Is Economic Volatility Coming?
Source: Karen Roche and JT Long of The Gold Report (5/9/12).
One special session at the April 27–29 Casey Research Recovery Reality Check Summit wasn’t on the agenda—a private panel for The Gold Report readers with three of the premier summit speakers: Global Resource Investments Founder and Chairman Rick Rule, Casey Research Senior Editor Louis James and Casey Energy Opportunities Senior Editor Marin Katusa. You won’t pin them down to a timeframe, but they’re looking forward to a buyer’s market, as equity prices fall and volatility increases. As Rule puts it, “When the luster is off the sector, it’s off all parts of the sector, so in bad markets the best companies are cheap. When the best come cheap, you have to play.”
Casey Research Summit Special Report: Reality Check or Checkmate?
The Gold Report: When we talked last fall after the When Money Dies summit, Rick, you were looking forward to the volatility preceding the decline of paper currencies as an opportunity to take advantage of the liquidity crisis.
Rick Rule: The volatility I anticipated didn’t happen because the amount of quantitative easing—I would call it counterfeiting—was extraordinary. That cash coming into the system acted as a soporific, so the volatility I had hoped for did not in fact come to pass. People whose portfolios declined probably felt they experienced volatility, but I think it was the weight of the chronically overvalued junior resources sector. Probably 80% of the sector is nonviable and in a state of permanent decline, with the market occasionally punctuated by up moves driven by performance among the best companies.
TGR: So, you were disappointed.
RR: I was very disappointed. I expected a Volatility S&P 500 (^VIX) in the range of 30. For somebody who makes a living basically as a pawnbroker, there are no better circumstances than extraordinary volatility. I didn’t get to practice my trade.
TGR: Do you think it will change in the second half of 2012?
RR: I don’t know, but the disconnect between the way we in the West live and the way we can afford to live will be problematic, particularly because the productive part of society—the so-called one percenters—is being vilified. The conflict between good and bad news will create incredible volatility at some point, but I’d be pressed to tell you when.
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Inevitable is not the same as imminent – Rick Rule
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TGR: That sounds like more social than economic volatility.
RR: Social volatility manifests itself in the economy. We’ll see less productive investing if the politics of envy drive increasing taxes on capital. To raise workers’ real wages, the workers must employ more capital, and you can’t do that if the capital isn’t finding its way into the economy.
TGR: Last fall, Marin, you said quantitative easing was deflating equity valuations. “He who has cash will be king,” you said, “because he can afford to buy discounted stocks. If you do your homework and be sharp you’ll make a fortune in the next three years.” Is that still the case? Are we too late?
Marin Katusa: Not too late at all, and I still believe we’re in deflating equity prices. I’d say it’s going to get a lot worse, especially for the junior resource companies. Less money is flowing into the sector and it’s now a buyer’s market. This is the riskiest investment segment on the planet. Risk mitigation is the key to succeed, and any opportunity to reduce risk is the most important thing moving forward. By mitigating risk, being strategic, always taking Casey free rides—the portfolios for 2011 for both the Casey Energy Report and Casey Energy Confidential gained over 20%. And Q1/12 was over 20% for both newsletters also. So if you do your homework and buy good companies, you can do well.
TGR: Louis, you said that the secret is to figure out what real stuff people need because it will retain value. When prices on valuable stuff go down ridiculously it’s a godsend because you can buy when it’s cheap and sell when it’s expensive. Is the stuff people need cheap now?
