Preceding the financial crisis in 2008, debt was unchecked and increasing by $100 billion a month. The current capital markets are following a very similar trajectory. The USA and Canada have huge debt issues because of out of control government spending. The average person has no idea of the scale of the challenges the global system is facing.
RockLinc Investment Partners, Inc. evaluates every single business, asset and investment to ensure it is generating strong, long-term cash flows. It invests only in companies that have no debt, good management, sensible leverage and tangible assets so it will survive the extended market downturn.
In addition, RockLinc sees precious metals as a hedge against the real financial risk ahead of us and has gained many new clients from this mandate. Precious metals are one of the best areas to protect capital against the unsustainable gaming of the system by central banks.
Central banks want to debase our money. And if asset prices were to come down significantly, it would wipe out the entire banking system. Money printing is very inflationary and gold moves ahead of inflation. By the time the general public realizes what is happening, gold will have already moved. Precious metals are tangible, enduring and maintain purchasing power. Please read RockLinc's summary here.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a new guest to the program, Jonathan Wellum. He has got a company named RockLinc Investment Partners. That is RockLinc, L-I-N-C. Jonathan has about $100 million under management. Jonathan, welcome to the program.
CEO and CIO of RockLinc Investment Partners Inc., Jonathan Wellum: Great to be with you, Collin. Look forward to speaking with you and your listeners.
CK: You are in the business of wealth preservation and managing folk's money up in Canada, which is certainly a difficult task right now with all of the different issues going on the world: rising debt levels; higher obligations for governments in the coming years that are unfunded - unfunded liabilities; and a world that we are entering of negative interest rates. I want to ask you starting off, you have done a piece for us on Palisade Research that you contributed which I will put a link to in the summary of the video here. I want to ask you about the environment that we are living in today and the different issues that you are seeing arising.
JW: Yes. Well, a bit of history. I mean I started back in 1990. If you go back in 1990 that was the boom years that began with the '90s, and what we had coming out of the '80s we had interest rates coming off at very, very high levels that people know you go back to Paul Volker days in terms of the Federal Reserve and so on. People were converting from fixed income to equities and they were leveraging and they were borrowing, and they had this sort of debt binge that really, really got quite large.
In the '90s we made lots of money buying financials and buying a lot of the fund companies, mutual fund companies, banks, and all the organizations that which we take advantage of their leverage. Fast forward to 2007, 2008, we saw that a lot of this creation of debt and credit instruments just reached an amazing proportion that was just simply not sustainable and then you had, as everybody knows, the financial debacle, financial crisis. Well, I looked at that and the management do the whole process and did fairly well at it. But as I set up RockLinc in the midst of all of that is you go back and you look at the bigger picture. I could not help but be overwhelmed by just the significant level of debt and the fact that it was not slowing down.
We would expect to go through a financial crisis. We expect to go through the challenges that we saw back in 2008, 2009 and there ensued some corrective action. But we did not see any corrective action. We saw money printing, a lot of quantitative easing, and everybody, I think, know the numbers. We go back to that period up until today about US$ 12.4, US$ 12.5 trillion added to the financial system; $100 billion a month is still being added, $100 billion a month of new money whether it is European Bank or whether it is the Bank of Japan. We have got interest rates that have been manipulated down further and further and further down, when I got into the industry with 7%, 8% and now virtually zero, in many countries negative, as people know. There is $7, $8 trillion worth of debt that has gone negative.
You look at all of that. You look at the unfunded liabilities. You look at just the promises the governments continue to make, and if you are an investor in capital markets you should be worried. You should be very concerned. You should be definitely focused on wealth preservation. Looking after client's money and talking to clients I am, constantly, again, reminding them that these are not normal days, that when you see interest rates at zero and even going negative, this is a sign of dysfunction. It is a sign of an unhealthy economic system and this means that we need to be prepared for tremendous volatility, in my view, and market turbulence, market trouble.
That has really driven me. I go over the last six, seven years in particular, as I setup now RockLinc Investment Corp. and dealing with people that cannot afford to lose money, who are looking at preservation, who are looking at solid, strong returns to really evaluate every single business we are going to, every asset that we invest in to make sure that we are generating strong, long-term cash flows from essential businesses, from business that are scarce and businesses that have a consistency to them in terms of the cash flow without a lot of leverage. That has driven us really over to a good weighting in precious metals. Your audience and listeners are very familiar of that area.
I have invested in precious metals over the years but nowhere near to the extent that I do now because I do believe it is probably one of the best areas to protect people's capital. We, in particular, have focused on a lot of the royalty companies, finance companies, with Franco (NYSE:FNV), Royal Gold (NASDAQ:RGLD), Sandstorm (NYSEMKT:SAND), Silver Wheaton (SLW), and along with some of the smaller miners in order to really protect clients, be more proactive in terms of hedging them against what we see as a real financial risk ahead of us as interest rates have gotten so low. We know we are really dependent now, as you know, on money printing and the goosing of the system by the central banks, which is simply not sustainable. I think going forward, it is actually causing more harm than good, and this is a big problem if you are an investment manager like ourselves.
CK: Precious metals investors, over the past few weeks, have done exceedingly well. Sometimes it is important to take that in context of how much money is actually going into the precious metals sector. For example, somebody with a junior portfolio might be up 10% today and yesterday, which is staggering, but that can lead people to think how long can this last and forget just how depressed the prices have gotten in this sector. Jonathan, you are talking to people on a daily basis, call it normal people, people that do have a nest egg, but just kind a representation of people across Canada. What kind of weighting do they have to gold right now? Is there interest from those people before they run into a person like yourself?
JW: Yes, great question. We have taken in quite a large number of new clients just this year and every single new client that we took in this year. Most of them are coming from brokerage offices, the large brokerage offices here in Canada. They have zero - literally zero - exposure to precious metals and it blows my mind. They are not even 2% or 3% or 5% - zero. What they do have a lot of, and this is where you gain in context, all sorts of oil and gas, and in many cases speculative oil and gas companies, not even the best quality ones.
The first thing that you sit them down and say, "Look, we got a record debt problem in the world, but also even in Canada." I mean in Canada we got a huge debt issue, provincially, in our Province of Ontario, Canadian government now is going on embarking on a binge, on in debt in terms of their expenditures. The personal problem in Canada is one of the worst situations in terms of debt, with a debt of over 170% debt to income level which is right off the chart.
You sit them down and say, look, we got a debt problem. We have a government that is out of control in terms of spending now and sucking up more and more of the private sector and pulling it into the public sector. We got central banks around the world which are punishing savers and forcing really bad behavior in terms of the capital markets. You have to protect yourself. You got to protect your purchasing power which is the key thing when you are investing is how can I transfer my labor into a savings program that is going to protect my capital purchasing power?
First thing that we do is we put them - depending on the client in where they are in terms of stage in life. We are going to put them into - at least up to 10% or more of their equities into precious metals immediately. Here we do that to, from our perspective, some of the highest-quality companies. That is not saying anything bad about the small ones; we are sympathetic to that. But with our client base, they are still looking, again, for consistency and a certain sense of predictability. But we definitely are going to move them into that space absolutely right away and build good positions because I think it is absolutely essential going forward given, again, the bigger picture problems that are facing us.
Majority of people on the street, the average person, does not have any sense of the gravity of the overall challenges to the monetary system that we are experiencing. They just do not understand it. We take a fairly bit of time in walking through that to prepare them and to, again, acclimatize them to the challenges that are inevitably ahead of us.
CK: In the 1990s, Jonathan, your funds were the largest shareholders of Franco Nevada. I do not know what dollar amount that equates to, but it is very significant. That goes to show that you have been around in the sector for some time. You have kept a good eye on the precious metals sector and that must give you some indication of where we are now. As we just discussed we have been moving off the bottom. Things are looking up for the precious metals sector. What do you expect over the next few years based on your past experiences on the type of gains? Even a strong company like Franco Nevada that has not seen the carnage of the juniors, what is it going to return possibly for investors?
JW: Yeah. Back in the '90s, we ran a very large portfolio that at one point we were the largest private mutual fund company in Canada. We left about 15 billion CAD that we managed. Our biggest positions were in the sea-based companies; these companies were reoccurring revenue, sort of perpetual long-term revenue stream. We really like Franco Nevada because that is where two key principles of Franco and Euro-Nevada at the time. But what they did was they were able to cut beautiful deals off of gold particularly gold and gold mines, and then generate long-term cash flows that would be protected from inflation because it is rooted in gold, and the net returns on volume and net profit interest that they generally do well on royalty companies not streaming companies at the time.
It really taught us that number 1 when you are investing you are buying cash flow streams; number 2, you want cash flow streams that can grow and that give you upside leverage which could have been in a royalty company or environmentally try to increase in price of the underlying commodity; and 3, they are going to hedge your purchasing power in a world where there is tremendous excess debt and there is the concerted effort on the part of central banks, we know this, to debase our money. So they want to debase our money. This is the whole goal. For doing that you want to buy things that will hedge against that and protect yourself.
Back in the '90s, we built this position not because we were gold bugs or anything. We saw a tremendous cash flow vehicle. Now fast forward to today when you look at the streaming companies or really log on mining companies, it is exciting now because the mining companies, especially the smaller, mid-tier, well-run mining companies, they have all restructured, so the profit margins that can accrue to them will be tremendous and the operating leverage will be huge. What we look at whether it is the bigger streaming companies, royalty companies, or some of the really well-run mining companies, we have got tremendous cash flow with the commodities companies. They are honed. They are in much better shape and the cash flow is coming off of gold and silver.
If you are in a world where they are trying to trash paper money, they are trying to undermine the fiat currency, they actually are going to charge you with tax or a fee for sitting cash in the bank, then you have to look at gold. You have to look at silver. But you want to find - in our view, what we are looking for our clients are the best, the predictable, the ones that are safe geographically that can give us tremendous upside because this is the only way we can ultimately protect your cash flow.
Now we look at a few other sectors: water industry, some agriculture areas, infrastructure, but in every case we are looking for businesses that are structured to protect against purchasing power loss and they are operating investments or assets that are essential. They are scarce and there is predictability to the business model. That is what people really have to zero in especially today. This negative interest rates situation, if people do not see that as blatant theft and blatant undermining of the capitalist system in order to prop up debters, the largest of which are governments, and allow governments to continue to get more bloated and more bureaucratic and lay down more regulations and more control the economy, which is just bringing all of the economic growth to a real halt around the world; if you don't see that, then I think you are not operating in the same universe that certainly we are, and they are not seeing the kind of risks that lie before us which, we think, are very significant.
CK: Gold, traditionally, has worked as a leading indicator to inflation, inflation that is coming or has already started. But I have heard I should say several times in the past that gold moves before people see the inflation. If you are not positioned ahead of time and aware of what is going to happen, you are going to be the general public jumping into gold at 2, 3, $4,000 an ounce, whatever it ends up going to, and you miss so much of the gains. Is the movement that is starting to happen in the mining sector and in gold and silver prices, is that indicative of inflation is now right around the corner or does it tell you something different?
JW: Well, the way I look at it, Collin, is that when I look at this financial system as it is now constructed and as they are now pushing it forward - and when I say "they" I mean the government and the central banks - it is completely unsustainable on the current course. What I mean that you cannot grow $3, $3.5, $4 debt for every $ GDP growth. You cannot run interest rates negative and expect people to save. You cannot have interest rates where they are at and have any kind of pension programs in the future because you have got 30%, 40% of your assets in the pension program earning nothing or maybe negative. You cannot have a pension program.
These things are all going to get restructured. They cannot stay in the same form. The government, their ultimate goal is to create inflation. My view is that is what they are trying to do, and I think gold and silver now, some of this early stage stocks they are coming back. You are sensing the instability; the fact that the current situation is not stable, the governments are trying to create some inflation.
From my perch, even if the government does not create the inflation, if you will, which is maybe possible or you are going to a deflationary situation, either way you need to protect your money because if you go to inflation, yes, gold is a wonderful, wonderful hedge and will work very well. If you are going into a deflationary situation which means that you lost control, I think negative interest rates are causing people to really step back and get more concerned and actually hoard cash and change behavior in Japan. I think negative interest rates are actually slowing down the economy. Certainly businesses are not making the kind of capital investments in the future in doing more financial engineering. But you threw a deflationary situation where asset prices were to come down, then you wipe out the banking system. You still want to have precious metals and I think you want to have that which is tangible, lasting, enduring, and will maintain purchasing power.
From my perch, it is hard and I know what they are pushing towards. They want to deflate or they want to inflate, I should say, and debase currency. Whether they will be successful like that, I guess we have to wait and see. They are trying everything they can. One of the concerns that I have is that the current QE process really has not worked at all. It has not worked in lowering interest rates. It is not stimulating growth and so what they are talking about now, and you are very much aware of this, is the sort of helicopter drop where you get governments just to go larger and larger in deficits and then just monetize the debt in Central Bank.
If they do that, then I think that potentially it could create inflation, but that will destroy the value of investors' money. They destroy capital value and the only way you are going to protect that, again, is you have got to own what is essential, scarce, and would be re-priced with some value in the future after going through a bit of a reset and certainly one of the main components of that will be precious metals. No question.
CK: All right, Jonathan, let us finish up with the question on the general equities. I am talking about the US stock market. The US stock market has been a huge benefactor of the easy money that started in 2008. The beginning of this year started pretty ugly, but we have now seen essentially a full recovery in those losses. That brings up the question where is the stock market heading? It is overvalued by several metrics, but with easy money flying around maybe it is a place for people to put some of their money. Where are you positioning people? Do you have them in any of the big name stocks? Do you see the Dow being able to make higher highs or is this the top?
JW: Well, we would bottoms up, largely bottoms up, sort of fundamental when it comes to the individual stocks. I mean having said that you have to contextualize. That is why we have been talking about the macro. Anyone who says they are completely bottom up and definitely contextualized all of their investments into the bigger picture, I think, is a big naïve and probably does not really do that. But when it comes to the individual stocks, what we are trying to do within the context of what we have talked about - the debt problem - is we want to find the growth side of the precious metals sector. Where are their industries that we can find great businesses with big amounts, not ridiculous leverage, good management, where there is hard assets around them so that there is tangibility. It is not a paper business that has been overly financialized and vulnerable to the problems that can emerge in a financial crisis.
We look at say the water industry, for example. We look at that and it is hard to get water reserves, but we will try to find business that are in that sector like Xylum or American Water, works that we have owned for some time and gold backed. So these are businesses that work in that industry. We help companies be more efficient, drive efficiency in the water industry and essential industries. There are hard assets behind it. We look at different infrastructure companies that are well-financed because, again, one of the things that we look for, we saw this in 2008, 2009, is that poorly structured companies, companies with bad balance sheets will get cleaned out, but the companies with better balance sheets to be able to buy assets cheaply.
If you are in a company that has got a strong balance sheet and you had access to capital, we saw this with some of the Brookfield businesses that we had some exposure to, then they can buy up great assets at cheap prices because people have had very poorly structured businesses, so we look at infrastructure businesses. Some of the technology companies we have some positions in some of the tech companies because, again, we have to buy them when they are at a reasonable price because technology is indispensable. It is a core part of our infrastructure and agriculture also. We look for good companies in that space.
The key there the link between gold and silver and some of the businesses that we are looking at, virtually all of the businesses we are looking at, is the businesses underneath them have solid, stable, tangible assets that regardless of financial conditions over time are needed. They are going to be around. We are human beings; they need food. They need water. They need basic infrastructure and so forth. What we stay away from and that we would not get close to were the highly levered banks, life insurance companies, anything that is a long-duration financial asset because the long-duration financial assets could be cleaned out in a debt crisis. There are certain areas that we will not go near and then other areas we think in terms of great opportunities but could be from volatility, but how do we get through the challenges? We look at those businesses.
If you go back to the US market, I think overall it is expensive on any kind of reasonable valuation basis, so we dabble. We pick off stocks where we see opportunities and then we keep a little cap powder dry, so with optionality so we can step in quickly. We loved it when the market came down early this year. It was great. But then it rebounded too quickly, so we took advantage in a number of portfolios, then backed off now. We are just watching. We hope for more volatility so that we can dollar cost average and pick away the companies that we really like, and we think, again, it is going to be around for a long term and survive the debt, the derivatives, the crazy government promises, the loans, the negative interest rates, the money printing. This too shall pass. But we want to be in a company that will take us through that without destroying value.
CK: Okay. Well, Jonathan, I really appreciate you coming on the show and taking half an hour out of your busy schedule to tell us about RockLinc. Just for our listeners, one more time it is RockLinc, L-I-N-C. Jonathan, thank you so much for coming on the program with us.
JW: Thank you very much, Collin. It is wonderful to talk with you.
Jonathan Wellum has a distinguished career in the financial industry, holding various positions including his present role as the CEO and CIO of RockLinc Investment Partners Inc. He was formerly the CEO and CIO of AIC Limited. He has twice been recognized as Fund Manager of the Year and in 1999, was recognized as one of the "top 40 under 40." He holds a Bachelor of Commerce and a Master of Business Administration degree from McMaster University, and a Bachelor of Science degree from the University of Waterloo. He completed his formal education with a Master of Arts degree in Theology from Trinity Seminary. He also holds the designation of Chartered Financial Analyst (CFA).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.