.S. long bond market.

And there's so many things within that. I want to just go a little bit further. Not everybody's now probably heard that phrase, carry trade, but maybe not quite as sure. But is it right to say the bottom line is I could borrow at basically zero trade?

out of a Japanese bank. I could borrow that money and then I could just place it somewhere else. Maybe that's what fueled Nvidia, for example, or fueled, you know, the big seven stocks or certainly the move in NASDAQ. So, and as you said, maybe more importantly, U.S. bonds. Hey, why not borrow at zero and get three or four, maybe 5% in a U.S. bond? And that seems to be reversing now. Yeah, the bond trade was perceived probably correctly for years as a riskless trade. Yeah.

You would borrow money at a nominal yield, 20 basis points in a currency that was declining, and buy 400 or 500 basis points in a currency that at least relative to the end was appreciating. This was a pretty good print. And if you were a Japanese bank, you could do it with no reserve requirement against it, meaning that you didn't have to have an equity loss reserve.

The return on capital employed was infinite because you were using depositor funds, not your own equity to make the trade. It is no surprise that the market capitalization of the Japanese banks, who were so reliant on this carry trade, was as dramatic as it was.

Mm-hmm. Again, so let's talk about the impact of the reversal of that. They raised interest rates. They said, the Bank of Japan, we're not going to buy as many bonds in the next couple of years because remember when they buy bonds, that's what helps keeps the rate down. I mean, no one else wanted those damn bonds, not if you're going to pay me half a percent in an inflation increasing environment. So they were the ones buying. So those two things seems to me the essential part. But

Let's follow through what that meant then or what the reaction was to that. Well, I think one reaction is that there is at least the perception of less liquidity on global markets from Japanese sources, which means the presupposition that there is always a buyer or a plethora of buyers and that one of those buyers is Japanese is out of the market. I think the implication for the U.S. Treasury market is probably negative.

The most important. It increases the possibility that they give a treasury auction because the U.S. funding needs, in particular the rescheduling needs, are pretty acute. And there won't be enough individual or institutional demand to fill the offering. And that they might have to fill the offering with quantitative easing, which means they might have to buy their own paper. Now, Mike, if you did that, it would be called counterfeiting.

If Congress does it, it's called quantitative easing. But the ultimate result, I think, is likely to be the same. The last time we had a failed Treasury auction was in the Clinton administration a very long time ago. And he coined the phrase the bond vigilantes. The bond vigilantes haven't been active in the market for a very long time. But if we begin to assert market pressure on the Treasury market, that'll become a very interesting change.

in financial markets and one that will probably not be pleasant for many participants. Yeah, to me, that's, that's always been my biggest fear, I say is liquidity. And one of the things that very simple to understand, no buyers, you know, and we first experienced that, well, not first experience, I'm sorry, but more recently, September 16th, 2019, when the overnight lending markets said, will you lend me this money? And,

no, I'm not lending you that money. So literally interest rates, just so people remember, went up 500% that night. That's when the Federal Reserve stepped in and said, well, we're going to calm that market down. We're going to make sure you can borrow at lower rates. But I think I counted five other times since that.

you know, where the Federal Reserve has stepped in. We know they stepped, you know, the Bank of England stepped in in the UK bond pension crisis, you know, obviously, again, back to the Federal Reserve, but they were certainly active when we had the Silicon Valley Bank. So it's not unprecedented. And Japan may be the granddaddy of them all. I mean, the Bank of Japan's been involved, you know, for decades now, because who the heck wanted those bonds? And Mike, I think that's the lesson for your audience. It isn't over till it's over.

People have seen the writing on the wall with regards to Japanese capital markets for 30 years. And nothing happened and nothing happened and nothing happened. And then when the something happened, it was a pretty ugly trap. I remember myself, frankly, back in 2006, 2007, driving on the freeway and seeing a big sign off to my right that said, borrow 125% of the value of your home. Bad credit. Okay.

If ever there was a warning sign for the 2008 real estate crash, that was it. I noticed it. I remember being a lender thinking bad credit okay was not a good omen, but I didn't pay attention to it. It wasn't until the event occurred that looking in the rearview mirror, I understood that that sign was a wonderful harbinger.

And when we talk about these circumstances that don't make sense to us and we belittle their importance because there isn't historical precedent, we set ourselves up to be victimized by the same trap that you're referring to. I think that's the lesson. I'm not suggesting that your audience

you don't panic and go out and buy ammunition or anything like that. What I'm asking them to do is take a look at the trends in motion that don't make sense to them from an economic point of view and incorporate the fact that they don't make sense into their own personal financial planning.

I think that is a brilliant point. You know, I mean, one of the challenges, in fact, you know, on this Japanese carry trade issue before it happened just recently, though, I put something up as you should be paying attention to this, but you won't. And it was about the carry trade and the dangers there. But again,

You've just expressed it better than I did. And that would be my message too, though. I just want to echo it. There's all sorts of signs and even stuff that makes sense to us. You know what I mean? Yeah, that's probably not a good idea to have 91 trillion in debt and pretend it's not there. You know, that's not probably not a good idea in the U.S. to have, what is it, 122%

you know, entitlement payments and defense and interest, you know, debt to GDP at 122%. You know, those kinds of numbers come at us and we're well aware of them. And I, yeah, I, the complacency around them is what blows me away. I think that's important. People look at the fact that we got through 2008. Okay. We got through 1997. Okay.

It's important to remember that the circumstance in 2008 happened with government debt to GDP at between 22 and 25%. In other words, there was plenty of string to push on with quantitative easing. There was plenty of faith in the U.S. Treasury market. There was plenty of faith in the strength of the U.S. government to muscle its way out of its own stupidity. With debt at 120% of GDP,

there's much less strength to push on. And so the fact that we got through it unscathed last time is not necessarily indicative of the stress that would be caused. Would that circumstance reoccur? Again, I'm not suggesting that people curl up in fetal position and moan about the hopelessness of the situation. All I'm asking people to do is to structure their portfolio in a way that's somewhat less

anti-fragile or somewhat less fragile, pardon me, than it is today.

And that brings me to gold in this way, because the way they've handled those situations has continued the devaluation of the purchasing power. You know, so I and I'm not so sure people weren't hurt. I think the people making the decisions weren't. I don't think anybody at the Fed was hurt in 2002, 2008, you know, and we can keep going. And I think half the population doesn't seem to be too hurt by what they've been doing so far. But I sure worry about that other half.

you know, who it's real, they don't own assets. So they didn't benefit in any way from the sort of really loose monetary policy. And I'm not here to debate that specifically coming out of the pandemic. The fact is, though, you had about a 40% increase in money supply. You know, we know that devalues and what you're describing here would devalue the currency further. And I just worry about

you know, that half of the population that I continue, this is me, I'm not putting words in your mouth, but we ignore them. They're not happening. I worry about both halves of the population. Yeah, fair enough. When I talk to a Vancouver audience, one of the things I'm struck with, particularly among people younger than I, which is most of the population, sadly, they say real estate prices in Vancouver can never go down. I lived in Vancouver in 1982 when the real estate price fell by half. If you had a five-year mortgage,

based on 1980 prices, and you went to refinance that mortgage after five years, and you found that the value of your house fell by half when you had a 75% first, you had a problem. It isn't just the poor people. If you have people pick a city, I'm picking on Vancouver because your audience is largely lower mainland centric, but you have a

a solvent audience that has learned the lesson in the period 1982 to 2002 that blue chip stocks only go up or that bank stocks only go up or that interest rates only go lower and so bond prices only go up i suggest that you revisit your paradigm there are a lot of people who have bought

the so-called magnificent seven in the United States because the price appreciates. And I ask them to describe what they think the business is worth, what the value of the business is, and they revert to the share price. The price of something is markedly different than the value. And I would argue that money is made over time

by understanding the discrepancy between price and value. That price information is of no use if you don't have an opinion as to value. And there are a lot of investors, a lot of people who listen to your show to get ahead that need to revisit in their own mind the difference between price and value and understand the risk of investing in asset classes that you don't actually understand.

Again, another great point. I mean, I'm always talking about there's the narrative and then the price you put on the narrative. And when you get these major corrections and I'm not, you know, and there's still many variables to play out. I think you don't have a huge down couple of days the way we did, you know, whether it's Thursday, Friday of a week ago, you know, Monday, you don't get that without a lot of up and down.

I mean, I think the VIX index was indicating volatility at the extreme. You know, I think that's going to be accurate. Don't be surprised by up moves. Don't be surprised by down moves. But I love that point. You come back when you're long term and you're setting back. You know, FOMO doesn't do you any good. Fear of missing out. But what does is recognizing that difference, recognizing the value compared to the price. And I just think we should put that on a sign and sell them.

because I certainly made that mistake in the past. What I love about these tumultuous days is that the selling is reflexive, which is to say often the sale decision is made by the investor, but rather by the margin clerk. And he or she doesn't care as long as it has a bid. And what that means is that high quality assets get thrown out with low quality assets. And the discriminating shopper, I view myself as one of those, and occasionally that's right,

has the ability to look at his or her shopping list. And if they have the courage on these tumultuous days, it generates some real bargains. You know, Mike, one of the other things that amuses me is when folks go out looking to buy physical goods, they're often fairly good shoppers.

You go to a store, you buy tuna fish when it's on sale. You substitute tuna fish for salmon or chicken. You go to buy a winter coat. If it's on sale for 50% off, you're delighted. But when people buy financial assets, they want that coat to be marked up. They want momentum in the trade, which is really profoundly stupid.

I want to come to, I don't want to run out of time without talking about silver, without talking about gold, but gold especially. I mean, you're well known through the resource sector, through the public investment thing and through your seminars. And in a moment, I'm going to tell people about a really interesting seminar that you're about to do that I think people are going to be very interested in. But it's, again, to me, there's nothing I've seen in this last little bit that discourages me from my

quotes, pro-gold view, you know, that you should have a portion of your portfolio that guards against the depreciation of the paper currencies that, you know, tumultuous times, et cetera, et cetera. I thought gold performed very well in those several days that were wild. It is not uncommon in real liquidity-driven sell-offs for gold and silver immediately to sell off. When there's no liquidity, there's no liquidity.

And the margin clerk sells what has a bid and gold always has a bid. So it's important to note that. But what you suggest is exactly correct. The policy response to a liquidity squeeze is to add liquidity, to debase the currency. And that's always good for gold. Rick, let me just go further. You know, as I say, I thought gold performed well.

Again, silver, another one, other sort of hard assets like that. And I've got to follow up in a second, but just to follow on from what you're just saying. I mean, again, we're back to liquidity, which I think is the key component here. For myself, I consider gold to be part of my liquidity, volatile liquidity to be sure, but non-correlated liquidity. It's interesting, Mike, people often say to me, well, when's the gold price going to move? And I have to say to them, well, from my point of view, 2000.

the gold price was at 256 bucks now it's at 2400 it's generated an 8.4 compound per you know internal rate of return for 24 years uh it's on precisely what i asked it to do uh i think what people are asking is when might they expect dramatic price performance uh and i would suggest as i've suggested in other interviews that you and i have done that that will require a real diminishment of the faith

uh in fiat currency denominated savings products and i think that faith is real uh i just don't think it's widely placed uh in the decade 19 well not the decade in the period 1967 to 1972 the hallmarks of inflation particularly relative to the interest paid on savings products were throughout the market and people talked about inflation

But it took five years of experiencing price increases relative to wage, salary and savings increases before the concern around inflation and hence the fondness for gold took hold. When it did take hold, remember, Mike, the decade of the 70s was truly spectacular. And I'm afraid that's the best word that passed in this case's prologue.

I'm with you, though. I mean, gold has had a wonderful, nice, solid up move. You know, if you're sort of an aggressive trader, maybe it didn't do what you wanted, but I think it's doing exactly as you described. It's provided that counterbalance to the depreciation of the purchasing power of our currencies. And silver, I think, has got more room to run, you know, in the same vein. But let me ask you about one, just about how you'd play it.

I like copper for all the reasons, you know, people have been talking about shortage, expensive to get, you know, demand, especially with renewable energy, et cetera, et cetera. Well, it's had a nice little price drop. How do you look at that? Do you look at that and say, great, finally, I got a buying opportunity at a price I can live with. The story's going back to what we said earlier. The story's a lot more reasonable at that price. People should buy the exposures that they can afford. If we have a circumstance and we could, I'm not an economist.

but if we have a circumstance where we have a synchronized global recession, demand for copper will fall. Irrespective of what we do, supply is going to fall because we've underinvested in copper for 30 years. I'm a five or 10 year player. So the fact that we're going to have supply shortages in the face of ultimately inexorably increasing demand means to me that it's a wonderful investment, but I invest an amount of money

that if it falls in two years or three years, doesn't present any particular difficulty for me. Too often, Mike, investors who believe they're investing in a long-term theme employ short-term strategies, and that guarantees a loss. If you are investing in copper because you know that a billion people on Earth have no access to primary electricity, and they will have it, and that will require more copper,

but copper supplies are falling. That's a five-year thesis. If you're the kind of person who has trauma holding stock over a long weekend, it's going to be very difficult for you to take advantage of that thesis given your time orientation. And I think that people need to do a better job synchronizing their own wants and needs with the realities of the narrative of the markets that they're trying to pay attention to.

I'm a big copper bull and I look at the decline in copper prices and the concomitant decline in the prices of copper equities as a gift.

Let me, before I let you go, and this is the kind of thing that you're doing in rural investment media, but also you run a whole bunch of seminars and you've got a new boot camp coming up. And sorry, I don't want to just spring this on you, but well, you know, you're doing it August 24th. That's not springing anything on you, but you're looking at, because I get these kinds of questions and you get a chance to do that in depth over like a six hour period to share, you know, over 50 years of market experience.

but you're doing it on how to buy a private placement, which I just think is a fascinating subject, especially for people interested in mining, as an example, or some aspect of it. So tell me what you'll do with that seminar. Yeah, I need to say four times a year we do a deep dive on a topic. And Mike, these aren't entertainment products. We work here really hard for eight hours, and we give you access to the recordings for a year, which is really what it takes. We're going to give you more information in eight hours than you can absorb online.

Assuming that you work hard, we did uranium, we did silver, we did prospect generators, we did royalty and streaming. You know, we've done a lot of things. This time we're doing private placements because we think that the market, the ability to transfer information to investors from equities is beginning to become very inefficient. And we think that there is a lot of opportunity in private placements, both debt and equity. Yeah.

in sub 300 or 500 million market caps. We think for accredited investors, we define accredited as investors with a million dollars or more in a portfolio, although the Canadian rules are somewhat less strict, is particularly attractive. But we find knowledge around how to do private placements, how to structure private placements, in particular knowledge around debt private placements, which I think on a risk-adjusted

framework are more attractive than equity private placements. We think that this is the area where the sophisticated investor is the least sophisticated relative to the opportunity in place. So we're going to spend eight hours talking about pre-public investment, private company investment, pipe investment, which is a public investment in, pardon me, private investment in public equities.

We're going to talk a lot about debt and convertible preferred placements, which we think is very, very, very attractive. We're going to charge $99 US dollars for it. Like all of the investment products that we've offered for the last 28 years, if you don't think you've got your money's worth, just email us. We'll give you your money back. There's an absolute gold-plated money-back guarantee. Well, let me just say this. That is ridiculously inexpensive.

And I'm serious. You know, I think I'm older than you are, Rick, just so you know. I've been around and done lots of seminars myself, you know, and attended. And I can't tell you, eight hours of info at that level, accumulation of 50 years of experience, you know, the ups, the downs, the all arounds. And as you say, the opportunity for $99, that's ridiculous. But great for my audience. So thank you. Yeah. Fully refundable if you don't get your money's worth.

Well, I'll just tell it right now that people just go to Mike's money talks.ca. We'll put it on all our social media. We'll put it. You'll be able to sign up right on Mike's money talks.ca. As I say, we'll get more information, but Rick, I, that does absolutely sounds fabulous. And I can't believe the price as you kind of get, you probably sussed out from what I'm saying here. And I have another offering. I have another offering Mike you'll like even more because it's free. Any of your audience who cares what I have to say about natural resource investments can personalize it.

Go to RuralInvestmentMedia.com, list your natural resource stocks, and I personally will rank them 1 to 10, 1 being best, 10 being worst. And I'll comment on individual issues if I think my comments are worth commenting on. And that's absolutely free, no obligation. RuralInvestmentMedia.com. RuralInvestmentMedia.com. Again, I'll put that up on our socials and I'll put it on our site, etc. But yeah, that's a hell of a deal too. I mean, I'll send you mine.

I'm being serious. I'd love to get your take on what we're doing here. I mean, you can tell we're certainly aligned in what the challenges are, and I'd love to get your take after years of making those investments. But yeah, I'll just remind, August 24th, take advantage of that. Just period. Take advantage of that. Rick, thank you so much for finding time. You know we appreciate it here. And really, real, I mean, I'm not the cliche. These are pearls of wisdom that people should take advantage of. I love the reminders for myself. So thanks, Rick.

I look forward to continuing them online, and I look forward to seeing you perhaps in Vancouver at Jay Martin's conference or whenever the next time I can catch sight of you in person. Great stuff. Thanks, Rick.