Energy & Commodities

Kyle Bass: Fed Won’t Raise Interest Rates Another 3-5 Years; Stocks “The Only Game In Town”

Posted by Kyle Bass via Financial Sense

on Tuesday, 22 October 2013 0:40

interest-rates-1Legendary hedge fund manager Kyle Bass joins the Financial Sense Newshour to cover a wide range of topics: stocks, bonds, the debt ceiling, and more. He believes the Federal Reserve won’t be raising interest rates for another 3-5 years and that stocks are, unfortunately, “the only game in town.”

Here we present a partial transcript of this thought-provoking interview airing for subscribers this Wednesday: 

Jim: Do you feel the debt ceiling debate and the political theater in Washington are hurting U.S. credibility and our capital markets in the long-run?

Kyle: No…the entire world is in the same position we are in one way or another. That’s painting the world with a broader brush, but when you look at the developed western economies (and, of course, we’ll exclude countries with no net debt like Australia and Canada that are natural resource heavy), but the developed western economies with the largest debt loads are all in the same boat. Whether or not they have debt ceilings in the U.S. or bank note agreements like they had in Japan until they recently abolished them, there are all of these potential glass ceilings that are put on the marketplace that always tend to move. I think since 1960 we’ve raised our debt something like 82 times.

Jim: Economists have often said—I’m thinking of “This Times Is Different” by Reinhart and Rogoff—when countries have debt-to-GDP ratios over 100%, they get into trouble; Japan’s is 230%. Why have they not had trouble up until now?

Kyle: When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.

Jim: I want to turn our attention to the stock market right now and your view of where you see the markets right now. They don’t seem overvalued when you compare them to 2000 or 2007, but they’re not cheap; and, where do you go in a market when the rate of return on cash or bonds is hardly anything?

Kyle: I think that as long as the Fed—for instance, the Fed is still buying $85 billion a month; almost a trillion a year—you could argue that the Fed is being more stimulative today than they were a year or year and a half ago. When we were running a trillion to a trillion and a half deficits, the Fed, at a trillion dollars in a deficit, was buying every bond that was issued. Today, you have a scenario where the fiscal deficit in the U.S., we think, is somewhere around 650 to 700 billion dollars. So, in theory, the Fed is actually adding more money to the economy today than it was a year ago because the deficit is lower and they’re still buying the same number of bonds. So what I’m saying is the monetary base continues to expand. What the economists are saying is velocity continues to drop at a faster rate than the base is expanding. Well, velocity, I believe, is a coincident indicator at best—possibly a lagging indicator. So, when the v [velocity] turns around that’s when inflation shows up, but for now–you’re asking about stocks…I think, given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off.  

Jim: What is your outlook on when the Fed will taper or, eventually, raise interest rates?

Kyle: I personally think that what enables the Fed to taper, again, is a contraction in the fiscal deficit. Now, part of that equation will be remedied by higher tax collections; unfortunately, the other side of that equation is, of course, lesser spending, which isn’t going to happen. So, I believe they can taper to the extent that the fiscal deficit has contracted. I don’t think that they’ll be able to raise the Fed funds rate any time in the foreseeable future—3 to 5 years.

Jim: So, that would argue that stocks would be a better play.

Kyle: Unfortunately…because it feels like they’re making it the only game in town. It’s not your choice, but it’s the only answer though. [End transcript]

In the rest of this must-listen interview, legendary hedge fund manager Kyle Bass gives investors his most recent views on Japan, the impact and outlook for shale gas in the U.S., and a wide range of other topics.

If you would like to hear this full must-listen interview with Kyle Bass ariing this Wednesday, CLICK HERE to subscribe. In addition to hearing from money managers, institutional investors, and analysts regularly interviewed for FS Insiders, you’ll also gain access to our entire archive of past interviews.

3 Essentials to Look for in Junior Mining Equities

Posted by Derek Macpherson - Streetwise Reports

on Tuesday, 22 October 2013 0:33

Underappreciated companies and companies with management teams that have disappointed in the past can be opportunities to buy, not sell, says Derek Macpherson of M Partners. Don’t be dazzled by flashy drill results, he advises. In this interview withThe Gold Report, Macpherson says that investors are better to look for junior explorers with long-term vision, high grades and simple operations in good jurisdictions, and names eight companies that make the grade.

Screen Shot 2013-10-21 at 5.25.11 PMCOMPANIES MENTIONED: ATICO MINING CORP. :COLORADO RESOURCES LTD. : GOLD REACH RESOURCES LTD. : KLONDEX MINES LTD. : MEGA PRECIOUS METALS INC. : TEMEX RESOURCES CORP. : TIMMINS GOLD CORP. : TREVALI MINING CORP. : CLIFTON STAR RESOURCES INC. : GUYANA GOLDFIELDS INC. : LION ONE METALS LTD. : PRETIUM RESOURCES INC. : TINKA RESOURCES LTD.

 

The Gold Report: Derek, when it comes to junior mining equities you’re something like a shark cruising for prey, seeking an opportunity to strike. What common buying opportunities do you look for that other investors might overlook?

Derek Macpherson: We seek out assets that have been underappreciated or unjustly tossed aside, companies whose stories are starting to change. That change might be an operations turnaround, a turnover in the management team or a revision to the capital structure.

TGR: One of your recent research flashes reported on the Mexican government’s consideration of imposing a royalty on Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) on companies that mine commodities in Mexico. Tell us about that.

DM: Whenever that topic comes up, it puts pressure on Mexican producers and developers. We are seeing the potential of a royalty getting priced in to those companies, and priced in as a worst case scenario.

Initial discussions centered on a 5% EBITDA royalty, which could affect company valuations significantly. However, Mexican mining companies are working with the government to find a more reasonable solution. If the proposal gets ratcheted down to a 2.5% EBITDA royalty or perhaps a 2% net smelter return, then company valuations could recover.

In Mexico, you want to look for companies that have low all-in cash costs. They will be somewhat insulated from the royalty because their margins won’t be as compressed as higher cost operations.

For example, we like Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), which sold off on the royalty news. We think the selloff was unjustified, because the company has generally low all-in cash costs and higher margins than many of its peers.

TGR: Timmins is expected to announce that the mine life at San Francisco could be extended 10 years. Would that attract a buyer?

DM: It could, but I don’t think Timmins is in the sweet spot for acquisition. The company is too small for a big company to acquire and too big for some of the midtier companies.

Once Timmins’ resource report comes out, the stock should move up as investor confidence improves. There has always been concern about Timmins’ long-term grade profile and the mine life at San Francisco. The pending resource update will answer those questions.

TGR: Your share target on Timmins is $3.20, correct?

DM: Yes, and we have a buy rating on Timmins. Considering its cash cost profile, Timmins is trading below three times 2014 EBITDA. If you look at the company’s low cash cost peers in Mexico, similar open-pit, heap-leach operations trade at six to eight times EBITDA. I think the resource update will improve investor confidence and we could see an upward rerating.

TGR: What other common events lead you to undervalued equities?

DM: One of the most obvious is when management teams disappoint; the mining space is littered with those.

In those instances, we look at the underlying value and whether the management team can turn the operation around. We ask ourselves if the selloff was excessive, potentially creating a buying opportunity if the damage is recoverable.

TGR: Do you think management teams are being punished too harshly for performance shortcomings?

DM: I think it’s partly a function of the commodity price environment. In a rising gold price environment, there was more room for error and setback didn’t have as large an impact on project economics.

In a volatile price environment, investors have shown very little patience. If production results or a resource update aren’t in line with projections or better, the market pushes the stock down.

TGR: Do you watch for seasonal opportunities, or has seasonality become less predictable?

DM: Seasonality has been a bit less predictable. It has been dampened, first, by gold being driven by macro events and, second, by it being technically traded.

This year, in particular, investors should be looking at the season for tax-loss selling. I expect to see an accelerated selloff near the end of 2013, as investors try to capitalize on their tax losses. This should create a buying opportunity for a lot of good stocks. This is the time for investors to do their homework and find the stocks they want to pick up as they sell off later in the year.

TGR: What types of stocks do you think will sell off more than others?

DM: I think it will be a function of the company’s year-to-date performance. Companies that had a tough time from January to October will be the most affected. That doesn’t speak to the quality of their projects, which could create buying opportunities.

TGR: News flow used to dry up in the summer and start to flow again in September with the publication of summer drill results. Does news flow still matter?

DM: To a certain extent, yes. Drill results became a bit of a selling opportunity or a liquidity event this summer. However, we are seeing that abate, particularly in September.

TGR: Haywood Securities produces a quarterly report on the junior exploration companies that looks out three months to forecast how the companies listed will perform quarter to quarter. Do you look for quarter-to-quarter performance or do you look more long term?

DM: In the junior exploration space, you have to look a little bit longer term. It often takes time and money to determine the value of a deposit. We try to look through flashy drill results that might move the stock over the short term but don’t necessarily indicate anything about a company’s long-term economic viability.

We try to hitch our wagon to companies that take a long-term approach to how they do their work and a long-term approach to driving value.

TGR: Can you give us an example of drill results that have moved a stock?

DM: Two base metals names are good examples: Colorado Resources Ltd. (CXO:TSX.V) and Gold Reach Resources Ltd. (GRV:TSX.V). Both have been hitting good results in northwest British Columbia. Both are near two of Imperial Metals Corp’s. (III:TSX) assets, a company we cover. Their results, even through this summer’s tough market, moved the stocks up. However, the market is very selective when rewarding good drill results. At the very least, it has to be a good project in a good location.

TGR: It also helps if your neighbor has a world-class asset.

DM: Yes, Colorado Resources benefits from being next to Red Chris. That provides an obvious synergistic solution for the company.

Imperial is building a 30,000 ton per day (30,000 tpd) mill at Red Chris, and there is likely more to come on its own property. I wouldn’t be in a rush to say that Colorado Resources is on its way to becoming part of Imperial. Imperial has its hands full maximizing the value of Red Chris over the medium term.

TGR: Speaking to those of our readers who are new to the junior mining space, what are some effective approaches for novice investors?

DM: You certainly need to account for commodity volatility. Pick companies that have lower risk and can withstand volatility.

When it comes to projects, we look for one of two things: a project needs to have very high grade, for example, Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB), or it needs to be technically simple, such as Timmins Gold’s open-pit, heap-leach project. Having one of those two features can reduce the risk of your investment.

The next thing to be aware of is jurisdiction. In the current market, there is an increased discount for political or permitting risk, and for the additional capital expense (capex) needed to put infrastructure in a remote location. Consequently, we tend to focus on North America, Mexico and some South American jurisdictions. In South America we look for jurisdictions with an existing mining culture, which can mean focusing on a specific region or even town in a given country. Peru is a good example; mining is welcome in some areas and is more challenging in others.

TGR: What about playing the volatility itself in metals prices?

DM: That’s very difficult to do because investors have to guess right on which way metal prices go that day. If investors want to play that volatility through equities, they have to get into more leveraged names, which tend to have a higher risk balance sheet. Playing the volatility can be very difficult and very expensive if you guess wrong.

TGR: Your thesis seems to prefer companies with cash and those that can raise cash with low-cash projects. Is that accurate?

DM: Yes. That is, in part, a function of the current market environment. Klondex and Timmins are two examples of low-cash costs and clean balance sheets: Klondex, thanks to its recent equity raise and ability to self-fund development going forward and Timmins, which should see its balance sheet strengthen over the next several quarters as it starts to generate free cash flow.

Temex Resources Corp. (TME:TSX.V; TQ1:FSE) fits into that category as well as an exploration-stage company with an attractive project that should be able to finance in the current market environment. Its project has the potential to be a high-grade, low all-in cash cost producer. It has low capex to start and $6 million ($6M) in cash on May 31 of this year. This is the type of company likely to get funded in the current market environment.

TGR: Temex is trading at $3/ounce ($3/oz), when some of its peers are as high as $20/oz. What accounts for that discount?

DM: As you know, exploration-stage companies are not as popular as they once were. Temex is still at an early stage, and investors might not fully understand the low-capex and shortened path to production that the Whitney project represents.

I think Temex is an excellent investment in the current environment for two reasons. First, it is in a joint venture with Goldcorp Inc. (G:TSX; GG:NYSE) on the Whitney project near Timmins, Ontario. That’s shaping up to be a higher grade, low-tonnage underground project.

The project is within sight of Lake Shore Gold Corp’s. (LSG:TSX) Bell Creek mill and about 12 kilometers (12km) from Goldcorp Inc.’s Dome mill. However, the Whitney ore is likely to be higher grade than either of those mills currently run, and consequently could displace ore at one of those mills. The market is still unsure of how real that opportunity is. The updated resource due out from Temex should increase market confidence in its potential.

Second, the Juby project makes Temex a good investment for the next gold price environment. Juby is the kind of lower grade, high-tonnage project that’s been popular target for majors. It resembles Prodigy Gold Inc., Rainy River Resources Ltd. and Trelawney Resources Ltd.—all of which have been taken out. Already at 3.2 million ounces (3.2 Moz) gold, there is a lot of upside at Juby, as it is still early days.

TGR: How long would its $6M cash in hand keep Temex running?

DM: Probably into mid-2014.

TGR: Does the board have access to funds?

DM: The board is strong. Ian Campbell is the CEO and the board includes René Marion and Gregory Gibson, both of whom have good track records.

TGR: In September you published a research flash on Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL) that said, “Trevali is currently trading at 3.5 times consensus 2015 EBITDA whereas other base metal producers trade closer to 5.4 times EBITDA.” Is that discount strictly zinc related?

DM: No, the flash was issued when concentrate production had just started at Santander, something the market had been waiting for. Trevali has now been operating for less than two months. The discount is related to the risk of being at such an early stage.

When it comes to zinc, Trevali is one of the few pure-play zinc producers in the midtier base metal space. The macro environment for zinc is looking very positive. With so few vehicles to play in that positive macro environment, Trevali could trade at a premium to its peers.

TGR: You recently visited the Santander mine in Peru.

DM: It was a good trip, and the operation appears to be ramping up smoothly now that the mill has started. The silver lining to the delays in getting the mill commissioned was that Trevali was able to ramp up the underground operations and get approximately 140,000 tonnes ahead of the mill. That is about two months of mill feed and gives the company lots of flexibility as it brings underground operations to a steady state. In our view, the mill is very close to its operating capacity already, after just over a month of operation.

TGR: What is the mill’s capacity?

DM: Full throughput is 2,000 tpd, although Trevali has talked about the potential to expand to 4,000 tpd. Based on what we saw—the mill and crushing capacity, the underground mining width and the amount of development—we think 4,000 tpd is achievable, but not for a couple of years. Before an expansion at Santander, Trevali will be working to restart the Caribou mine in New Brunswick.

TGR: Is it realistic to think that Trevali will be generating cash flow by the end of October?

DM: Based on what we saw, yes. While we were on-site, we saw concentrate shipments leaving the mill. Because Trevali gets paid within a couple weeks of the shipments being delivered to the port, it should be generating cash very soon.

TGR: Trevali has discovered some high-grade mineralization at Magistral Norte, which is part of the Santander complex. What do you know about that?

DM: Trevali was aware of the Rosa Vein but had done little exploration on it from surface because the deposit’s orientation made it difficult. Once underground, it became easier to explore this new zone. Initial results point to the potential for higher than resource grades.

The high-grade potential led to Trevali completing some initial development in the zone and we actually stood in that zone when we were on-site. This zone further increases Santander’s tonnes per vertical meter and supports our view that an expansion to 4,000 tpd is likely.

TGR: Where else have you visited lately?

DM: We went to Klondex Mines, where we were also impressed with the ramp up. Klondex has exceptionally high grade; Measured and Indicated grade is 44 grams/tonne (44 g/t) gold.

TGR: But it’s a very small resource. Could it be expanded?

DM: The resource is 720,000 oz; however, the grade has gone up substantially. While the previous resource was larger, the earlier resource methodology wasn’t suited for this type of deposit. The new management team reworked the resource with a more applicable methodology and consequently now has a higher quality resource. We believe there is opportunity to grow the resource.

Resource growth is likely to come from two areas. The first is additional exploration; generally speaking the property is underexplored, providing the opportunity to expand the resource along the existing veins, and add new ones. The second opportunity for growth is the mineralized halo. Unlike most narrow-vein deposits, the host rock is also mineralized; however, it’s not included in the existing resource. The halo could be included in future updates, as Klondex’s understanding of it increases. The other benefit of a mineralized halo is an effective reduction in mining dilution, which should also benefit project economics.

TGR: What can you tell us about Klondex’s toll milling arrangements?

DM: Klondex doesn’t have its own mill. Klondex has toll milling agreements with both Newmont Mining Corp. (NEM:NYSE) and Veris Gold Corp. (VG:TSX; YNGFF:OTCBB).

In the current environment, saving capex is important. It allows Klondex to get cash flow very quickly. In fact, it has already started receiving payments from its toll milling agreements.

This ability to generate cash in the near term should allow Klondex to continue exploring while doing the necessary development for steady-state operations. We model it reaching 500 tpd and producing over 80,000 oz gold in 2015; Klondex is able to fund the underground exploration drilling needed to meet these targets.

TGR: What other stories would you like to share with our readers today?

DM: Atico Mining Corp. (ATY:TSX.V; ATCMF:OTCBB) is making the rapid transition from being a base metal developer to a producer. The company recently exercised the option on the El Roble property in Colombia. Because El Roble was a producing asset, Atico will go from being a developer to a producer once it completes that agreement later this quarter.

El Roble historically has generated positive cash flow even though there is significant opportunity for the operations to improve. Applying new engineering and a modern approach should allow Atico to surface additional value. As Atico improves El Roble, the stock should move higher.

TGR: It sounds a little like Klondex.

DM: It is, as it’s also a high-grade, low-tonnage operation. The recent resource update for this Cu-Au-Ag deposit had copper equivalent grades above 6%.

As a result of exercising the option a few weeks ago, Atico should be generating positive operating cash flow by year-end.

TGR: In March, the share price was more than $1/share. Now it’s about $0.50/share. What happened?

DM: Early on, Atico had some pretty flashy drill results at El Roble, which drove the share price higher. However, Atico had to raise money to exercise the option—the last option payment was $14M. That probably put an overhang on the stock. It is also worth noting that the move down in the stock price coincided with the drop in commodity prices.

TGR: Atico just completed a number of financings as well.

DM: Yes, that money went toward two things. First was $14M to exercise the option on El Roble, which gives Atico 90% ownership of the asset. Additional funds were raised to reinvest in El Roble’s operations, allowing Atico to optimize the asset.

TGR: And the final name that you want to talk about today?

DM: That is Mega Precious Metals Inc. (MGP:TSX.V), an exploration-stage company in northeast Manitoba—a good jurisdiction.

Mega Precious is sitting on 3.6 Moz of 1.25 g/t gold and has defined resources over a 4km trend with a total potential strike length of 8km. And, it has yet to test three parallel structures. Obviously, this could be a real district play.

The really interesting thing about this story is the presence of a tungsten kicker. Management is re-assaying old core to determine how much tungsten is present. Based on results released to date, there could be as much as a 25–30% improvement in gold-equivalent grade from the inclusion of tungsten. This could significantly improve project economics with limited additional investment.

TGR: Do you have any parting thought for our readers?

DM: Even though markets are challenging for mining equities, some high-quality names have sold off, creating an opportunity for investors to get involved at a reasonable price. Despite the overhang that equity markets have put on the space, it will get better; it’s just a matter of when.

TGR: Derek, thanks for your time and insights.

Derek Macpherson Derek Macpherson is a mining analyst at M Partners; before joining M Partners he worked in mining research for a bank-owned investment dealer. Prior to entering capital markets, MacPherson spent six years working as a metallurgist. Macpherson has a Bachelor of Engineering and Management in materials science and a finance-focused MBA.

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DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins Gold Corp, Colorado Resources Ltd., Klondex Mines Ltd., Trevali Mining Corp. and Atico Mining Corp. Goldcorp Inc. is not affiliated with The Gold Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Derek Macpherson: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Klondex Mines Ltd, Timmins Gold Corp. and Temex Resources Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

 

It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments. 

The common wisdom on Wall Street is that gold has seen the moment of its greatness flicker. This confidence has been fueled by three beliefs:  A) the Fed will soon begin trimming its monthly purchases of Treasury and Mortgage Backed Securities (commonly called the “taper”), B) the growing strength of the U.S. economy is creating investment opportunities that will cause people to dump defensive assets like gold, and C) the renewed confidence in the U.S. economy will shore up the dollar and severely diminish gold’s allure as a safe haven. All three of these assumptions are false. (Our new edition of the Global Investor Newsletter explores how the attraction never dimmed in India).  

Recent developments suggest the opposite, that: A) the Fed has no exit strategy and is more likely to expand its QE program than diminish it, B) the U. S. economy is stuck in below-trend growth and possibly headed for another recession C) America’s refusal to deal with its fiscal problems will undermine international faith in the dollar.

Parallel confusion can be found in Wall Street’s reaction to the debt ceiling drama (for more on this see my prior commentary on the Debt Ceiling Delusions). Many had concluded that the danger was that Congress would fail to raise the ceiling. But the real peril was that it would be raised without any mitigating effort to get in front of our debt problems. Of course, that is just what happened.

These errors can be seen most clearly in the gold market. Last week, Goldman Sachs, the 800-pound gorilla of Wall Street, issued a research report that many read as gold’s obituary.The report declared that any kind of agreement in Washington that would forestall an immediate debt default, and defuse the crisis, would be a “slam dunk sell” for gold. Given that most people never believed Congress would really force the issue, the Goldman final note to its report initiated a panic selling in gold. Of course, just as I stated on numerous radio and television appearances in the day or so following the Goldman report, the “smartest guys in the room” turned out to be wrong. As soon as Congress agreed to kick the can, gold futures climbed $40 in one day.

Experts also warned that the dollar would decline if the debt ceiling was not raised. But when it was raised (actually it was suspended completely until February 2014) the dollar immediately sold off to a 8 ½ month low against the euro. Ironically many feared that failing to raise the debt ceiling would threaten the dollar’s role as the world’s reserve currency. In reality, it’s the continued lifting of that ceiling that is undermining its credibility.

The markets were similarly wrong-footed last month when the “The Taper That Wasn’t” caught everyone by surprise. The shock stemmed from Wall Street’s belief in the Fed’s false bravado and the conclusions of mainstream economists that the economy was improving. I countered by saying that the signs of improvement (most notably rising stock and real estate prices) were simply the direct results of the QE itself and that a removal of the QE would stop the “recovery” dead in its tracks. Despite the Fed surprise, most people still believe that it is itching to pull the taper trigger and that it will do so at its earliest opportunity (although many now concede that it may have to wait until this political mess is resolved). In contrast, I believe we are now stuck in a trap of infinite QE (which is the theme of my Newsletter issued last week).

The reality is that Washington has now committed itself to a policy of permanent debt increase and QE infinity that can only possibly end in one way: a currency crisis. While the dollar’s status as reserve currency, and America’s position as both the world’s largest economy and its largest debtor, will create a difficult and unpredictable path towards that destination, the ultimate arrival can’t be doubted. The fact that few investors are drawing these conclusions has allowed gold, and precious metal mining stocks, to remain close to multi year lows, even while these recent developments should be signaling otherwise. This creates an opportunity.

Gold moved from $300 to $1,800 not because investors believed the government would hold the line on debt, but because they believed that the U.S. fiscal position would get progressively worse. That is what happened this week. By deciding to once again kick the can down the road, Washington did not avoid a debt crisis. They simply delayed it. That is why I tried to inform investors that gold should rally if the debt limit were raised.Instead most investors put their faith in Goldman Sachs. 

Investors should be concluding that America will never deal with its fiscal problems on its own terms. In fact, since we have now redefined the problem as the debt ceiling, rather than the debt itself, all efforts to solve the real problem may be cast aside. It now falls on our nation’s creditors to provide the badly needed financial discipline that our own elected leaders lack the courage to face. That discipline will take the form of a dollar crisis, which will morph into a sovereign debt crisis. This would send U.S. consumer prices soaring, push the economy deeper into recession, and exert massive upward pressure on U.S. interest rates. At that point the Fed will have a very difficult decision to make: vastly expand QE to buy up all the bonds that the world is trying to unload (which could crash the dollar), or to allow bonds to fall and interest rates to soar (thereby crashing the economy instead).

The hard choices that our leaders have just avoided will have to be made someday under far more burdensome circumstances. It will have to choose which promises to keep and which to break. Much of the government will be shut down, this time for real. If the Fed does the wrong thing and expands QE to keep rates low, the ensuing dollar collapse will be even more damaging to our economy and our creditors. Sure, none of the promises will be technically broken, but they will be rendered meaningless, as the bills will be paid with nearly worthless money. 

In fact, the Chinese may finally be getting the message. Late last week, as the debt ceiling farce gathered steam in Washington, China’s state-run news agency issued perhaps its most dire warning to date on the subject: “it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.” Sometimes maps can be very easy to read. If the dollar is doomed, gold should rise. 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

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The Savior of America’s Future

Posted by Matt Insley - Tomorrow in Review

on Monday, 21 October 2013 20:13

Ah, as the world turns…

…Russia upstages the president in a recent op-ed regarding Syria.

…The Middle East remains a pressure cooker, on high heat.

…The political “kids” at the U.S. capitol continue squabbling.

…More recently, China ratchets up its “de-Americanize the world” rhetoric .

Say what you will, the daily news beat has been giving us a lot to read lately. Besides your added reading, though, there’s an opportunity brewing that’ll right America’s ship, no matter what happens in the news bytes above. Let’s have a look… 

Russia hates us. The Middle East is slowly forgetting about us (as we’re no longer their #1 oil consumer.) China is trying to be us. Heck, it even seems like Congress is against us!

Add it all up and you’d think the U.S. is in quite a pickle. But you’d be wrong.

Fact is, to become and stay a world power you’ve got to have a lot of things going for your country. A thriving economy, a “stable” currency, a hard-working population and abundant natural resources (like water and food.) But the real kicker is having a vast supply of affordable energy.

No matter what the negative, news blurbs portend, the U.S. has a lot going for it. Of note, our vast supply of affordable energy just keeps getting bigger. Indeed if you’re looking for the savoir of our country’s future, you’ll find it about 7,000ft below the topsoil.

You see, America was dealt a one-two punch of fortune.

The first punch was a swath of oil that’s propelling our country to the top of the world’s oil production ladder. Indeed, America’s shale oil story is playing out in front of our eyes and it’s a savior for the country’s economy.

The second punch hasn’t even wind-milled up yet.

I’m talking about America’s serendipitous natural gas glut.

As I type, the U.S. is producing more natural gas than ever before. Fact is, production has ramped up so high so fast prices had nowhere to go but lower.

DRH 10-15-13 CheapNatGas

It’s an American energy Catch-22. We’re producing so much of the stuff, and the boom was so unexpected that prices have curtailed much of the current drilling. In other words, with such low prices drillers aren’t drilling for regular natural gas.

But just as Muhammad Ali lined up a few jabs before an uppercut, a huge haymaker of natural gas will be a game-changer for America.

All it takes is a little support for natural gas prices to get the next round going. 

Natural gas prices have been in the doldrums for years now. But at some point — as soon as 2014 — the price will start heading higher.

More demand is coming from within the U.S. border. Power plants are switching over to cleaner burning natural gas, chemical plants are popping up to take advantage of low feedstock prices (same goes with fertilizer producers and other U.S. manufacturers) and slowly but surely more natural gas powered vehicles are hitting American roadways.

Not to mention more demand is set to come from outside of the U.S. border. Exports to eastern Canada, exports to Mexico and potential liquefied natural gas (LNG) shipments via tanker could all spur demand for nat gas.

Regardless of the reason, natural gas prices will surely rise. Even a modest rise to $5 or $6 would be a game-changer for the nat gas industry here in the U.S.

You see, the breakeven price for many dry shale gas plays is over $5. We won’t see much more activity in these gas fields until we see $5+ gas.

But when that happens, watch out! The same rig-race we saw run to oil plays throughout North Dakota, Texas, Oklahoma and others will be set to take place in America’s shale gas fields.

There’s just one problem…

There won’t be enough rigs!

“They can’t make enough rigs if nat gas prices rise” one of my Texas oil and gas contacts tells me, hinting at the next big trend in America’s energy comeback.

You see, as it stands many of the now-prolific shale oil plays (the Bakken, the Eagle Ford and the Permian) have enough target zones to drill for the next decade. That means the oil rigs that are out there — all 1,367 that are spinning in the U.S. oil patch this week — won’t be drilling for natural gas.

To be clear, there are 1,743 rigs (total) working in the U.S. right now, according to Baker Hughes rig count. 1,367 of them, a whopping 78% of all rigs, are drilling for oil. The other 369 are drilling for natural gas.

Go back a mere five years and the rig count was flip-flopped. With few oil prospects available back then, natural gas rigs totaled 1,537…77% of total rig count.

In the past five years alone we’ve seen a sea-change in the rig world. With rising potential for higher natural gas prices, we’re set to see our next big opportunity in the sector. Only instead of seeing another flip-flop, we’re going to be looking at an all-out rig shortage.

That’s music to the ears of rig operators.

In the coming 12-18 months keep your eyes peeled for a rebound in nat gas prices. When that happens, make sure you’ve already locked in shares of your favorite rig operators.

Stay tuned for more.

Keep your boots muddy,

Matt Insley 
For Tomorrow in Review

Ed. Note: It’s times like these that make investing so exciting. As Matt said, the coming 12-18 months should yield some great opportunities in the U.S. energy industries. 

But there is much more urgent research that I feel like you deserve to know about today. 

I want to share new research with you that could help you fund a fast and early retirement, or even supplement the money you’re already using. 

Go ahead and take a look to see if it’s something you’re interested in byclicking right here.

The nature of this research requires that distribution be very limited … In fact last time I looked, there were less than 25 openings left. Good luck and God’s speed!

Thank you for reading Tomorrow in Review. We greatly value your questions and comments. Click here to send us feedback.

 
 

Michael Campbell: “The Biggest Redistribution Of Wealth From The Poor To The Rich Ever”

Posted by Michael Campbell - Money Talks

on Monday, 21 October 2013 20:00

imagesThe young are just beginning to understand that they are getting a financial hammering from the Older Generation. Michael points out that it is Stanley Druckenmiller, who is touring schools in the US, explaining how entitlements are helping the Baby Boomers rip off future generations.

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More from Stanley Druckenmiller

Stanley Druckenmiller: How Washington Really Redistributes Income

The renowned money manager goes back to school to explain how entitlements are helping the Baby Boomers rip off future generations.

Stan Druckenmiller makes an unlikely class warrior. He’s a member of the 1%—make that the 0.001%—one of the most successful money managers of all time, and 60 years old to boot. But lately he has been touring college campuses promoting a message of income redistribution you don’t hear out of Washington. It’s how federal entitlements like Medicare and Social Security are letting Mr. Druckenmiller’s generation rip off all those doting Barack Obama voters in Generation X, Y and Z.

“I have been shocked at the reception. I had planned to only visit Bowdoin, ” his alma mater in Maine, he says. But he has since been invited to multiple campuses, and even the kids at Stanford and Berkeley have welcomed his theme of generational theft. Harlem Children’s Zone President Geoffrey Canada and former Federal Reserve Governor Kevin Warsh have joined him at stops along the tour.

Mr. Druckenmiller describes the reaction of students: “The biggest question I got was, ‘How do we start a movement?’ And my answer was ‘I’m a 60-year-old washed-up money manager. I don’t know how to start a movement. That’s your job. But we did it in Vietnam without Twitter and without Facebook and without any social media. That’s your job.’ But the enthusiasm—they get it.”

Even at Berkeley, he says, “they got it. There is tremendous energy in the room and of course they understand it. I’d say it’s a combination of appalled but motivated. That’s the response I’ve been getting, and it’s been overwhelming.”

Movement or no, this is a good week to check in with Mr. Druckenmiller, as President Obama won the budget battle without policy concessions to break the federal debt limit and continue borrowing beyond $17 trillion. I last spoke to the Pittsburgh native and father of three daughters during the 2011 debt-limit brawl, and he created a stir by supporting entitlement changes as a condition of raising the debt cap.

This was not the Wall Street consensus. He also said that a “technical default,” in which the government is a week or two late in making payments on its debt, would be “horrible” but not “the end of the world” if it produced reforms that put U.S. finances on a sounder footing.

“Some characters in the administration have mischaracterized my view,” he says now, in the conference room of his office high above midtown Manhattan. Then as now, he argues that major reform to protect future generations would be worth a short period of market turbulence.

“If there’s something really big on the other side in terms of entitlement reform, it’s worth using the debt limit. And God forbid even if you go a day or two over it in terms of interest payments,” he says, the country would be better off “if and only if you got big, big progress on a long-term problem.” Contemplating the recent Beltway debacle, he adds, “the problem with what we just went through is there was no big thing on the other side.”

Not that Mr. Druckenmiller endorsed the most recent Republican strategy. “I thought tyingObamaCare to the debt ceiling was nutty,” he says, and I can confirm that he was saying so for weeks before the denouement.

But he adds that “I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long-term problem. And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith. All this talk about, ‘I won’t negotiate with a gun at my head.’ OK, you’ve been president for five years.”

His voice rising now, Mr. Druckenmiller pounds his fist on the conference table. “Show me, President Obama, when the period was when you initiated budget discussions without a gun at your head.”

Which brings him back to his thieving generation. For three decades until 2010, Mr. Druckenmiller ran the hedge fund he founded, Duquesne Capital. Now retired from managing other people’s money, he looks after his own assets, which Forbes magazine recently estimated at $2.9 billion. And he wonders why in five years the massively indebted U.S. government will begin sending him a Social Security check for $3,500 each month. Because he earned it?

“I didn’t earn it,” he responds, while pointing to a bar chart that is part of his college presentation. Drawing on research by Boston University economist Laurence Kotlikoff, it shows the generational wealth transfer that benefits oldsters at the expense of the young.

While many seniors believe they are simply drawing out the “savings” they were forced to deposit into Social Security and Medicare, they are actually drawing out much more, especially relative to later generations. That’s because politicians have voted to award the seniors ever more generous benefits. As a result, while today’s 65-year-olds will receive on average net lifetime benefits of $327,400, children born now will suffer net lifetime losses of $420,600 as they struggle to pay the bills of aging Americans.

One of the great ironies of the Obama presidency is that it has been a disaster for the young people who form the core of his political coalition. High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.

Are the kids finally figuring out that the Obama economy is a lousy deal for them? “No, I don’t sense that,” says Mr. Druckenmiller, who is a registered independent. “But one of my points is neither party should own your vote. And once they know they own your vote, you’re not going to get any action on this particular issue.”

When the former money manager visited Stanford University, the audience included older folks as well as students. Some of the oldsters questioned why many of his dire forecasts assume that federal tax collections will stay at their traditional 18.5% of GDP. They asked why taxes should not rise to fulfill the promises already made.

Mr. Druckenmiller’s response: “Oh, so you’ve paid 18.5% for your 40 years and now you want the next generation of workers to pay 30% to finance your largess?” He added that if 18.5% was “so immoral, why don’t you give back some of your ill-gotten gains of the last 40 years?”

He has a similar argument for those on the left who say entitlements can be fixed with an eventual increase in payroll taxes. “Oh, I see,” he says. “So I get to pay a 12% payroll tax now until I’m 65 and then I don’t pay. But the next generation—instead of me paying 15% or having my benefits slightly reduced—they’re going to pay 17% in 2033. That’s why we’re waiting—so we can shift even more to the future than to now?”

He also rejects the “rat through the python theory,” which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable. By then, he says, “you have so much debt on the books that it’s too late.”

Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so by the 2040s the debt itself and its gargantuan interest payments become bigger problems than entitlements. He points to a chart that shows how America’s debt-to-GDP ratio, the amount of debt compared with national income, explodes in about 20 years. That’s where Greece was when it hit the skids, he says, pointing to about 2030.

Breaking again with many Wall Streeters but consistent with his theme, Mr. Druckenmiller wants to raise taxes now on capital gains and dividends, bringing both up to ordinary income rates. He says the current tax code represents “another intergenerational transfer, because 60-year-olds are worth five times what 30-year-olds are.”

And 65-year-olds are “much wealthier than the working-age population. So the guy who’s out there working—the plumber, the stockbroker, whatever he is—he’s paying the 40% rate and the coupon clippers who are not working anymore are paying a 20% rate.”

Ah, but what about the destructive double taxation on corporate income? The Druckenmiller plan is to raise tax rates on investors while at the same time cutting the corporate tax rate to zero.

“Who owns corporations? Shareholders. But who makes the decisions at corporations? The guys running the companies. So if you tax the shareholder at ordinary income [rates] but you tax the economic actors at zero,” he explains, “you get the actual economic actors incented to hire people, to do capital spending. It’s not the coupon clippers that are making those decisions. It’s the people at the operating level.”

As an added bonus, wiping out the corporate tax eliminates myriad opportunities for crony capitalism and corporate welfare. “How do the lobbying groups and the special interests work in Washington? Through the tax code. There’s no more building plants in Puerto Rico or Ireland and double-leasebacks and all this stuff. If you take corporate tax rates to zero, that’s gone. But in terms of the fairness argument, you are taxing the shareholder. So you eliminate double taxation. To me it could be very, very good for growth, which is a huge part of the solution to the debt problem long-term. You can’t do it without growth.”

Amid the shutdown nonsense, this week’s debt-ceiling accord did create an opening for some reform before the next deadline early next year. So what should Republican reformers like Paul Ryan do now?

“I would go for something simple that is very, very tough for the other side to argue, for example, means-testing Social Security and Medicare,” which would adjust benefits by income. He notes again his impending eligibility for a monthly government check.

“I don’t need it. I don’t want it. I could also make the argument that every health expert will tell you that wealthy people live 4.5 years longer than the middle class or the poor. So I’m going to get paid 4.5 years more than the middle class or the poor,” he says. “It’s not that many dollars, but I think it would be a great symbol in seeing exactly how serious they are.”

But Mr. Druckenmiller is not sure, so soon after the failed attempt to defund ObamaCare, that Republicans should demand entitlement reform in exchange for the next debt-limit vote this winter or spring. “Maybe they need a break,” he says. “I think a much more effective strategy would be for them to publicly shine a light on something so obvious as means-testing and take their case to the American people rather than go through the actual debt limit.”

If Mr. Obama rejects the idea, “then we will really know where he is on entitlement reform.” For this reason, Mr. Druckenmiller views means-testing as “really the perfect start—and it should only be a start—to find out who’s telling the truth here and who’s not.”

Mr. Freeman is assistant editor of the Journal’s editorial page.