Rick Rule: Systemic Shock Will Kill Sucker Rally
Posted By thestatedtruth.com on March 13, 2010
Source: TGRÂ Â 03/12/2010
 Charismatic, articulate, contrary and persuasive, Rick Rule probably could draw an audience if he were talking about the weather. But combine his presence with character, knowledge, understanding, experience and a track record of success, particularly in the resource arena, and the crowd falls silent. People listen to what Rick has to say and, as they have for years, look to him for guidance. Founder and chairman of Global Resource Investments, Rick recently made himself available for a brain-drain, and shared his insights on the direction of precious metals.
Economic Indicators
Lest you think the rallying stock market serves as a leading indicator that good times will soon roll again, along comes Rick Rule to rain on your parade. “The greatest bull market in history, beginning in 1982,” he says, has trained people “to believe things will do well and get better”—training he considers lethal—and conditioned them to “buy the dips.” Furthermore, he adds, “The amount of liquidity being injected into the system is truly spectacular. . .A lot of the stock market rally has been liquidity-driven.” Interestingly, he notes, that liquidity is short term; while banks are still avoiding long loans that they can’t resell to the federal government, Rick sees plenty of short-term money, lots of margin, ample lending to hedge funds, capital markets firms and individual investors.
He considers the markets “seriously overvalued,” with the economy in no condition to support the capitalization rates, but expects the rally to continue on the basis of those two reasons plus the gradual thawing of bank credit for merger and acquisition activity.
Bottom line, though, Rick calls it “a bear market trap, a real sucker rally. . .driven by liquidity rather than valuation. And when the inevitable shock to liquidity hits—from additional foreclosures, a collapse in commercial real estate, implosion of municipal markets or wherever)—this bull market will be over in a tremendous hurry. He sees a variety of potential catalysts that could take this market down. There’s no way of knowing when it will happen and how bad it will be, but he compares the likelihood of it happening to walking through a minefield. The odds are you’ll step on a mine and it will explode. “This is a minefield that it would be helpful if you were extremely drunk to stagger through. I do not like the probability of us getting through this without a couple more ugly, ugly, ugly shocks. The idea that we’re going to get through this unscathed just doesn’t make any sense.”
What could go wrong? Leveraged buyout loans in a weak economy. Additional reset loans in the residential market. Commercial real estate lending and commercial real estate capitalization rates. Municipal bond markets. Fundamentally, over the next 12 months Rick says, “I think we’re due for extraordinary volatility—volatility with a downward bias in equities markets in general.”
Make Volatility Your Ally
The extraordinary volatility he foresees in the equity markets might scare some investors away, but he argues, “Volatility’s good if you use it as opposed to being used by it. It allows you to pick up assets on the cheap. I don’t try to mitigate volatility. I think volatility is a tool. I try to enhance it. I have learned to react with absolute delight when a stock I think is worth a dollar falls to 50 cents. I buy the hell out of it at 50 cents. I seek to profit from volatility rather than to guard against it.”
Rum to Treat Tequila Hangover
One big reason that Rick is waiting for another shock (or shocks) to the system is that he sees “the entire set of circumstances that led us into the crash 18 months ago is before us again. . .None of the underlying causes of the problem have been dealt with at all. We had a balance sheet problem; as a society we’d lived beyond our means and our liabilities exceeded our assets both in short and long term. As a society, we’ve decided to spend more and borrow more. We had too much collective debt, so we took debt from $2 trillion to $9 trillion. We’ve exacerbated the problem. It reminds me of a mathematical truism—you cannot add a column of negative numbers and get to a positive. That’s not the way it works. This is the equivalent of us as a bunch of college students trying to cure a tequila hangover by switching to rum.”
Speaking of mathematical truisms, Rick referred to the “cashless earnings” recently reported by a major financial institution. Though he’s much smarter than the average bear, Rick confesses that he has “a very difficult time understanding the concept ‘cashless earnings,’ but the idea that people are excited about it from a bank whose assets are largely ephemeral and whose deposit liabilities people believe are real—that seems very, very problematic.”
The idea of ephemeral assets leads to the topic of the U.S. dollar. Isn’t its recent strength an encouraging sign? Rick repeats a wisecrack he hears (and makes): “The dollar is in fact the worse currency in the world except all the others.” He also alludes to Doug Casey’s description of the dollar: “IOU Nothing” (and the Euro “Who Owes You Nothing”). As Rick sees it, “currency crises in the last couple of years have always been kicked off by the dollar because people understand its counterfeit nature. For example, if one measure of value is scarcity, they’ve made the dollar substantially less scarce in the last 18 months by printing so many of them. But so has everyone else. The race to the bottom in the context of the debasement of currencies is a hotly competitive arena. . .the descent will be gradual but punctuated by air pockets. I can’t tell you when we’ll hit dollar or euro or yuan or peso air pockets, but I guarantee it won’t be pleasant on the way down.”
When it comes to the debate about whether the current environment is inflationary or deflationary, he thinks the coin falls in favor of inflation. “From a traditional economic viewpoint, you’d have to say the circumstances are deflationary. We are in the midst of a balance sheet recession. We have lived beyond our means and can’t service our debts. The normal way to get out of that would be to stop consuming, start earning, paying down debt, defaults and foreclosures—that’s clearly deflationary.”
The Yield-to-Politician Factor
But ours is a political economy, he argues, and therefore “If you look at inflation-versus-deflation in yield-to-politician (which is what matters), you find a politician has no yield whatever from deflation. A politician who presides over foreclosures and unemployment will get kicked out of office.”
Against this rather bleak backdrop, what does Rick foresee for the resources sector? “I think resources are going to be mixed,” he says. “In the first instance, I do think we’re going to have trouble in the broad stock market, and in the near term at least resource stocks are stocks. When liquidity is drawn out of the market, either intentionally or as a consequence of hitting an iceberg, there’s no mercy. When speculators have to sell, they sell what they can, not necessarily what they want to.
For the full article, go to http://www.theaureport.com/pub/na/5818
Comments