Trading Talk Live With Terry Lynch, An Independent Investor And Visionary!

Summary

• Lynch said the pandemic has changed the world and there is no going back.
• In many ways, with remote work and meetings, he said things will be more efficient.
• However, at a macro level, the pandemic is crippling the economy and killing thousands of people.
• Governments are technically insolvent, so they are printing money and there is no sign they are going to stop.

In a recent interview, Terry Lynch, CEO of Chilean Metals, talked about the state of the economy, mining and naked short selling.

Lynch said the pandemic has changed the world and there is no going back. In many ways, with remote work and meetings, he said things will be more efficient. However, at a macro level, the pandemic is crippling the economy and killing thousands of people. Governments are technically insolvent, so they are printing money and there is no sign they are going to stop. If you are on a fixed income, you need to be invested because savings in cash are going to be worth less and less. There is going to be inflation, and “lots of it.”

Patrick MontesDeOca said gold is up about 53% and silver is also substantially higher, as are many other commodities. It appears that the inflation monster is already appearing, which is one of the ways we are going to pay for all the printing of money.

Lawrence McDonald, Former Head of Macro Strategy Société Générale: Month-over-Month vs Year-to-Date

Palladium: +8.5% v +22.8%

Copper: +6.4% v +10.2%

Nickel: +6.0% +8.7%

Zinc: +5.5% v +8.5%

Tin: +3.2% v +5.8%

Alum: +2.3% v -1.7%

Platinum: +1.5% v +1.0%

Cobalt: +0.1% v +2.2%

Silver: -0.8% v +53.2%

Gold: -1.0% v +30.0%

Lynch said the key will be if people start to lose faith and “have to move money around in wheelbarrows...Luckily we are a long way from that.” If anything, at some point, there will be a new monetary order. It will probably, we hope, linked to some form of block-chain technology so they can’t just print money indiscriminately. It may be three or five years, but at some point they will have to “draw this up again.”

MontesDeOca said that other nations have been in a similar situation, especially in the Third World, but they could not just-print US dollars like the United States can. Countries that rely on the dollar, such as Ecuador, are in dire straits in the current situation. In Mexico in 1981, they could not pay the debt and they could not just print money, so they devalued the peso. It went from $16 to $46 literally overnight and then to thousands to the dollar.

In terms of monetary policy, we can continue to print money. The government is then the buyer of last resort for just about everything, which is unrealistic and dangerous. Debt levels are very high and increasing. It will explode at some point. The only thing that is stopping inflation right now is the velocity of money, since people are not going out and spending.

Lynch said they changed the definition of inflation about 15 years ago. Under the old definition, we have significant inflation now. They fool most of the people because most people don’t get into the details. Food and energy were taken out of the equation, which seems very odd.

Mining

Lynch said mining is a super cyclical business with long segments of down and about half as long segments of up. We are about to go into a “biblical” up period in mining. He recommended being over-weighted in metals, which are hard to find. Helicopter money is also going to drive commodity prices up, especially with oil prices down. Mining companies pay about 10% of their costs in oil, so that will go down. He said he is super bullish on mining companies.

The big mining companies, Barrick and Rio Tinto will be affected first, and then down into the advanced exploration firms and then the early exploration firms, such as Chilean Metals. Generally speaking, Lynch said, you should be over-weighted in the mining sector. Then it depends on your perception of risk. Lynch invests in a basket to diversify his risk. He works with the Equity Management Academy and the Variable Changing Price Momentum Indicator (VC PMI) to manage his core holdings.

Lynch said to be careful about big stories and promotion, but there are excellent opportunities out there. Typically, when a share doubles, take it off the table. He recommends using trailing stops. In junior mining shares he has a 50% trailing stop, or as it rises, might reduce it to 25% or 10%. He said, pluck your roses and avoid the thorns. In your head, know where you plan to get out of a trade. He uses the VC PMI to take emotion out of trading and know when to exit a trade.

Artificial Intelligence to Improve the Odds

Lynch said that artificial intelligence is used in the VC PMI to know when to execute, and he uses similar artificial intelligence in mining. Mining has been slow to adopt AI. Geophysicists and geologists are territorial about their expertise. They are not necessarily risk managers. Lynch said he is a businessman, so he wants to reduce risk and make money. The risk-return return is crucial. In mining, Chilean Metals hired Windfall Geotek, which is a public company and is doing great work. They looked at one of the company’s mines in Chile and compared the AI to what the company’s experts said. It confirmed some of what the experts said, but it also identified four other targets that the crew then went out and did more fieldwork. In exploration, it’s all about shots on goal, Lynch said. You want good shots on goal. The odds are against a drill finding what you’re looking for. The key is to aggregate good shots and eventually the stats will work for you, which is what we are trying to do as a very small company. We are using technology to get the most high-quality shots on goal to find an ore body. Chilean Metals has a market cap of about $4 million, but if they find an ore body for a major mine, it could sell for $4 billion, which is a major return. In that way, mining is similar to biotech. Lynch said both are based on risk-return.

Portfolio Planning

Lynch said about 30% of his net worth is in mining, 50% in Cardiol Therapeutics, which, he admits, is crazy. He is also in oil and gas, and private land. He said oil and gas are the disgusting cousin. No one wants to talk about it, but oil companies with no debt are trading at super low levels and look very attractive. He said he is a contrarian. He believes in tech, but has a hard time writing checks for Tesla or other hot stocks. He does not disrespect them, but he is a value guy and does not see value in such stocks.

Uptick Rule and Naked Short Selling

Lynch is working with Eric Sprott and others in relation to the uptick rule. In 2012, they changed the rule since the exchanges started 142 years ago, that you could only short a stock that was going up. Exchanges were created to allow capital formation so businesses could get capital and grow to benefit everyone. Then in 2011 or 2012, the traders convinced the regulators to make these theoretically quick trades with the promise that it would improve the markets. It did not happen, Lynch said. He said in mining, they did a study that showed that when that rule was put in, the TSXV mining index would have traded at or above the commodity index. Now, since the rule change, the mining stocks are down almost 65%, whereas the commodity index is down 7%. So mining stocks would have to triple across the board to get to where they were. Is it all because of the tick change, probably not, but it is a big part of it.

A big factor is that in stocks, trades are not being completed. People naked short stocks and they don’t disclose or complete. They have two days to settle and a ten-day buffer, so they keep rolling over the trades, so they never actually close. They’ve figured out a way to beat the system. In every stock in Canada, 20% to 30% of the stock trades are paper, in that they never really exist. If you crush confidence in markets, Lynch said, you crush confidence in capitalism. Socialism does not work and capitalism is not perfect, but it’s the best thing we’ve got. We have too much cronyism out there. Let’s get back to capital formation, Lynch said.

Interest Rates

MontesDeOca said that when interest rates were running 15% or more, President Reagan and his administration realized they could use fiscal policy to drop rates, which they managed to do. That led to the realization that the government can manipulate interest rates through monetary policy. That began the manipulation of the markets. Now we are back down to almost zero interest rates. Price discovery has been skewed due to this manipulation.

Now they are talking about capping inflation at 2%. Inflation is running at 8% or 10% if you include a broader range of goods and commodities than the government counts. If we do move into an inflationary cycle, which appears inevitable, the pressure will be to raise interest rates to control the velocity of money and inflation. On top of that, we have a $23 trillion debt with interest payments to control. So we are between a rock and a hard place. There are few things that can be done, so they are going to have to continue to manipulate interest rates.

In 2008, they should have allowed many of these zombie companies that were not financially stable to go broke. The system would have been cleansed. Instead, the stimulus went to executives and buybacks of their own stock, further distorting the system. Inflation never showed up, except in high-end assets where the wealthy were spending their money.

It seems that we are coming to the end of this manipulation, but governments are not going to give up easily. They are going to continue printing money and they are talking about capping the 30-year bond yield.

Lynch said it’s easy to decide to just go and hide. But the United States, he said, owns so much real estate. The UK owns very little of its own real estate. US assets are probably 50% of the land, including huge chunks of coastal land in California. The US still has a get out of jail free card in that it has massive assets, and a substantial infrastructure. As a businessman, you look at the assets of a business and the US has a lot of assets. The operating system is old and in trouble, but the assets are vast. There are, Lynch said, many reasons for optimism. We have a lot of smart people out there who are seeking to create value, the Internet is a great democratizing tool, so Lynch is optimistic. There is a stale, old layer on top, but under that the US has a great core and they will figure a way to refire the core. As individual investors, Lynch said, the key to figure out which classes to invest in and finding individuals to learn from. Lynch said he learned from the Equity Management Academy through Seeking Alpha to become more of a trader. The Internet really makes it far easier to meet experts and use them to make money. Lynch said he has made tons of money with the Equity Management Academy.

MontesDeOca said that for all the negative aspects of today, there are great opportunities to make money today. Metals and mining companies are offering huge potentials for profit. The cost of money and energy is falling, making mining companies far more likely to be profitable. Because of the manipulation that has taken place as a consequence of the up-tick rule, we don’t know the value of many shares and commodities, especially precious metals.

Cardiol Therapeutics

Lynch is an investor in Cardiol Therapeutics and it is his largest position. He sees it as the best team he has ever been involved with. It is highly motivated and has a tremendous leadership and scientific team. They are trying to stop heart failure. Some years ago they noticed that CBD has tremendous anti-inflammatory properties. In Lynch’s view, it should be a multi-billion dollar business that reduces fatalities from heart disease. COVID-19 is making heart disease worse, since people with pre-existing conditions have much higher fatality rates than others from COVID-19. They are working on solving myocarditis, an inflammation of the heart in younger people, using concentrated CBD, which is not toxic, crosses the blood-brain barrier, and reduces the inflammation that can damage the heart. Lynch believes the research is promising and he is highly confident in the business.