Category: Profile

Speculating is a risky business but it’s the risk that makes such high returns possible.  Today, I’m sharing an interview with someone who manages risk on a daily, weekly, monthly and yearly basis as a Senior Portfolio Manager with Sprott Asset Management.

Maria Smirnova has been with Sprott for more than 12 years, is currently the sole manager of the Sprott Silver Equities Class, and part of a team that manages the Sprott Gold and Precious Minerals Fund.

Recently, I had the chance to speak to Smirnova about the current silver market, her outlook for the rest of the year, and the biggest risks in the silver market.

Without further ado, A Conversation with Maria Smirnova.

Enjoy!

 

 

Brian: What brought you to where you are today, or more specifically, can you tell me a little about your career experience?  

Maria: I started at Sprott in 2005 and was hired by Eric Sprott when he was still actively involved in the business. Coincidently, it was the middle of the gold bull run, so it was a good time and Eric needed more people to help him look at the mining equities.

When I started, Eric asked me to look at base metals, which I did for a couple of years. Then I moved on to gold, as well, and I’ve been doing that ever since.

Today, I’m part of our precious metals team, which means I’m responsible for advising all our precious metals mandates, when it comes to gold and silver. My passion project, of course, is Sprott Silver Equities Class, which is solely invested in companies that explore for and mine silver.

 

Brian: Since you are the Sprott Silver Equities Class Portfolio Manager, I would like to focus my questions on silver.

2016 was a great year for silver, as the price rose from its bottom around USD $15/oz and almost hit USD $21/oz.  Moving into 2017, we’ve seen a couple of spikes in price, but haven’t been able to break USD $18.56.

What’s your outlook for silver for the remainder of 2017?

Maria: Of course, as Sprott, we’re bulls on silver and gold. Interestingly, however, we became really bullish at the beginning of last year, when the Bank of Japan adopted negative interest rates.

We had a bear market in precious metals that lasted four years. What changed was, in the beginning of last year, we realized that while the world has been quantitative easing, what we’re really seeing driving gold and silver, specifically, is real rates in the US dollar, the Japanese yen, etc.

Our call was that real rates will remain low, even though the Fed is talking about raising rates, our thesis still remains that the world, largely due to demographic factors, is not experiencing the same levels of growth as it has in the past.

Populations the world over are getting older. They’re consuming less and, therefore, it’s hard to stimulate the economy to grow faster. Whereas in the past, the normal growth rate would be 4% or 5%, now it’s down to 2%. In China, of course, it’s higher – but you can’t always believe their numbers.

In this environment, the Fed is the bellwether. The Fed sets the tone for the rest of the world and, yes, they’re raising rates, but we think that there’s limited ability for them to do so. In fact, the natural interest rate is actually lower than it has been – and that’s good for gold. Therefore, coincidentally, it’s very good for silver.

Back to your original question of what the outlook for silver is for the remainder of the year. It’s hard for me to see much downside for silver at these levels. We’ve come off a high of $21 last year and now it’s at $16.50. Basically, if you go much lower, companies will go back to environments where they don’t make money.

In that environment, production will have to start coming off and the supply-demand-balance will be pressured and, as it is, I would say that from the physical perspective, silver has been in a physical supply deficit for three or four years now.

What drives silver demand, there’s a lot of industrial uses, but what really drives the growth has been investment demand; ETF inventories have grown to 667 million ounces right now, and even in the bear market were stable, there were no outflows. There were some outflows earlier this year, and at the end of last year, after Trump won, but also towards the end of April.

Since the end of April, we’ve regained all that we lost. Coin and bar demand, in the last few years, has been really strong. Again, it came off at the end of last year with sentiment declining, but that will resume. Also, there were some things that happened in India that probably drove physical demand down, but that should stabilize.

From a physical metal perspective, the fundamentals I see are fantastic for silver. On the mine side, of course, my predicament is that I don’t see a lot of discoveries. I don’t see a lot of projects being built and that means that the mine supply will be constrained.

Also, scrap is a big component of the supply, which has fallen off in the last few years. Even last year, with the silver price rising, we didn’t see an uptick in scrap supply. I found that very interesting.

Again, the price rose to $21 from $14 or so, and you would expect that scrap supply should increase as price is price sensitive. So, if price rises, there should be more ounces coming to market, but I think that it was exactly the same as in 2015. So, from the physical market perspective, it’s very supportive of the price.

From a macroeconomic/sentiment perspective, like I said, it’s already come off quite a bit and we are positive on the outlook for gold for the second half of the year.  We’ve had two hikes in the U.S. since the Trump election, so all the exuberance and optimism of Trump has been priced into the market.

If anything, we see potential for disappointments in the economic data going forward, economic data has been softer recently in the US. Auto sales are softer, other economic data are softer. This will all put pressure on the Fed, making it a lot harder for them to raise rates. Right now, I believe they’re talking about two more hikes for this year. I think there will likely be one by the end of the year.

 

Brian: The resource market is synonymous with volatility and the last 6 months haven’t disappointed from that perspective. Volatility in the markets isn’t a bad thing, but for some, it can prove unnerving.  In particular, silver is especially volatile and suits the “gold on steroids” handle that it’s often given.

In your opinion, what is it that makes the silver market more volatile than, say, gold?

Maria: Number one, the fact that silver is much more accessible than gold to retail or smaller investors. Silver’s price per ounce is materially lower, which makes it easier to buy in smaller increments. Hence why I go back to investment demand, when there’s positive sentiment, we’ve seen tremendous Silver Eagle coin sales.

I think last year, in 2015, there’s been a lot of growth in retail demand for silver products and that’s to do with the lower unit price. It’s easier to buy silver than it is gold. So, when there’s demand and the sentiment is positive, the price percentage rise can go up more than gold.

The second factor is how much is available to invest. In silver’s case, it’s much less than it is for gold. GFMS estimates about 187,000 metric tons total have been mined over our history. If we subtract jewelry and what’s held in central banks, that leaves us with 65,000 metric tons of above ground investable gold, which is worth about $2.6 trillion. We can say that’s the investable gold universe.

On the silver side, we calculated about $47 billion. That’s a huge difference. If people are moving towards these metals and trying to buy them, from a dollar perspective the silver pool is much less. If there’s demand, incremental price movements will be amplified in silver.

 

Brian: We all need to manage risk in our portfolios. Whether it’s jurisdictional risk, metal price risk or exploration risk, risk in the resource market is viewed in a slightly different light depending on who you talk to.

In your opinion, where is the most risk in the silver market as a whole, currently?

Maria:  As far as the companies are concerned, it’s price risk that they’re most sensitive to. From a jurisdictional risk perspective, Mexico has been quite stable, and if you look at other producing countries, like Peru and Chile, they’ve been quite politically stable, too. If it’s an exploration company, it’ll have the exploration risk. If it’s a producer, there could be operational risks or price risk, which would be greater as your revenues depend on it.

So, to me, in any commodity, the metal the price risk is the biggest factor. Because you can try to manage around the other things.

 

Brian: People are widely accepted as the most important facet of any junior resource company.

Outside of a proven track record of success, in your opinion, are there any characteristics that are commonly shared by successful people in the resource sector? Characteristics that investors should look for?

Maria: That’s an interesting question. What sets some managers apart from others? Outside of me saying “the right time at the right place,” which, by the way, for some of the really well-known guys, has been the case. I think to be successful in mining you have to be able to dream and you have to be able to take on risk and see the bigger picture.

If you’re not a risk-taker in mining, you won’t succeed because you don’t know what’s in the ground until, literally, it’s been produced. When I say you need to see the bigger picture, what I mean is that if you’re a geologist, sometimes you can get too caught up in the rocks, get excited about the geology or the structures you’re seeing, and forget that you actually need to find an economic deposit.

To me, the guy who’s going to be successful is the one who’s going to be able to put together a multitude of factors, infrastructure, grade, size, metallurgy, and see the potential to have a great mine, and their ability to market, as well.

I think the CEOs that I’ve seen, be it a woman or a man, that have been successful with their companies, are the people who can promote what they’re doing, who are able to foster relationships not just with investors but with communities, because community relationship is hugely important in mining.

And that is kind of marketing, too. You’re forming relationships with all the stakeholders around you. So people skills are quite important, as well. You can’t just be technically strong, you have to also be people strong.

 

Brian: Technology is rapidly improving, improving so quickly that many believe that in the next 10 years, we will see more advancements than we did in the last 100 combined.

How do you think this technological advancement will affect the mining industry?

Maria: That’s also an interesting question because, I would argue, we haven’t seen nearly the amount of technological ingenuity in the mining sector as we have in so many other sectors. In many ways, the miners do the same thing they did 100 years ago. So, to me, I would love to see advancements in technology in mining. That would lead to better safety, fewer casualties.

I would love to see some improvement, some kind of creativity on how you mine to improve economics, how you recover the metal, and all of this will lead to, again, safer mines, better environmentally-friendly mines, fewer environmental disasters. It would, hopefully, even improve the image people have of mining.

So, actually, that’s something I would love to see more often in the industry.

  

Brian: What are the advantages of investing in a fund, such as your Sprott Silver Equities Class, versus buying individual companies?

Maria: Number one, diversification. Mining is a dangerous business. Mining is a risky business. As I said, unless you’re a dreamer you likely won’t succeed. So you want to have a basket of names, be it in a fund or be it in a portfolio. You can’t just own one or two names, you really do need to have a few to even out the operational risk and the political risk.

And the second advantage of the fund would be that, over time, my goal, as a portfolio manager, is to lose less money in downturns, i.e. preserve capital through being in cash or cash equivalents, to the loading of the portfolio with more beta when I think that the market will rock and my job is to find new stories that will lead to exciting discoveries in the future. Not everyone has the time to do that and that’s my job; so that’s why we have funds.

  

Silver truly is gold on steroids. For those with the intestinal fortitude to navigate its volatility, tremendous gains should be made in the months and years ahead. It has been said by many that people are what make a company a success. Do your diligence and find the people who are serially successful in the companies that they create, and you will be successful during this precious metals bull market.

For those who want exposure to silver but don’t have the time or expertise to pick the right companies to invest in, you may want to check out Maria’s Sprott Silver Equities Class. Buying funds, such as this, put your investing dollars in the hands of a professional and give you great odds at being successful in any market.

Finally, the Sprott Natural Resource Symposium held in Vancouver this July, offers a great value proposition, as Sprott has handpicked a group of speakers and companies that have out-performed the broader junior resource market in each of the last 4 years. If you’re going to attend just one natural resource conference, this is it.

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

Disclaimer – The following is not an investment recommendation. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence.

I know I’ve said it before, but when you have the opportunity to talk to successful speculators or investors, it’s far more valuable to ask questions pertaining to the HOW, instead of focusing on the WHO or WHAT. As great as it is to get a stock tip, it’s a short term solution to a grand puzzle, a puzzle which can only really be solved by working diligently to perfect your approach to speculation.

Today, I have for you an interview with someone who has a great understanding of the HOW, when it comes to being successful in the junior resource market. This person is Rick Rule. Mr.Rule’s understanding of the resource market comes from his experience, as he has spent his entire adult life pursuing alpha within the sector.

Currently, Mr.Rule is President and CEO of Sprott U.S. Holdings, which is a holding company made up of three separate and distinct companies: Sprott Global Resource Investments Ltd., Sprott Asset Management USA Inc., and Resource Capital Investment Corporation. For those looking for more information on Sprott Global financial products and services, check out the Sprott Global Resource Investments website.

 

Without further ado, A Conversation with Rick Rule.

Enjoy!

 

 

Brian: Doug Casey, whom I recently interviewed, mentioned that the book, The Market for Liberty, changed his life, transitioning his political philosophy from Objectivist to a Libertarian. This is a major change in political philosophy, one of which I’m not sure every person is capable. In my view, we live in a society of paradigms or bias that lock us into thought patterns that keep many of us blind to other alternatives – alternatives that may be more efficient or beneficial.

Whether it be financial, political or social, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

Rick: That is the billion dollar question. I think, probably, it was searching, having a curious mind that brought you to Doug Casey, and I think it was searching and having a curious mind that brought Doug Casey, who had a decidedly stateist family, if you know anything about his background, to the sort of free market anarcho captialist orientation that he has today.

Doug is enough smarter than me, and I suspect you are, too; my path was somewhat more tenuous. The path that I would describe is going to seem odd, but the first tract that I read that, in retrospect, was Libertian oriented, was War and Peace, talking about the relationship of man to society and vice versa, and I wasn’t really able to codify it, until I read a much simpler tome, Economics in One Lesson, or understand it deeply until I read, Human Action, by von Mises, of course, it wasn’t one thing that got me there. It was a longer course, it was a willingness to be exposed to other points of view.

 

Brian: While paradigms and bias give us the basis for how we view the world, emotion is the fuel that causes us to act without logic. The biggest lesson I have learned in my speculating career, thus far, is to act against the crowd and buy when everyone else is selling – and vice versa. This is a lot easier said than done!

Do you have a defined strategy that investors can adopt in some form, which works to minimize the role that emotion plays in speculations?

Rick: Arithmetic. Arithmetic is extremely important. When an industry is in liquidation, it is important to force yourself to be able to buy. When a commodity that is necessary for sustaining the lifestyles that are enjoyed by mankind, is selling for less than the total cost of production, one of two things happens; either that material becomes unavailable or the price goes up. It is difficult to make yourself buy an industry in liquidation, but the truth is, one of my Rule-isms, if you will, is that you are either contrarian or you are going to be a victim. An illustration of that would be the best bull market that I ever participated in, which was the uranium bull market of the last decade. Uranium had gone through a 20 year bear market in the 80s and 90s, and the consequence of that was that any investor who wasn’t bored to tears with uranium, had a moral objection to it as a consequence of Hiroshima, Nagasaki, Three Mile Island, Chernobyl. The sector was not only out of favour, it was hated. But despite that, at the time, it represented 20% of US base load demand and the industry was making it for $30 a pound and selling it for $10 a pound, losing $20 a pound and, of course, trying to make it up on volume. There was only one of 2 outcomes; whether the lights would go out across the United States or the price would go up. It was into that circumstance that I forced myself to buy the only 5 uranium juniors in the world, companies that had no hope of going into production with the uranium price where it was when I bought them, in anticipation that the price would have to go up. My reward was that the worst of those 5 ran 22 to 1 over the ensuing 5 years.

I would say, in short answer to the question, arithmetic is how you counter emotion and a narrative.

 

Brian: Warren Buffet says, “you must learn from mistakes, but they don’t have to be your own.” To me, there’s a lot of wisdom in this comment – we should all be so lucky.

First, would you agree? And second, how does this statement translate to your junior resource speculating career?

Rick: Answering the questions in reverse, sadly, I have had to make all of the mistakes I learnt from. I suspect 2 things; first, Mr. Buffet is smarter than me, he is also extremely disciplined and dispassionate. My own experience required me to learn the lessons personally. I certainly get reinforcement now, from watching other people who work hard and are smart making the same mistakes that I made in the past, and it warns me off the seeming necessity to make the same mistake over and over again.

This goes back to curiosity, the more time you go about gathering information and the more dispassionate about analysing the information that you gather, the better off you are going to be. Unfortunately, while all of us value ourselves as truth seekers, we think what we do is take information from everywhere, and sort that information to make rational conclusions – that isn’t what we do. We gather information and we use that information to support our existing paradigms and prejudice. So you have to be curious in the first instances, and then you have to be rigorous with regards to the products of your curiosity, and the second part is probably more difficult than the first.

Brian: Confirmation bias is hard to overcome.

Rick: Yes, it’s lethal.

 

Brian: For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk. For most, jurisdictional risk is most closely tied to the politics of the country in question, or the politics of a neighbouring country.

In a 2012 speech at Jayant Bhandari’s Capitalism and Morality Seminar (Video Link – around the 10:34 min), you said that one of your worst jurisdictional experiences that you have encountered in your career was an investment in a company in California, United States.

For most, this example may represent a quandary, because I believe the United States is easily sold as a premier investment jurisdiction, especially when compared to, say, the Congo in Africa. This isn’t always the case, however, as you pointed out.

Therefore, do you measure jurisdictional risk in terms of the delta between the company’s share price and its value? Meaning, would you be willing to take on any amount of jurisdictional risk, depending on the value of the company relative to the price for which its shares are selling?

Rick: Yes absolutely. My own experience is that most investors equate political risk to their emotion rather than to reality, and you tend to react more strongly to political risk that you haven’t experienced or don’t understand. My own belief is that money that is stolen from me by white people in English, according to the rule of law, is just as gone as money that is extorted from me in some third world kleptocracy.

My experience, further, by doing business internationally, and this is going to sound like a generality, which it is, but it is also true, countries that can’t get any worse don’t, and countries that can’t get any better don’t, either.  This plays out over time, not immediately, but the truth is, the countries that have rewarded me the best are countries that have been coming off low bottoms. An example would be Chile, with a superb exploration endowment coming off, first, the idiocy of socialism under Allende, and then, the murderous regime of Pinochet. The response of the geology in Chile to stability and the sort of social sense that they had had enough of rightist and leftist autocracy was spectacularly good for me. I made money in hard places like Russia, Sudan, Congo. The truth is that most of the great, easy to find, tier one deposits that exist in countries that have been able to be explored efficiently in the last 40 years, have been made. The big tier 1 discoveries that have yet to be made are going to be made in places where there have been problems with access or problems with cost of capital. Places like the Tethyan metalagentic belt, running through Turkey, Pakistan, Kazakhstan, Afghanistan, Uzbekistan, Kyrgyzstan, Mongolia, those types of places. The easy deposits in safe places have mostly been found.

 

Brian: Speculating in management teams with past success comes at a premium in the junior resource market – and with good reason; the odds of finding an economic deposit and/or bringing that deposit to production are slim. For those looking to find great companies at a ‘discount,’ however, they may have to look at companies with younger and unheralded management teams.

I have a two-part question; First, with people arguably being the most important part of a junior company, in your opinion, is it worth taking the risk in speculating with a younger team? Secondly, if so, how do you evaluate young management teams that don’t have the résumés of a Ross Beaty or Robert Quartermain?

Rick: I dispute the first of your thesis; I believe that if you are willing to speculate and invest in very bad markets that you can get top tier managements at a discount. Two and a half years ago, I was able to buy Ivanhoe Mines with, at that point in time, two – now three – top tier deposits at a discount to cash. People were afraid of the market, they were afraid of the Congo and they didn’t care about Friedland. In a market before that, I was able to buy Adolf Lundin at a discount to cash. The truth is, if you have the guts to invest in bad markets, you can buy the best properties and the best management teams very cheaply. In the market that we are heading into, a bull market, however, other sets of circumstances are true and I would suggest to your readers, unless prepared to devote a minimum of 20 hours per week to their speculative portfolios, that they give up the optionality associated with new management teams and focus on investing around the best of the best, even being willing to accept those premiums. For investors and speculators who are willing to work a little harder, having a sleeve of between 25 and 50% in your portfolio to try and speculate around management teams who you believe or have reason to believe, with guided advice, will become the Ross Beatys  and the Bob Quartermains of your generation, is a task that is very worthwhile.

  

Brian: I’m a strong believer in the gold thesis but, for the sake of playing devil’s advocate, in which type of scenario could you see the gold price falling in the future? 

Rick: I think a global liquidity driven economic collapse, a repeat of 2008 where the lack of faith in the system was such that liquidity itself became unavailable. Peripheral assets always follow the first, in the absence of liquidity, and certainly gold equities are as peripheral as you can get.

The other, of course, would be a deflationary, a real deflationary, collapse; I don’t happen to see that in the outlook. The most immediate threat to gold equities markets being a liquidity seize up like 2008.

 

Brian: Conferences are a great way to expand your knowledge of the sector and to speak to the people who are running the companies in which you’re speculating. Learn who these people are – you’re trusting them with your money.  For those looking for a conference to attend, I highly suggest that you attend the Sprott Natural Resource Symposium from July 25th to 28th, in Vancouver.  In my opinion, it’s by far the best conference in the business and worth every penny.

In your opinion, what’s the value proposition of the Sprott Natural Resource Symposium?

Rick: You’re asking me to answer a question in my own self interest, which I am delighted to do. These speakers have been hand selected, the economic precept to the gold case is made very well by Jim Rickards, whom, among other things, was corporate counsel for Long Term Capital Management and knows a lot about the structure of institutional financial relationships worldwide and the risks that they impose.

The political backdrop for the discussion is posed by David Stockman, who was an absolute insider as he was Ronald Regan’s primary Economic Advisor, and has been a big wig in republican politics for 30 years. It is important also, though, that this conference won’t all be gurus; David Harquail who was partially responsible for building Franco Nevada will be there telling you why and how. Ross Beatty will be there, Bob Quartermain will be there, the serially successful Robert Friedland will be there. Learning about how hugely, serially successful mining operators operated and built their own companies and, at the same time, built their own portfolios, gives lessons to investors that are absolutely invaluable.

Another circumstance that is unique to this conference; at almost every investment conference that I know, although the attendees view exhibitors as content, the conference sponsors view them as advertisers, and so at most conferences, the criterion for accepting exhibitors is a cheque that cashes. In the context of the Sprott conference, because our attendees have told us that they consider the exhibitors to be content, if we don’t own shares of the exhibitors in a Sprott managed account, we won’t admit them to the conference. That doesn’t mean that everyone will go up in price, but it means that we understand enough about the affairs of the company that we are willing to risk our own money.

And, by the way, if you constructed an index of the exhibitors, that index of exhibitors relative to the broader junior resource market, would have shown substantial out performance in each of the last 4 years.

 

Brian: Thank you very much for taking the time to answer my questions!

 

In my conversation with Mr.Rule, we covered a number of very important topics. Mr.Rule’s answers provide a great guideline for success in the junior market. Here’s a list of the points that stood out for me:

• Arithmetic is how you counter emotion and a narrative
• Confirmation bias is lethal to your success in the junior resource sector. Be curious, but also rigorous with regards to the products of your curiosity
• Be mindful that political risk is typically tied to emotion rather than to reality. The tendency, therefore, is to react more strongly to political risk that you haven’t experienced or don’t understand.
• Being a contrarian puts the odds of success in your favour, and is by far the most important piece of advice shared by Mr.Rule. Speaking from experience, I concur, but also warn that it is the HARDEST piece of advice to implement. Humans love to be a part of a group and, therefore, are prone to herd mentality.
• Finally, the Sprott Natural Resource Symposium offers a great value proposition, as Mr.Rule and his team have handpicked a group of speakers and companies which have out-performed the broader junior resource market in each of the last 4 years. If you’re going to attend just one natural resource conference, this is it.

 

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

Throughout human history “imagined orders,” a term coined by Yuval Noah Harari, author of Sapiens, have been used to control populations. Harari states,

“Imagined orders are not evil conspiracies or useless mirages. Rather, they are the only way large numbers of humans can cooperate effectively.” ~ Sapiens – pg.110

It’s vital to define the words we use so that our perspectives can be fully understood. This being the case, I believe Harari would define ‘imagined orders’ as a set of principles that are not rooted in objective validity, meaning they don’t have ties to the laws of biology, physics and chemistry, that govern our world.

‘Imagined order’ is inter-subjective, meaning that even if one person’s consciousness is able to escape the grip of the imagined order, the mass consciousness is unaffected. Examples of inter-subjective concepts are: law, money, gods, nations and schooling.

By now, I’m sure you’re thinking, ‘okay what’s his point?’ My point is that we’re all free to make our own choices, but it’s my contention that on a grand scale, more and more people are relying on the State to make their decisions for them, further expanding the imagined order of our world. The ability to critically think and question our current state of being is lacking, and from my perspective, it’s only going to get worse unless we’re able to wake from this slumber.

Today, I have for you an interview with John Hunt. John is a pediatrician and Chief Medical Officer at Liberty Healthshare, which is a health sharing ministry created to help families combat the burden of excessive health care costs. He has also written a number of books that include Your Child’s Asthma, Assume the Physician, Higher Cause, and his most recent, a series of books collaboratively written with Doug Casey, the High Ground Novel Series; Speculator was released last year, and the next book, Drug Lord, will be released this summer.

Now, Speculator was my first introduction to John, but I found that book so fascinating and important on so many different levels, that I thought it made good sense to interview John to get to know the man behind this masterpiece a little better. If you haven’t already, be sure to read my recent interview with John’s co-author, Doug Casey.

During our conversation, Hunt and I discussed a few of the inter-subjective concepts that I discussed earlier, as well as his two recent books, Speculator and Drug Lord. Check it out, there’s a lot of value to be gleaned from his answers, actionable wisdom that can be applied in all areas of your life.

 

Brian: You have a very interesting background, majoring in geology at Amherst College and then receiving your medical doctorate from George Washington University.

To me, geology and medicine seem to be worlds apart. How or why did you choose this path for your education?

John: Amherst was a reasonably classical liberal arts college back then, before it became one of the zillion progressive arts indoctrination centers it is now. It doesn’t matter what your major is in true liberal arts—the idea is to teach your brain how not lie to itself. Unfortunately, progressive arts teaches the opposite skill.

Geology teaches a brain how to think in four temporal-spatial dimensions concurrently with ongoing physics and chemistry, with a good smattering of economics in there too. It’s preparation for anything that requires rational intelligence later. Certainly it’s good prep to help holistically think about patients. I didn’t realize all this at the time. I was just a dumb kid that enjoyed rocks and liked the geo professors. My geology training helped a lot while writing Speculator with Doug Casey, though.

 

Brian: In my opinion, the general population’s ability to think critically is on a steady decline. Following the birth of my first child, I started reading books about education and the different schools of thought for how children are best educated. In particular, two books stood out from the rest; Dumbing us Down and Weapons of Mass Instruction by John Taylor Gatto. Gatto, the former winner of the New York State Teacher of the Year award, tells a fascinating story of the American education system. In essence, I believe his message to the reader is that the essential function of the school system is to produce good employees, which yield unwaveringly to authority and stick to the status quo of social norms.

I have a two-part question for you; First, do you agree with Gatto’s thesis regarding the American education system? And second, if so, what needs to occur in order for it to change?

John:  Gatto’s work influenced my thinking a lot, so it’s no surprise I agree with him. Schools indoctrinate kids into doing what authorities tell them to do, while video games numb children’s brains to suicidal military missions from which they fancifully can keep coming back to life. The kids are prepped to be either obedient serfs or cannon fodder.  Some go on to college to pay the hyperinflated tuitions that result from too much money available in the form of college debt. Without the feds in there, college tuitions would be much cheaper, but the kids didn’t get taught that in school, so they get suckered into selling their lives as indentured servants, paying off forever the company store owned by the government. Politicians claim to fight to create jobs (work) on the one hand while fighting also for shorter work weeks (less work) on the other hand. How about the politicians stand up for freedom instead of work, and let us figure out what we want to do with our freedom? Back to education—to fix it, the governments have to get out of the way. Then the inventors can invent, and the people—instead of the politically powerful—can choose their education. That’s all it takes. Ain’t gonna happen though, so the answer is that the parents and students need to ignore and avoid the government and its subsidies and insanities, and not just in the educational sector, but everywhere government inserts its parasitic tendrils.

 

Brian: I believe the power of exponential growth is not fully appreciated or understood by most people. Human evolution has grown leaps and bounds in the last Century from a technological standpoint, and it doesn’t appear to be slowing. In fact, author Ray Kurzweil wrote in his book, The Singularity is Near, that with the current pace of technological advancements, humans will merge with machines by 2050 and begin to explore the stars.

Do you agree with Kurzweil’s statement about the current pace of technological advancement and his prognostication about our merger with machines?

John:  It’s already happening. The question is will the free market producers much longer be able to outpace the parasitic majority who have been taught in their schools and colleges that stealing from others and enslaving them is their right. By that I mean all the egregious taxation we now suffer that is far outside of the US Constitutional limits (theft), and foolishness such as the right to health care (aka the belief that you have the right to compel someone to provide you with healthcare). If the free market can be left to grow, reasonably unabated, then within a thousand years freedom will bring humans to immortality, incredible power, and near omniscience. But if those who preach the ends justify the means philosophy keep control of the education system, media and politics, then ignorance and immorality will prevail and we’ll fall back into dark ages. Any species in the universe that is even 10,000 years ahead of us evolutionarily won’t allow us to become a member of their galactic club of omniscience and omnipotence if our species still thinks initiation of force and fraud is acceptable. Those alien types (legal or illegal) will keep us down until we grow up, and swat us like flies if we forcibly encroach upon them. So we libertarian types need to gain the cultural ascendency and teach the moral high ground for our species to thrive.

 

Brian: Although I still struggle with this sometimes, my biggest take-away from your book, Speculator, was the importance of listening to your gut.

In the book, Uncle Maurice gives Charles the following advice,

“Contrary to common opinion, intuition wasn’t mystical; it was scientific. Intuition was the ability to properly integrate many subtle pieces of information. To have good intuition, therefore, someone needs experience and data and a logical mind that can fuse them into coherence” ~ Speculator (PDF pg.17).

There are a lot themes in Speculator. Is there any particular lesson or theme that you wanted to bestow upon the reader, and if so, what? Why now?

John:  Listening to your gut works well, but only if you aren’t prone to lying to yourself. Most people lie to themselves to protect their ego from their own internal contradictions. Internal contradictions induce stress unless the person deals with them or refuses to perceive them. Example—college tuitions rise not because of better teaching, but because of poor stewardship of resources by academics (equivalent to bad fiscal policy) and the ever increasing flood of easy money (equivalent to bad monetary policy). The solution the progressive have for high tuition? Make more easy loans available! That of course was the cause of the problem in the first place but they are in denial about this internal contradiction. They lie to themselves.  Another example—medical costs are sky high because of insurance intermediacy and the third party payor mentality—called moral hazard. Moral hazard leads to price inflation, and in health care it is caused by insurance. The response of both progressives and conservatives? To mandate or subsidize insurance—the very thing that caused the problem. To survive with such blatant internal contradictions again requires prominent denial of reality. People lie to themselves all the time. The sequel to Speculator, which is titled Drug Lord, is about the epidemic of people lying to themselves. But the theme of Speculator and the whole series is that morality (natural law) trumps civil law (political law) any day of the week and twice on Tuesdays.

 

Brian: While there’s an obvious connection between Doug Casey and the speculation theme in the book, how would you describe your connection? Are you a speculator?

John: At this point in economic history, stock market investors are really all speculators. The government and central banks are now every bit as influential on the success or failure of a venture as whether it produces value. What should be conscientious investment decisions instead need to be speculative guesses about what distortion the fiscal and monetary “authorities” are next going to apply to the markets. I could say that I speculate that the dollar will continue to fail, that gold and bitcoin will be money. But really I am just gambling in bitcoin because—despite my constant reading about it—too many others have far better knowledge than I do about it. I speculate that government and central bank manipulations will result in a bubble burst that will hurt everyone except those who caused it and a few who prepared. So I am at least partly prepared. But I hedge, by having investments that thrive in the political economy, although I know they will suffer when the political economy melts down. I’m a speculator, sure.

 

Brian: I recently interviewed Doug Casey, co-author of the High Ground Series, and he mentioned that the second book, Drug Lord, would be hitting the shelves this July. In the interview, Casey makes the comment,

 “we’re trying to reform the unjustly besmirched reputations of a number of highly politically incorrect occupations.” ~ Junior Stock Review Interview

Casey is referring to the reputation of a few of the figures that have been and will be featured in the books, such as speculators, drug lords and assassins.

Where do the negative connotations regarding these types of people come from? And what does it say about the social construction of our current society?

John: It’s another example of the collectivist contagion rearing its incredibly ugly head. It’s not speculation, drug dealing or assassination that is wrong per se. Speculators who profit without force or fraud are acting morally and should not be lumped in with fraudsters. Which is immoral—the drug dealer who make possible some voluntary transactions between individuals, or the pharmaceutical company that lobbies for monopoly power through unconstitutional actions of the FDA and lies with statistics to convince naïve medical academies and government guideline committees about the value of their very marginal product? In regards to assassins, the Bible does not say, “thou shalt not kill” but rather “thou shalt not kill unjustifiably”. It is a sad reality that there is no organizational concept on the planet more active in the killing of the innocent than government. Collectivists group, and then attack, the 1%, even though some of the 1% are brilliant producers who help everybody. In contrast, individualists recognize that some of the 1% are cronies, and some of the 99% are cronies, and we prefer to judge against the cronies individually. Collectivists define racism as one race oppressing another. This group think definition falsely accuses good people of being racist—based solely on the color of their skin, nullifies individual responsibility, and obviates individual power to end racism. This collectivist definition has resulted in the recent exacerbations of racism in this country. Individualists define racism in the much broader terms of discrimination based on race, which places the individual moral agent into the process of choosing right from wrong.  Overall, our culture has been infected with a destructive contagious disease called collectivism.  We need a vaccine.

 

Brian: It has been a pleasure John, thank you for answering my questions.

 

 

The imagined order of our current state of being should be questioned as a number of our society’s strongest beliefs are broken and appear to be on their way to getting worse. The ability to critically judge ourselves and the inter-subjective concepts that we live by is vitally important, in my opinion.

On another note, I’m eagerly anticipating the release of John and Doug’s latest book, Drug Lord, this summer. If it’s anything like Speculator, it’ll be a MUST read for anyone looking for an entertaining story. For those looking to explore some deeper concepts, I’m certain John and Doug will not disappoint, as they attempt to reform the unjustly besmirched reputations of a few of the society’s most politically incorrect occupations.

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – for FREE!

 

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

While it can be highly profitable to know which stocks the sector’s best are picking, I prefer to know the philosophy and process behind their success.

“Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” ~ Unknown

Now, don’t get me wrong, I’ve definitely benefitted from paying attention to industry heavy hitters’ stock picks. Without a doubt, however, my biggest successes have come from applying the lessons I’ve learned about speculation from those same individuals – people like Doug Casey.

This line of thinking is what shaped the series of questions I asked Doug, and while they may seem a bit unorthodox, I believe there’s a lot of actionable wisdom to be gleaned from his answers. Look closely and you will discover what is, in my opinion, the basis for successful speculation in the most volatile market in the world, the junior resource sector.

Without further ado, A Conversation with Doug Casey:

 

Life

Brian: Last fall, in an interview with Albert Lu’s, The Power and Market Report, you mentioned that you have become less attached to physical or material things, as you’ve gotten older.

You’re still an active speculator and you speak regularly at various investment conferences around the world, so if it’s not the desire to make more so that you can buy more stuff, what motivates you to keep going?

Doug: The first rule, the prime directive of all living beings whether they be amoebas, people, corporations or governments, is to survive. And, in order to survive, you need resources. So, it’s genetically programmed into all entities to get more “stuff”, because resources helps you to survive. Of course I want more money because it allows you to do more things; money helps you to survive. Perhaps take advantage of a new technology, a break-through that enables you to live for 200 years. It’s not that I’m un-interested in a higher standard of living and more wealth. Everybody is, that’s natural. But from a psychological point of view, I’ve put it lower on the totem pole.

I’m thinking about writing a book that would be called Renaissance Man. It would centre around the three most basic verbs in every language; be, do and have. Most people concentrate on the ‘have’ verb; I want to have a new car, I want to have a new house and I want to have a new girlfriend. This is actually very stupid. The ‘having’ is not important; more important is ‘doing.’ In order to ‘have,’ you need to ‘do;’ you need to create something, you need to provide a good or service first in order to ‘have’. The ‘do’ is very important. You need to gain skills. Gaining possessions is marginal, gaining skills is much more important.

Even more important than that is the verb ‘be;’ you can change and improve your essential being. That allows you to do things, and that, in turn, allows you to have things. People just think of the end product – the have – without thinking of the ‘be’ and the ‘do.’ Of course, on the other hand, if you have stuff and you’re not corrupted, you can use the ‘have’ to facilitate your ‘doing’ and the ‘doing’ can facilitate your ‘being’ something different. It works both ways.

To answer your question, I’m trying to concentrate more on the ‘be.’

 

Brian: Last year, in an interview with Jeff Berwick, you mentioned that the book, The Market for Liberty, changed your life, transitioning your political philosophy from an Objectivist to a Libertarian. A change in political philosophy is a major transition, one of which I’m not sure every person is capable. In my view, we live in a society of paradigms or bias that lock us into thought patterns that keep many of us blind to other alternatives that may be more efficient or beneficial.

Whether it be financial, political or social, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

Doug: A very good question. I’ve become more pessimistic as I’ve gotten older because it occurs to me that most people, even if they use the phrase, ‘I think,’ what they really mean is ‘I feel.’ In other words, it’s not a rational process, it’s an emotional process for most people. That’s why political movements are always disasters.

In my own personal pilgrim’s progress, I started out like most kids, as a liberal. I became a conservative after I read Barry Goldwater’s, Conscience of a Conservative. It made sense, but, in high school, I had had no other political exposure. Then, after college, I read Ayn Rand’s book, Virtue of Selfishness. I suggest absolutely everyone read it. It’s only 120 pages. But it’s so brilliant I had to put it down after the first page because I was in shock. I couldn’t believe that someone could crystallize all the things that I’d thought about, but hadn’t put together yet.

Then, when I read, Market for Liberty, I realized what was wrong with Objectivism, which is actually a secular religion. Market for Liberty is an extremely important book; it shows how a society would work without government. The big problem is that everyone thinks: “what should the government do?” or “maybe if we change the government to do this instead of that, everything is going to be better,” This is completely barking up the wrong tree. The problem is the state itself; it’s government as an institution. The State is an anachronism in today’s world, it’s out-moded, it’s a stupid, destructive, coercive concept. It’s actually inherently evil. Market for Liberty explains how society might work without the State. Stop listening to liberals, conservatives, republicans and democrats; listening to them is a waste of time. That’s my take on the subject.

 

Freedom

Brian: In my opinion, the vast majority of people undervalue freedom. Instead, fear has taken over and is playing centre stage. Ironically, fear is quelled with greater government regulation and comes at the cost of our freedoms – which are diminishing by the day.

I recently read James Rickards’ latest book, The Road to Ruin, and even though I agree with him, it still surprised me to read, “Facism is not in our future, it is here now.” ~ The Road to Ruin pg.256. Over the last decade, whistle blowing has hit the mainstream, with Julian Assange and Edward Snowden becoming household names.

My question is do you think that the segment of the population that has heard the claims made by people like Assange and Snowden truly understand their magnitude? Please explain.

Doug: Apparently half of the people in the US, or thereabouts, think that Snowden and Assange are traitors, which is ridiculous. They’re heroes, both of them are heroes. I don’t know what they are like personally, but their actions are heroic. As far as what Rickards said, yes, he’s absolutely right. In fact, all the States in the world are socialist or fascist.

You have to define these terms accurately. Marx did that; he coined the term ‘capitalism,’ incidentally. He defined capitalism and socialism and, actually, using a Marxist analysis, you can define fascism as well as communism. It’s all about the means of production, ownership of property.

Fascism is an economic system, first and foremost. It’s not really about jack boots, good looking black uniforms, and soldiers goose stepping. It’s an economic system,perfected by Mussolini. It’s one where both the means of production and private goods are privately owned, however the state controls them all.

Socialism has been a disaster throughout the world, of course. It can be defined as state ownership of the means of production, but you can still own consumer goods– houses and cars and stuff like that. But the state controls it all. Fascism is much more economically productive than socialism but not nearly as productive as pure capitalism, where everything, absolutely everything, is owned—and controlled– privately. But that doesn’t exist anywhere. There are no capitalist systems in the world. They’re mostly fascist systems.

The average person conflates the government with the country; they’re different things.  Calling Assange and Snowden traitors is goofy- traitors to what? I mean, to the country? Not to the country, no, they’re trying to preserve the values of the country. Traitors to the government, which is different. Who really cares about the government? The government just a bunch of deep state types, basically criminal personalities that are controlling the country and making people think that the government is the country. It’s not. In fact, it’s a dead hand on top of the country. The fact that most people conflate these two things alone tells me that there’s no hope.

  

Speculation

Brian: While paradigms and bias give us the basis for how we view the world, emotion is the fuel that causes us to act without logic. The biggest lesson I have learned in my speculating career, thus far, is to act against the crowd and buy when everyone else is selling – and vice versa.

Would you say that you have successfully removed emotion from your speculations and investments, over the course of your speculating career? Why or Why not?

Doug: I try to, but it’s very hard to separate your rational mind from your emotions. In fact, when I feel like buying something or selling something, I say, “wait a minute, maybe I should do exactly the opposite of what I feel.” So, it’s very hard, but it’s important. If you start thinking that way, acting against your own emotions, it does improve your results because, as a general rule, you don’t want to be in what they call a ‘crowded trade,’ where everyone thinks, “yeah, this is going to happen”. Maybe there are actually good reasons why something should happen, and maybe it will happen. But, if everybody already believes that and is already long or short, there’s no profit in it, the profit is already gone.

 

Brian: Whether it’s Kondratieff wave theory or William Strauss and Neil Howe’s (authors of The Fourth Turning) analysis of the cycles of generations, human history appears doomed to repeat itself. Although, as a species, the human race is continually improving itself (the ascent of man) from a technological stand point,

Do you think we can ever break the boom and bust cycles that have been a common thread in our history?

Doug: Yes, I think we can. Boom and bust cycles have a significant psychological element, of course. But in the modern world, cyclical booms and busts, are basically a result of monetary manipulation. In other words, central banks create the business cycle. There’s a cyclical aspect to everything but central banks, which claim they exist to smooth out cycles and make things more predictable, have actually done exactly the opposite and accentuated these things.

A more basic problem is the psychological aberrations that lie within everybody’s mind. Everyone has their own set of psychological aberrations, and when you put a bunch of people together in a group the size of a nation state, they necessarily act according to the lowest common denominator, and the lowest common denominator is these psychological aberrations that make people act like chimpanzees. So, perhaps you’re never going to get rid of business cycles from a psychological point of view, but you could hugely improve things by getting rid of central banks, which create an actual monetary business cycle.

This is why the rich have been getting richer and the poor are getting poorer, whereas in the past, previous to the creation of the central banks around the world, 100 or so years ago, it was a more level playing field. The rich, not the poor, are in a position to profit from inflation.

Technology and science have made things better, of course. We would already be colonizing the moons of Jupiter if it hadn’t been for the State and the distortions that it has caused in the economy.

 

Brian: As you know, the junior resource sector is regarded as the most volatile in the world. The combination of geology, accounting and a general knowledge of markets can make the average investor or speculator feel as though the odds are perpetually against them.

In your opinion, how does one tilt the speculating playing field in their favour?

Doug: Well, I developed a mnemonic with the 9 Ps,* to help in assessing junior mining stocks, Mining is a crappy business, it’s a 19th century choo choo train business. This is why kids today aren’t going into mining. Sure, it’s fun to play in the dirt with big yellow trucks. And you need all of the things that come out of the ground. But it’s a horrible business.

It used to be a good business; you found a deposit, you developed a mine, nobody gave you any trouble, you made a lot of money. Today, it’s harder than ever, even with modern technology, to find a deposit anywhere on Earth, which is very picked over,. And mining is much more capital intensive than it used to be. You’re mining lower grade deposits, and it’s 10 years from the time you find something until the time you can start mining, because of regulations, NGOs, native groups, and taxes. It’s a horrible business.

That said, mining stocks are still the most volatile stocks in the world. But volatility isn’t your enemy. Volatility is your friend if your timing is good. Or it can be your deadly enemy if your timing is bad, obviously. *NOTE: The Nine Ps of Resource Stock Evaluation: People, Property, Phinancing, Paper, Promotion, Politics, Push, Pitfalls, Price – A Special Report Detailing each P can be downloaded for FREE from Casey Research.

Brian: In your Introduction to Strategic Investing, on page 21, you give the reader 4 steps to solidify their financial base, while providing them with protection against unexpected dangers and the liberation to become a successful speculator. The four steps are: Liquidate, Create, Consolidate and Speculate.

Strategic Investing was published in 1982; in your opinion, do these steps still hold true in today’s world? Please explain.

Doug: They are more important in today’s world than they were back then. Strategic Investing, in fact, is a very good book. About a quarter of it, or more, is about the stock market. The stock market was less than 1000 then, and I said the market was going to 3000—which people thought was absurd.. And I recommended a bunch of stocks which were yielding 10-15% in current dividends.

But at the same time, I felt – and I still do feel – that we were going to have a major depression. You have to look at western civilization itself, which has been going downhill since the start of WW1. American civilization has been going downhill since the mid ’50s, and the average American’s standard of living has been going down since the early ’70s. Now I think we are entering the trailing edge of this huge financial hurricane that we entered in 2007. You have to look at the long term time frame for all of these things.

Listen, we’re going to have a depression that, despite the huge advances in science and technology which are ongoing and wonderful, is going to be the biggest thing that has happened in modern history— much bigger than the unpleasantness of 1929 to 1946.

In that context, it makes sense to liquidate, which means get rid of everything you don’t need, that’s just a burden. Reorient yourself, consolidate, find out what you want to do, what your skills are, who your connections are. Take advantage of that. Stop thinking like an employee. And you’re going to have to learn to speculate, because in times of monetary chaos, there are a lot of opportunities for a speculator. But you have got to have the capital in order to engage in speculations, and so those 4 things, I think, are more important now than they were in ’82, which incidentally, was a very chaotic time.

 

Brian: In my opinion, your book, Speculator, can be read on a number of different levels. It’s simultaneously a great adventure story – complete with death, love and suspense – a useful guide to speculation, and a philosophical commentary on some of the most important social topics of our world. Although I still struggle with this sometimes, my biggest take-away was the importance of listening to your gut.

In the book, Uncle Maurice gives Charles the following advice,

“Contrary to common opinion, intuition wasn’t mystical; it was scientific. Intuition was the ability to properly integrate many subtle pieces of information. To have good intuition, therefore, someone needs experience and data and a logical mind that can fuse them into coherence” ~ Speculator (PDF pg.17).

With this book, was there a particular lesson or theme that you wanted to bestow upon the reader, and if so, what? Why now?

Doug: Speculator is the first in a series of 7. We’re going to release the next one in July, Drug Lord. We’re trying to reform the unjustly besmirched reputations of a number of highly politically incorrect occupations.

People automatically think, “Oh, speculator. Must be a horrible person taking advantage of the problems of poor people that are losing everything they have.” In Speculator our hero, Charles Knight, who is 23, goes to Africa, exposes a mining fraud, gets involved in a bush war and makes a huge amount of money. But he’s highly ethical. We show the speculator as a good guy.

In the next book, Charles becomes a Drug Lord, dealing in both legal and illegal drugs. We show how that business works, the morality of it, and that you can be a good guy as a drug lord, too. When he becomes an assassin in the third book, we deal with the morality and history and the techniques of an assassin.

You have to break away from the crowd. That’s the big lesson, That’s what our hero, Charles Knight, does by dropping out of high school, not going to college, and running off to Africa. He does this throughout his life, doing things that few others do.  Most people act like potted plants. They’re born some place, they grow up there and they stay there. That’s OK for plants, but it’s not a very good survival strategy for a human being. There are a lot of themes in Speculator.

 

Brian: Doug, it’s been an absolute pleasure, thank you very much for taking the time to answer my questions.

 

There isn’t just one way to be successful in life, we all have different paths to achieving our goals. There are, however, skills that we can develop, over time, that will help us overcome most obstacles that we encounter.

In this conversation with Doug, we tackled a few of the topics that I, personally, believe are major hurdles for individuals during their pursuit of wealth. These are highlights for what I believe were the most important takeaways from my conversation with Doug:

• Stop focusing on the ‘HAVE.’ Instead, concentrate on the ‘BE’ in order to ‘DO.’
• Read Ayn Rand’s Virtue of Selfishness, and Morris and Linda Tannehill’s, Market for Liberty. These books could change your life.
• Liquidate, Create, Consolidate, and Speculate – There are going to be opportunities to speculate, but you will need to have the capital in order to engage. These four steps have never been more important than they are now.
• Most importantly, be a contrarian, act opposite to the crowd, do things that nobody else is doing!
• Watch for the release of Drug Lord in July – the next adventure in a 7 part series that began with Speculator, a story that’s not only exciting and enjoyable to read, but draws on some very important lessons for speculation and our society .

 

Don’t want to miss an investment idea, interview or financial product review? Become a Junior Stock Review VIP now – for FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

Today, in 2017, we live in a world of constant flux. The greater recession that began in 2008 continues to plague the world economy, forcing governments to participate in unprecedented ‘Quantitative Easing (QE)’ to stabilize their economies and weaken their currencies. The stability bought with QE has come at an enormous price, as the amount of debt accumulated to keep markets from imploding is reaching crazy levels. The debt overhang will have to be dealt with at some point, and when it does, the government could seek out your savings to pay for it.

Some wise words from one of the world’s most successful International Men and speculators, Doug Casey:

“The day is coming when your local government may stop seeing you as a milk cow and start seeing you as a beef cow, and you want to have options before that day.”

In James Rickards’ new book, The Road to Ruin, Rickards refers to a freezing of the world’s financial system to quell the contagion of a future financial crisis. Sounds crazy? Well, it isn’t. Ask residents and bank account holders in Cyprus circa 2012. Their bank deposits became the cash used to bail-out their “too big to fail” banks. Bank accounts were frozen and 10% removed as a levy or ‘bail-in’ tax to the Cypriot banks, which were severely affected by the struggles of the Greek economy, the downgrading of Cypriot bond credit rating, and finally, exposure to an over-leveraged housing sector.

 

Modi’s War on Cash

In November of last year, the Indian government took a major step towards invoking more control over its people, with the removal of the 500 and 1000 rupee bank notes. To gain a better perspective on the situation in India, I corresponded with Mr. Jayant Bhandari, who knows firsthand the affects of this devastating move by the government.

For those unfamiliar with Bhandari, he has worked for U.S. Global Investors, Casey Research, and published his writing on a number of different platforms. Bhandari is very well respected in the resource sector community, and not only provides sound advice from an investment stand point, but also has a solid grasp of politics, the economy, and culture.

Bhandari now works independently and is continuously travelling the world looking for investment opportunities, primarily in the resource sector. Also, he runs a yearly seminar in Vancouver, entitled Capitalism and Morality, which is attended by resource sector heavy weights, Doug Casey and Rick Rule.

 

The Interview:

Brian: Mr. Bhandari, could you please give readers who are unfamiliar with India’s currency ban a few points on what has happened over the last 2 months since the ban of 500 and 1000 Rupee bank notes?

Jayant: On the night of 8th November 2016, Indian Prime Minister came on the TV to declare that these two highest denomination bank notes, equivalent to US$7.50 and US$15 respectively would no longer be legal tender. Their banning meant that 86% of the monetary value of all currency in circulation disappeared overnight. This created a major crisis in the country—people suddenly had no money. India is mostly a cash based economy. Without cash it was no longer possible for people transact. Money died that night.

When the banks opened, there were long lineups everywhere in the country. People were trying to convert their banned notes into smaller denomination notes, which were still legal tender. But banks did not have those. People wasted a huge amount of time lining up at banks. And then went home empty handed. Even if you could get hold of cash, the maximum allowed was Rs 4,000 (about US$60).

If businesses could not pay, they had to lay off people. If people could not buy, businesses suffered. India is an extremely poor country. A vast majority lives on daily earnings. They had no option but to start going hungry. Anything between 20% and 80% of the economic activity as a result might have come to a halt. Tens of millions of people were laid off.

Now, 50% of Indians have no bank account. So these people did not even have the option to deposit their cash. At least 150 people died in lineups. And then you can imagine how many died unheard and how many tens of millions suffered silently. The situation hasn’t really changed much even after these two months. The problem is that once you destroy the economy it is extremely difficult—almost impossible—to revive it.

 

Brian: The New York Times reports, “The ban is intended both to curb the flow of counterfeit money and to take aim at terrorist organizations that rely on unaccounted-for cash. It is also expected to help the government clean up a system that has relied on cash to pay bribes and avoid taxes.” ~ New York Times

Has the Indian government succeeded in their attempt to curb the flow of counterfeit money and reduce cash that is available to terrorists and bribing?

Jayant: India is an extra-ordinarily corrupt country. As a result of the ban, the tax authorities suddenly got a lot of new power. They increased their raids on people’s homes to look for unaccounted money. They started asking for higher bribes. They got paid what they asked for. I am told that the general level of bribes have gone up 100%.

Now, corruption exists because there are too many complex regulations. Instead of reducing these regulations and decentralizing, Modi has increased regulations and centralization of India.

Moreover, Modi has protected bureaucracy from legal actions. This is truly Orwellian, for the real corrupt people have been sheltered, while small businesses, which have no choice but to pay bribes, were troubled.

Hundreds of millions of Indians desperately poor, who earn a dollar or two a day, had neither unaccounted money nor the capability to collect bribes. These people suffered and went to bed hungry for no reason.

In other words, corruption has gone up, not down.

The new notes are much more prone to be counterfeited. The paper is of bad quality and the ink tends to smear. There have been many reports of bad printing. These bills are certainly of worse quality than those banned.

Terrorism… Someone truly naive might think that troubles in Kashmir can be ended by banning cash. The troubles have continued relentlessly. In fact, under Modi troubles at the border with Pakistan have significantly increased. Modi has massively increased India’s military budget. This combined with increased nationalism and Hindu fanaticism, in which Modi has a huge hand, has brought India very close to a war with Pakistan.

Ironically, Indian army has killed many multiples of its own people than it has of aliens. Indian armed forces operate with impunity in Kashmir, in the north eastern parts, and in tribal areas. They run a regime of terror in these areas. Across the country, fake encounter killings are the norm. Any alleged criminal should expect to be beaten up by the police, the reason no sane person—even if he is raped or assaulted—calls the police. I do make reports once in a while and end up police station just to make sure I keep myself updated.  

 

Brian: It is ironic that governments feel they need to intervene on corruption, when in my mind, at least, politicized economies are what fuel corruption. Ergo, further government regulation, such as a currency ban, only leads to further and more pronounced corruption and greater instability.

In your 8 part series on India’s currency ban (thus far), you have spoken about Prime Minister Narenda Modi’s popularity and his almost cult like following. How has Modi influenced the public?

 Jayant: Modi is a bully. He has been behind encouraging fanaticism among Hindus for the last two decades or more. Indians crave for a strong leader—this helps people transfer responsibilities of their lives to someone else. In short, all you need is demagoguery and sociopathy to rule Indians.

 

Brian: In James Rickards’ book, The Road to Ruin, he discusses shock doctrine and how fear is used to advance new policies that are used to quell fears but, typically, come at the cost of everyone’s liberty.

In your opinion, what do you think Modi’s next moves will be during this time of turmoil and fear?

Jayant: : I completely agree with what Rickards says. Modi did want to generate fear in the society and he has archived that. Indians never had much liberty, but now their situation is worse and getting worse by the day. In my view, India is rapidly on the path to becoming a police state.

Modi has destroyed India’s economy. He will now have to keep plugging holes. You simply cannot undertake a massive social engineering project of this kind and not have to keep doing patch up jobs.

He will likely impose capital controls to stop people from moving their wealth abroad. Modi has also been generating fear among gold owners. He will very likely restrict how much gold people can own.

Apart from having to keep doing patch up jobs, Modi will also have to keep people thinking that he is doing something. He has recently offered a slew of free stuff to the poorest people and to the Middle Class. Of course this means that more money will be stolen from these people. Unlike what happens in the West, not even a part is returned back in India. Indian politicians and bureaucrats keep all of it for themselves. India pays for schools, roads and bridges that merely exist on paper, with nothing on the ground. They don’t like to steal 5% or 10%. They like to steal all.

I have seen fragile old people sitting outside banks and begging to collect a few dollars of pension they should get. But somehow—even in this electronic age—it does not come to their accounts. They end up going door to door, humiliating and demeaning themselves. These are heart-wrenching sights. But a demagogue likes a humiliated, self-respect lacking society.

Whatever Modi does going forward, it will be for the sole aim of making India a police state and to increase his grip on the society.

 

Brian: From your series of articles, it’s clear that you think the outlook for India’s future is dismal. What would have to change in order for you to see it differently?

Jayant: India is an unnatural country. It was created by the British. There are 1.34 billion people with all kinds of ethnic, religious, regional, lingual etc. differences. All these matter, for India is a tribal society. They don’t necessarily like each other. When India became independent, it would have been much better if they had carved out 30-50 countries or many more. If I had control, I would institute constitutional provisions for regions to secede. And I would undertake rapid decentralization of India.

 

Brian: I don’t think it’s a stretch to believe that other governments from around the world are watching India’s currency ban with a keen eye. With most countries operating at a deficit each year, I am sure that demonetization is an option they would like to pursue.

For readers from the western world, it may seem far-fetched to think that it could happen to them. Can you see other countries following India’s example and pushing towards a cashless society? And, if so, why?

Jayant: In my view the situation with countries in South Asia, the Middle East, Africa and most of South America is dismal. These are tribal people. They will have horrendous social and political problems. Most of what I said so far applies to all these countries. They will all disintegrate within my lifetime, to tribal structures.

 

Brian: Once entrenched, political trends like the war on cash are extremely hard to break. I believe it’s more intelligent to use the knowledge of impending political policy for profit, better known as speculation, or at the very least, take the necessary precautions to protect yourself.

In Part 2 of your series on the India Currency Ban, you state,

“As Indian, be a speculator – even if the government does not like it and will blame you for all ills. Try to keep as much of your money in cash, in Rs 100 notes. Rs 2,000 notes have no value when you go shopping for groceries. Keep a supply of water and dried food sufficient for a few months’ needs.”

What advice would you give to people in other countries, where demonetization or a freezing of the financial system is a possibility?

Jayant: In the last 200 years of modern government, people have become very mobile and economies have become extremely complex. At the same time governments have become less competent, for everyone now has a right to vote and those who man the governments are less competent than they were earlier. All these governments are very brittle, much more outside the West than inside it.

While the state is increasingly an unnatural entity, populace are increasingly nationalistic and dependent on their governments. I am not sure how this will play, except that many countries will disintegrate. What I am sure is that there is a lot of pain ahead.

Savers and their wealth will be at huge risks. They will be made scapegoats. They should diversify internationally. And the time to take action is yesterday, particularly for people outside the West.

 

Brian: While Quantitative Easing or money printing by most of the world’s economies has propped up the financial system, thus far, things still appear to be rocky.

Though none of us have crystal balls, if you were to make your best educated guess, is the world’s financial calamity over or are we headed toward further crisis?

 Jayant: What we call money these days is fiat currency. It has no inherent value. Over the last 200 years or more the world has gone through exceptional economic growth. Governments and their printing presses have grown accustomed to continual printing of more and more fiat currency. But now, economies of the West are stagnating. And economies of most emerging markets are in negative-yielding mode, where they have mostly been except for the interlude of the last three decades. Everywhere—expect with some hope from Trump Presidency—the world is doing more of what created the original problems.

 

Brian: I tend to agree with the late Richard Russell, as he said before passing, “in the future to come, it isn’t who makes the most, but loses the least.”

 

Mr. Bhandari, thank you very much for answering my questions.

 

Catch Mr. Bhandari’s Musings on Investing on his website, or you can follow him through social media on his Facebook page or on Twitter, @JayantBhandari5

 

Until next time,

 

Brian