The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
You look at life and say, ‘Some things go on and on and on, but most things do change, and the change is what creates the opportunity.’ That’s the only reason I can get very excited about what I see every day, is that what make me feel bad, if I think for a moment, may present me with something new to do, and that’s a very exciting way to look at what’s going on.
– Jim Deeds
Kevin: One of our favorites, Dave, someone that we both actually talk to personally on a regular basis, is Jim Deeds. Jim was on the show four or five months ago, and he brings the wisdom of the ages to us. This is a man who remembers listening to the Fireside Chats of FDR when he was a young man, when he was in grade school. You talk about legacy, it’s a perspective that you can only gain from someone who has seen many generations before him.
David: I saw in my most recent Grant’s Interest Rate Observer that Jim was speaking last week and he was reflecting on being 80.
Kevin: Now, you’re talking about Jim Grant.
David: I’m talking about Jim Grant. And I just had to stop myself and think, that’s where he wins. He has reflections on history that other people in today’s markets don’t have. There is a perspective that both Jim Grant and Jim Deeds bring to the financial markets because not only have they read history, which I’ve done some of, but they’ve lived history, and that always brings a different insight.
Kevin: Last week Jim called me, and I know he called you, too. He was very, very excited talking about a conference that he had been to in Denver that goes on every year in September where he has gotten a chance through the years to spend time with the CEOs of virtually every major gold mine. He said, “Kevin, you’ve got to come up to this. The perspective that you gain seeing how much effort, how much time, how much money goes into pulling out those little bitty ounce coins – you’ll really learn so much.”
David: I think a conversation, on occasion, with Jim is really helpful, again, just for perspective. What is changing in the gold space, what is changing in the mining space, what is changing culturally? I get some of that from my dad, as well, seeing the perspective from the Philippines where it is removed just enough to give a certain objectivity that sometimes living day to day, moment by moment, you can lose. So it’s very helpful, I believe.
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David: Jim, it’s great to have you back on the program. I wanted to start with a quote from Paul Volcker, a man fairly familiar with inflation and central banking, and fairly well connected in circles back in Washington, D.C. Recently he has reflected this way. He says, “It’s a sobering fact that the prominence of central banks in this century has coincided with a general tendency toward inflation, not less. If the over-riding objective is price stability, we did better with the 19th century gold standard and passive central banks or with currency boards, or even with free banking. The truly unique power of a central bank, after all, is the power to create money, and ultimately, the power to create is the power to destroy.” I’d be interested in your thoughts and reflections. Maybe you can set some context for us.
Jim: I think that’s an amazing statement, David, and it relates, to a degree, certainly, to my lifetime experience. I go way back and I think it might help some of the listeners if they knew how far back I go. I was in grade school when FDR was giving his Fireside Chats on the radio, if that’s believable. I remember his voice very well. I also was in grade school and junior high school when World War II was going on. That’s a long, long time ago. Those two things – people coming out of the Depression and what was happening in the financial markets, and then what happened during the war, had a huge influence on my early years.
And then the most amazing part of all, which we want to talk about today, I expect, is the fact that from 1950 on, for the next 50 years we saw America probably show the most growth, the most innovation ever in the history of the world. And at that time it was a free country, a free enterprise country – free markets. So that’s the background leading up to where we might be and what changes we might see today.
David: When we look at what has changed through the years, you have Bill Gross who recently says the financial markets are becoming a Vegas Casino. Do you think that adequately reflects where we are?
Jim: I totally do. I agree, and I would explain, at least from my perspective, and I think Doug Nolan in his letters every week writes about this, but the fact is, the whole market structure has changed completely for me because there are no longer any interest rates that relate to risk in any market in the world. Whether you’re talking about sovereign debt, or whether you’re talking about corporate debt, or whether you’re talking about borrowing to buy a car, all of these interest rates are way below normal and in no way measure the risk of each of these different investment areas, which they used to do, so that you and I had a perspective on risk in the old days as to what it was, because if somebody had to pay 6% interest they must be more risky than the fellow who had to pay 4%. Central banks today have destroyed that mechanism and, in fact, really lead to what seems to be a totally speculative financial market all over the world.
David: It leaves very few assets out. If you look at current estimates of central bank asset purchases, today we focus mostly on European Central Bank and the Bank of Japan because the U.S. Fed stopped back in 2014 with its direct asset purchases. It doesn’t mean they can’t crank it back up again, but between the ECB and the BOJ, Deutsche Bank Global Markets Research says it’s about 180 billion dollars. And that’s a monthly figure. They’re stepping in and buying assets in the marketplace. So you have, as a consequence, European and Japanese investors who are fresh with cash from those central bank purchases, if they’re going in and buying the asset, which means that now an investor class has cash on hand. Where do they take the cash?
So you end up with further distortions in terms of prices because of central bank activity. Maybe you have some global liquidity flowing to U.S. equities and bonds, but you really have almost twice the impact. If it’s 180 billion, and then it frees up 180 billion in cash for investors to go do something else with (laughs), you actually have a real exaggeration in terms of price trends in other markets, which gets back to that point – there is a lot of speculative money flowing around and it has been inspired by cheap credit, easy credit, and that’s a different world to live in.
Jim: Right. What you’ve just mentioned, to me, is honestly scary. And it’s scary from the standpoint that we know that in Japan they first went to negative interest rates which means that if you invest over there in a bond you’re going to get back less money when it matures than when you put it in, and in the meantime you’ll get no income. But more importantly, in Japan they’ve been buying stocks through ETFs, Exchange-Traded Funds, and they are becoming a major support for the Japanese stock market and this is now starting to happen in Europe. The Europeans, first of all, bought the sovereign bonds and most of that market has disappeared. They have very little in sovereign bonds left to buy from the public, and so now they’ve buying corporate bonds, as well, and they’re mentioning over there that they want to buy stock.
Then we look at America and just this past week, Larry Summers – I think he was speaking over in Japan, I’m not quite sure – Larry Summers, an authority on America, I expect, came out and said, “Well, if we really get in tough times, we probably will have to have the Fed buying both corporate debt and stocks in this country to support the market. That just totally destroys anything in my belief system that I used to have about a free market and how it worked.
David: And how should we react to that? There are still opportunities, but maybe just a shift in mindset from thinking about varieties of risk as you look at investments. Are we basically saying that the entire investment spectrum has shifted toward everything being a speculation?
Jim: It would seem to me that what you’re saying is right, and I think for most Americans they’ve just turned it off, like I’m sorry to say I did with the Vice Presidents’ discussion on TV, because it just gets to be wearing and old, and you’re not sure you’re getting anywhere. And I think I’m afraid that’s what’s happened in the market. I was a stockbroker. I go way back. I went to work for Dean Witter after I graduated from college. I was an investor back then. I went to work for Dean Witter as a stockbroker. I was what you call in those days a position broker, meaning I would build a position in a stock with all my clients on the basis that two to three years later we might be able to sell it for double or triple on our money, which was neat. It was a high goal. And you then would just work one stock at a time, and found what you could do.
When you look at the markets today that theory is all gone because the markets are, as you say, I think, very, very speculative, and with very little easy way to measure one versus the other. So then you do have to start looking for alternatives, and I don’t think most Americans have a clue. I’m sorry, about that, and I think many, many Americans, therefore, are living day to day and saying, “I hope they take care of me.” (laughs) And I have some answers for that, in my view, what we might do looking ahead, but I don’t think most people any longer, it’s too confusing to even look.
David: I’d like to come back to that, what we might do, but when you mention that most investors don’t have a clue, it seems like that’s what we see as a growing trend, people opting for robo-advisors, the equivalent of a computer trading model, which is supposed to manage everything for them, or just taking the average of the market, sort of throwing lock, stock, and barrel in with what is already a discredited view of the markets, the efficient market hypothesis based on modern portfolio theory. And the best way to do that is buying index funds through a group like Vanguard and just basically adopt an autopilot approach to the markets.
What you just described is radically different. You contrasted the days of having a broker, and then we transitioned through this phase where Wall Street said, “No, no, no, no. No more brokers. We’re going to have financial advisors, and they’re going to represent, but they’ll be the voice of the company, not necessarily independent thinkers (laughs). And now we find that, actually, computers are making the financial advisor irrelevant, unless, of course, you can find unique opportunities, either being long or short in the marketplace, to add value that you’re not going to get from just “taking the average.”
Jim: I think that brings up maybe the subject that we’re working toward, and that’s the fact that I’ve gone to conferences all my life. I go way back to Jimmy Dines, I went to San Francisco to see him with your dad. Your dad had conferences. We went down to Blanchard, New Orleans, where Don would speak quite often. A fellow named Chuck [Geffler?] had conferences all over the world, actually, and Barbara and I got to see South Africa twice, Europe, China, Hong Kong – lots of fun trips. And in another way, you get to see how other people live. So those days are gone, and the public is not involved in anything like that anymore, nor are the brokers. They are all just placing you in this ETF or that ETF, or with this financial genius. And of course, you and I both know that even in the hedge fund industry, it’s shrinking rapidly at the moment because they haven’t had any results that measure up to the option to take 20% of your gains every year if they win. So the whole market structure has changed completely. And your question then becomes, why would you go to the oil conference which was here in Denver in August, or why would you go to the gold conference at the Broadmoor, which was here in September, and what do you learn out of those today versus what they used to be, right?
David: Yes, what did you learn (laughs)?
David: I assume you went because you still throw your hat in the ring.
Jim: Yes, and it’s really neat because it does give you perspective, and I only mention it because some of your listeners or clients may wish to go. The best oil conference I know of is in Denver every August, and the best gold conference I know of – and I haven’t been to them all of course – but one of the best I know of is in Denver in September. And these are different from all other financial conferences that I’ve gone to in that the oil conference is three-and-a-half days of 20-minute speeches from all of the CEOs of the major and minor oil companies in the world.
And the same applies to the gold conference. It’s a conference put on for the miners and their CEOs or presidents of their companies to go up for 20 minutes and explain what they’ve been accomplishing during the past year and where they think they’re going in the next. So you get, in three days’ time, a view of an industry and what the industry is thinking about itself. And it’s amazing. And, of course, this year is amazing even more so because the oil conference, I wondered if anybody would show up, and if they did, if they would have any money in their pockets.
And then secondly, the gold conference, which was just as exciting because they’ve gone through five years of a drought when at least a third of the people in the mining industry either shut down or went bankrupt. So again, they’ve just emerging, which they have now in the last six months, from a long, long, long period of downtime. And so the two conferences were really interesting in that respect.
David: Back on the east coast there is a really smart guy, Jeremy Grantham. He runs a management company, GMO. He has recently picked energy and metal shares as being his two most interesting value plays. He looks at it relative to the S&P 500 and says, “Yes, that’s where money should be going.” Of course, he’s got a reputation for being early. He was early in 1999 pulling clients out of tech stocks, and half his clients left him – left him.
Jim: (laughs) I think I’ve been there and done that. Right.
David: Yes, because he didn’t capture the very peak. And most of those clients came back to him in the next three to four years with their tails between their legs saying, “Look, you were right. You had us out for a reason, and we got greedy, and we weren’t thinking straight.” It’s interesting, because you just described something. It’s an unloved space – it’s an unloved space. Oil is not at its absolute lowest, (laughs) but it’s not at $150.
Jim: I would give you two examples, because they are amazing, and that’s what’s happened in the markets, and that’s why I have a little ring in my voice still. One, the oil conference. Jim Volker, who has been a friend for probably 30 years – I’ve known him at Whiting Petroleum. They were a Denver-based company. Two years ago at the oil conference at the top when oil was $100, Jim was on the stage, he got to speak. He was one of the featured speakers. He said, “Golly, in the last, I think it would be six or eight years, we’ve got you a seven-bagger.”
What that means, for stock investors, is the stock had gone up seven times in value from where it started. And of course, the crowd was very excited about it and that was at an August conference. Three months later his stock reached $90 a share on the New York Stock Exchange and was one of the leading oil stocks, and I just looked this morning, it’s trading at $8.25 and it’s been under $6. So you can see a dramatic, hurting decline in the oil industry, particularly in the stocks because they were so highly leveraged because of the shale oil industry they all borrowed billions. Jim borrowed a couple of billion dollars. And all of a sudden when the market changed they weren’t able to adjust to that with their debt.
And the stock market, in gold shares, it’s even more dramatic. It’s five years of the worst performance I’ve seen ever in my life, because it wasn’t neutral, it was down, and we had an opportunity in October through December of last year to see small middle-sized stocks that used to trade for $8 -$10 that got down to 25 cents a share, and recently they’ve bounced back in the last eight months back up to $1.50 or so a share or $2 a share. But they’re still so far below their old highs from the excitement of 2011. So those industries have gone through an amazing, amazing washout, and that’s the only reason, from what you say, Dave, it is right that perhaps if you are an investor in market shares that they might be something you would look at.
David: Certainly the industry-specific conversations that you would have with executives, whether it is the Denver oil venue or the Denver gold show that was in September, for me, I think that’s very helpful information. Some of what we look at is even bigger picture, sort of the macro backdrop. You look and you say, debt to GDP ratios – we’ve got corporate debt, which, as you say, is a killer, when you have a cyclical downturn in price, and it has very much cleaned out those in the gold space who were over-leveraged. But even as a country, you look and say we haven’t had debt-to-GDP ratios this high since World War II.
David: Here are the threats to businesses of any sort, regardless of the sector. You had U.S. corporate tax rates which were, right after World War II, about 6% of GDP, so they’re paying a pretty hefty price. Today, corporate tax rates are about 2% of GDP. And personal income tax, we were, in that same timeframe, rolling the clock back, we were about 6% of GDP and now we’re 9%. So individuals are paying more, but corporations are paying far less than they were following World War II, and you wonder if the desperate nature of the government leviathan doesn’t shift focus and require more of corporate America.
Jim: I think that’s what the election is about. Obviously, and to me, the election – I’m like everyone else, I think the election determines whether there is an America that we know or whether it changes completely – the culture and the country changes completely and there is something new and different. I believe that personally, but that doesn’t mean anything. That is the argument, I think. What you’re discussing is very much the argument. But I think the overlay, which is even scarier to me, and scary is the right word because it’s debt, and the debt numbers are so high now, tens of trillions of dollars. And it’s not just America, every country is so far over-indebted that there appears to be – now you can tell me, David, because you’re sharper on this – is there any way out? What is the way out?
David: (laughs) We’ve had this conversation in-house quite a bit, and even in recent weeks, going back to comments from David Walker. He said on his way out the door, “No, no, we can grow our way out. That’s not a problem. What we need is 50 years uninterrupted of double-digit GDP growth…”
Jim: (laughs) That’s right. That would be right, yes.
David: And by the way, that was about eight years ago and in the interim we’ve doubled our national debt (laughs) so we’re not exactly moving the right direction, either in terms of growth, or in terms of what represents real headwinds for us. So for the individual investor, let’s come back to that because the individual investor has to make decisions. And you say, even today, sitting in cash is a speculation because you’re betting on the outcomes of central bank management.
Jim: You’re betting you’ll get your money out of the bank the day you want it, to be honest. If you know what a bail-in rules you know that could change, as well. I would go back to two things very quickly just because that’s where we started, or had in mind, and that is, the gold conference. What did we learn? We learned about three things and I had to pass it on to you because it was all different, and changing, and very, very positive. I just gave you a quick summary because it’s really interesting. The people who were there and speaking are all miners, and by miners that means that they graduated from the School of Mines, or the South Dakota School of Mines, and they believe in building things and mining and getting something out of the ground.
So there were no people speaking on the terms that you and I are about the monetary system and where we are, they were speaking on whether mining could be profitable, whether they had reduced their prices and their costs of getting more out of the ground. Mining is much more difficult. All the good, easy gold mines have been found. In the old says you would go into an underground mine and find 15, 20, 25 grams per ton that you would get in gold out of a mine. Today they are mining open pit mines and getting 1-3 grams per ton. So the whole scheme of that system has changed.
The other thing that is fascinating to me, I just thought it about it listening to them, is that the upfront price to get into the business is huge. They have to spend 100, or 200, or 300 million dollars in mine development and going through all the regulations, which takes two to five years before they can open a mine, and put all that money up front. And that sounds awful, but of course the kicker is that if they do get the mine in operation under today’s economics, they usually can pay back that mine and pay back their total cost within three to four years, at most. So it’s a huge profitable enterprise if you get over those first few years of the hump.
But the first hump is really difficult because it takes a lot of money. And all these people are positive. There are five different streams, ways to find money today. They used to go to New York and they used to sell stock and that would dilute their company. Now there are many other ways to get money to finance a mine and the good people, not the marginal, but the good people are getting money to develop and increase the size of their mines. And they are very optimistic.
The last thing I would say is, from that conference it is fascinating because they are saying they’ve brought their mining costs down. In one of the leading silver mines out there, one of the quality mines, it was costing them $19 an ounce to get silver out of the ground four years ago and they’re down now to where it’s $9 an ounce to get silver out of the ground. In the gold business it’s the same way. They used to talk about $1200 or $1000, perhaps, to get gold out of the ground and now most of them who are still in business, the others are gone, are saying somewhere between $600 and $1000 an ounce is their cost to get gold out of the ground.
So they’re looking ahead and saying, “Golly, if we get back to $1500 or $2000 gold, or if we get back to $25 silver,” this was the whole crux of their conversation, “this is really going to be fun.” (laughs) Now, when you compare that to some people who say gold is going to $10,000 it blows your mind, it doesn’t even make sense. But it’s a different framework and it’s because they’re miners, they’re not economists. I thought it was fascinating to see what they were doing, and they’re all very positive on that basis.
David: So point number one is that they’ve reduced costs dramatically.
David: Is point number two is that there has been a change in sentiment, they’re more optimistic?
Jim: Right. Those that are left are very optimistic, and even though it’s very hard to find gold, the new technologies, and honestly, the price of oil coming down since these are open pit mines and take huge, heavy equipment, it all works in their favor.
David: It argues for there being several quarters of significantly improved numbers. Folks that maybe were not making any money over the last four to five years now extinguishing debt, putting money in the bank, doing deals with folks that maybe weren’t as smart in managing their businesses and now maybe even stepping in and buying those assets for an undervalued price.
Jim: What you just said is really interesting. One of the oldest – actually, it’s a silver mine that has been in existence for 70 years. That’s one of the leading companies. Most of their properties have been taken over from other people who couldn’t mine it properly or couldn’t get it done. So they’re going in, and with technology and with better mining technique, are making money. It’s fascinating. And they can do it.
David: We look at things like, we mentioned how these shares are cheap relative to the S&P 500 and relative values can be helpful. Would you say that they are attractive? We also talked about the over-valuation of assets, given central bank money-printing and what have you. Are they relatively attractive because the S&P is so expensive, or because we’re actually looking at something that is overlooked, truly under-valued, that is, in the energy and the metals shares? And does that become compelling?
Jim: There would be two answers to that. One is, gold mining shares six months ago have never been that low in relation to the price of gold, historically, ever. Going back to 1968, they weren’t even that cheap back then. They were so over-sold you couldn’t believe it. That’s the good news if you were an investor. The bad news is, the whole world market system is speculative, and certainly owning shares personally, just for me, and I’m an older person, the only money I have, we have a little in the markets, obviously, because I’ve done it all my life. The money we have in the markets, and mined, is totally speculative money. There is serious money that you have to invest in other places hoping that you can pick assets that will retain their value.
David: And that might be something that has cash flow and is a real asset. It could be an apartment complex or farmland that has a reasonable lease, things like that where you’re dealing with something that is, perhaps, outside of the financial markets. But as you mentioned earlier, even today, cash is a speculation.
David: And that’s something that’s difficult for people to conceive of. But you and I tend to see gold as money. The vast majority of folks prefer things like money market funds and…
David: Sure, yes.
Jim: Plastic, I think, is better than 50% of all transactions today.
David: We’ve got some changes coming in the money market funds October 14th. But look at gold and yes, it has had a good move since the beginning of the year, but the folks at UBS have basically said, “Look, it’s still very under-owned.” There is about 57 billion dollars that have been put into gold ETFs – that’s in the U.S. markets – in contrast to 3.85 trillion which is still sitting in U.S. money markets.
David: That’s about 68 times – 68 times – greater.
Jim: That’s because people either don’t know what to do, or they don’t care.
David: Do you think they appreciate that cash is a speculation?
Jim: No. No, I don’t. That would go into what has happened in my lifetime, Dave, and that is that it’s a sorry opinion just for me, not from anyone else, but I think the culture in America has changed completely during my lifetime. I remember my granddad lived in our home. He was a Methodist minister and came to Colorado in 1890, and when his wife died he lived the last six years of his life with our family. He used to come upstairs and tell us what he thought of FDR. A culture changes so dramatically in a person’s lifetime that unless you’re aware of it you don’t realize it.
That’s the hardest part I’ve got that is next to impossible is to bring yourself up to speed on what is happening around you and how people think today and what they do today compared to what it used to be in the good old days, because the good old days are gone. It’s all new and different. I think one thing you’ve mentioned that people bring up, and I think you’re in the middle of that business, is that personal assets that are held become very important and they have to be held by you and I don’t think you can trust the system. In an indebted society as we are in, the whole society is indebted right up to their necks, so I think as an investor you try to find things that you have physical control over, if you can do that. That makes sense to me. I’m sorry, that’s what it looks like to me.
David: We talked about this in last week’s Commentary where if you look in the European banking space the interbank lending suggests that within the TARGET2 system there is major stress. Banks don’t trust banks. Commercial banks do not trust commercial banks to loan money to each other on an overnight basis. What is it about the institutional frailties that they’re looking at that is not well understood by bank depositors?
Jim: They know the leverage involved. I think the interesting thing which came out a couple of weeks ago was the fact that in Germany the sale of personal vaults is going through the roof (laughs) which would tell you that the Germans aren’t stupid. They’re taking their money out of the bank and they’re putting it either in gold or silver or maybe it’s food for all I know, but something in a safe in their own house and they think that might be a better way to go. And the safe sales are way up in Europe. People want some personal control over their savings, if they have some.
David: And where those sales have gone through the roof has been the two places where they’ve experimented with negative rates the most.
Jim: This is really an exciting time, David! (laughs) And you’re in the right place at the right time to have a lot of fun. And hopefully, if you make the right choices you can really help an amazing amount of people and that’s probably the best part of what you’re doing.
David: This is where I would go. My question would be this. If culture has changed, and there are less people who appreciate what is in front of them today, whether that is just sort of a general amnesia as it relates to the past and the way markets work, have opportunities gone away, or are they actually exaggerated, where they’re bigger because there are less people participating?
Jim: Just a personal opinion, I think the opportunities, in many cases, have gone away. I think what you mentioned earlier, the fact that all we have to do is get back to 3%, or 5%, or 7% growth and we’ll cure the whole system, if you look at the freedom and the enterprise in America and the opportunity, when I got out of college I had six job offers. I doubt whether many people have that kind of a job offer today. I graduated in engineering and business, two different degrees, and there were places to go to work.
I think it’s darn hard to find a place to go to work today and I don’t think there are as many growth opportunities for people today in America as there were. I think we’ve slowed down. Regulation certainly slows everything down and high technology really slows everything down because technology replaces a lot of things that we used to do physically, or in a different fashion. So I think it’s a changed culture, and I think that’s the negative.
The positive is that there is always an opportunity (laughs). Rome disappeared, but Italy is still there. Of course, Italy is in the midst of a giant banking crisis today, but they go up and down, Germany goes up and down. I think the United States might be the same, we go up and down. The Depression years certainly weren’t any fun, from 1930 to 1940 it wasn’t much fun in America unless you were just in exactly the right spot. It was very, very difficult for most people, but if you were in the right spot, if you were in the entertainment business, if you realized that the entertainment business – people wanted to have a smile, they wanted to be entertained – you had some of the best years you ever had. So I think the neat part of today is looking for the new opportunities which may be new and different from what we know.
David: It means staying engaged. It means thinking. It means keeping your eyes wide open.
Jim: And watching what people do. And then what they need, and what they use. That’s always struck me as being the focal point. If you can figure out where people will be going next year and the year after, and what they will need, and what they will use, I think you can always come up with a pretty good business idea and a business plan.
David: So there are problems, but there are also opportunities, and a lot of navigating these waters seems to me has a lot do with attitude. You can shut down and say, “I just can’t believe it’s not working the way it used to.” Or you can say, “I’m disappointed, to some degree, that it’s not the way it used to be.” But it’s different, and you’ve got to adapt and change.
Jim: Well see, you’re a thinker, and that’s the scary part because you’re unique, and that’s because you come from a family where your dad and your mom are very, very thoughtful in what they do. The catch is that I think television, and you’ve heard me perhaps talk about magic boxes. And I’m not alone. People my age, and I’m old, will go to a restaurant and see half the people there, or more, looking at their magic box or at their cell phone and not even having any conversation at the dinner table or the breakfast table. It’s a total change in culture and a total change in outlook on life.
I think that’s part of what we have to face up to, that this has changed dramatically. TV changes people’s lives. It did change our lives, for sure. I used to listen to FDR on the radio and I can remember the tone of his voice. It sounded very serious to me, and I never knew the whole time he was in office that he was in a wheelchair. Those things wouldn’t happen today, would they?
David: I remember Neil Postman’s book, Amusing Ourselves to Death. It was the first clear articulation of what was happening to the average person as they spent more and more time watching television and being entertained as the chief end of man. This is what you strive for. At the end of the day you go home and you kick up your feet and you watch television. On the weekends you watch movies. And what you’re saying is, basically, we’ve just got technology, which has brought the delivery of entertainment to us, not only at the end of the day, but any time we want it during the day. I think of Taleb’s book, The Black Swan, and I think of this heightened mediocrity where everybody is sort of moving to average. Everyone thinks the same way. What are your thoughts?
Jim: (laughs) I’m with you because I think The Black Swan has some amazing, amazing thoughts and ideas in it. The biggest part is, I took statistics and had a really hard time with it in college, to be honest with you. We had great big Marchant calculators and they were tough for me. And when I read The Black Swan I realize that the Bell curve is a nothing and doesn’t make sense (laughs). That’s shoots down statistics.
It means to me, number one, it’s very scary, because everything that we see and do today is measured in dollars and is measured by a calculator and instantaneous update. You mentioned it in the stock market. That’s how they trade the stock market now, and they’re not doing very well with it because they all have gotten to the point of no return, but that replaced the stock broker who used to actually call a client and say, “Here’s an interesting idea and you can buy it and in maybe three years this company will have grown.” That whole picture of life is gone, the whole long-term picture of life is gone. So I would answer you in one term, people have gotten instantaneous in wanting instant gratification.
Number two, it brings us down more and more and more, as Eustace said, to the average, which is very scary because you want individuals and individual thinking going on, and individual enterprise, and failure. When I was at Dean Witter, Enterprise Fund was one of the best performing funds in the United States for a period of six to eight years. I got to know those people, and Fred Carr, who ran the fund, said, “I won’t hire a portfolio manager unless he’s gone bankrupt once.” That’s an amazing statement to think about because it says that you have to know the risks on the downside before you can appreciate your opportunity on the upside.
David: Yes, so we don’t have that. We have, instead, if you diverge from the middle point of that Bell curve…
Jim: People don’t want to take risks anymore, I don’t think, David, in America. Do you? Risk is what built the country, so I’m sorry, that’s a little bit of a dire statement from me, but that’s what I think.
David: Well, from the standpoint of the publicly traded markets it means that there is probably less opportunity moving forward, but from the standpoint of entrepreneurship, if there are less risk-takers I would look at that as a positive.
Jim: Right. That’s where I would land.
David: Yes, so when I think of my kids, grandkids, training them to – I’ll give you an example. This next week I’m taking my eight-year-old and we’re going to climb Fisher Towers in Moab, Utah. It’s about a 300-foot climb. I can guarantee you that he’s going to experience every kind of fear that I do. I have a fear of heights. I don’t like to climb to high levels, and yet you learn to deal with the fears that go into failure, go into falling, go into doing things that are challenging and uncomfortable. It’s my belief that he stands a better chance of being a 12-year-old with an entrepreneurial idea and putting it into motion, and refining that by the time he’s 18, and by the time he’s 24, on his fourth or fifth business, he’s actually developed some maturity at a very young age in order to be successful in the entrepreneurial sphere. And guess what the landscape is?
Jim: That’s a huge challenge for you and people with kids your age. There really is a giant challenge looking ahead, but you’re right in what you’re doing.
David: To me it’s not only fun but it says, yes, we’ve got some challenges ahead, and those who are thinking creatively…
Jim: I would give you another answer just from my personal life, and that is, every failure I had – I learned way more from my failures than I did from my successes. I’m just telling you the truth. When you hit your head against a wall, it hurts, and you don’t do that again. And when you run down the track and you win, you say, that’s great, but you’re not quite sure why you got to win. So I think failure is part of life and I think each time, if you pay attention, a failure leads you to your next chance for success because you say, “I know I can’t do that, I’ve got to do something better.”
I think that’s where we are right now in the economy and in this country, and I think that’s the one opportunity America has to stay in the position it is in, in the world, and I’m not sure whether we can do it or not, because I think most people don’t want to take risk. I think they’re risk-averse at this point in time. And that’s too bad if that’s true. I think that’s why they buy ETFs instead of buying an individual stock. I think that’s the answer. I don’t know, I think that’s why they go for entertainment today and say, “I won’t worry about tomorrow, I’ll just be entertained today. I want to watch football all weekend.” I heard somebody the other day at a restaurant say, “We’re going to watch football tomorrow. There are three games we want to watch.” I thought, “Golly. On Sunday, one, not going to church. Two, watching three football games. Is this really America?” (laughs) What do you think, David?
David: (laughs) I think that what Postman wrote decades ago is absolutely true, that we are some form of the walking dead, amusing ourselves to death. It’s more commentary on what’s happened to the mind of America, and the heart of America. What I like to do is be reminded of Neil Howe and William Strauss’ book, The Fourth Turning, where they say, “Yes, you know what? Actually, this happens all the time. About every 100 years what we’ve talked about happens, and then it cycles all over again.”
Jim: And I think if you believe in the cycles you can identify where you are, and number two, you can start to plan. You have to look ahead. That’s the scary part. I’m not sure many people look ahead anymore. I think they get they discouraged. But who knows? We’ll find out.
David: It’s where my greatest source of hope lies, which is, in the context of crisis you see leaders that are shaped by that experience and just as you described your family experience, in having family move out west in the 1890s and living through the great depression, living through World War I and World War II, this is very interesting for you, being a child and reflecting on what you were hearing about World War II and FDR’s Fireside Chats.
Jim: Yes, on their outlook on life and what they enjoyed.
David: Over the next 20 years, it’s your grandkids that will represent the greatest opportunity and hope for our country, and maybe we’re not quite there yet. Maybe we are. Maybe culture is ready for change, and maybe we’re not, which is sobering for me as a father because I think, well then, I’ve got a lot of work ahead.
Jim: You have an amazing project. It’s so much bigger than what Barbara and I – we had four kids and all four have turned out to be amazing people. As far as I’m concerned, they’re amazing adults. They’ve all been married, and they’ve only been married once – all four of them. That’s pretty remarkable in today’s society. But it’s a huge project to bring up family now, and the reward will be amazing if you can get it right (laughs). I would look at it from that point of view, wouldn’t you, David?
David: Well, you know, we circle back around to the markets, and I think that rings true. It’s an amazing project if you can get it right.
Jim: The catch now, to sum up everything I saw at the gold and oil conferences, that those businesses have changed completely, in character, from what they were 10, 20, 50 or 100 years ago. It’s really amazing. We were up at Cripple Creek this weekend looking at the Aspen – beautiful Aspen – and there’s a mountain up at Cripple Creek which I had never noticed before. It goes and goes and it turns out it’s the mine tailings from that gold mine which has now been in operation for over 100 years, and now it’s an open pit mine, if you look at it, and it’s still a profitable open pit mine. The last time I heard it was owned by South Africans, I’m not sure who owns it now. But you look at life and say, “Some things all go on and on and on, but most things do change, and the change is what creates the opportunity.” That’s the only reason I can get very excited about what I see every day, is that what makes me feel bad, if I think for a moment, may present me with something new to do, and that is a very exciting way to look at what’s going on.
David: Jim, thanks for joining us on the Commentary. I love our conversations and the insights that you bring.
Jim: Hope we’ve come up with a good idea somewhere, David. Thank you very much.
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Kevin: Something, Dave, that I’ve learned from Jim, and I’ve learned from your father, I’m learning, actually, watching your family and the way you raise your kids, is to think long term, and to look in the rear-view mirror, actually, from a future historic point. I know how you think. You think, “Okay, 50 years from now if I were looking in a rear-view mirror, am I doing today what I should have been doing?”
I think of Mark Twain. When he was an old man and he said, “You know, I’m an old man now, and I’ve had many problems. Most of them never happened.”
Kevin: I love that because each day I look at my worries and my concerns and I realize that there are so many opportunities, as well.
David: And I want to come back to something that Jim was reflecting on, an idea, I think, developed by Doug Noland, that today everything is a speculation. While that can be disconcerting, from the standpoint of, “I don’t want to be a speculator, I want to be an investor. I want to be reasonable about this.” What has changed is the context that we’re in, and that is the artificial world of central bank control of prices, and of interest rates, which affects the nature of all assets.
And I think the profound nature of that change won’t be appreciated for many more years. What it requires is that individuals step up their game. It requires them to engage fully and acknowledged what they’re committing to. Sometimes a no is the same thing as a yes. You say no to this and you are, by default, saying yes to something else. In this case, do you choose to leave your money with Janet Yellen? Do you choose to leave your money with XYZ management company? Do you choose to leave your money in a pot of gold buried in the back yard?
Whatever you do is a choice. Even if you say, “No, I’m not willing to do anything.” I’m sorry, you’ve chosen to speculate. And you are not in the position to go neutral because that’s what the Fed has created. That’s what the ECB, the Bank of Japan, the central banking community, as we talked about several weeks ago with a very bright lady from Harvard. You are being corralled into particular asset classes. There is no neutral.
Jim: And I loved what he said. He said, “David, I’ve learned more from failures than from successes.” America is actually not built on success, it’s built on failure after failure after failure. Churchill said what success really is, is how many times do you get knocked over, and then how many times can you get up? Early in the conversation Jim said something that is really frustrating to both of us, you and I, and that is that the central banks have eliminated our ability to measure risk the old-fashioned way, with interest rates. But guess what? Risk still exists. We may not be able to measure it the way everybody can measure it, but maybe there is an advantage there, Dave, because if you can see risk where no one else does, then when the failure comes the opportunity is profound.
David: I think one of the ways that you look at that, and I look at that, is to say, “Yes, there is this homogenization which is occurring across investors where you just take the average.” We talked about it just briefly, referencing The Black Swan, where Nassim Taleb talks about the Gaussian Curve, and how there was a practice in the 1700s, this fascination with statistics and how everything needed to be average, and everything outside of the average was uncomfortable for those who were closer to the average.
Kevin: The longtail, they called it.
David: Right. And so it’s interesting, if you can identify homogeneity in today’s stock markets and today’s bond markets, you’re also identifying the clustering and the greater concentration of risk. So even in a world that is managed and controlled, learn how to view the homogeneity of the marketplace and recognize that there are gaps all around it. And that if you have the courage to step outside onto a longtail, you actually have greater opportunity there.