Top Three Videos – July 11 2023

Quick Summary Bullets:

Volatility and Risk in Investing

• Rick Rule predicts that the next 10 years will be much less benign and investors will face volatility that they haven’t experienced before.
• Underinvestment in the oil and gas industries, like in Mexico and Venezuela, due to politically expedient domestic spending programs, will lead to higher oil prices for longer.
• The next 10 years are going to be much less benign than the last 40, with increased risk and volatility that most investors haven’t experienced.
• The decline in interest rates over the past 10 years allowed investors to borrow money at cheap rates, increasing their return on capital employed, but this period is now over and people will have to adapt to more challenging circumstances.
• The equity markets may be pricing in a recession, but the one sector that appears to be bulletproof due to its 40 years of performance is Big Tech.
• “Having cash when nobody else has any sometimes gives you the courage when nobody else has any so that you can take advantage of a liquidity squeeze rather than being taken advantage of by it.”
• Rick Rule emphasizes the importance of organizing one’s portfolio to be comfortable in a broad range of circumstances, rather than trying to predict the future with perfect clarity.

Impact of Technology and Problem-Solving

• The Malthusian theory of running out of resources fails to consider the impact of technology, trade, and human problem-solving capabilities, which have led to increased material well-being and richness over time.
• “I believe that if the copper price went from three dollars and fifty cents a pound to ten dollars a pound in real terms, consumers would conserve and producers would find a way to make more and that markets would in fact work.” – Rick Rule
• The lifting up of the bottom third of humankind is the greatest challenge that Humanity faces and the area of greatest promise for natural resources.
• “Not in the next 40 years, could we transition to alternative sources of energy without harming the consumer through underinvestment of the oil and gas sectors.”

Importance of Data and Facts in Decision-Making

• Contrarian point of view that is more arithmetically oriented than narrative oriented, emphasizing the importance of looking at data and facts rather than popular opinions.
• The paradox that our individual creativity and tenacity has been enough to finance our collective stupidity is something that scares me on a going forward basis.
• “I’m being asked to give the U.S government money in the U.S 10-year treasury, and they proposed to pay me something like four percent in a currency where I believe my purchasing power is decreasing by eight percent.”
• “My preference would be that the government didn’t attempt to set interest rates that they allowed the market to set interest rates because I think that markets work they’re messy and they don’t lead to outcomes that many people particularly the less successful people want.”

Transcript Summary:

• 00:00 Brace for increased risk and volatility in the next 10 years, as underinvestment in industries like oil and copper may lead to shortages and higher prices, while the market share of fossil fuels is expected to decrease further as investment in alternative energies grows.
  • The next 10 years will be less benign than the last 40, with increased risk and volatility that most investors haven’t experienced.
  • Rick Rule believes that the idea of running out of resources is unlikely in the near future due to technological advancements and the problem-solving capabilities of humanity, but predicts that there may be spot shortages of raw materials in the next few years due to underinvestment.
  • Markets will adjust and work efficiently in response to changes in commodity prices, such as copper and oil, despite predictions of peak oil demand in 2032.
  • The underinvestment in the oil, copper, and zinc industries, due to political and economic factors, will lead to higher oil prices and hinder the development of valuable copper deposits.
  • A global recession could lead to supply shortages and price increases, as sustaining capital investment may decrease and geopolitical tensions may restrict access to supplies.
  • Investment and consumption are being politically constrained, potentially exacerbating supply issues, but despite investing almost $5 trillion in alternative energies over 40 years, the market share of fossil fuels has only decreased by 1%, indicating that while markets work, they are messy and take time; however, the speaker expects the investment in alternatives to grow substantially in the next 30 years as the world will need more energy from various sources.
• 08:26 Investors should brace for volatility in the natural resources market due to the growing global demand for key metals, China’s urbanization, and competition from other developing countries, while also considering solvency issues and the well-being of humanity.
  • The world is growing and providing for the material needs of humanity is an important consideration, with a focus on the shortage of certain key metals and a contrarian, arithmetically oriented point of view on the market share of fossil fuels.
  • Investors in natural resources should consider the volatility and changes in the market over the past 20 years, particularly in relation to China’s urbanization and emergence.
  • China’s increasing wealth and competition from the West has led to a need for other countries like India, Indonesia, Nigeria, and Ethiopia to also improve their citizens’ well-being, which presents both a challenge and opportunity for natural resources.
  • The speaker suggests that solvency will be a key issue in the future, as the world’s Reserve currency holders have a large amount of liabilities and a deficit budget.
  • Humanity and solvency are important factors for investors, as the well-being of the bottom third of humanity needs to be considered and there is concern about the collective stupidity that has been financed so far.
• 14:50 Brace for increased risk and volatility in the next 10 years as economic growth slows down and interest rates rise, posing challenges for investors who need to adapt their strategies; however, higher interest rates could present opportunities for higher yields if accompanied by a stable currency.
  • The next 10 years will be less benign than the last 40, with increased risk and volatility that most investors have not experienced before.
  • Economic growth is expected to slow down due to the rise in nominal interest rates, which will make borrowing more expensive and pose challenges for investors.
  • The banking industry’s reliance on declining interest rates and short-term borrowing has led to negative consequences when interest rates rise, highlighting the need for investors to adapt their strategies in the face of changing market conditions.
  • Rule believes that many constituents in society, including banks, government, voters, savers, and borrowers, are unprepared for the potential volatility and higher interest rates, but if higher interest rates are not accompanied by a faster deterioration in the currency, it could present opportunities for investors to save more and potentially see higher yields.
  • The Consumer Price Index is a fraudulent measure of inflation as it includes hedonistic adjustments and excludes food and fuel costs.
  • Rule discusses the impact of government costs and taxes on purchasing power, and expresses concern about investing in US treasury bonds due to the potential decrease in purchasing power, while also acknowledging that deflation can have different effects depending on one’s financial situation.
• 23:26 The inverted yield curve suggests a recession, but the equity markets, except for Big Tech, are not reflecting the same level of worry, indicating a lack of breadth in the market.
  • Rule discusses the stability of long-term treasury yields and the implications for the economy.
  • The credit and treasury markets are indicating a recession, with the inverted yield curve in the bond market suggesting investors should be concerned, while the equity markets are not reflecting the same level of worry.
  • Equity markets, except for Big Tech, have shown lackluster performance despite positive economic news and earnings growth, possibly indicating a recession, but Big Tech remains strong due to its consistent performance over the past 40 years.
  • The increase in the US indexes is primarily driven by 10 big tech stocks, indicating a lack of breadth in the market.
  • The FED is concerned about inflation and believes that increasing interest rates will be necessary to control it, despite the questionable accuracy of the core pce number.
• 28:41 Increasing interest rates will impact the long bond market, portfolio distributions won’t keep up with inflation, short-term gains may overshadow long-term pain, commodities collapsing may signal lower inflation but recession response would likely be inflationary, cash position is important during recessions, focus on investing in large stable companies and smaller companies for potential advantage.
  • Increasing interest rates will have a devastating impact on the long bond market, causing the value of long bonds to decrease and creating financial challenges for institutions with significant investments in these bonds.
  • The real purchasing power of portfolio distributions will not keep pace with inflation, posing a challenge for portfolio managers.
  • There may be a mismatch between short-term and long-term mandates for investors, as many professionals prioritize short-term gain over long-term pain, and the equities rally may be influenced by mandates rather than expectations.
  • The collapse of certain commodities may signal lower inflation ahead, but the policy response to a recession would likely be highly inflationary, as every economic hiccup in recent years has resulted in increased quantitative easing and decreased interest rates.
  • Maintaining a cash position is important during recessions as it provides the opportunity to take advantage of liquidity squeezes and reduces the risk of being taken advantage of, and investing in sectors of expertise rather than speculative asset classes is preferred to avoid fear of missing out.
  • Investors should focus on investing in both large, stable companies for market data and dividends, as well as smaller companies for potential competitive advantage and understanding, in order to navigate uncertain economic circumstances.
• 36:46 The lack of investment in the oil industry and the failure to understand the business case for Canadian Natural Gas exports are contributing to potential triple-digit volatility in the market, while politicians’ actions and skepticism towards the wealthy are impacting the price of gasoline and hindering the transition to alternative energy sources.
  • The lack of sustaining capital investment in the oil industry worldwide and the failure to understand the business case of exporting Canadian Natural Gas are contributing factors to the potential triple-digit volatility in the market.
  • The price of gasoline is being affected by politicians’ actions, which are discouraging investment in the oil industry and constraining its growth.
  • There is a need for politicians to address the cost of living and the transition to alternative energy sources, as well as the skepticism towards the wealthy advocating for driving less while taking private jets, but it is unlikely that the energy industry can transition without harming consumers through underinvestment in oil and gas sectors in the next 40 years, and individuals in developing countries are more concerned with improving their own lifestyles than meeting the aspirations of others.
  • Rule discusses the carbon debate and the perspective of poor people in emerging markets, who believe that carbon emissions should be measured on a per capita basis and that developed markets should bear the cost of reducing carbon emissions.
  • Investors should consider the time value of money and technology when evaluating the feasibility of renewable energy sources, and the speaker offers to rank and provide comments on natural resource portfolios.
  • Rick Rule is starting a new bank and is offering to help rank natural resource stocks, with a focus on not dealing with text, pot, or crypto stocks.
• 44:22 Rick Rule is starting a bank to look after the interests of depositors and borrowers, focusing on precious metals as collateral for lending, aiming to compete with big banks and excel in specific market segments.
  • Rick Rule is starting a bank because he loves the banking industry and believes in looking after the interests of depositors and borrowers.
  • Maintain a diversified portfolio, avoid excessive leverage, and focus on precious metals as collateral for lending.
  • Rule discusses their entrepreneurial mindset and desire to fill a market gap, expressing their intention to compete with big banks and excel in a specific market segment.
  • Apple’s high-yield savings account is a narrow banking solution, but the speaker believes that their value proposition is different as they aim to service specific niches and offer lending options against industries with greater spreads.
• 48:38 Most investors are actually wild speculators who own too many stocks, but owning the best companies in a sector and diversifying can lower risk and be more profitable than investing in ETFs.
  • Most investors own too many stocks and consider themselves cautious, but they are actually wild speculators.
  • Investors are more speculatively inclined and less contrarian than they realize, as evidenced by their interest in microcap names and the inclusion of popular resources like lithium in their portfolios.
  • Speculation can be profitable but most people own too many stocks to effectively follow, and ETFs can be a convenient option for investors who believe in market beta and don’t have time to study individual stocks.
  • Owning the best companies in a sector lowers the risk of single company failures, making it preferable to paying a fee for an ETF that includes stocks one wouldn’t otherwise own.
  • Diversification is important because it provides a hedge in case you are wrong about a stock, and many people own too many stocks relative to the time and effort they spend on them.