In This Episode

The Coronavirus continues to spread, now with cases outside of China. Dan discusses how you can track the outbreak and begs the question “Is the situation worse than is being reported?”

If so, how much worse? And how does that affect the global equities market?

He then introduces this week’s guest, Raoul Pal. Raoul worked as a hedge fund manager at Goldman Sachs before retiring and founding RealVision.

Raoul now also writes for the Global Macro Investor in an effort to advise institutions on their macro-investing strategy.

Dan and Raoul discuss global macro ideas and Raoul gives the listeners four simple words of advice to help their portfolios.

 


Featured Guests

Raoul Pal
Raoul Pal
Raoul Pal is a former hedge fund manager who retired at 36, Raoul Pal is a co-founder of Real Vision, a financial media company offering in-depth video interviews and research publications from the world’s best investors. He has run a successful global macro hedge fund, co-managed Goldman Sachs’ hedge fund sales business in Equities and Equity Derivatives in Europe, and helped design the BBC TV program Million Dollar Traders, training participants in investment and risk management strategy. Raoul retired from managing client money and now lives in the Cayman Islands, from where he manages Real Vision and writes for The Global Macro Investor, a highly regarded original research service for hedge funds, family offices, sovereign wealth funds, and other elite investors.
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Episode Extras

NOTES & LINKS           

  • To follow Dan’s most recent work at Extreme Value, click here.
  • To check out check out Raoul Pal’s work at RealVision, click here.
  • To hear Steve Sjuggerud’s big announcement for Febuary 12th, click here.

SHOW HIGHLIGHTS

1:00 – Dan gives us an update on the Coronavirus, how it compares to similar outbreaks in the past, and shows you how you can track the virus yourself. Are cases being underreported? Which stocks will suffer the most? “Lots of uncertainty… and markets hate uncertainty.”

14:38 – Dan reiterates his advice for investors, “Anyone who’s taken my advice over the last few years is well positioned coming into the Coronavirus episode…”

17:00 – Dan speaks with former Goldman Sachs hedgefund manager and co-founder of RealVision, Raoul Pal. He now writes for the Global Macro Investor in an effort to advise institutions on their macro-investing strategy.

23:30 – Raoul Pal discusses how the financial crisis motivated him to start the Global Macro Investor and RealVision… “I knew what was going on, I was at the epicenter of it all… friends would come up to me and say, ‘well why didn’t we know?’ and that sat really uncomfortably with me. Why do some of us know and others don’t?”

30:38 – Raoul shares a startling discovery on the US dollar and what that means for the global markets, “There’s not enough dollars in the world to service the debts.”

 32:30 – Raoul shares his overall macro view for the long term. “…so you’re long gold?” – Dan

40:00 – Dan gets Raoul’s take on the Coronavirus, and how it’ll impact the global markets. “It’s all about how people react to the outcome…”

44:10 – Raoul makes a prediction about interest rates again in the upcoming months.

52:30 – As the interview winds down Dan asks, “If I could force you to leave our listeners with only one thought, what would that thought be?”

53:50 – Raoul leaves the interview with one last piece of advice… the best $1 investment you can make.

59:00 – Altius may be undervalued, but it’s trailed the S&P 500. Is it still a good investment? Dan answers questions from listeners in the mailbag.

 


Transcript

Recorded voice:          Broadcasting from Baltimore, Maryland and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.

Dan Ferris:                 Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Hey, man. We're going to talk with Raoul Paul today from Real Vision. I promise you'll love this. He's unlike anybody else we've ever interviewed. He just sees the whole world and just delivers you one pristine, perfect trade on a silver platter. And I'm pretty sure he's going to do that for us today. But first, let's talk about the thing people can't stop talking about. We can't not talk about this. And of course, I’m talking about the Coronavirus. OK?

So you can track the progress of the disease in China and elsewhere by looking at the Johns Hopkins Coronavirus tracker. If you just google that, it'll take you to it. And it's got a little dashboard, and it tells you how many cases. We're at more than 20,000 cases of this thing now. And it shows you a map of where they all are, and it tells you how many people have died and where the cases are and where the people have died and how many people have recovered from this thing too. So there's 20,000 cases of this thing right now, and that's up from, you know, January 19th when there were like 282 cases.

And the overwhelming – 99% of these are still in China, although there are more in several other countries. And you know, it keeps on keeping on. Now, of course, there are cases on every continent except Antarctica. And of course, if you know me at all, you probably know what I'm about to tell you. Nobody knows how this will ultimately play out. I think it's a little worse than that, though. Because along with the uncertainty, I don't trust the numbers coming out of China. You just think about that culture and that government for a minute, and they have a tight grip on society there. You know? They have the surveillance society.

And everybody, you know...there's a strong incentive to conform and not rock the boat. You're not allowed to criticize the government. You got to do what they say. And so, there's this huge cultural thing where – the worst thing in the world for a billion – for Chinese, would be for anyone to feel like the government doesn't have things under control. So the government gets things under control. And it makes it hard because – they want to control the narrative so much, it makes it hard for the outside world to ever know what's going on inside.

And remember, like, the Chinese government only started reporting the extent of this thing once folks in Hong Kong started getting it. And then, you know, the information flow out of Hong Kong is much better. So they had to kind of fess up. According to a January 22 article in The New York Times, the country has tightened its grip on Internet media and civil society since the outbreak of SARS virus back in 2003. The article paints this picture of a country that should've become more open after that, but instead has become more clamped down and closed off.

A former Chinese journalist quoted in the article said, "Only the government is allowed to speak publicly about the virus. Everybody else – they just want everybody else to just shut up." One thing I've noticed from the Hopkins statistics – the Johns Hopkins statistics – is the overwhelming majority of the deaths were in the Hubei region where Wuhan is, where the virus started. And everywhere else, the death rates are kind of low. So, you know, if you wanted to assume the worst, you'd have to assume that maybe deaths are being underreported elsewhere in China possibly. The virus has been compared to the SARS and MERS viruses. After nine months, there were like 8,000. Just shy of 8,100 SARS cases worldwide and then it was over. MERS has been going, and it's still going since 2012.

And there's only 2,500 cases reported. And, you know, Corona passed those numbers in days. Right? And it's over 20,000 now. SARS killed 10 % of those infected. MERS has killed one-third. So far according to the reported figures, looks like roughly 2% of reported cases have resulted in deaths. But again. Overwhelmingly those numbers come out of China. So I'm not really sure. H1N1 flu in 2009 killed 285,000, which was a really low death rate. A lot of people got that. The death rate is like .02%. Nothing. The Spanish flu of 1918 killed tens of millions of people. I've seen estimates as high as 50 million. Maybe 10%. Maybe as much as 20% of everybody who got it died.

But so many people got it, and medical care was so poor at the time that lots of people died. Overall I'm going to assume that in public, they'll do whatever they deem necessary not to lose face and to make the world understand that they have this under control. They might underreport the new cases, they might underreport the deaths inside the country. They'll prosecute anybody who says anything about the virus that they don't like or even hints at criticizing the government's handling of it. You know, I do assume, though, that they'll do anything to stop the spread of it. That's one good thing that China will do. They'll shut down the whole country. They'll stop at nothing trying to get the result they want to create.

So there'll be a significant impact on global commerce while this is playing out. And just like – for example, China air travel is 12% of global air traffic. That's huge, right? Also, for example, crude oil is already down substantially. Down 13 or 14%. That's a 1.7 trillion-dollar global market. If the price falls, you know, 30% that's almost 600 billion. You know? Just sucked up out of that if that happens. You know, if Corona keeps scaring people and spreading and governments and businesses keep shutting things down to combat the virus, I think oil will keep dropping and we will get that 20 or 30-% drop.

While the U.S. stock market doesn't seem to be that scared, copper is down 10%. Gold is off a few percent. Companies like Apple and Starbucks have closed stores in China. Apple says it's temporarily closed all 42 of its stores in China and will reopen in February 10th. It'll be interesting to see if that comes true. If it doesn’t, you know, maybe the market takes it as a bad sign. Remains to be seen. Starbucks also said it's closing more than 2,000 of its 4,300 china stores. Also, you know, temporarily. I’m doing air quotes. You can't see me, but I'm doing air quotes. "Temporarily." We'll see how long "temporarily" is. They're not alone either. McDonald's, KFC, Dairy Queen, Pizza Hut all closing stores in China. IKEA has closed all 30 of its China stores. The Gap, Old Navy, H&M, all closing stores in China.

Macau, the so-called semi-autonomous Chinese territory that is also the biggest gambling destination on Earth, has asked that all of the Casinos close up. Last night as we record this podcast – earlier in the week, I spoke with Michael Covell, a trader we interviewed on the podcast not long ago. He's based in Vietnam. He asked his father, who is a doctor in the East Coast, to send him some masks to wear over there in Vietnam. His father said, "Yeah. Sure. I'll send them to you." And then, his father got back to hm and said, "They're back-ordered. It'll take four months to get them." And he said, "Go on Amazon." And I did. I went on Amazon.

And this is not like getting masks in Asia. This is buying them in the U.S., right? And I went on Amazon. I eventually found one source that said it could deliver them to me in a couple of days. But several of them said it would be like a few days. So, you know, I know a couple other people – like some people who are on the ground in Asia or even in China recently – and they report weird things like, you know, people being confined to their apartments by force. And this one guy on the Internet posted this thing. And you never know if these things are true or not. But it seems plausible, given what's happening, given the Chinese government...that there was this huge piece of metal welded to his front door, preventing him from leaving his apartment.

And, you know, I would suspect that there's a lot of that sort of thing going on. My overall sense is, we're in the early innings of learning about the true state of the virus. I saw this one report that said computer models suggest the number of cases ought to be closer to 100,000 right now. And that was when the Johns Hopkins map said less than 18,000. That's the way these things go. Lots of uncertainty, nobody knows exactly what's happened. Nobody can predict what'll happen. Markets hate uncertainty, of course. If it gets bad enough and there's like outright panic in society in China – which I kind of don't think will happen – various financial markets might show panic as well. China is already trying to get ahead of all this with government stimulus in the stock market. The first day the market opened earlier this week, it fell 9%.

So their efforts are not quite bearing fruit there. But believe me. The Chinese government will absolutely have no qualms and zero hesitation in, you know, borrowing whatever they need to borrow, doing whatever they need to do to prop up the security's prices and its own economy as much as humanly possible. The Chinese economy is up eight-fold since basically the beginning of the century. And I'm sure some of that growth was the result of the stimulus designed to combat the depressing effect of SARS back in 2003. The Federal Reserve will probably take massive action too, I think. You may have heard that markets are discounting a June rate cut. I think it'll be more like March.

And I don't know how much, you know, they've been doing 25 basis points. You know, maybe more than that. I don't know. I don't really have a feel for that. But definitely sooner rather than later, I think. We interviewed Harris Kupperman in a recent episode, you may remember. He said he doesn't know exactly what the timing will be, but that you can and should buy the entire periodic table of elements; meaning commodities, because China's a big commodity user, and they will stimulate their economy massively. And it should support those prices. Of course, they're falling now. So, you know, timing is anybody's guess. Right?

So there's a real bottom line for investors, right? Everybody wants to know, "What the hell do I do? Anything, nothing, sell, run? Make my own, you know, surgical masks?" And I have to acknowledge the S&P 500, it's maybe – as I speak to you – 2% off its January 17thhigh. But, you know, the market is kind of up as I'm speaking to you. It's like, "Hey. All clear. Nothing to worry about. You know, everybody go to your homes and places of business. Nothing to see here. Move along." I don't think that's true. I don't think it's really over yet. So, you know, I mean, all that needs to happen to take another – what, I don't know – 5%, 10% or something off the S&P 500 is for the market to start believing, "Wow. This thing was much worse than we ever thought."

But of course...you know, it's funny I'm talking about this. Because I was going through my phone yesterday deleting old messages and notes I'd taken at conferences that I didn't need anymore. And I came across this one note, and it just had this quote on it by the Chinese philosopher Lao Tzu who lived, I think...it's not known. Maybe between the 4th and 6th centuries, B.C. He said, "Those who have knowledge don't predict. Those who predict don't have knowledge." And man, is that right up my alley. I'd like to think I know something, a little something after decades at this, you know, negotiating with financial markets on a daily basis. So I don't like to predict.

And I think that's – I don't know. I think that's something you learn. If you learn anything from financial markets, trying to predict is sort of not a great idea. You can try to trade this thing, and I don't think it's probably too late to, depending on how it all plays out in the next, I don't know, few weeks, couple months. Whatever. You know, being short stocks was cool. You could've perfectly timed maybe out-of-the-money put option purchase on a big equity index. But you really have to get it right, because stocks are so volatile. Being long bonds is kind of easier, less downside.

But to take advantage of this type of thing...like, you can't do a deep dive. You have to dive in early in anticipation of panic setting in later. You can't hesitate, and you can't ever do enough homework. You just have to understand it's that type of situation – whether it be short stocks, long bonds, whatever it is you want to do – and do it. You can't hesitate. It's a speculation. You know? You're just counting on it playing out like previous episodes. You know? SARS, whatever. And so, I don't really write about or recommend that sort of thing. So, you know, you're not going to hear anything definitely recommended for me – anybody who's taken my advice over the last few years is well-positioned coming into the coronavirus episode.

Because I've been recommending the same kind of three-part, simple but diversified portfolio of plenty of cash, gold, and short stocks where you find something cheap enough. And a good enough business that's selling at a reasonable enough price. You know? So not Tesla at $900. You know? When it's bigger than the market cap of like five other car companies and, you know, it's making a few hundred-thousand cars, and they're making 20 million. You know? Not that. So cash, gold, stocks where you find value. And I think that's going to treat you well during this. You know, like just holding cash is not going to make a ton of money.

But in Extreme Value, we do have a way to just put a little bit more juice in your cash holding while not taking really any more risk. And we're actually, this month in Extreme Value, going to add another little ingredient to this that will further diversify it and contain, I think at this point, a really asymmetric payoff ratio. So we're going to show you how to limit your downside to just next to nothing and expose yourself to – I don't know – 10-, 20-, 50-, 100-bagger type upside potential while diversifying at the same time. Kind of nice. But that's really all I have to say about that. It's an ongoing situation. I think it definitely gets worse. I think it's definitely going to be a lot more than 20,000 cases of the disease around the world. You know, I think it'll impact financial markets.

Like I said. You know, I think the cash, gold, stocks portfolio will do just fine and protect your assets. And you'll probably get an opportunity to buy something cheaper in the equity market here in the next few months. You know, say just between now and June even. Between February and June. And I think that's the way it goes, man. So let's go ahead and talk to Raoul Paul, because I'm going to ask him about this. And, you know, I can probably even guarantee he'll have great ideas about it and great information to share. So let's do that.

Before we do anything else this week, I need to tell you something really important right now. My Stansberry colleague Steve Sjuggerud says the 11-year bull market we're in is about to take a huge, dramatic shift starting February the 12th. Steve told me recently that he can't wait for February the 12th. He says, "Folks have no idea what's coming." But he expects to turn thousands and thousands of well-prepared investors into millionaires.

He says he's seen it happen before, and it's about to happen again. I haven't had a chance to find out exactly what Steve is talking about, but I always take him seriously because he's made a lot of investors a ton of money. I can't wait to turn in on February the 12th at 8:00 PM Eastern time to see what Steve has to say. Go sign up right now at www.investorhourmeltup.com by entering your E-mail address. They'll send you a link so you can log on and see what Steve has to say on February the 12th. That's www.investorhourmeltup.com. Do it.

OKOK. Today's guest is Raoul Paul. And Raoul Paul is a former hedge-fund manager who retired at 36. He's co-founder of Real Vision, a financial media company offering in-depth video interviews and research publications from the world's best investors. He has run a successful Global Macro hedge fund, co-managed Goldman Sachs hedge fund sales business in equities and equity derivatives in Europe, and helped design the BBC TV program, Million-Dollar Traders, training participants in investment and risk management strategy. Raoul retired from managing client money and now lives in the Cayman Islands from where he manages Real Vision and writes for the Global Macro Investor, a highly regarded, original research service for hedge funds, family offices, sovereign wealth funds and other elite investors. Raoul Paul, welcome to the program sir.

Raoul Paul:                 Thank you very much, Dan. Great to be here.

Dan Ferris:                 So, you know, Raoul. I want our listeners to know you better. I bet some of them may not have even heard of you – even if they are like Real Vision subscribers. I don't know. I'd like to know, when did you...like, when was your first inkling that finance was the career for you? How old were you when you first figured that out?

Raoul Paul:                 I'm 52 now. So I was a – I was at university, and just before university during the crazy '80s. So when everybody was driving around in red Porsches and wearing braces and Wall Street the film was out, it was peaking my interest. And I never forget I was – I'd just finished my degree. I did my degree in economics in law. And my father's background was architect. And he was saying, "You know, you should go into fast-moving consumer goods marketing. It's always a great business."

And I remember sitting down with a friend of his, Sam. because I’m thinking about what I'm going to do. I didn't have particularly great grades. So I was trying to decide...well, A, who would give me a job. The recession in 1990. So there was a huge banking recession and a number of other things. So I was trying to look for a job then. and I spoke to this guy. I said, "So what do you think I should do?" And he said, "Raoul, it's very simple." He said, "You can go work at the Mars, and they'll give you free Mars bars. Or you can go work for a bank, and they'll give you free money." It was that point I realized that that was the choice I wanted to make.

Dan Ferris:                 That's not much of a choice, is it? It's pretty easy. And then, what was your first gig?

Raoul Paul:                 My first gig was – I couldn't get...because it was a recession, I couldn’t get into a bank. And I didn't go to particularly great university. I was too busy enjoying the social life. So my first job was for Dow Jones Telerate. So people who'd been around for a while will remember them as the kind of precursor to Bloomberg. So they had, you know, every single gig. This thing that the Wall Street, all those, "Greens, greens" – they're all Telerate's greens. So I worked for them, training people in technical analysis. So they had a product called Teletrack. So I trained people in technical analysis and learned technical analysis on the roof myself and realizing I was very visually driven and thought I could understand the narrative of markets by that.

I then managed to eventually after doing...moving into new business sales, I managed to somehow get myself a job in a very prestigious firm called James Capel who were like the queen stock brokers. But they were also one of the biggest institutional brokers in the U.K., part of HSBC. And I got a job on their equity derivative desk selling international stock index derivatives. And luckily for me, within six months my boss left. I got promoted to head of the desk. And that was where my career started.

Dan Ferris:                 Wow. Nice. You know, tell me about the transition from, you know, a guy with a pretty good job to Real Vision Internet finance TV entrepreneur. What happened in between there?

Raoul Paul:                 So, you know, what happened in between was I started speaking in the early '90s to some hedge funds. Also I'd been following Jim Rogers on the Barron's Roundtable and his book, Venture Capital, where he went around the world in a motorbike. And – sorry, Investment Biker went around the world on a motorbike and kind of looked at the world in a top-down way. And I realized that's how I saw things. And as I said, I'm a relatively visual thinker. So putting together technical analysis, understanding the big-picture narratives, and taking that very top-down view – which is now commonly referred to as macro – I realized that was what I liked.

And I was early to this game where the big hedge funds at the time, people like Tiger, Tudor, Soros – were really trying to make that impact known in financial markets. And I was dealing with them as my customers. So I started to speak to these people – people like Paul Tudor Jones – on a daily basis. Sam Druckenmiller, Louis Bacon at Moore Capital...the most famous investors in the world. And I was the go-to guy in Europe. And it was an extraordinary time for me. Eventually we moved from James Capel to NatWest, the big U.K. bank at the time and then finally got poached by the partner around equity derivatives at Goldman Sachs to come and start the hedge fund business at Goldman. So that was a gift and opportunity in 1997. Goldman Sachs had been slow to the hedge fund business in equities.

And so, I was given the dream mandate to building a business with the best reputational firm on Earth. And so, it was the easiest business to build. But we built it into a hell of a big business. And then at the peak of the dot-com bubble, I knew it was going to bust. I'd been writing about it, talking about it to my client. And eventually, one of my clients called GLG Con is who are the largest hedge fund firm in Europe at the time said, "Look. Why don't you come and run a macro-portfolio through us?" So I opted across to the dark side and moved to the hedge fund business. So I started running a macro portfolio. That went extremely well.

So then, I founded – so again. The cap C, cap result and it allowed me to, within GLG, found and manage the Global Macro – the GLG Global Macro hedge fund. Which I did for several years over the crisis, over the dot-com bust. And it was kind of very exciting times. And then eventually in 2005, I decided to opt out of the rat race, move to the Mediterranean coast of Spain and I started writing. Usually my kind of unique experiences, one of the more experienced people in the hedge fund business – I'd run a hedge fund, I knew all the hedge-fund managers. I serviced them all. I'd seen the growth of the industry. I knew how they looked at things. And I looked at things in the same way.

So I started a kind of a very high-end research business called the Global Macro Investor that I still run to this day. And that was advising the world's largest hedge funds, sovereign wealth funds, family offices, asset managers, governments on macro-invested strategy. And so, I was doing that in Spain for a long time. The financial crisis came along in 2008, and I realized that I was at the epicenter of it all. You know, many of the people in the big short were clients of mine. I knew what was going on. I was very much at the heart of the system. But friends of my parents and friends of friends would come up to me and said, "Well why didn't we know?"

And that sat really uncomfortably with me is "Why do some of us know and others don't?" And I thought, "This is not right." And that was the same as the rise of the Occupy Wall Street movements and all of this other pushback we're still seeing today is why do some people get everything and others get nothing? And I thought 'I want to do something about it.' It took a while to realize until I met a gentleman called Grant Williams who many of your listeners will know as well. He's one of the co-founders of Real Vision. He had a newsletter business – which is a $300 newsletter. So very different to mine, because mine's $40,000. Yeah? Very different ends of the market. And he started making videos.

And I realized that video was the future of both the newsletter industry, but also for the future – video and demand technology was very disruptive to the TV companies like Bloomberg and particularly CNBC who had really kind of lost the trust of the viewers because of their coverage of the financial crisis. They were too late, too much cheerleading, and not enough fiduciary duty. So that day, we had dinner in Spain one night. And over a few glasses of wine, we decided that we wanted to start a business. Woke up in the morning and still thought it was a good idea, which is usually quite rare after a few glasses of wine.

And so, we started Real Vision. We had no idea what we were doing, but we were on a mission to democratize the very best financial intelligence and bring it to everybody. So we thought, "Well how do we do that?" A, we'd never made a video before. Grant had made a few, but they were pretty crappy. And I had never made a video before. We had no idea what we were doing. There was four of us involved. And so, I just reached out to my kind of rolodex of the world's most famous hedge-fund managers and said, "Listen. Would you come and – would you be prepared to be interviewed for like an hour?" because everyone said, "Well if you're going to do this, you need to have short form. because there's no attention span, and it needs to be free.

So we decided to get that. We're going to do subscription in long form because finance is a really meaningful topic as a clear value proposition. And we know it from the newsletter industry. And so, these hedge-fund managers said, "Yes. We'd love to. Nobody's ever given us an hour before. We get 10 minutes, three minutes on CNBC. It's a waste of our time, and it's just cheerleading, as opposed to real, deep-dive, nuance understanding of what's going on. So we started with that. And before you knew it, people started engaging by word of mouth dramatically.

And it grew from there, and it's become an incredible thing. We've had documentary series on PBS. We've probably got some of the world's largest interview series of finance, which is the real interview and a whole bunch of really exciting things that people find our content on airlines...we have a free channel on YouTube. The Real Vision channel. And we also have our main subscription business. Plus on top of that, we built some paid membership businesses, a live events business. AND we also work with the world's largest financial corporations, RAA funds, asset managers, investment banks on creating distribution of content. So that's a really exciting thing.

Dan Ferris:                 Yeah. It is super exciting. I'm a huge fan myself. It's like every American's dream to sort of sit and watch TV and be able to say, "I'm doing work. I'm doing work." And I can do that with Real Vision.

Raoul Paul:                 Yeah. Because now having people being included, watch Real Vision on a Friday night or, you know, on a Saturday night or something with a glass of wine...it becomes our entertainment. Because we're thinking we're getting value out of it. So, yeah. Interesting enough, we ran a trial for one of the world's biggest asset managers – the world's biggest asset manager. And so many people that said that, "Look. We'd love to know all that stuff. We're watching this. We don't want to disrupt their working days." Interesting enough, they were all watching at lunch times and evenings. And one guy wrote to say, "My girlfriend and I stay in on a Friday night with a bottle of wine and watch our favorite Real Vision interview." I'm like, "My God. This is a different world from finance. We've done something really right here."

Dan Ferris:                 So Raoul. I've been, you know, looking over recent issues of Global Macro Investor. And of course, I've seen you on Real Vision and on Twitter. I Follow you. You're great on Twitter. So I sort of know where you're coming from. But I bet our listeners don't. So why don't we – why don’t we spend our time just kind of going through how Raoul Paul sees the world today? It's a very interesting viewpoint. And I think the place to start – it seems to me the center of this for you...the center of your viewpoint of where things are at this moment is a strong U.S. dollar. Is that fair to say?

Raoul Paul:                 Actually there's one step above that. So the very macro level – I use the business cycle to understand where we are. Now with the ISM in the U.S. as my indicator, one of my indicators of the business cycle, it was just below 50 and it's just above 50. So it tells you – and it peaked a long time. So tells us we're in the down phase of the growth cycle. So we're expecting at some point a recession.

Dan Ferris:                 And just for our listeners, what is the ISM, Raoul?

Raoul Paul:                 The Institute of Supply Management Survey. It basically surveys a bunch of buyers within the largest companies in and asks them about financial conditions, market conditions, their inventories, their expectations for the future. And it blends it all together and gives you an indicator that's been going essentially one way, shape, or form – it was the treasury survey before that – since about 1910 or something. So 1917. So there's a huge amount of data. And what's interesting I found about it is, all asset prices are correlated. Basically the year-on-year change in the S&P, bond hills, copper, emerging markets...everything is related to the business cycle.

The one thing that's the least-related to the business cycle, bizarrely enough, is the U.S. dollar. The U.S. dollar being the Reserve currency of the world has a number of different drivers. It's called a Bayesian distribution, which means that it is many, many things that influence it; unlike, let's say, bonds which are really influenced by inflation and interest rates. So there's a lot of input into a currency market. But the real big one for listeners here to concern themselves over is, in this bizarre world of massive monetary concentrated easing, there's not enough dollars in the world to service the debts. It's like a game of musical chairs. The issue is, the foreigners – so the offshore-borrowing market – is about $15,000,000,000. I mean, it's truly enormous.

And in the U.S., obviously when we see the corporate debt markets and all of this, it's absolutely gigantic. But that whole amount of dollar borrowings and a slowdown in economic growth has mean it's the musical chairs to borrow the dollars. Which is why periodically, you're seeing things like the Argentinian currency or the Turkish liras and South African rand blowing up...is, there's not enough dollars out there. And then when you enter into a slower growth environment like now where the oil price falls and the oil is traded in dollars, well things like that means there's even less dollars in the global system.

And there's a scramble for dollars. So we can see it in China, which is notoriously short of dollars right now. Now as the dollar goes higher, it drives down the price of commodities because commodities are priced in dollars, and that creates yet more of a shortfall. It also means there's kind of less lubrication for the financial system globally. So the dollar is pretty much everything right now. And in the dollar – the Fed trade-weighted dollar index, it's pretty much got its nose pressed against the ceiling of all-time highs. It's extremely strong. And that's causing problems across the world.

Dan Ferris:                 Does it surprise you to see a strong dollar and strong gold prices at the same time?

Raoul Paul:                 No. My core thesis for some time was, we were going to see both together – which is a very rare occurrence. Normally gold falls as the dollar rallies, because it's the normal age of dollars. But gold started out performing 27 of the world's currencies – I have a GMI currency basket – which doesn’t include U.S. dollars. And gold started to outperform those. Which was telling us that monetary easing or that concentrated easing was actually devaluing al currencies against gold. Now the dollar and gold – because of the dollar shortage and gold being the rare asset – are both rallying together in this space. Eventually the dollar too will top out.

I think it's going to come much higher than here. Maybe even 20% higher than here. Something quite devastating. And that will cause a massive devaluation of the dollar as other countries have to abandon it – and hearing the talk of additional currencies and the move away from the dollar. So I think the dollar and gold go together, and eventually gold is the last man standing. And, you know, I think there's other things too; whether it's cryptocurrencies or whatever. But that generally is my overall macro view for the longer term.

Dan Ferris:                 I see. So you're long gold now, then, along with being long dollar in some way.

Raoul Paul:                 Yes. I've been long gold against the basket currencies for about two years. I've been long gold outright for about the last nine months. And I've been long the dollar... I switched all of my savings – I was living in Europe, billing in Euros, living in Euros with my savings in Euros. I switched my billing for Global Macro Investor entirely to dollars. I switched my entire savings to dollars, bought property in the U.S. and the Cayman Islands as a way of forcing myself to hold dollars. And that was when the Euro was at 148 and a half. And I still held that back to this day.

Dan Ferris:                 I've actually noticed, Raoul, with you over the past – I don't know – I want to say a year or so. You've been tracking the massive bubble in equity valuation as it rises. But you're really shy about...you don't want to short it, though. That's just not the way to go at it for you. Why is that? Why don't you want to do that?

Raoul Paul:                 So I've learned this from my 30 years of experience in this. So if you think of the reaction function of markets and the macro sensitivity of asset classes, the most macro-sensitive bubble is the short end of the bond market. Because that is when they cut interest rates. It basically reflects that. There's very little froth bubble – you get bits of overexposure and underexposure. And generally, it reacts as it's supposed to, to cuts in interest rates. The next one is the long bond, which has some future expectations built in. So it's not quite as pure. Then I would say it's the commodity markets, which have quite a lot of speculation in.

But they tend to reflect macro fundamentals. Then probably currencies and then finally equities, because it's basically human emotion built on kind of long-term earnings expectations. So I found that the reaction function of the Federal Reserve say that if growth slows they will cut rates. Therefore, own bonds. So that's an easy trade. People tend to get confused and want to do a vanity trade, as I call it, which is short equities. Now short equities, they come with much higher volatility.

They don't look like a call option, which is what let's say the short end of the bond market looks like – which means that you get...they're unlikely to raise rates, but there is a high probability they cut rates. And therefore, it looks like a coal. It's a one-sided risk reward. Equities aren't. And you can see that in Tesla's today. It's a really problematic market, particularly at the peak of bubbles and the peak of the cycle. So even though it's a clear bubble, it is impossible not to even think of it as a bubble now. You shouldn't do anything about it. If you do, just do bonds. It's a much better bet, and there's a much higher risk reward in all circumstances.

Dan Ferris:                 Yeah. Actually, Raoul, I have to credit you with – you said something on Twitter about this a while ago. Quite a while ago, maybe. A couple of years. And I was inspired to, in my own newsletter Extreme Value, to show our Apple around the dot-com peak. And I was trying to tell people, you know, "Trading this thing on either side of it is just absolutely insane." You know? Even though it's the top being short, it will crush you. You know? And going long, trying to go long, of course, is even worse.

Raoul Paul:                 So a great example. Again. Talk about true learning. A friend of mine who's a great trader was running his own macro hedge fund back in 2000. He was extremely bearish and short as much as possible. And he lost 30 % and had to close his fund. Why was that? The volatility of the equity market short was too high. In fact, over that 2000 bust the equity market went up more days than it went down. So you ended up getting stopped out every time that you should've been adding to the trade.

It was a really difficult situation, and it really taught me, "Be careful what instrument you use to express your view." My old boss at GLG, Ned Guzman who founded and ran GLG, his view is very simple. He said, "Just keep it to the most simple expression of a view." Goes into German, but it's always the same. He said, "Don't give me complicated trades. Give me the simplest, purest expression and stick to that. Because then, you can apply leverage to it if you want to. But you understand what bet you're taking.

Dan Ferris:                 So purist, simplest, though... if I can just follow this line of thinking – and it makes perfect – how is buying bonds purer and simpler than shorting equities if you're bearish on equities? Just walk me through that.

Raoul Paul:                 Because you know that if the equity market falls, the Fed are going to cut rates. So if you are trading at economic view – which is, the economy is slower and therefore equity's at the wrong valuation versus where the economy is. OK? That's essentially what a bubble is. So if you're trading the economic view, then the most macro-economic sense bearable is the bond market. So trade in the bond market, because the Fed will cut if the equity market cracks. We saw it in 2000, we saw it in 2008. So you know the Fed have got your back in the trade. The Fed don't have your back in the equity market trade, because usually you get a few of these massive rallies every time the Fed cut. So in which case, you'll make money in the bond market but you'll lost money in the equity market.

Dan Ferris:                 Yeah. And I'm kind of hammering on this for the sake of the listener, because I think it's kind of a brilliant insight. Because people are so... most of our Stansberry readers and podcast listeners, they're so hyper-equity-focused. And I love having you on, because you're kind of the opposite. You're not that way at all. So I really appreciate that. I want to shift gears a little bit, Raoul.

Raoul Paul:                 Sorry. Just a key thing to add.

Dan Ferris:                 Yeah. Yeah.

Raoul Paul:                 You know, if everyone's got the right person, just the TLT is your friend. It is a great ETF that will help you make intelligent decisions. And people say, "Why would I want to own bonds with yields so low?" It's not a yield game. It goes up in price significantly. You know, TLT has. Been a really good performer already this year. It was a great performer last year. So just because it's bonds, you can still get performance. And that's the key thing.

Dan Ferris:                 Yeah. I looked at the chart of that last night as I was reading through some of your stuff. And TLT has ripped – better than stocks. It's really awesome. So I said a second ago I wanted to switch gears, because I'm curious about – I'm curious about where you are in your coronavirus. You put out an update in January, and you were like, "Hey, man. You got to get ahead of this thing. It trades on fear and emotion." And, you know, that's been a couple of weeks now. And so, where are you in that?

Raoul Paul:                 Well, I mean, that was a – you know, I was in early to that environment. And it sounds gruesome because you're trading bad headlines. But really, this is going to trade very similar to gold for one, gold for two and 9/11, as oddly enough. The other examples of similar that gripped the world – one was the Asian crisis which was somewhat different, and secondly was SARS. So SARS. Why it's not like SARS is, SARS was 2003. The central bank had cut rates. The equity market had collapsed already. So you were in a recovery phase, which was quite hard to fight.

So, yes, the bond market rallied. But it wasn't really economic markets as such. But gold for one, gold for two and 9/11 were demand shocks and supply shocks. The supply of oil and demand for goods as we go to war. This is very similar. It's all about how people react to the outcome. So how people react to something like this is, China goes into massive lockdown, because they know it's bigger than they're reporting. And it's huge. So you basically shut down all economic activity in China, which is truly astonishing. But again. It’s not China necessarily. It's what everybody else looks at that see how China is reacting so strongly and they know they have only one chance to react – and they better overreact.

And the overreaction is shutting down all flights to China, stopping imports of people. Kids in Singapore are not going back to school till mid-March. People are shutting down borders with China. Russia has. Hong Kong's going to shut down its border with China. You know, we see the U.S. banned people coming from China. This is a huge thing. And it's that behavior of humans making rational decisions themselves saying, "Listen. I don’t want to travel up to New York. Because, you know, I know it's silly, but I still don't want to take that risk." That's a normal thing to do. What happens is, when you compound that you create big, enormous black holes both in the global economy just when it's weak – which is go for one, go for two and 9/11 were more interesting. Because all the time the economies were weak, the ISM's were at 50 or lower. Where we are now.

So the business cycle was weak. So this is a shock that pushes things over, compounding onto the top of the trade tariffs. So that situation is still outstanding. It will continue for a while as we get to understand the spread of the virus amongst other countries. And nobody's going to want to go in short the equity market or short at bonds along the equity market I'm sure that bonds going into weekends. Because the news flow comes out where you get this cluster of several days' news coming out as the spread of the virus continues.

So that whole thing is going to take – because the incubations period and how long this takes out and the seasonality, it will probably take until February or March if it's just a normal event. If it really does spread abroad, it'll go on longer as well. So that whole process is only just started, and I think that will play out for the next couple of months. And I think the impact on the global economy is meaningful and real, and there are going to be some real supply chain disruptions from and to China that may break forever as compounding on top of the trade tariffs – where companies have to decide, "Maybe I don't want to manufacture in China any longer." And I think that is going to be the case. The world is going to see its reliance on China is too much and is going to start pushing away still.

Dan Ferris:                 Right. And was it – I’m sorry, Raoul. I read a bunch of stuff about this in the last 24, 48 hours. Was it you who... I think you were the one who said you thought the Fed was going to cut in March, not in June? Do I have that right? Yeah. Yeah. Yeah. And that-

Raoul Paul:                 Well, it's this point. I think the Fed are going to have to cut 50 basis points reasonably fast. The economic data for February is going to be terrible. And when you compare it to the year-on-year base effect versus last year where we had just peaked in, you know...from the equity market that had rallied so strongly – some of the economic data had as well – we're going to have some very tough year-on-year comparisons, and we're going to have this drop-off. So we're going to see some really weak growth in February and March. I don't think the market's expecting it. And maybe the thing that brings equity market down – I'm not sure, but again, as we talked about before it's not really in my bet.

Dan Ferris:                 50 bits really fast, huh? Like all at once or maybe, you know, an interim cut or something like that?

Raoul Paul:                 I think it's a 50 and a 50. I honestly think that there's a decent likelihood they'll just cut 100 basis points by June. And that will be – that will be nice ahead of the election, which is pretty much what Trump would like as well. I think that's what we're going to do, is the Fed trying to re-steepen the yield curve – which is negative pretty much all the way along.

Dan Ferris:                 And so, wouldn’t you want to own the short end of that rather than the TLT or no?

Raoul Paul:                 Yes. It's my biggest bet. So currently, I have both TLT and the short end – the Euro dollars future's market. I will, as the curve begins to steepen, I would reduce my TLT exposure even though it will still perform. It's called a bullish steepening whether the long end goes up or the short end goes up even more in terms of price and, you know, down into yield. So I'm kind of full-risk in fixed income right now. And I will skew that bet towards the short end where I think the real juice is to be had over the next three months.

Dan Ferris:                 Yeah. You know, I write this bottom-up mostly U.S. and Canadian equity newsletter. You know? We pick stocks one at a time. But I just could not help myself, and we added that – you know, the SHY, the short-term treasury ETF. Because I couldn't help myself, and I couldn’t see how it would go wrong. You know? So even the guy who spends his life looking at company balance sheets and things just could not... I absolutely cannot resist it. It's a force of gravity.

Raoul Paul:                 Yeah. It makes such sense to me because of the reaction function of the Fed and the fact that they're not going to raise rates. So yes. You might have some downside, you might get some volatility and have to sell off in the last few days in the SHY. But the reality is, the risk-reward is so massively skewed to the upside. So bets like that are great. And the Fed-

Dan Ferris:                 Yeah. But like selloff...yeah. Fed's got your back. And by selloff, we don't mean down by 10 or 20 % either. Right? So it's really skewed. Really skewed. You know, very little downside and...yeah, rips when they cut. I just feel like I can't trust any of these numbers. It ticked over 20,000 cases of the corona [virus] this morning. Of course, overwhelmingly – like 99 % – in China. But there's something about that culture where I just... you know, like you said. They're massively on lockdown, and the reporting is – I feel like everything is under-reported. And I wonder when and if we're ever going to find a real number. I've seen some people that are modeling the thing, and they say it should be 100,000 cases by now. Have you seen that?

Raoul Paul:                 Yeah. I agree. And the answer is, look at what's happening in the other countries. That's your answer. When you see the death rate, the recovery rate, and the spread rates from third-body countries like Singapore that will probably factorially account, then you're getting a much better understanding. So it's relatively new there, so it's probably about a month behind in the cycle. So let's see how that develops over the course of a month and then we'll have a true understanding. So for me, it’s not the Chinese part of the equation that we need to watch. It's all of the other countries that have the virus. I mean, God forbid if this spreads into India. India had a case, but they're not set up for this. You know? It's a real problem. So, you know, we have to watch this very carefully.

Dan Ferris:                 Well that's one of the data points that has come out of China. Like, "Wuhan was not set up for it." I think they had, you know, 110 beds available. And of course, they're massively building hospital bed capacity. But that's been the explanation that I've gotten so far for why the death rate was so high just in that one area. Because it quickly overwhelmed them. And of course, you know, they don't want to let it out. So they were probably doing two things at once I figure.

Raoul Paul:                 Yeah. China has some great advantages, because it's come out of the colony. So I’m speaking to somebody whose family's from Wuhan and is there now. Basically because the government is able to track every single individual – you know, we've heard about the new kind of cyber surveillance state that China set up. So they have tracked down every single person who left Wuhan and Hubei Province, found where they are and has approached them and asked them to go into incubation.

So there are whole... So there are empty hotels all over right now, because nobody's traveling. So they're filling them with people who come out of the province and say, "Wait. You're going to stay in this hotel under surveillance for two weeks." Because China can do that. Nobody else can do that. So China, even though it's very big, they have some sort of chance of trying to curtail it. I don't think any other countries really can. And I'm not going to be alarmist and say, "It's definitely spreading. It's definitely going to be the world's pandemic." I have no idea, literally no clue. All I care about is how the market's going to perceive it. And my view is that the market's going to perceive this as more concerning.

Dan Ferris:                 Right. But as we speak, though, not today. The stock market doesn’t seem to care today.

Raoul Paul:                 Yeah. Again. Ignore the stock market. Turn it off your screen. But yeah. Even the bond market doesn’t care today. But, you know, that's the way it's got to go. It's got to go in phases. We've had a huge move-up in all fixed income right now. It should consolidate for a bit. And as I said, nobody wants to go in short fixed income into the weekend. So, you know, I think we've got a chance of a week non-phone payroll coming out on Friday. And that would only fan the flames of the bond market screaming for Fed cuts.

Dan Ferris:                 OK. Actually we've been talking for a while here. I'm going to let you go soon. But just a couple more things, Raoul. You, of course, have a massive guest bit in your latest newsletter from a gal named Tracy that we all follow who are interested in crude oil. We all follow her on Twitter. And it was an excellent little piece. Are you short crude oil right now or no?

Raoul Paul:                 No, because I don't need to. Because being sort crude oil is basically the two trades that are going to do better... because crude is very volatile, and you've got this geopolitical risk of shorting crude... is, as crude oil falls, it makes my bonds go up. So I'm happy, because inflation expectations collapse. And it also makes dollars go up, because there's a shortage of dollars as the price of crude falls. So it works to my two core trades, which is – anybody else who knows me, "Buy bonds, wear diamonds." Which means, buy bonds and you'll make plenty of money.

And it's the same with dollars too. So that trade, I wouldn't short crude oil. I have been on and off short with the oil stocks. And I think the oil stocks half from here over time based on – not any of the crude oil oversupply dynamics, but also because I think that over time there's going to be more potential litigation against the oil companies. So I'm happy to be structurly short oil-producing companies, but I'm not currently right now. My whole focus is on bonds and dollars.

Dan Ferris:                 All right. Well I really appreciate you being here. I'd like to ask you one more question, though. I ask all my guests this, and it has produced some wonderful answers. But if you don't want to answer it, that's cool too. If I could ask you, Raoul, to just leave our listeners... If I forced you to just leave our listeners with only one thought... I think I can guess in your case. But if I could force you to leave them with only one thought, what would that thought be?

Raoul Paul:                 Buy bonds, wear diamonds.

Dan Ferris:                 Buy bonds, and you will soon be wearing diamonds, huh?

Raoul Paul:                 Exactly right. It's an old expression from the bond market in the '80s and '90s. But it's basically, filter all the noise out and what is it you're trying to say? We're trying to say we're over-debt-burdened, over-leveraged, slow growth, risky world. So the opportunity set in earning bonds for the price appreciation as interest rates in the U.S. – which are the highest in all of the developing world – merge to that of the rest of the world and go to zero. That is one of the last, I think, home run trades in fixed income that we'll get... is this one trade left.

Dan Ferris:                 Thank you so much, Raoul. I sincerely hope that we will get to talk to you again and, you know, just check back up on all of this sometime in the future.

Raoul Paul:                 I've got a couple of pieces out in Real Vision where I dig into some of this. So if people want to go across to realvision.com, there's a crazy offer of $1 for one month's access of Real Vision. I urge you to do it, because it'll be the best dollar you've ever spent in your life. And even if you don't like what I say, there's literally one-and-a-half thousand interviews of amazing people with incredible views. And we've got some huge stuff coming up, particularly on the retirement crisis in America. We've got two weeks of huge content coming up. So people, go have a look at that. I think they'll really enjoy it.

Dan Ferris:                 Wow. That's a whole month for a dollar?

Raoul Paul:                 Yeah.

Dan Ferris:                 Wow. That's an amazing deal. That's an amazing deal. Thank you. OK, Raoul. I'm going to let you go. Thanks so much for being here, and I hope we'll talk soon.

Raoul Paul:                 Yeah. Thanks very much for having me, Dan. I really enjoyed it.

Dan Ferris:                 OK. Bye-bye.

Raoul Paul:                 Bye-bye.

Dan Ferris:                 OK. So, you know, wow. That guy obviously is brilliant. And I always feel like when I hear from Raoul, usually on Real Vision...actually I've never spoken to him before. First time. But any time you hear from him, you always have the feeling that we just got from him: that you're talking to somebody who knows what's happening in the world to a significant degree in global financial markets and can just reach out, simplify it all and pinpoint that one really awesome trade idea as he did for us. And I hope we'll talk to him again, man. Awesome.

All right. Let's check out the mail bag.

Dan Ferris:       It's time for the mail bag. In my mind, you know, this is the heart of the podcast. Because our goal is to help folks become better investors – myself included. And this is where you and I get to have a frank conversation and help each other become better investors. Just write in to [email protected] with your comments, questions and politely-worded criticisms, and I'll read them all and respond to as many on the show as possible. Very little in the mail bag that required any sort of a comment. There were lots of comments and things, but not much that required an answer this week. Just people telling us to stop talking. I'm like, "You know, it's a podcast. And people talk on podcasts." Right? But, you know... So I don't know if I can fix that.

But we got a couple of good ones here. First one is from Roger M. And Roger M says, "Hi, Dan. Great podcast. In a very short space of time, it's become a must-listen-to for me." Thank you, Roger. Roger continues. "My question is, if one believes that the stock market is due a correction, then what are the advantages of buying into an inverse S&P 500 ETF as opposed to simply placing a short trade on the index itself? Thank you in-advance, Roger M." Well, Roger, one advantage is you get to shoot yourself in the head later on for buying this garbage. And I just really am not a fan of these inverse ETF's. They're levered usually. You know, it's usually at least like two times the inverse of the index.

And you have to understand, they're designed to perform over a fairly short period of time. So they tend to be – I mean, because most of them are levered, of course – they tend to be really volatile. And I just don't like them. I would much rather – I would much rather... actually after today's podcast, I'd rather just buy bonds, man. Frankly. Or I'd rather hold cash or buy bonds. Or, you know, maybe you take a – if you want to hedge, you take a small amount of capital and you buy a put option on an index. Something like that. I'd rather do those things, because it's either safer in the case of bonds and cash or just a much smaller risk in terms of total portfolio in the case of the little hedge put option position. So that's my answer. Not a fan. But good question. I'm glad you asked.

OK. This next one has a lot of parts to it. And it's our second and last question this week. But it's got a lot of good question in it. And I feel like I really need to respond. And it is from Eman M. Eman M. Eman, thank you for writing this very thoughtful e-mail. It says, "Hello, Dan. Like you, I have been a long-time shareholder of Altius and have a high regard for the management team." Oh, I should tell you. As I go, I'm going to comment on these things as I go. Because there are many things to comment on. So I'll let you know when it's my comment and when it's him. So Eman says, "I've been a long-time shareholder like you of Altius. And I have a high regard for the management team."

My comment is, I'm contractually forbidden by Stansberry to own shares of Altius, because I write about it in my newsletter. So not a long-time shareholder, but I've been writing about it in my newsletter since 2009. So he continues. "On your latest podcast, you mentioned concerning Apple that a company can be a great company, but not a great investment. I'm beginning to wonder whether the same story could be applied to Altius." My comment is, I said Apple might be a great company and not a great investment right now... It is a great company. Definitely. But maybe not a great investment right now, solely because the stock went from 13 times earnings to 26 times earnings really fast over the past year or so as sales and earnings fell from fiscal 2018 to fiscal 2019. And that didn't make a lot of sense to me.

He continues. "There is a very revealing chart on the Website, Corner of Berkshire and Fairfax, which charts Altius's underperformance relative to the S&P 500 over the last five to eight years. It highlights the opportunity cost involved in holding the stock against just the index." My comment is, this doesn’t mean a lot to me because, you know, your portfolio does not consist of just Altius minerals holding against the index. And also, the index is not the correct benchmark. You know? It's a commodity company. So you got to gauge it against commodity benchmark. And it's kind of... You know, it's done pretty well usually. When things are bad for other commodity companies, they're usually not nearly as bad for Altius.

And, you know, Altius performs well when the rest of them perform well. And none of this – none of what you said about the chart – which doesn't mean anything to me anyway – makes it a bad by today, as you acknowledge later on in your e-mail. He continues. "While the company will often times make reference to a stock performance since inception, this simply masked recent underperformance." But then, he says, "The early years contained most of the outperformance of the stock due to a low initial base evaluation in the sale of the CNB uranium asset, which is to date the only home run the company has achieved."

My comment is, I know what you mean by home runs. You're talking about prospect-generation home runs. But there's more to the company than that. Their investment's in Virginia mines and international royalty, generated tens of millions of dollars. The royalty portfolio, frankly, is a home run in my view. Because it increased the revenues more than 20-fold, from 3 million to just the ballpark of 70 million annually. So I consider that a home run. Then he continues. "Some recent company presentations make reference to other home runs potentially." And he says, "At 500-millioin enterprise value, it'll take something significant to move the needle. I'm no expert, but it's hard to see where this is going to come from."

My comment is, nobody – including Altius – will know where it comes from until it happens. There's no expertise that can predict that. It's not difficult to see, it's impossible for anyone to see. And 100 million would move the needle. And I think that's what you can expect out of one of these – 100, 200. You know? Like that. That's what I would consider a home run, and that would move the needle on... actually more like a 400-million market cap. It'll move the needle on the equity value big. And more than on the enterprise value total.

OK. So he continues. "There's no doubt that Altius is very undervalued at present." And then he says some other stuff. "There's one factor which is within their control and on which they have disappointed me to date – share buybacks. Until the recent repurchases, 389,000 shares in December, the share purchase program has been immaterial and anemic at best. Hopefully the recent repurchase is a start of something more meaningful. I don't understand their decision to invest in wind royalties. It's outside their circle of competence and an area better-suited to the finance industry than to mining entrepreneurs."

We'll agree to disagree here, Eman. Wind is a resource, and they're resource financiers. And they're some of the very best on Earth. And they wipe the floor up with those finance people you're talking about. Royalties are a sophisticated financing vehicle, and they're very good at it. They're much more savvy than the average finance industry professional. So, you know, those finance industry guys, they lend into bubbles and they lend at the top. And Altius sits on capital for years at a time and waits for that downturn and then steps in. You know, I just think they're ten times better at it.

And as far as the share repurchases go, Eman offers restoration hardware as an extreme example, but gives the flavor of what can be achieved with an aggressive buyback program. My comment is, I'm glad they're not aggressive share re-purchasers. Well I'm glad that they don’t borrow money. And frankly in the example of restoration hardware, the market is behaving with that company the way it's behaving with many companies. It's not seeing the cyclicality in the business at all. I think one day, everybody will point to companies that had big run-ups in the bubble as examples of how most share repurchases are huge mistakes.

So I totally disagree about the share repurchases. If Altius bought back stock without borrowing the money to do it... hey, fine. Cool. Great. Great use of royalty income. I agree. I think they should accumulate the capital and pay down debt in anticipation of further opportunities to grow the business. This company is teeny-tiny in relation to the size of the opportunity in the nonprecious metals royalties. That's their original thesis. You know, the nonprecious metal mining sector's like five or six times the size of precious metal. But the precious metal royalty companies are, you know, many times the size of Altius and the one or two others that, you know, are anything remotely close to what it does. And it is much more diversified than any other. You know?

So personally, I'd rather see them pay out the royalty in dividends than make share repurchases. Because income opportunities the world over are total crap right now. And creating a new one would attract a lot more value-minded, long-term type investors than just becoming another moronic company loading up on debt and taking risk to buy back stock. Remember: Debt creates risk for equity holders. I pray they don't do that. If Altius borrows money to buy back shares, the way I've pounded the table on their brilliant capital allocation skills since 2009, for God's sake... If they do that, I would consider recommending, you know, selling the stock and just not covering it anymore. Because I think as capital allocators, they're too smart to do anything like that. They know the size of the opportunity they're going after.

And buying back a few shares here and there is OK with me as long as they don't borrow money to do it. And the stock is cheap. So I agree about that. Buying back shares is a good deal for them right now. You and I definitely agree about that. But borrowing money and being too aggressive? Eh, usually doesn't work out terribly well, you know, over the long-term. Cycles happen. And cycles make a lot of share repurchase look really stupid. But, you know, these are very good questions. You know, you're pushing the pressure points in the right spot and asking some good questions. So I thank you for that, Eman, and that's all I have to say about it. Thanks very much.

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Recorded voice:          Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail at [email protected] This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.