“100 years of history proves that the Fed is clueless. The mismatch between interest rates and risk today is absolutely insane. My opinion is that the whole financial system is going to blow sky high.”
The Energy & Gold team had the pleasure of connecting with legendary metals blogger and investor Bob Moriarty. As always Bob didn’t pull any punches and delivered a frank and worrisome assessment of the Syrian conflict and the prospects for the global financial system. However, perhaps Mr. Moriarty’s most notable assessment came in the form of the Federal Reserve’s ineptitude. The Fed has essentially boxed itself into a corner from which it cannot escape without extremely negative consequences for the global financial system. Without further ado here is Energy & Gold’s end of 2015 interview with Bob Moriarty:
CEO Technician: We’re in the 5th year of a brutal resource/precious metals bear market and it has lasted much longer than anyone expected. Will 2016 be a year of rebirth for the metals & mining sectors?
Bob Moriarty: Yes I think so. This is the longest bear market in metals we have had since 1970 (when Nixon ended convertibility of the US dollar to gold and gold began its secular bull market). Commodities are the lowest in real dollar terms then they have been in recorded history[1] and then you’ve got the stock market getting ready to tumble. So I think we are at a turning point.
CEO Technician: Do you think that the senior gold producers have finally right-sized their cost structure and ripe to benefit handsomely from some mean reversion in metals prices?
Bob Moriarty: The senior producers are just beginning to adjust. Anglo-American announced last week that it will lay off 85,000 people and sell 60% of its projects. My question is who will they sell these projects to? However, Anglo-American will benefit tremendously from lower labor costs, lower fuel costs, lower steel costs, etc. These benefits have not yet kicked in but the seniors will be the first to benefit, then the mid-tiers, then the juniors.
CEO Technician: What are your favorite names in the junior resource space? Where are you investing your own capital right now?
Bob Moriarty: I am not deploying fresh capital now because I’m already fully invested. I don’t think you can pick juniors in here, I think that you’re really throwing dice by trying to pick individual stocks in the junior space. When we get a turn in the sector we will see a sector-wide increase on the magnitude of 2000, 3000, 5000%. However, a lot of companies are frankly not going to survive to see that turn.
The safest place to invest right now is in mid-tier explorers & producers[2] . You will always get your highest percentage return in the juniors but who knows how many, if any, will survive. The senior companies will still be around but they don’t move much in percentage terms. For now the safest space with the best returns will be the mid-tier producers.
CEO Technician: We have quite a macro backdrop right now; proxy wars in Syria and a growing powder keg in the Middle East, more numerous acts of terrorism around the world, U.S. Presidential election mayhem, junk bond turmoil etc. How might all of this affect precious metals and what do you see as the most important thing that investors should be concerned with in 2016?
Bob Moriarty: If we look at the whole picture there’s some big stuff going on right now. The closing of the Third Avenue junk bond fund is a really big deal, when the bond market blows up it’s the end of the world financially. It’s also the end of the empire for the United States. Obamacare is just another example, it’s been a disaster for everyone. The theory was that you could give free medical care to anyone that wanted it. Whether we like it or not medical care has to be rationed and we have to figure out how to ration it. The companies providing the insurance (to the healthcare marketplace) are losing huge sums of money.
CEO Technician: We hear that you are writing a book, can you tell us a bit about what you are writing about?
Bob Moriarty: It’s kind of interesting because everyone automatically assumes i’m writing a book about the markets and investing. I’m actually writing a book about war. When Putin went in front of the UN a month ago and said “do you realize what you’ve done?”, I realized he was asking a question that all Americans should be asking and they’re not. I spent two years in Vietnam and friends have been telling me for years to write a book. I knew there was something wrong with that but what I realized I needed to do was to write a book about war many years afterwards so you can see the real impact of that war.
If you see what Turkey is doing and what Putin is doing we are in a very dangerous place. Turkey has literally invaded Iraq and the only reason they are able to get away with it is because they are a member of NATO. Turkey is protected because they are a member of NATO and that makes every member of NATO responsible for Turkey’s stupidity.
CEO Technician: That leads to my next question. The situation in Syria seems like it’s the biggest powder keg in the history of the world, what do your foresee happening with that situation and how does one invest against such an unstable and potentially catastrophic macro backdrop?
Bob Moriarty: That’s a really good question. What I foresee is World War III. The west is pretty much ignorant on the importance of warm water ports to Russia, it has no warm water ports other than Sevastopol in Crimea. From a strategic point of view it’s very important to Russia to have warm water ports. They have had a warm water port in Syria (Tartus) for nearly 40 years. So when the United States, Israel, Turkey, and Saudi Arabia began funding mercenaries and terrorists in Syria to help overthrow Assad it was only natural that Putin would want to defend the interests of Russia and support Assad.
When Turkey shot down that Russian place it was an assassination, it was a deliberately planned ambush on someone that was no threat to Turkey. Then Turkey went in to invade Iraq. We are being dragged into something that’s just extremely foolish, if it continues it could easily be World War III. I don’t see anyone other than Putin trying to slow things down, and Turkey continues to get more aggressive which is a really bad idea on their part.
CEO Technician: So how does one invest in this climate?
Bob Moriarty: I own physical silver, gold, platinum, and palladium. I couldn’t give you the percentage chance that there will be World War III, I don’t know if it’s 5%, 10%, or 95%. I don’t know how you invest for World War III, I just know it’s important to have some physical money in your hand and precious metals are the tried and true form of money.
CEO Technician: If World War III happens does it even matter where we are invested? Do you foresee this war being a nuclear confrontation?
Bob Moriarty: It could easily be totally catastrophic, it could also be a war that lasts 30 minutes. I’m anti-war, I was in a war for two years (Vietnam), I’m anti-war from the point of view of not fighting stupid wars and we’ve had one stupid war after another.
The Syrian situation is the funniest situation i’ve ever seen, in a bad way. Here are the players: The Kurds are fighting for independence and they’re fighting ISIS so they’re allies of the United States, The Turkish hate the Kurds and do not want to give them independence and Turkey is an ally of the United States. So the U.S. is allied with two sides that are fighting one another. There are no good guys and there are no bad guys in Syria; The Turks are fighting the Kurds and the Russians, the Americans are supposedly fighting ISIS, the Turks are actually importing Syrian fuel from ISIS and the son of Erdogan is making billions from importing ISIS fuel. The Syrian situation is the craziest excuse for risking a world war that i’ve ever seen.
Attempted summary of Syria conflict via Citi Research
CEO Technician: You’ve already stated how difficult it is to pick individual stocks in the resource space, however, we do know that the quality of management teams makes a huge difference in the success of an investment. Can you tell us some of your favorite managers or management teams in the resource sector?
Bob Moriarty: Keith Neumeyer of First Majestic would absolutely be one of them, and Keith Barron (Firestone Ventures, Aurania Resources, etc.) is another high integrity top notch manager. Novo Resources is another company with a world class management team.
Minco Silver (MSV.TO) is currently selling for .38/share and they have $1/share in cash. They have a big silver resource in China and the market is punishing them for both being a silver explorer and being located in China. The valuations we are seeing are absurd and this is a prime example. Almaden just bought a brand new mill in Alaska and shipped it to Mexico. I think they knocked off about $80 million in capex by buying the mill. They have brilliant management.
CEO Technician: What is the future of 321gold? How has the bear market affected content and affected your business?
Bob Moriarty: Well that’s interesting, we started the site 14 years ago with the aim of educating people. I think we are literally on the cusp of what we’ve been warning about for years; you’re starting to see a bond market crash (junk bond market), and a stock market crash is probably close by, and precious metals are about to resume their long term bull market.
Bear markets breed bull markets and bull markets breed bear markets. We’re in the worst bear market since 1970 and that means we’re going to have a great bull market very soon. Another thing that a 4+ year bear market has done is save me a lot of money on travel. I don’t bother going to investment shows or conferences anymore because they’re a total waste of time.
CEO Technician: The Fed is likely to raise interest rates on Wednesday and the hike has already been priced into the market.
Bob Moriarty: The really interesting thing is that it doesn’t make any difference what the Fed does. 100 years of history proves that the Fed is clueless. The mismatch between interest rates and risk today is absolutely insane. My opinion is that the whole financial system is going to blow sky high.
The Fed has painted itself into a corner and there is simply no way out; if the Fed were to start selling some of the Treasuries from its balance sheet we would see a bond market crash. Mark my words, this hedge fund that cut off redemptions last week (Third Avenue) is not the last one, it’s the first one and we will hear about more funds blowing up.