Pandemic Playbook with Economist David Rosenberg
June 9, 2020, | (63 mins 56 secs)
Speakers: Ed Coyne, Senior Managing Director, Global Sales at Sprott Asset Management, David Rosenberg, Founder and President of Rosenberg Research & Associates and John Hathaway, Senior Portfolio Manager.
Topics: Economist David Rosenberg believes that investing in a post-pandemic world is shifting our focus from what we want to what we need. Households and businesses are reassessing the importance of savings, liquidity and balance sheet health. John Hathaway discusses how the macro landscape has become very friendly for both physical gold and gold stocks, but few investors have taken appropriate action.
In this webcast, we explored:
- Rosenberg’s bird’s eye view of the current economic storm
- Why the recovery is likely to be L- and not V-shaped
- The impact of ballooning debt levels and money supply
- Will fixed income continue to play a role as a portfolio diversifier and risk mitigator?
- Why gold has been a “winner” during this crisis
- How gold equities are poised to benefit as the metal rallies
Natalie Noel, RIA Database: Cover Slide
Hi everyone, thank you for joining today's webcast: “Pandemic Playbook with Economist David Rosenberg,” sponsored by Sprott Asset Management. Today's webcast will be providing one CFP, one CIMA and one CFA CE credit. If you have any questions on credit, please do not hesitate to give us a call at 704-540-2657. We welcome any questions you may have at any point during today's webcast. You can type your questions in the Q&A box to the right of the slides, and we will do our best to answer as many of your questions as possible. In the event your question is not answered during today's event, a member of the Sprott Asset Management team will get back to you directly. We have main materials available for you to download in the Documents folder at the bottom of your screen. As always, we appreciate your feedback and striving to make these events the best they can be for your viewing satisfaction. At your convenience, please take a moment to take our survey that is also located at the bottom of your console. We will cover quite a bit of information during today's webcast. If at any point in time you're interested in scheduling a one-on-one meeting with Sprott Asset Management, please click the one-on-one folder at the bottom of your screen and confirm the request. In the event you miss any part of today's webcast or simply would like to watch it again, a replay will be made available to all registrants via email. With that, I'd like to turn it over to today's first speaker, Ed Coyne, Senior Managing Director, Global Sales for Sprott Asset Management. Ed, take it away.
Ed Coyne: Slide 3
Thank you, Natalie, and welcome all to today’s webcast. My name is Ed Coyne, Senior Managing Director and Head of Global Sales at Sprott Inc. With me today is David Rosenberg and John Hathaway. David Rosenberg is the President and Chief Economist and Strategist of Rosenberg Research and Associates, which is an independent Financial Markets and Economic Consulting Firm launched in January of 2020. David’s company is uniquely positioned to provide clients with unbiased insights and actionable investment guidance. David provides traditional daily commentaries but also includes in-depth reports, podcasts and timely data, technical analysis, conference calls, meetings, and customized services. David has provided economic and market strategists for more than 30 years both on the sell-side and the buy-side of the business on both Bay St in Toronto and Wall St in New York. David was a chief economist and strategist at Gluskin Sheff, a Toronto-based wealth management firm and prior to that, he was a Chief North American economist at Bank of America and Merill Lynch from 2002-2009. David is also the author of Breakfast with Dave, a Daily economic and financial markets insight and forecast report he has published under various names and titles since 1998. In addition to David, we asked John Hathaway, our very own senior portfolio manager, to also join us. John is a CFA and Senior Portfolio Manager at Sprott Asset Management. John joined Sprott in January of this year and is the portfolio manager of the Sprott Hathaway Special Situation Strategy and the co-portfolio manager of the Sprott Gold Equity Fund. Previously, John was at Tocqueville Asset Management, where he was the co-portfolio manager of the Tocqueville gold fund as well as other investment vehicles in the Tocqueville Gold Equity Strategy. Prior to Tocqueville, John was the co-founder and a manager of Hudson Capital Advisors, followed by seven years with Oak Hall Advisors as Chief Investment Officer. John earned his BA from Harvard College and his MBA from the University of Virginia. With that, I’d like to give you a brief commercial on who Sprott is for those who aren’t that familiar with us. Sprott is a unique firm in regard to what we focus on. Sprott is a publicly listed company on the Toronto Stock Exchange with the ticker symbol SII and will soon be also on the New York Stock Exchange by late June. Sprott is one of the largest precious metals firms focused on purely precious metals with over $12 billion in assets under management. What’s unique about our firm is that we offer three unique avenues of solutions in the gold and gold equities space, with over 8 billion in physical metal made up of both gold and silver, pure gold, pure silver, as well as platinum/palladium, Sprott is one of the leaders in the unique physical trust environment. In addition, we offer a suite of equity portfolios with over 2.3 billion made possible with the recent acquisition of the Tocqueville gold fund back in January of this year along with John Hathaway and Doug Groh and his entire team. In addition to both the physical and the equity we also have a unique debt solution where we actually finance and lend capital to predominantly junior mining companies with close to a billion dollars in current capital outstanding. We call institutional clients, pensions, foundations, and sovereign wealth funds among many of our largest clients. With that, I’d like to now turn it over to David Rosenberg, Chief Economist to talk about what’s going on in today’s market and his view into the Pandemic Playbook.
David Rosenberg: Slides 4-5
Thanks Ed, and good afternoon to everyone. First and foremost, I just want to wish everybody good health and that you’re all safe and well. The theme is really the great repression and the tagline is “Business will not be as usual,” and a three-month rally that I’m sure historians will look back on as a blip on a screen hasn’t altered the big picture perspective. For the historians out there, I want to remind everybody that we had no fewer than six absolutely monster rallies in the 1930s. Two of them were bigger than the one we just experienced. Just as every bull market has a pullback, every bear market has a rally. Please don’t confuse this period of liquidity and rampant speculation for the real thing. All that said, I remain of the view that the level of conviction I have in anybody's forecast on the economy is several standard deviations below the norm. I actually feel that I’m in pretty good company when you consider that more than a third of the companies that have reported their quarterly financial results so far have pulled their full year guidance which is something we haven’t seen happen since the collapse of Lehman in 2008. As it stands, a bit of a recap, the second quarter holes in real GDP are getting bigger and bigger, and it's getting bigger and bigger in every country in the world.
Looking at what’s been built in in the data, and remember, what goes into GDP is spending, not employment. When you’re looking at real GDP, it looks to me like we could be down in the US at least 50 percent for the second quarter on an annual rate. Remember that this follows a 5% GDP decline in the first quarter, so for everyone who’s saying that they can’t wait to get back to the pre-pandemic economy, be careful what you wish for, because the NBER [National Burea of Economic Research] just told us, yesterday, that the recession started in February, not in April. The decay was already in play. Like I said, the hole we must dig out of is just getting bigger. The economic math is daunting because to recoup a 50 percent plunge in GDP means it has to then surge 100 percent just to make up for the deep loss. At the same time, I think we also have to consider all these government programs are only bridge income replacement support mechanisms. That’s all they are. Keep in mind, this is not FDR New Deal stimulus. This is not fiscal stimulus with any future multiple impact, it is simply government-assisted life support.
Meanwhile, watching the stock market today for me has been like watching a clown blowing up a balloon knowing the inevitable. Although I have to say it is impressive to see the level of confidence that the bulls have at the moment. All I can say I that either the investment community sees the Fed going beyond high yield corporate bonds, actually coming in and buying stocks at some point, or investors view that all we’ve seen here is temporary and that the economy is going to miraculously bottom with all the reopening's and that even if things don’t get back to normal completely, they’ll get back to normal enough to warrant the sky-high multiples being where they are right now. It’s hard to handicap just how far the Powell Fed is going to go. I used to actually talk about them going into the Junk Bond market and bailing out the fallen angels, but in truth, I was just saying it in jest.
I won’t assume that the Fed doesn’t have the stock market on its mind at all times, and Powell has proven to have been as much of a back stopper and market manipulator as Greenspan and Bernanke. I’ll be the first to acknowledge that fighting the Fed is a futile game. Be that as it may, what Central Banks everywhere have done is to make it next to impossible to appropriately price risk, and they have created tremendous moral hazards by bailing out poor managers of risk. The economics will tell you that this is what it takes to save the system. Another financial sector bailout. The last one was for the banks, but this one is about credit hedge funds.
In terms of predicting when things turn to normal, assuming they ever do, the problem is that we don’t have a template, we don’t have a playbook, for this type of shock on a global scale. It would be one thing if this was 2008/2009 when all it took was a recapitalization of the banking system to put in the lows of March of 2009. It would be one thing if this is just about mopping up the excess capacity in the tech sector, which finally helped establish the lows in the fall of 2002. Or it would be one thing if all we had to do was just wait for RTC to absorb the commercial real estate mess created by the loan crisis back in 1990-1991.
But this current situation is all about when and if the treatment or a vaccine arrives. That could take months, quarters, or years. It’s definitely not about the reopening of the economy because what is going to matter most is demand. Demand is the key. I can tell you the stock market is behaving in a way that it almost seems to be expecting a vaccine to have successfully completed all its trial phases and prove to be safe and effective by the fall. I say that because of the sort of value and stocks that have taken leadership recently, and how the market is ignoring heightened tension between the US and China, what’s happening in Hong Kong, let alone the riots and demonstrations which obviously go beyond just police brutality but also speak to the extreme income and wealth disparities. I can tell you that will emerge as the number one economic and political issue heading into the November election.
Things that a year ago would have been sending the stock market into a tailspin are now being ignored because if it’s not about the Fed at any given moment of time, then it’s all about an upcoming vaccine treatment around the corner. I also think there is a lot of excitement in the marketplace around these reopening's happening around the world and in all 50 states. The bottom line here is that the economy is still struggling. It isn’t just about reopening the economy, because what social distancing does is it impairs capacity in practically every industry, including the consumer sectors that have been rallying the most lately.
What’s going to matter most again is what demand does. The daily mobility trackers look very exciting to the bulls, and all the pictures in the media line up, but the reality is that when you go to the polls, you’ll see that most households are already saying that they have no willingness at all to go to a restaurant even if they’re opening. The reality is that restaurants with 25-50% capacity are going to go bust even after they rationalize on their space expenses. I mentioned before there was a survey I saw on 2500 households in May. Three quarters of them plan to dine less frequently than they did before, or they will just avoid restaurants altogether. Reservations are still 80% below where they were a year ago, occupancy rates in the hotel industry are up 32% from the recent lows of 21%, but the normal level pre-covid is 62%.
I also found a Chicago Fed study that was just done in the past month, it found that three quarters of firms say that the US economy is going to need at least a year to fully recover from the pandemic. I don’t think that’s priced in to the stock market right now. There were 670 respondents to the poll. Half of them told the Chicago Fed that the recovery will take between one and two years to develop. The other half was split between saying that the recovery would take less than a year, and more than two years. The conclusion of the report is that “many of the small businesses we heard from, especially those in the entertainment, tourism, recreation or restaurant/retail sectors are in danger of financial distress. Many businesses are facing very difficult challenges that are unlikely to go away quickly”. You tally up these sectors, they support thirty-two million jobs. A third of the private sector workforce. It looks to me as though half of them aren’t going to be getting their old jobs back.
I’m not sure many people understand that amusement parks, airlines, restaurants, hotels cannot stay in business at fifty percent capacity. People have to understand that for these sectors, they spend thirty percent on labor, thirty percent on rent, and thirty percent on food. They have ten percent margin. Good luck with the partial reopening, with the social distancing. All these polls basically say the same thing. It’s not going to be business as usual as the bulls try to convince you. I think the best we can hope for is a partial recovery. We have on our hands vertical doubt, economic decline, with job loss an order of magnitude higher than anything we’ve witnessed since the great depression. Even if the stock market is telling you, oh we have it all figured out, I can assure you that what we face at this very moment is a highly uncertain economic future, and unfortunately, most of the longer-term economic risks are to the downside, not the upside.
I repeat, we are in a depression. Not a recession, a depression. I didn’t say the great depression, it’s a depression. I think the dynamics of a depression are different than they are in a recession because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten within a year after they end. At a minimum, depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure initially, and a wave of bankruptcy. The markets as I see them don’t reflect the economic depression, they only reflect a V-shaped recovery which I can tell you is nothing more than pure fantasy. I think the best that will come is something L shaped or maybe backward J shaped recovery. I repeat, that’s the best case. That’s what I call a slow, jobless recovery made possible by continued and constant support from gaping fiscal deficits and central bank liquidity. With that in mind, I want to bring your attention to another report by the San Francisco Fed which does the best research by the way. A report they published in March, called Longer Run Economic Consequences of Pandemics. In a nutshell, they studied the medium to long term effects of major pandemics. Fifteen in total, dating back to the fourteenth century. The major finding was a secular shift towards greater precautionary savings. At the same time, investment demand also tends to decline and the impact of these great historical pandemics of the last millennium has been to exert lasting downward impact on the natural and neutral rate of interest. It goes down on average 150 basis points once the pandemic hits and in the decades that follow, which is maybe one reason we can’t rule out negative interest rates which is being officially discussed in the U.K. Especially when you consider the starting point of the cycle on neutral rates was a fraction of one percent. The conclusion of the San Fran Fed report was: “Following a pandemic, the natural rate of interest declines for decades thereafter, reaching its nadir about twenty years later. At about four decades later, the natural rate returns to the level it would be expected to have had the pandemic not taken place. History shows that real neutral rates can be depressed for five to ten years”. If that’s not an advertisement for physical gold, I don’t know what it is. Then we have to consider, once we get to the other side, the massive government debt we build up and how that, along with bloated central bank balance sheets, will get dealt with. Will tax policy have to change as it did to defray the cost of fighting the Great Depression. What the world looks like when the crisis ends is anyone's guess, I would say with 100% clarity it will look a lot different than it did before. Not just a question of government policy, but at the individual level with months of isolation and distancing, the fear of the return of the pandemic. Now we’re seeing the case counts rise in many of the states that have reopened. This is going to fundamentally alter lifestyles for the future. There will be a profound influence not just on the way that we live, but how we conduct ourselves and our personal and our commercial lives. For example, working from home which I’m doing now is certainly going to be a much more dominant force. Obvious negative implications for commercial real estate, the positive implications for internet infrastructure, computer hardware, video conferencing is going to be a sharp reduction from work travel in general. That tells me fewer cars on the road. There’s nothing here that’s good for the auto sector. There’s going to be some bullish things that will emerge and are emerging as we go into an era of elevated personal savings rates where people are going to focus on what they need, not what they want. It was very interesting to me behaviorally speaking to see what consumers were spending their money on in the past few months of lockdown beyond just canned food, toilet paper, and booze. Things like garden supplies, bread makers, jig-saw puzzles, anything related to ecommerce or wiring up your home to become your new office. Delivery services have become essential. Here is a budding bull market right here for any business model that copies Amazon, or Amazon itself, I should tack on Grocery Chains with online services coming out. That’s a winner. The shifting behavior that is already taking place tells me the focus on consumer staples and other areas of the market; healthcare, big tech that have become essential. Microsoft, it could be argued, has become a utility. One could argue that Amazon has become a utility. One could also argue that Google may have become a utility, and it’s apparent to me that you want to have exposure to healthcare because this clearly is an underinvested area and will without a shadow of a doubt become less regulated in the future. Then there are other ways to hedge and diversify such as REITs which have stable income. I’m particularly referencing multifamily REITs and industrial REITs benefitting from the Amazon effect. I think sustainable interest rates make your stable yields more attractive. The cap rates will remain lower for longer. I might not be bullish on the entire market, but you can surely create your own index that fits the theme I’m describing. This brings me to one of my key investment ideas in the current state of the world. Gold is a very good hedge against the instability that the extreme deflation and inflation brings. If there is deflation, interest rates will remain low or go negative, making the opportunity cost of holding gold nil. If there is inflation, gold will do well as the traditional store of value. Lastly, all the central bank alchemy has led to ever increasingly unstable markets and gold will continue to grind higher against this backdrop. Think of a future with massive public deficits, massive public debt, government intervention in the economy and regulation and a world of reduced globalization or localized supply chains and what the future holds for taxation. My belief is that globalization slows or stalls here. I think the cost savings strategy or just-in-time inventory does the same because we’ve seen in real time the importance of having important stockpiles on hand. The implications of everything I just mentioned means that for every unit of production, the global corporate cost curve goes up in a secular fashion. Since for a while we’ll still be operating with a deflationary output gap, this in turn means more compressed profit margins. This in a time when share buybacks are going to be slowing in favor of retention of caps on business balance sheets. Fed liquidity will continue to prop up the markets near term, but the fundamental picture I see is very weak outside of the specific investible themes that I’ve put in front of you. It leaves me wondering why so many people who focus on normalized earnings think that there is no impairment to the future earnings curve. Not to mention, by the way, how China’s relations with the rest of the world are going to undergo a major transformation. Not just China, but I think we can reasonably expect the rising tide of nationalism, populism, isolationism to gain more momentum globally. From a real big picture perspective, we come out of this with a world that is going to be smaller. A world that is more nationalistic, more protectionist than before. That was a trend that we already saw was in motion from the trade conflicts that started about a year and a half ago. There will be more regulations, more government intervention, and more global supply chains becoming localized. I should probably add socialism to the mix. Knowing what history has to say, what happens when the economy enters a crisis with unprecedented income and wealth disparities as I’ve mentioned earlier. In these riots and these demonstrations that we’ve been seeing, many, not most but many, initially, came from outside these cities and were not local civil rights groups. These were far left groups, meaning that these groups were using George Floyd’s death to protest an attack on their far-left agenda. I say, for the record, aided and abetted by the fed, the wealth gap just keeps getting bigger and bigger. Here we have the makings of a backlash, and I think we may well see a head after the elections in November. An Occupy Wall Street on steroids. Everyone is comparing this current situation to 1968. Maybe this isn’t a bad thing to do except for the fact that the music was a lot better back then. When you go back to learn from history, and you go back to 1968, you’ll see that we were at a real inflection point from a financial, political, economic and social perspective. From a risk standpoint, it marked the end of a fourteen-year bull market and the onset of a fourteen-year secular bear market. The latter coinciding with escalating geopolitical tensions, beggar-thy-neighbor currency policies, fed induced inflationary strategies, massive fiscal deficits, regulations, heavy government intervention in the economy, accelerated labor power, which up hinged on profit margins for years to come. In other words, and I’m going past the next year or two, this is basically maybe talking about desert as we’re still setting the plates for the appetizer. I would say that stagflation, the bitter enemy of financial assets, but the friends to real tangible assets like precious metals, and I throw real estate into the mix too, maybe not office or retail, but residential and industrial for sure. As the risk of sounding like an economics 101 professor, and this is my last thought, what I’m describing here is a future maybe just a case of looking at the forest past the trees, which I never find the stock market is very adept at. What I see in this future is an inelastic aggregate supply curve. It is going to ensure a future of cost push inflation, even with lingering weakness and aggregate demand. That might be two or three years away, but something worth putting a reminder on. That’s what stagflation is. Higher inflation, and weak economic growth. I think at some point; we’ll be dusting off the 1970s investment playbook. Either way, gold comes out a winner. It is my highest conviction call right now. If for any other reason than it is a currency with no government liability, and its production growth runs at a reliable and constant 1% annual rate. Whereas the production of money right now is running at 23% for M2 and 33% for M1, I kid you not. That has already taken out the 20% growth peaks in the 70s and 80s when we were watching Happy Days, playing Trivial Pursuit, and listening to disco music. Ed, that’s it for me. I’ll pass the baton back to you.
Thank you so much David, I would agree with you and I think the market agrees that gold is one of the assets to be considering. It’s sitting at 1720 right now and the market is boding with that even with the rally we’ve seen here in the short term. For many of you that want to get more information on David’s charts, we took the liberty to include many of his charts and topics he talked about today at the back end of this presentation. Once the presentation is over, you’ll have the ability to download it and look at his presentation deck. I’ll talk more about Rosenberg Research at the end of the call as well, and how you can be more interactive with David and his team going forward. With that, David has talked a lot about the economy, the market, gold’s role in the market. What I thought would be interesting now would be to have John Hathaway, our senior portfolio manager at Sprott Asset Management, talk about not just gold but also gold equity and how you can think about that in your portfolio today, why we’re excited about it, what it’s looking like, and how to allocate to it today. With that, here’s John Hathaway for his comments on gold and the gold equity market.
John Hathaway: Slides 6-15
Thanks a lot and thank you all for listening in today. As Ed said, I will focus on gold equities. David gave a very good foundation for why gold should do very well going forward. I would just like to add a few things from my perspective. Even though gold has been rising for the last couple of years, it is still really early in this next leg of the bull market. I’d like to call your attention to the fact that the Fed balance sheet in 2011 when gold peaked at 1900 was three trillion. Today it’s roughly seven trillion and moving possibly to ten trillion by the end of the year. Gold has not scaled the previous peak of 1900, it’s trading today around $1,700 so just based on that one metric, gold should be trading substantially higher than it is. Possibly as high as $3,000. Nobody believes that today, but I think that’s a realistic consideration. The result of all this intervention by the Fed, by the federal government, and it’s not just here, it’s in Europe and it’s also in China is that we’re going to be left with a level of debt all over the world that’s much higher in relation to GDP than any previous peak. Substantially higher. One thing we’ve learned about debt is that it is a dampener of economic growth. It also means that the likelihood of that being repaid is absolutely zilch. What it means in terms of gold, this is where I think it comes into portfolio construction, typically bonds have been the balancing mechanism for equity risk and it seems very hard for me, especially in light of what David talked about as far as the likelihood of a stagflationary environment where there would be substantial upside in bonds. In fact, there could conceivably be tremendous risk in bonds. What’s left as a portfolio stabilizer, there aren’t many options, but gold is one of them. Gold is uncorrelated with financial markets, it is a beneficiary of the money printing that’s been taking place, and I would think that as bonds become less and less of a safe haven, which is historically how they’ve been viewed, investors will look around for an alternative. That alternative, and there will be others, but gold is the big liquid portfolio risk mitigator. Bonds are vacating that space. What we have as a landscape that’s very friendly for gold and we see it at Sprott. We see some pretty strong inflows into physical metals. But by and large I would say it is still not a mainstream investment thought. I would say it’s way underrepresented in portfolios and in fact I think this is going to be the key driver of higher gold prices over the next several years. Let’s go to the next slide, it’s a reminder that gold has been a very good performing asset relative to equities and bonds for many years. It’s kind of been in a stealth bull market. As I’ve said just before, gold has yet to break out to new highs, but based on the fundamentals I think the next couple of years it’s a pretty good bet that it will. The next slide shows you that in the last couple of years, gold has outperformed mainstream equities. Again, this is without gold scaling to new highs. Even with that, I would say gold has not gained a big following. The rest of what I want to talk about is the equities and the principal thought is that if gold is going to go to new highs, gold mining equities are going to be a very dynamic way to position portfolio assets. Typically, in a bull run for the metal, the gold stocks outperform the metal by 2-3x. That’s just based on past history. The fundamentals of the gold miners are as strong as they have ever been. It’s not hard to find companies generating up to 10% free cash flow yields and I would suggest that that’s very unusual across the board in terms of other industrial sectors and other sectors of the stock market. Here we have an island of value very, very cheap and companies that are very, very healthy. We’re seeing more and more dividend hikes and share buybacks. This would be anomalous in the context of the rest of the market. Gold stocks have never been cheaper in the past many decades and here we see on Slide 11 that the ratio of gold stocks to the gold price is the lowest it’s been in decades. I would say just to normalize that relationship, taking that history, there’s a substantial uptick just in terms of valuation even without further rise in the gold price. Let’s go to the next slide, As I mentioned, the fundamentals are very positive. We’re seeing company after company report strong earnings. Again, I would say that from what I see, most sell side analysts are not pricing in the full benefit of higher gold prices into their earnings model so even though the gold stocks look relatively cheap on first sight, they’re even cheaper than that because most sell side analysts are not fully pricing in current gold prices and the possibility over the next three or four years that the gold price will rise further. Next slide. Here are a few slides on gold stocks relative to other mainstream equities. We can see that on valuation, and I’ve already mentioned this, that gold stocks are trading at a discount to a standard mix of S&P names just in terms of price to EBITDA. They are healthy financially, the bottom panel on this slide shows how healthy they are relative to S&P. Lastly, they are much more solvent with a very healthy debt to EBITDA ratio compared to the rest of the market. Now let me just say that mid and smaller cap stocks are even cheaper than large cap stocks. Small and mid cap stocks represent tremendous bargains and that’s how we’ve positioned our portfolios. Skewing them to the mid and small cap names in the gold space. Lastly, gold stocks have outperformed the FANG stocks, which might come as a surprise to most people. Here we’re talking about the large cap names which have done very well. Last thought here, the gold universe of mining stocks is tiny. It’s about 260 billion. If you look at that compared to FANG stocks, it’s a fraction of that. It would only be a small shift of allocation by portfolio managers to gold mining stocks to drive them substantially higher. I would end on that note and pass it back to Ed for further questions.
Ed Coyne: Slides 16-19
Thank you John, so before we go into the Q&A session, there are two points that I want to make with regards to our speakers today. As I mentioned earlier, David Rosenberg and Rosenberg research was kind enough to join us today and for those that like what he had to say or want to learn more about how to learn how to work directly with David, they have been kind enough to offer all of our listeners here a one month free trial. If you look at Page 17 you will see a link for access to a free trial to Rosenberg Research. In addition, if you have further questions or interests on how to work more directly with David and his team, you can reach directly out to Marcel Aulls and his email address is on this page too. We use David personally for a lot of our research, we like working with him and I think many of you in the advisor and brokerage community may find it useful as well so I encourage you to try a one month free trial of that. As we go further into the presentation, before we go into the Q&A session I do want to touch on a few things that make Sprott very unique. As I mentioned at the beginning of the presentation, we are really a leader in the physical side of the market. When I say physical side, we have very unique closed end trusts that allow investors to physically own the metal directly in a very liquid, unencumbered, direct way. For those that want to own a combination of both gold and silver, we offer the Sprott Physical Gold and Silver Trust with the ticker symbol CEF on the NYSE. For those that want to purely have an allocation to gold like David Rosenberg suggested, PHYS would be a very direct and liquid way to get allocation to the physical gold and actually own it yourself. For those that want to take advantage of the silver opportunities out there, PSLV is a great opportunity to allocate in silver. For those looking at the platinum and palladium market, SPPP is another trust that we offer to give you direct exposure. We also have three equity options out there for you. We have two factor based ETFs, one in the large cap senior mining space, SGDM. We also have SGDJ which is our junior mining ETF. On the active side, with John and his team and Doug Groh, we have the SGDLX and we actually have two share classes. We have a share class that provides a 12B1 fee, and an institutional class with no 12B1 fee. Depending on how you currently allocate your capital and build your book, you have two options there. We would love to work directly with you and all of your clients. We have the United States broken up into three major territories. You can see Matt, Julia and Sergio based on where all of our listeners are coming in from today. I encourage you to reach out to them in their respective territories to learn more about how Sprott can be your alternative into the gold and precious metals space. With that, I’d like to turn it over to Natalie for a few housekeeping items before we go into the Q&A session, which, by the way, we have 97 questions. Maybe a record for all the webcasts I’ve done over the last couple of years. We will get to many of those but we will also follow up via email and direct phone calls if your question is not answered. Thank you for your support. Natalie.
Great. Thank you all for such an informative presentation. As a reminder, a copy of today’s presentation as well as additional material can be found in the documents folder at the bottom of your screen. We appreciate your feedback, please take a moment to fill out our survey also located at the bottom of your screen. Our speakers will be taking advisor questions. Please type your question in the box to the right of the slides and we’ll get to as many of your questions as possible. In the event your question is not answered during today's webcast, a member of the Sprott Asset Management team will reach out to you directly. If you’d like to have a conversation to further discuss the ideas that were covered today, please click the One-On-One folder at the bottom of your screen and confirm your request. With that, I’ll hand it back to Ed for our first question.
Question and Answer Section
Ed Coyne Q&A
Thank you, Natalie, the first one I think is best served for David. It really comes down to employment. David, the question is, do you anticipate a further setback to the recovery as major corporations release early retirees and others who take special separation packages going into July, August and September. What might that look like?
David Rosenberg Q&A
There is a risk that we do fall off a fiscal cliff. I think primarily if these jobless benefits don’t get extended again and if the state and local governments don’t get some relief in the next fiscal package which is getting resistance by the Republicans in the Senate then the biggest risk is actually the state and local governments who have been laying off people in that Friday payroll report. As other people went to work, they were still letting people go in the state and local governing area and so they are running a collective shortfall of something like 650 billion dollars and they’re not permitted to run deficits. I actually think that’s the overriding risk. The next one is what I said before, the big risk outside of the fiscal cliff is that demand doesn’t come back in any great extent with the reopening phase. As I said before, companies that can’t operate at any less than 75% capacity, they’re going to be shut down. Look, of course there’s ongoing health risks as we’re already seeing by reopening as early as we did, but I’d say that if we’re looking forward, the risk is at the end of the summer.
Ed Coyne Q&A
Thank you David, this one is for both you and John. Part one is for you David and part two is for John. You mentioned earlier about the L shaped versus V shaped. It seems like we’ve all experienced in the last couple months a pretty severe V shaped recovery. I know you touched on that a bit, but can you give us a little more sense behind why that’s happening. The question is basically just, why? Could you give a little more color on that?
David Rosenberg Q&A
How am I supposed to give color on a question that’s telling me we have a V shaped recovery when I just said in the second quarter than GDP is going to be negative 50 percent. How are we getting a V? The stock market is in a V, the same stock market that didn’t see the pandemic. When was the first U.S case. It was in January. The market didn’t peak till the middle of February. The stock market is breathing in fumes from the Fed and it might be pricing in a V shaped recovery. I’ll be the first to tell you, if we get a vaccine, we will get a huge V shaped recovery. The market is pricing that in. As I said before, you can open up the supply side of the economy. You can bring the horse to water, it doesn’t mean it’s going to drink. That’s what’s happening in China right now. They’ve reopened the economy; demand hasn’t come back. That’s why if you look at the inflation numbers in China, they’re going down because there’s a supply demand imbalance. That’s the big risk. That even with a vaccine people will be very slow to re-engage in the economy even as businesses open back up. Then they’ll be forced to close because they will be incurring a net loss. Here’s the reality: no vaccine, no V.
Ed Coyne Q&A
That would be, maybe, the slogan of the year. John this would be a good one for you to grasp. Some of the well-known investors out there have publicly talked about this, we’ve seen it in many white papers and so forth. This is maybe a bit of a self-serving question on our side, but this came in from one of our listeners. They see this as the best macro environment for both gold and silver as well as miners that they’ve experienced in the last two or three decades. I know you touched on that a bit, but could you give us a little more color on that? Is it gold, silver, gold miners, silver miners? Given the landscape we have today, what type of macro environment should we expect and what opportunities are you seeing as a long time gold investor?
John Hathaway Q&A
For the macro environment, which we discussed at length, gold fits in very well. With very low interest rates, with the possibility of inflation or stagflation over the next three to five years, one should have a reasonable allocation to precious metals. It’s amazing to me that all these luminaries such as Seth Klarman, Ray Dalio, Paul Singer, that so few people have really acted on this investment idea. I think it’s partly because mainstream thinking and gold just don’t mix. Somehow, an allocation to gold is seen to undermine the investment thesis behind most mainstream investing. That’s not necessarily the case, but I think that’s one of the great barriers. I would say, and we really don’t know where we’re headed, but what we do know is that we’re in unprecedented times and we’re going to end up with a lot more debt than we ever had. Bonds are not going to be a safe investment as they have been taught to have been. Something has to replace bonds. That would be an allocation to gold. For anyone who agrees with that basic view and wants a more dynamic exposure, some portion of that gold allocation should be in gold mining stocks which as I mentioned earlier outperform a given move in the gold price by 2-3x. Silver is gold on steroids, one could make a case that silver has been very depressed relative to gold. The ratio of silver to gold is the widest it’s been in the last 30 or 40 years. Silver is a monetary metal same as gold. To the extent that gold gets a bid for the reasons we’ve talked about, it’s very hard to imagine that silver wouldn’t also catch a bid and quite possibly outperform whatever move in gold by a substantial amount.
Ed Coyne Q&A
Thank you, that just knocked out about six questions. One follow-up question on that was: Within your gold allocation, from a percentage term, how would you view your split between physical versus equity? How would you in general view that split?
John Hathaway Q&A
Let’s remember that gold is a very safe asset. I would say for investors that are very risk averse, most of that allocation should be to physical metal. On the other hand, for those who see the landscape that we’ve been talking about as an investment opportunity and want to maximize returns from it, I would weigh the exposure towards mining stocks. They will give you much more bang for the buck. Again, I think it just comes down to where each investor is coming from. Whether they’re risk tolerant or risk averse.
Ed Coyne Q&A
Perfect, thank you. David, this is good one for you: The Markets were at historic highs a few months ago and recovered quite significantly from the downturn. Without the virus, it seems like none of your predictions would be realized. Could you please comment on that?
David Rosenberg Q&A
Look, I think we have to go back to last year where we actually had recessions in many key components of GDP. We had a recession in capital spending, we had a recession in commercial construction, we had a recession in productivity and we had a significant recession in profits. What we then needed, to save 2019, was three Fed rate cuts. If you remember, at the end of 2018 we were supposed to see the Fed normalize interest rates and hike three times. J Powell cut rates three times, then by October he’s re-spending the Feds balance sheet to paper over the problems in the repo market. The market that had positive return, most of it took place in last year's fourth quarter when once again all the central bank machinations were taking place. I feel I was right on the fundamentals. Probably not right on the liquidity story, but as far as this year is concerned, remember what the NBER told us yesterday. I mentioned this before, the recession started in February. It didn’t start in April, or March. It started in February before the pandemic really hit. The decay was so evident in industrial production, in real retail sales, in real capital spending orders, they had all turned negative on a three-month basis heading into February. That’s why the recession was dated in February. I just want to make this other point, again, looking at the big picture. We have gone from what used to be, in the days of productivity led growth, when I started in the business in the mid 80s, we used to have real economy that used the markets as the source by which to form capital. We formed that to a financial economy that manipulates to create fake wealth. We have all these bobble head stock promoters who just love it. Just imagine a system we have, where stimulus checks are being used to open up commission free stock accounts to trade. Now come and tell me if that creates durable wealth, productivity fueled income growth, and sustainable value added employment. Not so sure it does. We have a huge disconnect here that we’ve had for a long time and became exposed in this pandemic. Who thought that a health crisis would morph into an economic crisis, of course! Companies were forced to shut down. But I don’t remember anyone telling me in February or March that the Fed was going to have to go into the high yield bond market. I don’t remember anyone telling me a few months ago that the Fed was going to aggressively ease policy by a factor of tenfold, but it did, in the Great Recession of 08 and 09. That’s because we went into the situation tremendously overlevered at every single level of society. Government, households, and especially businesses. Once again we have a cycle of debt accumulation and asset inflation that gets exposed by an external shock. Next thing you know, we need even more gargantuan intrusion and involvement by the central bank to create the solution of an equity wealth effect. I think that’s the situation we have on our hands right now. No Country for Old Fundamentals.
Ed Coyne Q&A
Right. You know, we’re at the top of the hour and I do want to close with maybe one more. We’re actually at 112 questions which is surprising so we’ve got a bit of follow up to do here. I’m going through some of the other questions and one that might apply to many people on this call that are thinking about how to allocate new capital. Can maybe both of you comment on the directional move in the dollar and interest rates being lower for longer and what that means for the overall economy and bonds? Lastly, the question is: What are appropriate replacements for bonds for an investor looking for income.
John Hathaway Q&A
I think most of that is for David. David why don’t you take the dollar and bonds question.
David Rosenberg Q&A
I’m bearish on currencies. All fiat currencies that are being printed by central banks have become financing arms of government. The U.S dollar just might range trade. The only currency whose production is stable and is constant and certain is gold. It’s the only currency I like, so I can’t comment. I guess we can sit and talk about the euro against the dollar or CAD against the dollar, but I think it’s just going to be in a holding pattern. I’m bearish on all currencies because every country shares the same affliction. I’ll just say that I do like bonds, because bonds, like gold, have that inverse correlation with equities. It’s a different form of diversification. I like both. I’ve been talking in my reports about the bond bullion barbell for a long time and it’s delivered a thirty percent return in the past years. I will say that I still like treasuries for the deflation head as much as I like gold for the inflation hedge. I will just say that both are insurance policies against things going wrong. That’s what I would say, and the one characteristic about treasuries is that unlike other bonds, there is no default risk. We can talk about duration risk or rate risk, we can talk about inflation risk which is true, but you don’t have capital risk. The one thing I do value about treasuries, irrespective of the yield, is that there is no other security where you know you’re getting paid at the end of the maturity. That’s something to keep in the back of your mind. There’s no default risk, you know you’re getting paid at the end of the day.
John Hathaway Q&A
The only thing I would say to that, and I do agree that sovereign debt is still a safe asset, but the real question is: you’re going to get repaid, but what’s the value of the currency that you’re getting repaid in. Especially if it’s a long dated instrument. I can see the argument for possibly bonds appreciating but here we are very close to the zero bound and I’m not sure what the upside in bonds would be once the thirty year gets close to 0. Why would you have a big allocation to that? That is my reservation to the same allocation to bonds that we have seen historically.
David Rosenberg Q&A
I would tend to agree with you John. I'll just add that bond yields just hit record lows, the equity market has gone back to record highs, you look at relative value and gold is still not at the high it was at nine years ago. There’s lots of catching up. I would say that gold is my primary strategy right now.
Ed Coyne Q&A
Sounds like gold is the ultimate trade right now. David and John, thank you so much for taking the time out today. Hopefully everyone on this webcast found it insightful. I encourage you, again, to reach out to Rosenberg Research directly to see how you can work more directly and closely with David and his team. As well as reach out to our senior investment consultants at Sprott to learn more about how we can advise you on how to allocate to both the physical market and the equity market.
Thank you all again for your time today and we wish you much luck and safety going into the summer. All the best.
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