In a recent interview for the Equity Management Academy, Rick Rule, Chairman of Sprott US Holdings, commented on the academic nature of the Fed, the continued need for low interest rates, the hidden strength of the US economy, and the durability of the US dollar as the world’s reserve currency.
The Fed
“Of the candidates for Fed chairman,” Rule said, “she [Janet Yellen] was probably a good pick.” However, Rule had plenty of criticism for the process of selecting a new chairman. “It appears that among the credentials you need to become Fed chairman is that you have never had gainful employment, at least in the private sector.” He focused on the academic background of many in the Fed, including past chairmen. In a recent article in Foreign Affairs, when asked about why he missed foreseeing the 2008 financial collapse, Allan Greenspan said, “The market did not conform to the laws.” Rule argued that the idea that our economy ought to conform to laws instead of the other way around is based on an academic view of the world and is “very strange.”
Given the aggregate total of US government debt, Rule said the Fed cannot “afford to let interest rates rise.” Unfortunately, Rule argued, “The voters of the United States by and large support this….There are more consumers and spenders than producers and savers.” Since low interest rates transfer wealth from savers to consumers, the Fed policy of keeping interest rates low has “widespread support.”
Regulation versus Innovation
Rule sees the US economy as one divided between the government and regulation versus the private sector and innovation. He mentioned the innovative sector of oil drilling, which helped “kick off the shale revolution” and “increased production by 2 million barrels a day.” He called such an increase “incredible.” He also mentioned Facebook as a sign of US innovation. Rule said the wonderful things in the US economy “are dramatically divorced from the government and government policy.” He said that any US recovery in the next 10 to 15 years “will depend on whether the private sector begins to triumph over the public sector or whether the inverse happens.”
Rule argued that the Fed was able to being tapering QE because the government raised taxes on the productive parts of the economy, which reduced the deficit and allowed the Fed to decrease the amount of money it had to print or, as Rule called it, “counterfeit.” He argued that the Fed has no choice, since it has to hope for an organic recovery that does not rely on liquidity, given that the Fed has already pumped as much liquidity into the economy as it can. He said, “We can’t sustain this level of entitlements…[so the Fed has] to decrease the purchasing power of those obligations, so it continues to counterfeit money.”
Gold and Silver
Turning to the gold and silver markets, Rule said, “We are going to see a very volatile market, with higher highs and lower lows.” In terms of mining stocks, he said that the extraordinary bear market brought some buyers into the market, but not many. He sees today as similar to 2000-2002, when the overall market was soft, but better exploration juniors began to generate 100% returns. Rule said, “If we begin to see capitulation pricing this year, we will see a recovery that will stun even the most optimistic investors in the market.”
US Dollar Durable
Rule argued strongly against the idea of the Chinese renminbi replacing the US dollar as the world’s reserve currency. Although the emerging markets do not trust the United States, “they trust each other even less.” Four months ago, when the United States was on the verge of defaulting on its sovereign debt, the market responded by bidding up the value of the US dollar and US debt. This showed the “durability of the franchise.” Although the US dollar has major problems, it is, Rule said, “The prettiest mare in the slaughterhouse.” The Chinese renimbi is hindered by the opacity of the Chinese economy, the structure of an economy where 20,000 people attempt to rule 1.2 billion, and by the depth of the securities market. Rule said all that talk about the Chinese currency superseding the US dollar helps to do is “sell newsletters.” The depth of liquidity and transparency of the US dollar is unrivaled.
Rule believes that China is buying gold, not to tie their currency to gold, but because China is getting hurt by US treasuries, which pay 3%, even while the buying power of the dollar declines by 6%. Therefore, China is “getting banged for 300 basis points per year.”