Mike Maroney Interviews Investment Performance Institute's Stuart Veale - April 2014
Stuart Veale and Mike Maroney
Portfolio strategist Stuart Veale discusses why it is so important for today's investors to diversify their assets and offers his advice on when and how to incorporate precious metals into a modern and strategic investment portfolio.
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Mike Maroney: Good Morning! It’s Tuesday, April 29, and I’m here today with Stu Veale the author on an incredible book Alternative Investments. A matter of fact, if you’re interested in receiving a copy you might want to give us a call here at Monex. So we can share with you this breakdown on how you can diversify with alternative investments. Obviously, one of those alternative investments that Stu speaks about is the precious metals market.
Now, we’re on the eve of potentially seeing the third taper by the Fed. Interest rates are still at historic lows, but let’s find out what Stu feels about this potential announcement tomorrow.
Stu, if the Fed tapers, which is fully expected, some people think maybe the stock market sells off a little bit, maybe precious metals sell off a little bit, what do you think?
Stu Veale: Well again because it’s fully expected, I think, it’s already fully priced into the market, as long as the Fed doesn’t taper more than what’s expected, more than the ten billion that’s expected; it’s fully built in, there’s no surprise there, it’s fully priced in. So, I’m not expecting any reaction unless they suddenly go to twenty billion, which is very, very unlikely or announce they are going to reduce their tapering, but none of those seem very likely. So, I think it’s actually going to be a non-event as far as the markets are concerned.
Mike Maroney: How interesting, because a lot of people obviously are factoring in that they’re going to be steady, ten billion at a time, but the amazing thing is that everyone thought that once they started to taper and the U.S. economy was getting a little bit better that the dollar would do better, but the dollar is stuck below eighty, why?
Stu Veale: Well, the dollar is stuck below eighty because we are still looking at more than seventeen trillion dollars in debt. We’re still adding record amounts to the debt historically. I mean, the fact that we’re adding a little bit less is kind of like saying, “Last week I lost my arm, this week I only lost a hand.” It’s still bad. Even the most conservative Senators and Congressmen, aren’t talking any more about balancing the budget or running a budget surplus. The only conversation we’re having is, At what rate will the debt increase ad infinitum? We’ve reached the point where there’s only three ways to deal with our debt. You could raise taxes and that would cripple the economy. You can cut spending and that’s never going to happen in Washington. In fact, Washington’s expenses are going to grow tremendously as this wave of Federal employees that we are about to retire retire. They’ve been promised life-time benefits, not a single dollar has been set aside to pay for it. So that will all come out of current accounts and then of course they’ll hire new people to replace them. So the cost of government is simply going to explode in the future. If you can’t raise taxes and you can’t cut spending, the only you’ve got left with is printing money. So this is just a lull before the storm. The only way we’re going to get out of this is what every civilization in history has done when they’ve gotten into debt over their heads; they print their way out of it. The dollar will decline dramatically over the long term. Now, right now, we’ve got the least ugly girl at the dance, because of what’s going on in the Ukraine and what’s going on with China being so aggressive in Asia. There are a lot of people who are looking at the dollar relative to their own currencies and they’re saying, “It’s better than what I have,” but they really should be looking in a different direction. They should be looking for other currency that’s worked for ten thousand years as opposed to one that has worked for two hundred.
Mike Maroney: So, if you look out on the horizon and I know you’ve been quoted as saying, “Fiat currency always becomes worth less, worth less, and eventually worthless, historic precedent” and obviously the dollar is teetering right on the edge of key support down around seventy-nine, but if you look three, four, five years out, where could you see the dollar? Could you see the dollar down twenty, thirty, forty percent from where it is today?
Stu Veale: The government inflation figures are of course ridiculous. Anyone who thinks that we’re really having two or three percent inflation hasn’t been to a supermaket lately. The real rate of inflation is more like six or seven percent and I think it’s going to then escalate from there. We’re not that far away, we’re two or three years away from double digit inflation. The last time we got into a hole like this Paul Volcker was Fed Chairman and Paul Volcker basically saved the dollar, because he basically had the Feds sell off those securities that reduced the dollars, but the trade off for that was interest rates went up to sixteen, seventeen percent. That option today is off the table, because when you have by then twenty trillion dollars in debt, if you’re talking about a sixteen percent interest rate, you’re looking at $3.2 trillion just in debt service. That’s about the size of the Federal budget, so 100% of our taxes would just go to pay the interest. You couldn’t pay your army. You couldn’t pay anything else. So realistically, they’re going to have to-- the only solution is to print money. This really isn’t a financial issue at this point. It’s a human nature issue. Human nature is consistent; it never changes over time, especially for politicians. They want to provide benefits and that gets them votes, they want to keep taxes low and that gets them votes, and the least costly to them is to just print money. It’s not just an alternative form of taxation, but it’s hidden. Another reality is most people don’t understand it. And the scary part of right now is that again we’re in this lull before the storm. President Obama has been a tremendous beneficiary of the fact that as interest rates declined the cost of servicing our debt has gone down, while the amount of debt has gone up. So we really haven’t experienced any pain from adding the trillions of dollars of debt that the stimulus program put on, but when interest rates go back up that pain is going to become absolutely excrutiating. That’s when I think we’re going to see some real social unrest, you’re really going to see some dramatic cuts in social programs, you’re going to see Draconian rises in tax rates, and then people are going to realize we’re in a hole so deep there’s simply no way out.
Mike Maroney: If mathematics is an absolute certainty and when we look at the overall equation based on debt, based on unfunded liabilities, how can we not see what sits out on the horizon or is it just that we’re afraid to believe what’s coming? Do you really think that’s possible?
Stu Veale: Yeah, I mean, there’s a whole field of psychology that talks about mass delusion and crowds; when something is so terrible you just don’t conceive of it. I mean, you go back to the, I hate to use the example, but the Jews in Germany. I mean, they could see it coming and yet they kept going with the sense of denial, because it was so terrible they couldn’t believe it until it was too late. We’re just in that case of absolute mass denial. Now again, so much of our population -- the dollar has been so strong and so stable, and the U.S. has been the dominant country, and we’ve had the dominant currency, we’ve had so many advantages for so long, that it’s unconceivable to us that-- that would change, but of course that used to be Britain. Britain, the sun never set on the British Empire. The British pound plays the role that the U.S. dollar plays today and it went by the wayside and we will -- ours will as well. It’s only a matter of time.
Mike Maroney: I guess they talk a little bit about history; they talk about Holland, they talk about France, they talk about Britain, they talk about Spain and the United States. It seems as if all countries had about an eighty to a hundred year run and then what inevitably happens is government spends themselves into oblivion and then they have to go through a major pullback and re-establish themselves maybe three or four hundred years down the road. Is there an event sitting out on the horizon, a catalyst that suddenly awakens everyone to the fact that, I need to own some precious metals at these price levels?
Stu Veale: Well the problem is that this is a slow decay that’s insidious. It’s an old joke about the boiled frog. If you throw a frog into a pot of boiling water, it of course knows it’s really hot and hops out. If you throw a frog into a pot of luke warm water and raise the temperature slowly, the frog cooks. It’s not really true, but it’s a good analogy for what happens. If every year just gets a little bit worse, a little bit worse, a little bit worse, there really isn’t that trigger.
Eventually, when that trigger does come, it’s going to be too late. So like everything else, you want to buy low and sell high. I always like to give it the cocktail party test. If I’m at a cocktail party and people know I’m heavily involved in the investment world and come up to me and say, “What do you advise?” and I say, “Well, now I’m looking very hard at precious metals and accumulating metals while they’re cheap.” If people turn around and walk away from me, then I know I’m on the right track. You always want to buy what’s out of favor. There’s an old saying, You’re either contrarian or you’re road kill, and you want to be a contrarian. Plus, the fundamentals for the precious metals have simply never been better; the cost of mining keeps rising, environmental regulations get tougher and tougher, the central banks instead of being net sellers have become net buyers of gold. There’s a huge shortage of physical gold and physical metals in the market place. South Africa is -- while the miner strike is theoretically solved, that’s only a temporary fix and that’s only going to get worse. A lot of our precious metals, frankly, come from Russia and given the state of relations between our countries at the moment, it’s not a bad time to put a few of those away and add a few to the portfolio. I just view them as wealth insurance, I mean if you look at it, I have health insurance and I hope I don’t have to use it. I insure my house, but I hope I never have to use it. I have precious metals to insure the rest of my wealth. If I’m dead wrong, that’s ok, that means world peace, balanced budgets, and a bright future. If that doesn’t happen, I need to have a plan B and I have a plan B that has worked for ten thousand years. Anything that’s worked for ten thousand years probably has a bit of credibility about it.
Mike Maroney: Now interesting thing a lot of people probably hear you speak and say, Oh, he’s a precious metals guy. You’re a stock guy, you’ve worked with all the major brokerage firms on Wall Street, you’ve trained their reps, you’ve taught them all the different products, this isn’t something that you have always invested in and that’s all you’ve invested in. So, when you talk about this, and you’ve told me this before, you wish you didn’t have to own gold, but based on the current situation, do you think stocks, bonds, real estate, obviously, people are well diversified, but what’s your view on what sits out on the horizon for those products?
Stu Veale: Well, the problem with real estate, one is that it’s taxable and you can’t move it. Real Estate has its own issues and politicians know it can’t be moved. Mike Bloomberg, when he was Mayor of New York, made a very pithy quote when the New York state legislature wanted to put a tax on hedge funds he said, “Why would you do that? They can move to New Jersey. Tax real estate instead. You can’t take it with you.” As again, when it goes back to the mines, governments raise the taxes on mines, because they know the mines can’t move and that just raises the cost further. If you look at the other alternatives, we look at modern art, gemstones, those prices have already soared. The price of an apartment on the East side of Manhattan was up fifty-five percent last year. Modern art prices are up three hundred percent. Gold and Silver are the last to move and on a relative basis of the alternative investments theyrepresent the best value at the moment. You’re absolutely right, I mean, I’ve written twelve books and only one of them has been on alternative investments, 90% of my time is spent in financial assets, only 10% is spent with the precious metals, but my personal portfolio today is 50/50.
Mike Maroney: Now that’s an amazing blend. What would you tell the individual investor that’s been thinking about precious metals, but looks at the price and says, Why would I buy it now? It keeps going down and looks at the stock market and says, It’s trading at all time highs. I know you’ve spoken to many people about diversification strategies, how do we get this out to the individual investor that just may not be able to push himself psychologically into being able to buy low?
Stu Veale: Uh, well I mean, that’s something where somebody has to just take a look at the history and step up and realize they have to step up to the plate. There are a lot of people who put off the decision to buy life insurance and for most of them putting it off for a day doesn’t hurt, but for some of them it’s catastrophic. There’s going to come an event and I don’t know what that event will be, but no one expected Russia to invade Ukraine—we didn’t get a 30-day advanced notice on that. We didn’t get a 30-day advanced notice on the strike in South Africa and there is going to be some other event down the road where at one day it’s going to become one day too late. Procrastination is a killer from a financial point of view. Most people today have reasonably good, if not exceptional profits on some of their stocks. No one went broke taking profits. It’s always again, start trading out of the stocks as they move up. That’s when you want to be the seller. The institutions right now are selling retail buying is at an all time high. Well retail buyers are the last buyers in and they’re usually buying at the top. So lighten up and then slowly shift a portion of your portfolio into the alternatives. I would, frankly, it wouldn’t just be gold, I’m actually more bullish on silver, platinum, and palladium, than I am on gold at the moment, but I would certainly build a diversified portfolio of all four. Why try and pick the winner, when all four should do very well and all just in a rotating basis.
Mike Maroney: Fantastic. I’ll tell you what, I had an opportunity to read this book it was absolutely informative. Stu has some great information on some of the alternative investments that he spoke a little bit about, gemstones, which have skyrocketed and some of the other alternative investments, and sure enough, the precious metals may be in that proverbial buy zone. So if you have a chance, give us a call. We can share some very important information with you and hopefully give you the information necessary, so you could make a positive decision and maybe be able to buy low and sell high, in the not so distant future.
Stu, great invterview today. Always a pleasure.
Stu Veale: Always a pleasure. Keep up the good work.
Mike Maroney: I look forward to seeing you soon.
Stu Veale: You guys are the class act in the business.
Mike Maroney: Thank you, Stu!