Michael Campbell: Obviously you have done a great job shepherding your people into the precious metals and related situations. We had gold at a record high this week. I need your perspective on it.

Peter Grandich: Well, you know I called it the mother of Bull Markets. Other than some short term corrections I have been an aggressive long. I have said all along that my target was a 2,000 number before we would even begin to think that the market was maybe at least fairly valued, and at that point in time I think it continues. All of the things we spoke about for several years now have remained in place, central banks are no longer net sellers. The producers are no longer aggressive forward sellers. The ability to buy gold has become universal now and institutions can use ETFs, people in the world where growth is growing India and China are making it easier and easier for their citizens to acquire gold and silver just like Americans 20 years ago made it easy for people to acquire stocks through their retirement plans. So all the positives remain in favor for it. All the fear factors, and Mike I can’t recall and you’ve been in this game about as long as I have, a market that’s gone up so much that has a lack of universal participation. I think you can pick out any hundred people walking in the street, look at their investment portfolios and very few of them have any exposure to gold and silver yet these markets have done incredibly well. That tells me that we’re not even close to the top because we don’t have that universal participation that happens at the end of all great bull markets.

The Mother of All Bull Markets

Michael Campbell: Let’s put in perspective for us, is the debt ceiling negotiation is just the canary in the coal mine approach, where it’s just reminding us how big the debt problem is but that’s not the pivotal issue. For example, no one should heave some big sigh of relief if they reach some debt ceiling agreement between the republicans and democrats because that’s just not the nature of the problem.

Peter Grandich: Imagine if you will that you had to tell your children 74 times not to do something and they didn’t listen. We are going to be raising the debt ceiling because it will be raised for the 75th time since deficit spending came to America. That means 73 other times politicians both on the right and the left had a debt ceiling to work with, spent more and had to raise the debt ceiling. So canary yes but it’s an on going factor that America has been living way beyond it’s means and it will be a bandage, there will be some market release that we didn’t default but the problem that has persisted has now mushroomed to epic proportions, has not gone away even when they do finally come to some sort of agreement.

Michael: Do you realistically see a way, I am talking of the broader debt issues, any way that US is ever going to pay back the money it’s borrowed? I just don’t see it in the cards. It’s just a case of whether they can keep the merry  go round going, the musical chairs going, and clearly they haven’t been able to do that in Greece. They haven’t been able to do it Portugal or Ireland and I think it’s coming to Spain, Italy, and Belgium among others. If it hits the United States there will be massive repercussions worldwide obviously. Am I just too pessimistic?

Peter: No I think you’re realistic. You know Mike if the United States was a business it would have declared bankruptcy a while back,  because anybody that’s a good accountant or understands book keeping knows that America doesn’t have to account for it’s unfunded liabilities where a corporation does. We would have been broke already because our unfunded liabilities alone are never going to be able to be met. At the end there’s three part solution if you want to call it  a solution.

Michael: Yes actually can I hold you to that because I want to make sure people understand the term unfunded liabilities, your point so well taken. If I own a car or I am share holder in a company, it doesn’t matter what it is, that company has to report the pension promises it’s made. It’s promise to pay out X amount and it’s a liability on the books if it’s not funded. If I said I am going to pay you a $1,000 a month but I had no money set aside and it’s clear that I am not going to reach that I have got to ante up some cash. What Peter is pointing out is especially in the case of Medicare, Medicaid and US Social Security. They have made clear promises and money is not there, then they do actuarial accounting and look at what’s going to happen with the aging population and they see no way,  those promises on pensions haven’t been funded. So what Peter is pointing out is the case in the United States, and in every western country.

Peter: Yes, and it’s $72 trillion where people are talking about our debt being around 14 to 17 trillion and our unfunded liabilities dwarf that. I think in the end Mike, there is only three part solutions, and again I don’t think solutions is the right word, but this is what the outcome would be is part of it will be defaulted on, part of it will be monetized and part of it be renegotiated. Any and all three of those parts are no good for America over the long term. So like you said, at the end no matter how far they kick the can , and it’s becoming obviously more difficult to kick the can down the road, eventually it hits the end of the road and when it does the sins of the past are paid for,  and paid dearly. I’m a 55 year old male and I just told my daughter this morning who is 19, it will not be in my life time before we ever see America, if at all possible, anything close to what it was like when I was 19. I think this is decades of difficulties, great lower living standards will have to be accepted which America isn’t even prepared for, and then of course the political power that’s lost in that because the people that we’ll be indebted to will use that in leverage as it’s always been done in history. So there is no bright picture for America no matter how you spin it, no matter what cable network you listen to down here that tries to tell you differently, it’s going to take decades to even come remotely close to fixing it.

Michael: You mentioned a couple of things there Peter. It’s one of the themes on this show that I cannot believe the screwing we’re giving our younger generation yet we are full of a political class that tell us how much they care about children. I have a list of things that we are doing to them financially  and it’s unbelievable to me  how this is not a bigger issue. Maybe it’s because we have socialized our children in school to not look at these things. I am the father of three children in that same age group as your daughter and it’s outrageous what we were doing to them financially and I am glad you’re bringing that up because you can’t say that often enough. There are implications, just as if I’ve got a family business in my household, I borrow excessively and  go bankrupt, there are implications for my family and especially if those debts then get passed on to my kids to pay off.  It’s not very tough to understand, we just refuse to look at it.

Peter: Mike the war in America coming is not going to be overseas it’s going to be internally, it’s going to be a war of classes. It’s also going to be a war between the ages. an example being in a local town near me not too long ago, you would drive to a good part of it and think any vote on school board would pass because so many homes had children in bicycles outside. Yet the school board vote lost because a third of the population are empty nesters, there’s people living in 55 and over communities, people who also control most of the wealth who also tend to vote more than young ones, and the school board vote was turned down because the older people said why do I need to pay for so much taxes towards schools? I don’t have anybody in schools anymore. When the young people heard that it got turned down they said how dare you, my children are entitled to the same education. So one of the implications of this enormous debt problem, which is going to have to hit everybody, is it’s going to be a war of classes because  the only way America could ever move towards solvency is going to be a radical change towards entitlement programs, which most acutely is going to be in Medicare. In America, people have become accustomed to literally a platinum medical service that they pay little or nothing for, and that’s going to have change at a time when the older most need it. You need most of your medical services as you get older, so there is enormous social issues let alone the economic and political issues which are in the forefront right now.

Michael: It’s so interesting Peter, that the implications you’re talking about in front of our eyes, we could have had a discussion about ten years ago because the die had been already been set. Peter mentions a lower standard of living, well, what the heck do you think is going in Southern Europe right now? In Europe there is a permanent lowering of the standard of living, a permanent curtailment of some entitlement programs and more to come I believe. That’s my best guess, but the fact is it’s already happened to some level.

Just so you know Peter, in the Canadian healthcare system we have had reports since last August,  they came from everywhere, coming from the Canadian Medical Association, from the Organization of Economic Cooperation and Development, from actuarial accountants, all of them saying that our healthcare system is not sustainable in it’s current form. Yet that wasn’t even debate in our federal election in May. What’s killing me, is it’s not like we’re getting different answers, we’re not even having the discussion on these things as the train comes toward us.

Peter: Here in the United States, what I view as the poster boy to this problem is public storage. If you go back a generation or two in Canada and the US  there were no public storage facilities, and you know why Mike? Because people didn’t have too much stuff then. It all goes back to what we get accustomed to. I think the difference now is the children of today don’t ask if can we afford it, they ask can we make the payment, and that’s the difference between us and our parents and grandparents.

Michael: I want to get to something you said. At the onset of the credit crisis I said the recovery in the economy would be predicated on whether we have altered our consumption patterns, and I love the work you are doing this way, you outlined that this issue of storage lockers, that one of the ways to measure this is that the concept of having a storage locker wasn’t in existence until what, 20, 30 years ago Peter?

Peter: Yes, the interesting thing is that here in the US in major towns, I have also seen them in Toronto and Vancouver,  but here in the US you can’t really drive a mile or two on any major road in any major area without coming across public storage facilities. While some of them are indeed used by people for businesses, by and large many of them are being used by people to store their extra stuff. Now, why is that so critical? Well, our families and our grandparents didn’t have the 4,000 and 5,000 square feet homes that we now have but we still don’t find enough room to store stuff, and and our grandparents used to live in much smaller dwellings.

So not only has the amount of stuff been increased by us, but do we own it that’s the problem. You know it would be great if we all paid for it and everything but mostly all Americans are on credit. Most people own very little of what they have. They  are making some sort of payments to the car in the driveway, the boat in the water, the second home etcetera and it’s become a way of life. Kids in college in United States now have $9,000 in credit card debt, and these were unheard of just a generation or two ago. We have lived beyond our means, it’s just like putting on weight, which I am guilty of, and after you’ve done it for a decade or two you just can’t solve it in a month or two and that’s what the needed the fix is. Even now when they eventually do come to an 11th or 12th hour agreement , it will be so sold to us as a fix but it won’t in reality be anything more than bandage.

Michael: I remember looking at chart that you have put up that shows that growth of the storage lockers, talk about a bull market. You and I both remember one car families, and then it was a big shift to two car families, followed by a big shift to three and four car families. One TV, then it was color TV now it’s not unusual to find people with two or three TVs in their home. This is the kind of stuff growth that you’re talking about and if that consumption pattern changes then that way of financing of economic growth is going to be a thing of the past.

Peter: Yes, that’s really what’s kept us going. Through the ‘90s and through 2006, two thirds of America’s growth directly or indirectly was coming off the heals of what was happening in the real estate market. A lot of that was people borrowing money against increased values and cheap mortgages and all. So they could consume money that is not available to them now, that ATM that the house was is no longer available. The only thing that’s sustained the economy since then is all the money creation which has led to more and more debt. We haven’t had real growth in the United States and that’s the problem, we don’t have the economic engine in the United States to have real growth so that’s why I continue to be basically very bearish long term on the US equity market.

Michael: Peter I want to cut to the chase. I think you have done a wonderful job of setting the back drop, but  if we are in a low growth economy what are the implications for investors in stock market?

Peter: If we get to live long enough and come back ten years from now, one of the last places I think we’ll see real sustained growth in terms of stock prices will be in the US. I think what people have to just wake up to if they haven’t yet, is that the economic engine of the world is no longer the US. It doesn’t have to grow strongly in order for other places in the world to do well. In particular I think you need to look where real growth is and that’s Asia. Looking back in five or ten years at the markets that did the best and the worst, among the best I would take China and India and  among the worst would be the US and parts of Europe. I think it’s important to realize that real growth in the world is no longer based in the US, and yet both in Canada and the US when I meet individuals, I find most of their portfolios, outside of metals, when it comes to general equities they’re still based in major US corporations and I think that’s a mistake. I think you have to begin by diversifying. Being willing to understand and appreciate that whether you like or not, and some people have a prejudice and they have got to get over it, China and India are going to be the two economic powers in the next 10 to 20 years. You have to exposure there.

Michael: Obviously you have done a great job shepherding your people into the precious metals and related situations. We had gold at a record high this week. I need your perspective on it.

Peter: Well, you know I called it the mother of Bull Markets. Other than some short term corrections I have been an aggressive long. I have said all along that my target was a 2,000 number before we would even begin to think that the market was maybe at least fairly valued, and at that point in time I think it continues. All of the things we spoke about for several years now have remained in place, central banks are no longer net sellers. The producers are no longer aggressive forward sellers. The ability to buy gold has become universal now and institutions can use ETFs, people in the world where growth is growing India and China are making it easier and easier for their citizens to acquire gold and silver just like Americans 20 years ago made it easy for people to acquire stocks through their retirement plans. So all the positives remain in favor for it. All the fear factors, and Mike I can’t recall and you’ve been in this game about as long as I have, a market that’s gone up so much that has a lack of universal participation. I think you can pick out any hundred people walking in the street, look at their investment portfolios and very few of them have any exposure to gold and silver yet these markets have done incredibly well. That tells me that we’re not even close to the top because we don’t have that universal participation that happens at the end of all great bull markets.

Michael: So we’ve got the movement in the commodities themselves, then want your perspective on this Peter, my observation has been usually that you get the senior producers, then mids and then juniors move at the end of a bull market cycle. You’ll see the juniors right into a pure speculation like for example the internet bubble when someone just stuck the name .com on the end and it went crazy. That will be a time sell, and as you have warned me many times Peter, you said ‘That’s the time it’s going to be toughest to sell and that’s the time you will have to sell.’

What about the progression of the market and how to play those markets?

Peter: One difficulty, and even I did not stay fully on top of it, one of the reasons why the shares weren’t performing to the level that they should be giving what the underlying metals have done, is that institutions who used to be great buyers of shares now have ability to buy physical metal and get the exposures they now do through ETFs. It’s one of the reasons that you see in the PE ratios come down on the average gold producers, down to even market values or less which is good, and one of the reasons why haven’t participated up to now. We haven’t even begun to see speculation in the mining shares yet. We have not seen a situation like you pointed out with the internet bubble, which should be a typical when we get to that point and it’s going to be difficult to sell them because everybody is going to be talking about it and be painting very Rosy pictures. This has been stealth bull market, given the gains that we have seen percentage wise and given how many few people, especially on the retail end, have experienced it. Instead of everybody and its mother is talking about it and they can’t get enough, the only thing we see in the coverage in the media is how many people are telling us to sell gold and not to buy gold.

Michael: I know that you have been spending a lot of your time looking at junior situations. You always give great warnings about the speculative nature of Juniors depending on if they are in production, or they are thinking about getting into production. What is your perspective on the difference between short term and long term in this  context for investors?

Peter: Well, first of all let’s be clear and you I say this in the loudest voice. The word speculation was created so Wall Street and the financial service essentially wouldn’t have to use the word gambling. But they are one and the same, speculation and gambling. When you gamble you have to be prepared to lose part or all your investment. Long term has changed Mike, when I entered the business our long term forecast was three to five years now at best it’s three to five months. One thing I can tell you is that  in the junior resource markets failure is the norm. Despite all the great stories, and many people being sincere about it, a small percentage of juniors are going to turn into majors. So if you simply buy and hold and say I am going to be a long term holder in juniors, chances are you’re going to lose all the time. It is an investment area, if you want to call it investment area, that you have to be top of all the time. You have to be in a sense almost a trader in that you just can’t simply buy and put them in a safe deposit box and look at them three to five years from now. In that regard I think its one of the big mistakes that people make about juniors, they buy and they hold them and unfortunately it’s something that needs attention almost daily.

Michael: I know Jim Dines is someone we’re both familiar with. Jim says why don’t you buy a basket of half dozen or a dozen, don’t just stick it in one because some will work some will be a disaster and some will break even. Os that you’re approach also in advising people to to play it within a portfolio, besides the admonition that this is just another form of gambling and the vast majority will lose?

Peter: Well, first of all it shouldn’t be more than 10 to 20% of their whole portfolio and within that one of the best ways particularly for people that don’t have the expertise to be looking at it and understanding what’s actually going on, there are now ETFs. Funds that own a basket of the juniors and that I think is the best way for most to go. As you say you don’t end up just picking the one or two that didn’t do well in a whole when all the other boats rise. So I think the ETF or a fund that’s diversified that way is usually the way to go. Then of course there is individual investment letters and I don’t believe I write the best letter in the business, particularly in individual juniors. I think one of the best letters in the business right now and dissevering so is the the Coffin Brothers Hard Rock Analyst a group that spends day in and day out, every moment looking at juniors and trying to decipher them. So I think you need to try to find a service or a group that’s demonstrated they understand this and between that and only maybe some mutual funds should be your limit to this area because like you said, it is gambling and majority of them don’t make it in exchange for those huge gains of the ones that do make it.

Michael: Well, I think that’s terrific advice and you can find more from Peter just go to www.grandich.com. Peter we always appreciate that you find time for us across the country in Canada here so have a terrific weekend many thanks.

Peter: All  the best to my Vancouver Canuck fans.

Check out Peter Grandich’s website Grandich.com

About Peter: Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s with no formal education or training and within three years was appointed Vice President of Investment Strategy for a leading New York Stock Exchange member firm. He would go on to hold positions as a Market Strategist, portfolio manager for four hedgefunds and a mutual fund that bared his name.

He resides in New Jersey with his wife Mary and daughter Tara