By Albert Lu
When Lloyd Blankfein asked Guy Adami to join J. Aron & Co. - the fixed income, currency and commodity group at Goldman Sachs - the young trader asked for time to think about it. Blankfein's response is something Adami remembers well:
"Guy, you have all the time you need. I just need an answer before you leave this room today."
"I was being tested," Adami recalls. He took the job and never looked back. "I trusted my instincts … I think we're all born with great instincts."
The trader and TV personality has come a long way since then. His experience at Goldman Sachs eventually led him to CIBC World Markets and, from there, to CNBC where he landed a role as one of the original cast members of "Fast Money," the trader-centric program now in its 12th year.
The move from commodity trader to TV personality was challenging. When pressed by his employer to choose between his day job and an unproven television gig, Adami once again went with his gut.
"I was in my early 40s, three kids, mortgage, the whole rig, and I said, 'I think you're making a mistake, but if you're asking me to choose, I choose CNBC - I quit.'"
The trader, who had been making a living trading commodities, made his biggest trade ever - he traded careers.
"Don't allow people to define who you are" was the message he delivered to a packed room at the 44th New Orleans Investment Conference earlier this month, where he and an impressive cast of industry experts gathered to tackle key challenges facing U.S. and global investors.
"Rich Dad Poor Dad" author, Robert Kiyosaki, urged attendees at his presentation to "learn from real teachers, those who do what they teach, not fake ones."
Sounds like good advice, so, in case you missed the event, here are my five fast lessons.
1. Don't Ignore The Math - Gold's Time Will Come
Government spending is out of control. Perhaps this is not news to you. However, upon closer inspection, the numbers are rather shocking.
In his opening address, conference host Brien Lundin outlined an inescapable web of government largesse and central bank meddling that, in his calculation, will surely send the gold price higher.
In particular, Lundin points to the gross federal debt:
"It is too large right now to be managed by any other means other than some significant degree of depreciation of the dollar."
"We can't grow our way out of this debt. It's crushing."
According to Lundin, the federal debt is growing much more quickly than people realize in part due to off-budget spending.
"[The] federal deficit for 2018 is projected to come in at only $793 billion. Yet, federal debt for fiscal 2018 [has] grown $1.2 trillion over the previous year because of $400 billion to $500 billion in off-budget spending."
"If you and I decided to do off-budget accounting like this in our business, we'd go to jail."
Extrapolating the current trendline, Lundin estimates the federal debt will reach $30 trillion by 2022 - his point being, the federal debt is already out of control.
But the situation is not without precedent.
"Back in ancient Greece there were probably Peter Schiffs and Rick Rules and James Grants walking around in their robes, saying, 'Debt is out of control! Spending is out of control!'"
Yet, time and time again, these warnings fall on deaf ears.
Lundin points out that, by the government's own measure, the U.S. dollar has lost roughly 87% of its purchasing power since silver was removed from coinage in 1965.
"Over the wide sweep of history, when the dollar goes down, gold goes up."
2. The Uber Bubble - We Are Living In The Biggest Bubble Ever
This, according to Ben Hunt of Second Foundation Partners, is the bubble of everything.
"As a country, you can't be richer than your economy grows."
Mike Larson of Weiss Ratings calls it "the Uber Bubble" and points out that, this time, the range of affected assets is much broader. As proof, he points to Leonardo da Vinci's "Salvator Mundi," which reportedly sold for approximately $450 million, and NFL franchises, which, he notes, are up 146% in the last quantitative easing period.
Not surprisingly, Peter Schiff, president of Euro Pacific Capital, agrees - and goes one step further. When asked about the new bearish tone on Wall Street, he responds,
"I still think those warnings are too tepid; they're just not nearly bearish enough."
"They don't appreciate the severity of what is about to happen. They look back at 2008 as some kind of reference point, like that's as bad as it's going to get."
If you believe Schiff, things are about to get much worse.
"We have an abnormal amount of debt. Because [interest] rates were kept so low for so long, everybody borrowed more money. It can never be repaid. In fact, it can't even be serviced if interest rates even approach normal."
So, what will pop the Uber Bubble?
Hunt thinks surging inflation is a possibility.
"It has to be something that undermines market global confidence and the ability of central bankers to bail us out … to rescue us."
Mike Larson, senior analyst at Weiss Ratings, speaks at the 2018 New Orleans Investment Conference.
Larson suspects the correction is already underway.
"We've gotten more defensive. I think the process of unwinding some of this is already beginning."
"There are so many possible pins," says Schiff. "When you're in a bubble, it's hard to see the pin."
"There were a lot of pins that were pretty obvious in 2006 and 2007 … There are more pins now. It's more obvious now that we're heading for a train wreck."
But while the panelists agreed on the problem, they diverged on what investors should do to protect themselves.
Larson gravitates to the liquidity of cash and the security of boring domestic stocks.
"It's important to be domestic rather than overseas. It's important to be boring versus extravagant."
Buy foreign equities and stay away from dollar-denominated bonds was Schiff's conclusion.
"The bond bubble, for my money, is a bigger bubble than the stock market. So, why would you want to take refuge from one bubble by participating in an even bigger bubble?"
"We have to live in the real world. In the real world, we have stocks and bonds … we have government-rated instruments. Most of us can't step back for five years waiting for the popping of 'the big bubble.' We have to play the game."
3. History Matters - But Focus On The Big Picture
According to James Grant, founder of Grant's Interest Rate Observer, money is not humanity's best subject. And although our body of scientific knowledge grows with each passing year, when it comes to financial matters, he points out, we somehow keep stepping on the same rake - that inescapable pattern of financial boom and bust.
Thirty-seven years ago, when U.S. bond yields hit their peak, Grant could not imagine a situation where a speculative-grade corporate issuer such as Telecom Italia (NYSE:TI) could borrow below 1%. Yet, that time has arrived. Perhaps we have not learned the business cycle lesson well enough, or at all.
The facts suggest we haven't:
Today, $7 trillion worth of bonds are priced to yield less than 0% to maturity
Federal Reserve leverage (assets/equity) has grown from 24 (2007) to 107 (today)
Assets of the four major central banks have grown by 200% to $14.5 trillion over the past 10 years
Chinese bank assets as a fraction of world GDP have grown from 12% (2007) to 48% (today)
The ratio of BBB to speculative-grade debt has jumped from 1:1 (2007) to 2.5:1 (today)
The key, according to Grant, is to resist the temptation to extrapolate based solely on our recent experiences in asset prices.
"I have come to believe, through observation and experience, that great highs and great bottoms - extremes in markets - are typically punctuated by levels of valuations that, in retrospect, quickly seem to be preposterous."
Citing the peak in U.S. Treasury yields in 1981 and the trough in 2016, Grant suggests that the bond bull market has finally given way to a new trend.
"I invoke these facts to build - at least a working hypothesis, certainly not a forecast - a hypothesis that … a bond bear market, perhaps of generation length, began in 2016."
4. Improve Your Odds - Focus On "Serially Successful Explorers"
In the broadest sense, mineral exploration is very seductive and very unprofitable, explained Rick Rule, the president and CEO of Sprott U.S. Holdings Inc.
"There are over 2,000 publicly listed junior mining companies in the world. If you merged every one of those into one company, the resultant company - we'll call it Junior Explore Co. - in a good year would lose $2 billion, [and] in a bad year would lose $5 billion. So, what is the industry worth? Is it worth six times losses? Nine times losses? Fifteen times losses? What is the correct price-to-loss ratio?"
It's true the numbers don't lie. So, where's the seduction?
"Five percent of the listed issuers, that is 5% of 2,000 companies, generate so much wealth that they add legitimacy (and even luster) to a business that, in a good year, loses $2 billion."
Hence, Rule believes the way to beat the poor odds is to seek out and align with "serially successful explorers." In particular, he is partial to a subgroup of explorers known as prospect generators - those who focus on developing exploration theses as their primary value proposition.
"When you begin to think of exploration as a research and development business … like software or biotechnology … then you begin to understand the essence of exploration."
Prospect generators focus on the intellectually intensive side of the mining business, as opposed to the capital-intensive side that most investors associate with the industry. By formulating solid exploration theses and methods by which to test them, the teams create opportunities to bring in joint venture partners who fund the exploration and advance projects. In this way, the owners of prospect generators dilute their interests only at the property level, not the strategic or intellectual level.
"I have invested [over the course of 35 years] in approximately 65 prospect generators … I've participated, now, in 24 economic discoveries and 22 takeovers."
That's an extraordinary record if you consider that, according to Rule, only 1 in 3,000 mineralized anomalies becomes an economical mine.
"If you look at a success rate of 22 out of 65, rather than 1 in 3,000, you understand the efficacious nature of this style of investment."
5. The Global Search For Opportunity Comes Full Circle
On the global investing panel, CNBC personality Guy Adami found himself in unfamiliar territory as the most optimistic person on stage. Nevertheless, his concerns were apparent.
"There's geopolitical risk right here at home," he said, in concurrence with fellow panelist Doug Casey.
"Doug mentioned he's a permabear. I think in this environment we find ourselves in … it actually might be the right view."
In a wide-ranging discussion that spanned the demise of the Roman Empire to the current troubles of the European Union, the panelists explored the intimate relationship between crisis and opportunity.
"The U.S. dollar is a fiat currency, and every fiat currency in the history of mankind, starting with the Roman Empire, has ended in disaster," Adami added.
"As you know, most opportunities come when there's danger … I think the whole eurozone is going to break up between north and south," said Adrian Day of Adrian Day Asset Management.
Regarding seeking opportunities abroad, Doug Casey remarked, "Before 1971 everything abroad was dirt cheap. Even backward countries are not values anymore."
"I used to make a habit of visiting third world stock exchanges. One of the more interesting ones I visited was the Makati exchange in Manila … and there were only two guys standing around smoking cigarettes. That's how active that exchange was in those days. There was real value in the Philippines in those days."
But what about today?
According to Adami, "heightened volatility is coming," and the recent market swings seem to validate his point.
"Recessions are necessary and will be 10 times worse if not allowed to naturally occur," he said, before adding, "Central banks globally are in a race to torch their currencies … that can't end well."
So, where is opportunity?
According to Casey, commodities are the place to look.
"The only thing in the world that's really cheap today is commodities … In particular, if you don't have a bunch of gold, make sure you do."
"Gold is not a story until it's a story," admitted Adami, before adding, "Wow, I want to go get a Scotch now."
I say, great instincts.