Don Luskin, Founder and CIO of TrendMacrolytics, is a well-known television pundit and a frequent contributor to The Wall Street Journal and National Review Online.
What many may not know about Don is that he is an industry heavyweight. Many common investment products would not exist today if not for his creativity. He is credited with inventing the first sector ETF, the first ECN (allowing trading after hours), LifePath mutual funds and is said to have traded the first index option.
I've known Don for over 10 years. We spoke frequently when he ran MetaMarkets, the company whose mutual fund, Open Fund, posted its trades online in real time.
As part of the Investment U Interview Series, I sat down last week with Don to discuss his view of the economy, his thoughts on the stock market and his new book, I am John Galt. And of course, he had some choice words for politicians and pundits who support government intrusion in the markets.
Don Luskin: The Investment U Interview
Marc Lichtenfeld: Back in 2001, you predicted that gold was going to enter a bull market. You were heavily ridiculed for it, but were ultimately proven right. Where do you think we are now in this gold bull market and with some of the other precious metals?
Don Luskin: They pretty much all move together. There are moments when they don't. Silver has gone berserk lately. I have a feeling we're going to be in for quite a pause in this bull market.
It's been the perfect storm, driven by very easy monetary policy around the world. It was driven by a decade of amazing wealth creation. In the poorer parts of the world, there was a whole new class of people who wanted to enjoy the fruits of their wealth and were able to buy gold perhaps for the first time in their lives. And they were able to do other things, simple things for the first time, as well. Drinking Coca-Cola, smoking cigarettes and owning a little gold is part of that.
But when you look at the growth trajectory of places like China, I think you have to say the best growth years are behind us. That's not to say it's going to go bad, but growth is a question of rate of change. And I've got to believe we're kind of in the knee of the curve.
I don't expect the price of gold to go down significantly, unless there's some economic event that would be very deflationary, which I don't foresee. But would I expect another double? We've had plenty of doubles, right? It's sextupled since I called the bottom in 2001. I just think it's going to be quite a while until we get another double. Quite a while.
The Saudi Arabia of Natural Gas
Marc Lichtenfeld: In March, you wrote in The Wall Street Journal that the United States is well positioned to withstand a spike in the price of oil. Where does oil go from here and are we still well positioned to withstand a spike?
Don Luskin: Yes, we are well positioned, and the things I wrote in The Journal are even more true today than they were two months ago.
We are consuming oil, mostly in the form of gasoline, at about the same rate of consumption that we were almost 16 years ago. There are other parts of the world that are consuming more, like India and China, but we're not.
The other uses of crude oil in this country, such as powering electric power plants, which doesn't account for a huge part of demand, is just basically dropping out. So probably in about five years, oil isn't going to be used for anything other than transportation and home heating.
Oil has some very compelling competition. The United States is certainly the Saudi Arabia of natural gas. There's no reason why the entire U.S. truck fleet that now drives diesel fuel from crude oil shouldn't be powered by natural gas.
It's a fairly inexpensive and efficient conversion. And natural gas prices are likely to go even lower because of the new extraction technologies. That seems inevitable. In fact, we should be in a position in five years to be a massive net exporter of natural gas.
Marc Lichtenfeld: You feel confident that will happen?
Don Luskin: It absolutely can happen. The physical presence of natural gas in the United States is no secret. It's locked in shale. The ability to extract it now from fracking is pretty much ready to go. The only thing holding it back is regulation.
What a surprise.
Marc Lichtenfeld: People have been talking about the United States getting off foreign oil for years but it never seems to happen. What would be the catalyst to make it happen in the next five years?
Don Luskin: The technology really is different now than it was five years ago. This ability to frack gas out of shale is fairly new.
I recently attended a convention of people in this business. I'd heard of it like everybody had, but I never really understood it's a whole subculture. But going to their convention was like going to the Consumer Electronics Show in Vegas. And that's one that everyone knows about because everyone uses consumer electronics and loves them and follows them and understands them.
I walked into this conference in Ft. Worth, and you're in one of these rooms, the size of two football fields and there's all these booths, where they're selling everything from these crazy drill bits to chemicals and at every booth they're handing out goodies... and it's just like the Consumer Electronics Show, except it's all about how to get gas out of rock. And you realize, "Oh, my God, these guys are going to change the world."
I am John Galt and Ayn Rand
Marc Lichtenfeld: Let's talk about your book, I am John Galt. What was it about Ayn Rand's work that attracted you and made you want to compare modern day business people and politicians to characters in her novels?
Don Luskin: Like many people, I've been an Ayn Rand fan my entire life. I read them first in high school. Her books have the power to inspire you. They're all about heroes. If you're an adolescent and looking for role models and people who overcome difficulties and are hated and shunned, but end up prevailing in the end, Ayn Rand novels are absolutely for you.
One of the lessons I'd like people to take from this book is that many people who read Rand and think they understand Rand think the lesson is just that government is bad.
No. The lesson is that collectivism is bad. Corruption is bad. The real villains in Atlas Shrugged are big businessmen, not government people. The government people in Atlas Shrugged are really just the puppets of the corrupt businessmen.
And so it was in the great crisis of 2008 and 2009. There couldn't have been a [Congressman] Barney Frank if there was not an Angelo Mozilo who was the CEO of Countrywide Finance. [Mozilo] basically crawled into bed with Fannie and Freddie and created this monstrous hybrid, this unholy alliance of business and government to do things that no business could have done without government subsidies and no government could have done without business funneling money into it and it nearly destroyed the world.
The Big Picture for 2012
Marc Lichtenfeld: Let's move on to the markets. Give us the big picture for the next year or so.
Don Luskin: We're in the aftermath of this horrible crisis that was created by this unholy alliance of government and big business to create an unsustainable mortgage lending boom, that blew up. It nearly blew up the whole banking system.
We have a world where trust has been shattered, where capital is in retreat. The normal risk bearing, that causes growth to happen and the world to go around, is not absent but is not happening with the depth and breadth that normally comes at the end of a business cycle, where there's been less damage. This one really ripped the fabric of the world apart.
Remember after Barack Obama had been elected President, before he took office - his Chief of Staff designate, Rahm Emanuel, went on one of those TV talk shows and said his policy was going to be to never let a good crisis go to waste.
The world was already in crisis. There was a six-to-nine-month period where we didn't know if Citibank was going to be able to turn on the lights on any given Monday morning. Where if you stuck your ATM card in the slot, you didn't know what was going to come out.
That was a real crisis. And look at all the things they did to not let it go to waste. They got Obamacare through. They essentially confiscated General Motors (NYSE: GM) and Chrysler and handed them over to the unions that got them elected.
The crowning glory was the Dodd-Frank financial re-regulation bill. Barney Frank [reminds me of] the Ayn Rand villain Wesley Mouch, who, every time he [messed] up the economy, demanded broader powers. Every time [government messed up], Barney Frank said, "Well, the Fannie and Freddie thing didn't quite work out, but we need broader powers." And he got them.
So we've got thousands of pages of the Dodd-Frank bill that will always have his name on them. No wonder the economy can't recover. When a crisis created by an unholy alliance between business and government results at the worst part of the crisis in a gigantic expansion of government.
That's like saying, "When you're stuck in a hole, keep digging."
Well, sometime about a little less than a year ago, we stopped digging. I don't know why, but we did.
All the evidence keeps coming in that there has been a fundamental change. The Democrats still want to raise taxes, but now it's in the name of deficit reduction. A year ago it was in the name of providing education for everyone, healthcare for everyone, a house for everyone, everything for everyone. Soak the rich.
They still want to soak the rich, but now they want to do it in the name of deficit reduction. So at least now they're telling the right lies. And that's a start.
I think the long-term outlook is great. When you stop digging the hole, the 99 percent of people in this country who are actually productive and are willing to work for a living, can now actually get out and do it.
Instead of trying to climb out of an elevator going down, so you never get anywhere. The elevator stopped going down, so if you climb even a little bit, you start to get somewhere.
The Single Broad Asset Class to Invest in Today
Marc Lichtenfeld: Is there a certain asset class or sector that you particularly like right now?
Don Luskin: If I had to invest in a single broad asset class today, from anywhere in the world, I would pick U.S. stocks.
The reason I say that is the United States is getting back up on its feet. These knee jerk attractive growth investments like China, Russia, Brazil, India - they didn't suffer severe recessions, they suffered through mild, quick recessions and recovered brilliantly. They've been at new highs for a long time. Their stock markets don't particularly reflect that, but what are they going to do for an encore at this point? That's the obvious trade.
You talk to anyone on Wall Street these days and they say, "Ugh, the United States is finished. We're just too loaded up with debt. You've got to put your money with those smart guys in India and China. You've got to invest with people who lend the money not borrow the money."
Well, look, everybody does that. In the developed world, the United States and Germany are the only two major nations that have completely recovered from the recession. Germany just did it last quarter. The United States did it two quarters ago. The United States is leading the way.
What drives stock prices? Corporate earnings. Corporate earnings are at all-time highs. All-time highs. Take out the financial sector and corporate earnings have been at all-time highs for six months. Even with the crippled financials, they're at all-time highs. Why shouldn't stock prices be at all time highs? I think they will be soon.
Spain: The Fiscal Cancer of Europe Still Growing
Marc Lichtenfeld: Anything you'd avoid?
Don Luskin: There's nothing that really scares me.
There are a lot of people that think you should avoid U.S. Treasury bonds. A lot of the worries have to do with too much debt and a dollar crisis, but if that happens, the whole world is going to collapse, so you can run but you can't hide on that one.
If I had to name one thing that was going to do something really bad in the next year, I'd have to say Spain. The fiscal cancer of Europe is still growing. The next organ that will be infected is Spain.
That's not a particularly unusual position. Everyone knows the next one in line is Spain. The question is does it get infected or doesn't it? The bond market right now is telling you that it's not. You can buy a Spanish 10-year bond with an interest rate that starts with a five. There's nothing so crazy about that.
If you were buying Greek debt, you wouldn't have a five, you'd have a twenty. That's one that's infected. Spain is probably thought to be a survivor. I disagree.
Lichtenfeld (Q): Thank you for your time, Don.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.
