This week's Stansberry Investor Hour guest is hailed by Dan Ferris as "the blueprint for a great guest." And co-host Corey McLaughlin says, "I get excited when I know he's going to be talking somewhere." Rick Rule is back for his fourth appearance.
For our newer listeners, Rick is one of the most accomplished natural resource investors on the planet. He began his financial career in the securities business in 1974 and has been principally involved with natural resource securities ever since. And over his long career, Rick has originated and participated in hundreds of debt and equity transactions with private, pre-public, and public companies. Even after a decade of serving as Sprott U.S. president and CEO, he's still spending his retirement years in the markets as founder and CEO of Rule Investment Media.
After opening with "the most entertaining [news] item" on their minds this week and an in-depth discussion on natural resource stocks, last week's latest Consumer Price Index report, Big Tech layoffs, and unemployment numbers... the duo chat with Rick about how to navigate the market these days.
The get-rich-quick fads – like meme stocks, cryptocurrencies, Cathie Wood's ARK universe, and SPACs (that's "special purpose acquisition companies") – are all "over and done," according to Dan. And success now requires some elbow grease...
All that easy money that was a narrative plus a chart that goes up to the right... it's all done. Now, you have to be a bargain hunter. You need to do the bottom-up work. As Rick Rule likes to say, "You need to do the arithmetic." And for people who do the arithmetic and do the work, this is their time to shine.
Rick touches on the fundamental analysis behind it all, untangling the complex interplay between the oil industry and politics for listeners. And Dan, who has been itching to know what Rick has to say about investing in natural resources, gets his answer...
There's a very good intermediate-term play in the oil and gas sector. Ironically, that's almost guaranteed by our government. [... ]
If you are willing to subject yourself to government stupidity both in the United States and Canada – which is to say, if you are willing to subject your purse to the twin threats of Biden and Trudeau – then the opportunities become truly staggering.
While Rick doesn't shy away from natural resource investments that carry "complex political risk" and require some arithmetic legwork, he understands listeners might hesitate to do the same. If you're eyeing oil and gas stocks, he suggests Big Oil could hold the key for some great intermediate-term returns.
So, whether it's hunting for the latest investment opportunities in uranium, natural gas, or precious metals... or poking fun at a few world leaders... Rick covers it all in this week's episode.
President & CEO, Rule Investment Media
Rick Rule is the president and CEO of Rule Investment Media. He began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. As a world-renowned resource investor, Rick has specialized in mining, energy, water utilities, forest products, and agriculture. He also has originated and participated in hundreds of debt and equity transactions with private, pre-public, and public companies. And he served as founder of Global Resource Investments for nearly two decades before leading Sprott U.S. for 10 years as president and CEO.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan talks with Rick Rule, president and CEO of Rule Investment Media.
Dan Ferris: And for our opening rant, so much to talk about... Sam Bankman-Fried, again, oil prices, November CPI report. and more.
Corey McLaughlin: And remember, you can e-mail us at [email protected], and tell us what's on your mind.
Dan Ferris: That and more, right now, on the Stansberry Investor Hour. Lots to talk about this week, but we have to start with the most entertaining item, don't we? Sam Bankman-Fried just insists. He insists on staying top of mind, this time by getting arrested.
Corey McLaughlin: Yeah, that was, I guess, a surprising stunner right before he was going to talk. Well, I'll let you say if it was surprising or not. But to me, the timing of it was more surprising than anything as far as right before he was supposed to talk before the Congress. Yeah, there's a lot of questions about that. But the person we did hear from was the new CEO who basically laid out how terribly run FTX was and what was really going on. And he, basically from his view, says that it was old-fashioned embezzlement, which is old fashioned. You know, crypto was the vehicle. But his view and the lack of paperwork and everything he's been able to figure out is not good. So, yeah.
Dan Ferris: Newfangled investment vehicle, old-fashioned embezzlement. There's nothing like a good-old fashioned embezzle. You know, you take customer money. They trust you with it. They expect you to take care of it. And you turn around and give it to your hedge fund, and let them trade crypto garbage with it.
Corey McLaughlin: Boy, just good old-fashioned stuff. Margin trade and then try to cover it up and say you didn't know anything. It's –
Dan Ferris: Right, right. And your story is "I didn't know." That's the best you could do. [Laughter]
Corey McLaughlin: Yeah.
Dan Ferris: Frankly, I'll tell you something. The arrest is a bit of a letdown. Because the best thing about Sam Bankman-Fried is that he couldn't shut up. Every week, you got this jaw-dropping "Oh my god, he did not say that out loud in public." And he, of course, did. But I will say this: He kept going to the bitter end. I mean, on the day he was arrested, he says, "I'd really like to start a new business so I can pay back the people who got screwed at FTX," out loud with a straight face in public. Unbelievable.
Corey McLaughlin: Yeah. If he actually believes that, he's got larger problems to deal with.
Dan Ferris: I know. [Laughter]
Corey McLaughlin: Actually, you know, for the rest of his being. But he also keeps saying that "This can't be fraud because it wasn't intentional, and I only have $100,000 left to my name." OK. [Laughter] I mean, but what about all these other people that have lost money, apparently? The upshot is – maybe I'm missing something, but you haven't heard a ton of stories about everyday people who have lost a ton in this. I feel like a lot of it may be this international crypto crowd that's kind of been wrapped up in it. Thankfully, you haven't heard things like "not like the financial crisis" or "It's not that sort of level of it." It seems to be kind of isolated. But also there's all these creditors involved, so there's that piece of it, too.
Dan Ferris: Yeah. That's what I was going to say. There's a million creditors. So I doubt they're all, you know, like Tudor Jones, and all these other people that got wrapped up in this thing. I think they're probably more like – well, actually, there was an article about this recently in Bloomberg, and I quoted it in a recent Stansberry Digest, my latest one. There was this one guy, he was like an insurance salesman or something. And it his last $10,000 of life savings is locked up in a locked FTX trading account. And I'm sure there are many, many more people like that. I'm sure this impacted many more like regular retail investors than anything else.
Corey McLaughlin: Yeah, I sense that too, which is why I said maybe I'm missing something. Obviously, people don't want to go around talking about how they got – they're locked up in FTX, or bankruptcies, or different things.
Dan Ferris: Exactly.
Corey McLaughlin: Nobody's posting about it on social media, I suppose, as much as they were when all the trades were doing great.
Dan Ferris: Right. When they were trolling people like you and me on Twitter and saying, "Have fun staying poor, suckers," you know, they were a lot more vocal in those days now. Now, not so much.
Corey McLaughlin: Yeah, it was fun while it lasted.
Dan Ferris: All right. So let's talk about oil prices. I think this is an interesting topic right now. And we'll talk with our guest Rick Rule about this because he probably knows more about oil and gas than any 10 people combined that I know.
Corey McLaughlin: Yeah, by the way, I'm really excited to hear that later. I mean, we always have good guests, but he's one of those guys that I get excited about whenever I know he's going to be talking somewhere. So happy to hear you talk to him.
Dan Ferris: Frankly, I feel like Rick is the blueprint for a great guest because he knows everything. He doesn't talk about things he doesn't know about. And the stuff he does talk about, he's one of the No. 1 experts in those fields. And then he usually dribbles out, you know, five, or six, or 10 stock picks. So it's he's like a fantastic guest. But, yeah, oil prices, my thing that I'll ask him about, and I'll tell you, starting around July, it seemed like oil prices started falling, and oil stocks kept going up. But they've come back down now a little bit since, like, maybe just end last couple of weeks here. And I'm wondering, and I'll ask Rick, if this isn't a pretty decent place to get in because I think long term, it looks great, even though short term, it's kind of pulling back here. What are you thinking?
Corey McLaughlin: Yeah, well, in the spirit of what you just said about not knowing, [laughter] what I don't know, I don't know for sure. But I would think so. I mean, I wrote about this too, recently, of oil prices are down almost 40% since the summer. But there's this, as one of our, one of our editors wrote recently, there's this Biden put in place, where if WTI goes between $67 and $72, that the government will start buying and replenishing the strategic reserves that have been depleted. Which I think that's an overlooked part in the in the mainstream, at least, from the oil market. You know, a lot of people are talking about the recession, and that may be why oil prices have been falling, which would make sense. But if there's this floor underneath it, that's good for the energy companies, overall, long term.
Dan Ferris: Yeah, I'm glad you mentioned recession, because like no matter what Rick tells me today, and what we're saying here, and no matter what I might say about thinking this might be a good entry, a recession will hurt natural resources and natural resources stocks. That's like one of the most sensitive items to a recession. So there will be pain. There may be pain. But, you know, it's sort of like housing in the short term, hmm, who knows?
Corey McLaughlin: Right. Yeah, it's exactly like housing.
Dan Ferris: Yeah. Yep. Long-term, good fundamentals. Short term, who the hell knows, right?
Corey McLaughlin: Right. So yeah, I mean, these, I can't think that these energy companies aren't going to keep making money over the next year or two. I mean, the fundamentals are, so I mean, they've already pulled back 40, you know, a decent amount since the summer highs. So, yeah, if you're a believer in those fundamentals, I would, I would think it's a good time to get back in.
Dan Ferris: Yeah, that's right. They're minting money hand over fist at these oil prices. And the political situation isn't going to change rapidly. And it's not going to change in the next few months. I don't know, I like it. But, again, the caveat is recession. Speaking of which, like what's the opposite of recession, generally speaking? Inflation. And we just got a November CPI report of 7.1%. So the narrative is that inflation has peaked, you know. Then it was eight-ish for a couple of months. And now, seven. And the stock market at least is acting like "Hey, no more inflation." But, you know, 7% on the way up was a disaster. Now, 7% on the way down is wonderful, but it's still 7% inflation, right? I don't know.
Corey McLaughlin: Yeah, I mean, it's still 40-year highs, right? It's still near 40-year highs, which is not good overall. But the trends are going down. Importantly, CPI is both a useful and meaningless number in some ways because it's an annual year-over-year comparison to the same month, the previous year. That's the headline number. But the one that really matters to me is the monthly rate, which shows you if inflation is increasing or decreasing...
Dan Ferris: Oh, month-over-month.
Corey McLaughlin: Month-over-month. Yeah. And that one's actually slowing down again for the first time in a long time. So that actually shows you that the pace of inflation is slowing down. Of course, inflation is always there in some form – unless you have deflation, which is another concern ahead. I think if the Fed keeps tightening without knowing what's going to happen in the future, which they don't know. That's a possibility that's on the table too. But, anyway, the inflation numbers do show, from the CPI at least, you know, it was a 0.4% gain in September and October, and only 0.1% in November. So as a significant slowdown in the pace of inflation.
Now, again, that doesn't mean that it's going to 2% next month, or ever really, if you ask me. I've been in the weeds in this inflation data this week. So maybe it'll get there. I doubt it next year. But, yeah, the markets doing what it does... seeing these inflation numbers go down and kind of getting that part of the story behind it, in my view, at least.
Dan Ferris: Yeah. I agree. The CPI is – it's not anything like perfect. And it's not what the Fed uses for inflation.
Corey McLaughlin: Right. They use PCE core, which takes out energy and food prices.
Dan Ferris: Yeah, because you don't need to go anywhere to eat. So that makes sense. Right?
Corey McLaughlin: Right. Of course. But they're also, but then, Powell has said, "Oh, but, you know, given oil prices is like, we have to consider that." So you never really know what exactly they're using. I think they're more "using directional things" than anything.
Dan Ferris: Well, they have told us that they're using forward spreads on, you know, for interest rates, they're looking at forward spreads on short-term rates, not twos and tens, and all this other all these other spreads that are more popular in the media. And like you said PCE, things other than CPI, and, also, he keeps talking about labor, the labor market tightness. And I think part of their thinking was raising interest rates is like destroying all these job openings.
Corey McLaughlin: Yes.
Dan Ferris: You know, they'll wreck that, and then they'll see less tightness in the labor market, more of a balance of supply and demand of labor. And they'll call that good at some point. The question is, like, at what point, and I still think, I think we're in agreement that higher for longer is still the more reasonable expectation for inflation. No? Are we in agreement?
Corey McLaughlin: Yes, I'm in – I agree with that. Yes.
Dan Ferris: Yeah. So I think that the regime at the Fed has changed. Like for years and years and years, it was looser and looser and looser. You know, they were worried about – much more worried about the Great Depression, not at all worried about inflation, I think that has well and truly flipped. And that, now, Powell and the FOMC, are much more concerned about inflation, they don't want to be the folks who let inflation get away. So I think they're going to be – I don't know what they're going to do next time, the next time, and the next time. But I think on net balance, you know, a year from now, or whenever we'll look back and say, "Yeah, they were more aggressive than everyone thought they would be." Just my guess.
Corey McLaughlin: Yeah. And if that's the case, that doesn't portend good things in the next year ahead. You're right. There's a lot of those job openings that are still out there. You know, it's hard to believe that like these huge headline numbers, to me, like how do you get down to specifics in markets and different sectors, and whatnot, with these headline numbers? Again, I'm talking about the job openings, and what jobs are actually open, or listed, or, you know. That all, to me, is – there's a lot of room for error there.
But, yeah, I do sense that they're talking about still raising rates, and maybe into next year, when you're already seeing signs of the housing market slowdown, and job losses, and layoffs at the tech companies. And, so, you would think that would continue and spread before it reverses. Like because nothing has changed in the last six months since they started doing these things.
Dan Ferris: Right. Now, some of those tech layoffs, as we've seen, if you're a user of Twitter, Elan, Musk has fired 1000s of people and it hasn't mattered one bit. It still works just the same as it always did. Except there's less censorship now. So I wonder, is that a general trend in these big tech companies? I can't believe it's only confined to Twitter after the decade we've just had. You know what I'm saying?
I think part of the whole last decade, basically since the financial crisis, and really unbalanced, like decades now, like part of the continued easiness and increased easiness of money was that all these big, successful companies that have low capex, and super-high returns and super-high free cash flow that are basically software companies, like I can't believe they're not all padded up with employees like Twitter.
Corey McLaughlin: Yeah, I mean, we saw the same thing with Facebook.
Dan Ferris: Yeah, exactly.
Corey McLaughlin: Yeah. So, yeah, I'm with you. I mean, and like at Google, I keep reading these reports occasionally about like angst within Google, and you know, the employees wanting certain things, and the CEO being like "Just deal with it." So I sense that's probably the case in a lot of places.
Dan Ferris: Yeah. And they – anybody who knows about life on the Google campus, or the Apple campus, or these places, where they're providing childcare, and meals, and probably many other things. I mean, they probably – it's probably like a resort compared to what the rest of us deal with at work. I'm not saying us. You and I have a very, very good. Stansberry is a wonderful place to work, but it's not the Google campus. [Laughter]
Corey McLaughlin: No, it's not. I'm looking around. I don't see the shiny objects, and free popcorn, or whatever. But we do have a nice – some nice perks for sure.
Dan Ferris: Yeah, for sure. We're doing great. So I think, you know, part of that is the wonderfulness of the business, or is it at least in part, the evidence that money was really easy for a long time. And, actually, this very topic showed up in Howard Marks's latest memo. He was saying, in latest memo, one of the many things he said was, quote, "I consider it nearly impossible to overstate the influence of declining rates over the last four decades," end quote.
And I bet a lot of people are learning today that they are far less smart and more lucky just to be investing during a time of low interest rates. You know, or were lucky, you know. They're not lucky anymore. They're now finding out that it was luck, and they don't have it anymore. And they don't have as much brains as they thought. We're all Sam Bankman-Fried right now, right? "I was not nearly as competent as I thought," was what is statements.
Corey McLaughlin: The days of the bull market genius are long gone for now, which I think is actually a good thing for people that are actually paying attention to an opportunity to make some money in ways that are not talked about at CNBC, or, or anywhere like that.
Dan Ferris: Yes, you're exactly correct, Corey. And that was another thing that Marks said, at the very end of his memo called "sea change." It just came out, I read all the Howard Marks memos. I highly recommend it.
Corey McLaughlin: Yeah, he's great. I love reading his stuff.
Dan Ferris: But at the end, he said, "We've gone from the low return world of 2009 to 2021, to a full return world." And then he says, "Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments, to achieve their overall return targets. Lenders and bargain hunters face much better prospects than they did previously, previous to 2021." And he says, "Really, this is the last 13 years."
But it's most of the last 40 years, right? Because interest rates peaked in 1980, or, really, 1981. And inflation peaked in 1980 – interest rates in 1981. And then for 40 years, it was just like, you couldn't go wrong, you could buy every single dip for 40 years, and make money. But now not so much. Now, you should expect higher returns from credit instruments, but that means lower valuations for equities. So you've got to be careful.
Corey McLaughlin: Yeah, I think it's going to take a little bit of work to get those returns that people have come to expect. I know he's the guy who ended up being a credit investor because you know what the return is going to be, you know, the fixed return. And so for him, of course, you can see how he sees opportunities. And I think more people can educate themselves on what opportunities are out there. I mean, it can be a great time. You know, you're not going to get the maybe not the stock returns that you're going to get for the next decade. Who knows? But in a higher-interest-rate environment, there's the higher interest rates everywhere. So that can be a good thing if you have money to actually put to work.
Dan Ferris: Right. And a great part of that is what Mark says, you're not running around looking for this ultra-risky thing that happens to be soaring, right? So meme stocks, over. You know, 99.9% of crypto, over. Done. You know, we could name others like SPACs, done. Cathie Wood... Ark, done. All that easy money that was like a narrative plus a chart that goes up to the right, you know. It's all done. Now, you have to be a bargain hunter. You need to do the bottom-up work. As Rick Rule likes to say, you need to do the arithmetic. And for people who do the arithmetic and do the work, this is the time to shine. And that's us, man. That's Stansberry. So I'm kind of happy about this. Everybody else is miserable, and I'm happy.
Corey McLaughlin: Yeah, right. Well, this also fits with what you've said this year as far as "flipped the last 20 years on its head," and "think differently." And then you've written about that in the list of things that to expect or to prepare for that are different than basically all the opposites of what you expect in a low-rate environment. It was one of those as compared to a higher rate environment.
Dan Ferris: Yeah, Marks has the same kind of list in his sea change memo, this new memo. And he has like 14 items like fed behavior, inflation, economic outlook, etc. And one of the items like is the key worry on investor's mind. And from 2009 to 2021. And I think he would probably say most of the last 40 years, it was FOMO. Right? Fear Of Missing Out. Fear that you're not going to make enough money, as much as everybody else. Now, the key worry today is that you're going to lose money.
It's completely flipped. And all of the items on his list are like that. Inflation was dormant during that period. Now, it's 40-year highs, as you pointed out. And fed behavior was highly stimulative. Now they're tightening. Everything's the opposite. It's just all flipped upside down. It's a different world. It's, as he says, the third major sea change of his 53-year investment career. And it's a great time, actually, to be an investor, because it's not easy anymore. And you got to know what you're doing.
Corey McLaughlin: Yeah. And if you could recognize the sea change that's happening, and if you listen to smart people like him, and you, that are pointing that out, it can be a great time.
Dan Ferris: I'm going to continue allowing you to think I'm smart. And with that, why don't we talk to someone who actually is smart, who I think we both agree is smart. And that's my old friend, Rick Rule. Let's talk to him. Let's do it right now. Many mainstream analysts are predicting that stocks will recover soon. But I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. And I'm urging Americans not to buy a single stock until they see it.
I predicted the Lehman Brothers crash in 2008. And I called the top of the NASDAQ in 2021. But this is the No. 1 most important thing to pay attention to for 2023. And I'm not talking about another market crash, or politics, or inflation, or any of these other things. As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers. And now is the time to decide which one you'll be.
This is why I strongly encourage you to read about my warning totally free today. It's all spelled out in our free report we've put together, get the facts yourself, go to www.stockdeadzone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again, that's www.stockdeadzone for a free copy of this new report.
Rick Rule: Dan, it's a pleasure to be on the show. It's a bit of a consternation to be able to be described, both literally and figuratively, as "an old friend." But I guess we must face the facts, must we?
Dan Ferris: We must. It's been an interesting couple of decades that we've known each other too. But I want to play to your strengths. I want to talk about all the good stuff that you've learned over these many decades. And I want to start with oil, because it's been an interesting trade for the past year or more. And it's been my personal view that if you use something like an ETF, like IEO or something, and then you look at like front month WTI. It looked to me like they diverged starting in July, and you saw oil sort of downtrend a bit, but the stocks kept going up.
Now, I feel like the stocks are coming have come back down somewhat. And I'm wondering if you might not agree that there's a decent longer-term underpinning in the fundamentals, and that there might not be an entry around here somewhere.
Rick Rule: I think there's a very good intermediate term play in the oil and gas sector. Ironically, that's almost guaranteed by our government. The government is suggesting to the oil industry that they need to increase the availability of oil and gas, while telling them that they're going to put them out of business in 2030. Telling somebody that you're going to put them out of business in 2030 is not really a good way to get them to invest hundreds of billions of dollars today. So we have an artificial supply constraint from an investor's point of view, particularly a sophisticated investor's point of view. It gets better than that.
You may know, Dan, that I'm celebrating retirement by starting a new bank, Battle Bank. It never occurred to me that in my dotage, I would be able to start a bank that could compete in oil and gas lending. Because, of course, the biggest banks in the country, the JPMorgan Chases, the Citigroups, the Wells Fargos are pretty good energy bankers. But the fact is that for political reasons, and for social reasons, the biggest bankers in the world are backing out of energy, leaving room for little old Rick.
In my fondest, wildest dreams, it never occurred to me that the finest sector in lending, at least the one that I had the most experience with, would be opening up to me, as a consequence of my fast friends in Congress. Similarly, Dan, I'm in the insurance business, in the environmental bonding business. It never occurred to me that there would be room for me in super catastrophe or in bonding and remediation in the oil and gas business because so many larger pools of capital were already well-established with distribution in the oil and gas and coal insurance business. But now, the biggest and mightiest insurers in the space, the John Hancocks of the world, are retreating from the sector, destroying capacity. [Laughter]
The wonderful joke for me is that even an old, fat, bald guy, like myself, could win the 100-yard dash if I'm the only guy that shows up to run. So the opportunities that you talk about in the oil and gas business are spectacular. I would estimate the peak oil demand occurs sometime between 2040 and 2050. Given the fact that we're in 2022 now, that suggests to me that there is at least a 20- or 25-year run. And by the way, at the end of 25 years, the oil and gas business isn't over. It's just my estimate that demand stops growing at that point in time. You have a very, very, very long liquidation to tail in the oil and gas business, probably 40 or 50 years after demand peaks.
So the idea that I have 65 or 70 years, clear sailing in the oil and gas business, at age 70, probably means that there's enough duration in the business to satisfy my wildest dreams of avarice. It's very strange, it's strange right now. Strange is not the right word. I guess it is. It's strange right now that the oil industry, as a consequence of current pricing, is able to generate substantial free cash flows. But because of political uncertainties, the oil and gas industry is estimated to be under investing in sustaining capital and new project capital to the extent of about $1 billion a day, which is to say $365 billion a year.
This in and of itself guarantees tight oil supplies. Some oil and gas companies are generating enough cash, and have an accurate enough view of the future, that they are both making the necessary sustaining capital investments to maintain production, while increasing returns to shareholders, either by way of share buybacks, or by way of dividend increases, or both. About 10% of the issuers that we monitor are generating enough free cash flow to both sustain very high yields and reinvest in the future. And it's difficult for me to see that group of companies not doing well, given the fact that the energy industry itself is decapitalizing as to about $1 billion a day.
Dan Ferris: Whoa. So there's a couple things. First of all, when you speak of the opportunity that's been laid at your feet by the likes of JP Morgan and John Hancock, I mean, they're lending to people like ExxonMobil, aren't they? Are you telling me that you're lending to companies like ExxonMobil?
Rick Rule: I believe that if Battle Bank were up and running now, that we could actually get in the ExxonMobil syndicate. I wouldn't do that probably. I don't think I need to. There's so much room in the $5 million to $25 million senior-secured revolving credit facility business, which by the way as a prime plus business, that I don't think that I would need to involve myself in the Chevron syndicate, or in the ExxonMobil syndicate. The only thing that I'm pointing out is that the biggest financial institutions in the world, in conjunction with the big thinkers are decapitalizing credit facilities all the way up to ExxonMobil. The idea that if I wanted to, I could participate in those syndicates, is something that's of endless amusement to me, Dan.
Dan Ferris: It is wonderful. The other thought on my mind is, I was wondering, "OK, obviously, there's this political underpinning." We see that plain as day. And I wondered about industries like railroads, eventually, they screwed up, and eventually got some discipline. Even for a little while there, it seemed like airlines, if only by dint of going bankrupt all over the place, and consolidating, you know, became slightly better businesses, let's just say.
I know you and I have talked about the way goldminers generated negative free cash flow over a period of like multiple decades, and sort of seemed to figure something out at the end of that period, as well. Is there any of that discipline in the oil patch? I know these people love to sink money into the ground? Is it purely this political thing that they're worried about?
Rick Rule: Yeah, I believe, I believe there's two things. I believe that they're genuinely concerned about the politics of energy. I believe, too, that the institutional investors are keeping them on an extraordinarily short leash. Partially because of political risk, partially because many of the institutional investors don't invest their own money. They invest other people's money. And so I think you have a whole collection of portfolio managers, investing recapitalizing the oil industry for woke purposes. I love competing with people who don't compete. It, to me, is a very good circumstance.
I think that the oil industry, at present, is being probably, on balance, too disciplined, which is to say that many of the issuers that I see aren't investing enough to maintain current production. They're generating very high free cash flows, and they have very, very, very high returns to investors by way of dividends and share buybacks. Unfortunately, when you use all of your surplus capital to do that, what you're doing, in effect, is cannibalizing your business because these are declining asset bases. You need to strike a balance between sustaining capital investment, new project investment, and return to shareholders.
So I would suggest to you that for structural and political reasons, the oil and gas business as a whole is being too conservative. Mercifully, for me, it's fairly easy, statistically, to find the companies that have positive recycle ratios, which is to say that they reinvest efficiently, and are also investing sufficiently, [laughter] not merely efficiently, so that they can maintain their production, maintain their free cash flow, while treating me, the shareholder, in a very civilized fashion.
Dan Ferris: Nice. Do you care to throw a name at us or no?
Rick Rule: Well, you know, for most people, I think you keep it pretty simple. I mean, I had some gaming names that I could give you. But I don't think I have to. I think if you look at Exxon, [laughter] ExxonMobil, not a bad choice. If you look at the Buffett portfolio, he's actually willing to take a little bit more risk in things like Occidental Petroleum. I see Occidental Petroleum as being fully priced myself, but I do see them, with his encouragement, spending enough money on development drilling, primarily in the Permian Basin, to maintain the very high returns on capital employed that he has been enjoying. I see, too, that he has like myself, been investing in Chevron, for a different reason there. Mostly because of constrained U.S. refining and marketing investments.
We haven't built a grassroots greenfield refinery in the United States, I believe since 1976. It's fairly easy to point out that the population and the GDP of the United States has increased somewhat since 1976. So this constrained capacity gives Chevron me oligopolistic returns in an integrated oil and gas business. So for most U.S. investors, I think that the macro theme, the beta opportunity is large enough in the five-to seven-year time frame that you could probably construct yourself a portfolio around Exxon, Chevron, and Occidental, and come out of life very, very, very happy.
As you know, Dan, I like complex political risk. I like circumstances where I get paid a lot to accept the fact that many things could go wrong. So if you're willing to subject yourself to government stupidity, both in the United States and Canada, which is to say, if you are willing to subject your purse to the twin threats of Biden and Trudeau, then the opportunities become truly staggering. The names in Canada that could benefit from sober leadership in Canada, and at least pragmatic leadership in the United States, would include names like PrairieSky, the great Canadian royalty company. Ark, which I believe is the best-managed intermediate oil company in the hemisphere. Peyto, Birchcliff, Tourmaline.
For most of your viewers, Dan, I suspect that they don't do the work to keep up on the intermediate names, and most of your viewers, and perhaps I'm disparaging your viewers, but most of your viewers would probably do well to simply attempt to catch the beta. And you could either catch the beta with one of the integrated oil company ETFs, or simply by constructing a portfolio around Exxon, Chevron, and Occidental. Perhaps, if you wanted to capture natural gas in the mix, you could throw in Devon.
Dan Ferris: All right. The other thing, of course, Rick, I think I met you in 1998. I have to say, I've never heard you say "capture the beta" before. [Laughter] I mean, this is like as bullish as I've heard you sound except at really big bottoms. But the other thing on my mind, of course, is that in all that time I've known you, I mean, you've invested all around the world in some crazy political jurisdictions. And you know better than anybody, the political winds can just change direction and blow you up in a second. How much do you view capturing that beta as exposure to maybe, you know, maybe the next election, we get a far less woke administration. And it all turns around, and this underpinning of what we call an artificial supply constraint, maybe isn't there anymore.
Rick Rule: Well, my hope is not that the political class wakes up to the reality of the world, but rather that the voters, when they have a look at what the alternatives are, for them, force reality on the political class. Let's look, as an example, at the alternative energy space, which as you know, Dan, I have been involved in as an investor for three decades. We have now, as a society, as I understand, spent about $4.6 trillion on various forms of alternative energy. And we've reduced the market share of conventional oil and gas from 82% to 81%. So we spent $4.6 trillion to reduce the market share of conventional energy by 1%.
In the meantime, we have created tremendous dislocations in energy distribution and energy pricing. And I wonder, as an example, where the gate price of natural gas in California right now is $55 per million British thermal units, up 10-fold in four years. How much of this foolishness, even California voters will be willing to stomach? My suspicion is that the voters will run headlong into the collusion between narrative and arithmetic. I realized that arithmetic isn't a subject that's in particular favor, particularly in California. But at some point, in time, I think you will come to understand that well, we need more of all forms of energy, in particular, we need dense and efficient energy to maintain our way of lives.
One of the things that I've tried to do in presentations like this is point out to people who are respectful and do the work but have a different point of view than I do of a different reality... a social justice reality around energy. Dan, most people don't realize that 1.2 billion people on Earth have no access to electricity. They want to live like you and I, but you and I live an energy dense life. Another two billion people on Earth have access to unaffordable or intermittent electricity.
So three billion people on Earth are experiencing energy, in particular electricity, poverty, what right do the big thinkers have to deprive those people access to the same material living standards that you enjoy and I enjoy? How long will voters tolerate 600 private jets flying to Egypt and meeting to tell us to drive less? My belief, to paraphrase Churchill in World War II, is that we always do the right thing, when there's no other available alternative. And I think we're coming to that.
Dan Ferris: Right. Wasn't it Keynes, who said that California voters can stay irrational longer than you can stay solvent, I think.
Rick Rule: [Laughter] Well, now that I've left California and moved to the state of Washington, I concur, of course.
Dan Ferris: Yeah, of course. [Laughter] All right. So I think we've I think we've covered oil very well. And thank you for that. Before we started recording, you actually mentioned uranium, and you piqued my interest. And you've been, you've been on this story, again, practically, since I've known you. And it has turned from a "when" story to a "wow" story. Where do you see it right now, and, you know, how does it look to you as an investment at this time?
Rick Rule: You know, Dan, I've been coming to your interview shows for a very long time. And one of my favorite phrases is you're either a contrarian or you're going to be a victim. And uranium gives you numerous opportunities to do both. It goes from really truly disgustingly out of favor, to being pardon the pun, thermonuclear, extraordinarily hot. And all you have to do is get it sort of right. You don't have to buy at the absolute bottom and sell the absolute top, which is of course an impossibility. All you have to do is pay attention to the arithmetic.
So let's look at the arithmetic right now. This stuff, the uranium the stuff in popular mines of Hiroshima, Three Mile Island, and Nagasaki is also the stuff that is 13% of total energy demand in United States, and 20% baseload demand in the United States. Which is to say despite the fact that it's unpopular among certain sectors, if we don't have it, and we don't have increasing quantities of it, the lights go out. So ongoing demand is pretty much assured. Let's focus, too, on the fact that global uranium demand post-Fukushima, post the disaster in Japan that knocked uranium demand for a loop, global uranium demand is now higher than it was pre-Fukushima.
And even in Japan, the host of Fukushima, popular sentiment around uranium, has gone from 30% in favor to 62% in favor. So now even Japan is restarting the nuclear fleets, which means that demand for nuclear energy, demand for uranium can only go up. Let's look at the arithmetic around it. It is estimated that the total cost of producing a pound of uranium, I don't mean just the mine cost, I mean social rents like taxation, cost of capital. prior year write downs, the total cost of producing a pound of uranium hovers around $60 U.S a pound. But we sell it on the spot market for $50 U.S. per pound.
In other words, the industry as a whole on a fully loaded basis loses $10 a pound, 130 million times a year. The industry at this price is in liquidation despite the fact that demand for uranium is growing. This is an inescapable collision of supply and demand, which will have its impact on price. Because we cannot do without uranium. If the price of something has to go up, it will go up if it can go up. And this is where uranium becomes interesting too. Because the cost of uranium relative to the finished price of electricity from a nuclear power plant is functionally de minimis.
The price of uranium might be 5% or 6% of the total cost of the finished electricity. The lobbyist bill... the lawyer bill is higher, and certainly the amortization of the cost of capital around building the nuclear power plant is higher. If the price of something must go up, which uranium must, and can go up because uranium can go up, it will go up. I love arithmetic like that. I absolutely positively love arithmetic like that. Must go up in 2023? No, not necessarily. But I believe for five or six years that the catalyst for higher uranium prices was the increased pace of Japanese restarts. Which doesn't increase uranium demand five years from now, but rather increases uranium demand right now. And we're seeing precisely that. So I'm quite attracted to the uranium space.
The other thing that happened, of course, is that my former employer, Sprott Inc., where, by the way, I'm still the largest shareholder is still in the board, saw the circumstances that I see about five years ago, took over Uranium Participation Corp., rebranded at the Sprott Physical Uranium Trust, and caught a real wave of investor interest, particularly family office investor interests, and the Sprott Physical Uranium Trust now commands in excess of 50 million pounds of uranium. Which is to say from my point of view, most of the spare supply in the spot market that emanated from the shutdown of the Japanese reactor fleet has now been absorbed by Sprott.
So in addition to the fact that the price can go up, and the price will go up, the overhang of supply on the market has, I would suggest to you, mostly been absorbed by Sprott, and the Sprott Physical Uranium Trust is a roach motel. Uranium can go into the trust, but the trust doesn't sell it. It's purely a vehicle for participating in the price escalation of uranium. This is a really unique set of circumstances, and one that I'm delighted to enjoy in my declining years. I love it when reality makes my life easy.
Dan Ferris: Yeah, I was going to ask that question. It's so odd to me. I understand a vehicle for holding physical gold, physical silver. These are traditional destinations for some savings and investment. But uranium, it's a very practical substance, you know, it has one use, primarily. And to find it sequestered in this manner, it's a bit of a head scratcher. But it is what it is.
Rick Rule: You know, the product serves a market in an unusually fine way. Which is to say that if you and I decided that we wanted to own physical gold and silver, one thing we might do is buy it and store it in the basement. That's a bad idea with yellowcake. You know, distributed storage of yellowcake probably represents a public health hazard. And so unlike a circumstance where you could say that there were viable alternatives to the Sprott Physical Trust, which is to say personal storage, you can't say that about uranium for fairly obvious reasons.
Dan Ferris: [Laughter]
Rick Rule: You don't want a couple of drums of yellowcake in the basement.
Dan Ferris: No, and they're not selling that down with the coin shop either. OK. I have two questions. One is do you have any names? But the other one is, you know, at times when an industry is in liquidation, as you describe with uranium, those are usually the times when there's less capital being put into exploration. And, you know, that has to be part of the thesis, does it not?
Rick Rule: It does. Mercifully, in terms of exploration, you'll recall that we had, pardon the pun, again, a uranium boom, in the latter part of the last decade, where probably a billion dollars or more was spent on exploration. So in a sense, the industry is allowed to live on past laurels. Some of that money was very well spent, particularly the money that was spent in Kazakhstan, which went from 20 years ago, being a marginal producer, to today producing over 40% of the world's supply of uranium. In addition, there were some other discoveries that happened 15 years ago. I'm thinking of the wonderful discoveries made by NexGen and Fission on the western part of the Athabasca Basin.
So despite the fact that exploration spending in uranium is constrained, there is a reasonable backlog of deposits that can go into production this cycle that were discovered as a consequence of the uranium boom that we experienced in the 2000 to 2011 time frame. In particular, a development pipeline in Kazakhstan. It's true, too, that the industry finally began to exert some production discipline. And so at least four of the best uranium mines in the world were shut down during a period of low prices. And those deposits will be able to be brought online as enough stability returns to the uranium market, so that the shareholders of those companies can generate reasonable returns on capital employed as those deposits are returned to production.
Dan Ferris: All right. Again, it's just it sounds like sounds like we've hit two really good ones here with oil and uranium. I mean, shall I go for a third? Is there another of the sectors you've spent your career studying that looks as attractive as these two?
Rick Rule: Well, as you know, I've been involved in precious metals for a very long time as a professional, but I also am philosophically inclined to what I laughingly call "real money" as opposed to "specious or fiat money." And I haven't seen a circumstance, really, for 45 years that was better than the circumstance that I see in front of myself for either hoarding precious metals or investing in precious metals equities. In my lifetime, Dan, precious metals prices have done well when people are concerned about the maintenance of purchasing power in fiat savings instruments.
So let's continue our tradition today of looking at the arithmetic behind investing. Let's look at the efficacy of the world's predominant savings instrument, which is to say the U.S. 10-year Treasury, the deepest and most liquid savings market in the world. The value proposition from an arithmetic viewpoint is pretty easy to understand. The U.S. government proposes to pay you about 4% interest per annum on the U.S. 10-year Treasury in a currency that the Congressional Budget Office suggests.
By the way, not some fat, old, cranky libertarian, but rather, the Congressional Budget Office suggests that the purchasing power of U.S.-dollar-denominated investments is declining by 8% a year. So you get paid 4% in a currency that's losing 8% in purchasing power. And Franz Pick described this as a certificate of guaranteed confiscation. The U.S. government guarantees that you will have your purchasing power reduced by 4% per annum, compounded. Jim Grant calls this "return-free risk." So I would argue, Dan, and gold and latterly silver, much more volatile, are competing with return-free risk.
And just in the fashion that I believe that I can outcompete banks and insurance companies that don't compete with me, my belief is that gold and silver have a reasonable opportunity to compete with return-free risk. We've been conditioned over the last 40 years, 40 years of very benign economic climates with decreasing real interest rates. With demographics and world peace on our backs. We've been inclined to believe that the big thinkers of the world have our economic future well and truly secured. George Soros said that he made his fortune by finding widely believed precepts that were wrong, and voting against him. [Laughter]
And that's sort of how I see things. I think that there's a popular confidence that I don't share. In particular, I don't share it when sharing it costs me a guaranteed 4% compounded over time. And so while I believe that the wind is in gold sales, where silver sales, maybe not next week, maybe not even next year, but certainly over the lifetime of the U.S. 10-year Treasury, I also see a circumstance where the publicly quoted precious metals mining equities, particularly the large and intermediate caps, are selling at the lowest multiples of enterprise value to net asset value, using current precious metals prices to establish net asset value, that I've seen in 45 years in the sector.
That to me, again, is a very attractive alternative. I'm not suggesting, Dan, that your readers, some of whom come from the very old Agora files, put 100% of their net worth, or in old Agora fashion, 120% of their net worth into the precious metals trade. But what I'm saying is that storing some of your liquidity in an asset that isn't somebody else's liability, which is to say precious metals, and investing or speculating in an asset class that has been proven to do well during periods of time when other investments don't do so well. And, further, is very, very cheap by historical standards, cheap in the context of enterprise value versus net asset value. I think that that's a real identifiable theme. And I think that people would do well to pay attention to it. And, in fact, work on it.
Dan Ferris: And so large and medium gold miners...
Rick Rule: Again, for most listeners who don't want to do the work, who don't want to get in the weeds with regards to production, pipelines, taxation, political risk, all that kind of stuff. There's enough money to be made in the data that you don't need to get fancy. Most people don't need to get fancy. You make the huge money being fancy, but you take huge risks too. So rather than engender some hate for you and I, from people who aren't willing to do the work, let's confine ourselves to the beta.
The finance mining company in the world, precious metals mining company, the world by far is the royalty company, Franco Nevada. It's not cheap. It shouldn't be cheap. Their gross is their net. It's a very good business. It's better than financial publishing. Probably the best business in the world. Coming down the quality trail a little bit, Barrick the best agglomeration of big multidecade-long mines in the industry, increasing margins, a wonderful balance sheet coming down a little further now, and this necessitates taking some political risk, you look at names like endeavor mining, an Africa focus, wonderful grower, wonderful product pipeline, wonderful free cash flow, and perhaps the highest quality North American miner, which is to say Agnico Eagle.
I think probably you also throw in the royalty and streaming company, Wheaton Precious Metals, which although it doesn't enjoy the same margins that Franco Nevada does, it enjoys very stout margins indeed. I think probably putting together a portfolio of those five names, for most people, captures as much beta as they need to capture, while, by the way, generating a very handsome dividend yield.
Dan Ferris: Oh, nice. I didn't get you to do the same exercise with uranium names, but I'm going to bet that it sounds similar. Keep it simple.
Rick Rule: Yeah, it's much smaller, I have concentrated myself in the space on some of the gamier names because I have durable competitive advantages, having been able to, among other things to spell "uranium" for 50 years, which pushed me ahead of most of my competitors. But people who don't want to get in the weeds with uranium could probably simply buy Cameco, the largest of the North American producers.
If they want to take some political risk, and some psychological risk, the best uranium company in the world by far is Kazatomprom. Most American investors can't spell Kazakhstan and are uncomfortable with having reserves tucked between China and Russia. I'm a very large Kazatomprom holder because the quality of the assets is such that I'm willing to take the risk. If you want to come down the quality trail a – well, not a little bit more, a lot more, I think then you look to the huge discoveries in the western part of the Athabasca Basin. And you focus on NexGen and Fission, in that order. Truly miraculous discoveries that will be multidecade producers, but are not in production yet. And face financing risk and political risk around mine building.
Dan Ferris: All right. Well, this is awesome. You've put together a kind of, you know, hopefully a one-and-done portfolio for the next several years for a lot of these things. And I thank you for it. I'm going to ask you my final question now, which is the same for every guest. You've answered a couple of times in the past. And that is, very simply, no matter what the topic is always the identical question. And that is if you could leave our listeners with a single thought today, what might that be?
Rick Rule: Common sense. The answer is usually apparent if you look for it. If you do the arithmetic, rather than ignore the narrative, you'll do fine. You know, people have become too trading oriented, I think. People have paid too much attention to the story and to their feelings, and not enough time to doing the work. Remember the great Bernard Baruch talking about traders, saying that the only guy who ever bought at the bottom and sold it to the top was a liar? It didn't happen. You want to take your slice out of the middle. And you do that with common sense.
By the way, in terms of people's natural resource portfolios, Dan, I've given people I think very sound advice, and most of them are going to ignore it. Most people who are in your file and my file came as a consequence of old agora copywriters. The world is going to end on Thursday. Here's how you can profit. So what happens is that many people have large portfolios of natural resource stocks that they don't actually know enough to own. And I'd like to help them deal with that. Any of your listeners who go to my website, RuleInvestmentMedia.com, can list their natural resource stocks, and I will, for free, no obligation, evaluate them, one being best, 10 being worst.
And I'll comment on individual issues where I think my comments might have value. In addition, an unabashed commercial plug, I'm celebrating retirement, by being involved in a new startup bank, the seventh of my career. If your listeners are, for any reason, unsatisfied with the business relationship that they enjoy, if that's the right phrase, with their current bank, I would love to battle for their business. The name of our bank is Battle Bank.
So if your listeners believe that they deserve better banking. As an example, if they believe that they should be paid some interest on their deposits, if they believe that they ought to be able to borrow against good collateral, like gold or silver, I would encourage them at Rule Investment Media, in the question and comments section, to say, "bank" or "Battle Bank," and we will put them on the list of people that we will inform about our products, probably at the end of March, when our conditionally approved national banking charter goes effective.
Dan Ferris: Awesome. And I want the listeners, believe me, take Rick up on his offer. Send him your natural resources names. And I mean, he knows more about this stuff than any other two, or three, or five people I've ever met combined. Do it. I mean, it's free. You know, it's like Warren Buffett looking at your general portfolio for free. So, all right. Thanks very much for that, and always a pleasure to talk with you, Rick. Thanks for coming back and talking with us.
Rick Rule: My pleasure. Dan, I like talking to you. I like talking to your audience. So whenever you think it's appropriate, I'm easy to find.
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Always a pleasure to talk to my old friend Rick Rule for a lot of reasons, just because we like each other, but because he is, as I continue to point out, the single most knowledgeable natural resources guy oil and gas and mining guy that I've ever met in my life. And we didn't even talk, we didn't get to talk about water. He has been an investor in water companies for many years. Maybe we'll do that next time he's on. But, gosh, he gave us a great list of names. I wrote down every name as he was talking. I hope you did the same. He gave us a fantastic, sort of, you know, one-size-fits-many, I think, portfolio of oil and gas, precious metals, and uranium names. I mean, where do you get that? From a guy like Rick. Awesome.
And do take him up on his offer. I'm not kidding. If you hold a bunch of natural resources stocks that you really want to know if they're great bets or not, he will tell you. And he knows. I'm sure a lot of people will tell you, but they don't necessarily know. He actually knows, so take him up on his offer. Other than that, I was really happy to hear him talk about capturing the beta. I've never heard Rick talk this way. I've known him since 1998. And I've never heard him talk about capturing the beta. In other words, you know, just buy ExxonMobil.
You know, he's always been talking about all the names that he dives deeply into. But in his retirement, he's sort of more, more open with ideas. And, sometimes, he can afford to be more practical and not worry about, you know, trying to get your business or whatever. So he's at a perfect time in his life to hear what he has to say, because he knows more than ever, and he's just more open and honest than ever. And it's great. He doesn't have an ax to grind with you. It's wonderful. Once again, I hope you enjoyed that as much as I did. And, gosh, I probably enjoy talking with Rick more than, more than anybody, certainly about natural resources. Let's just keep it to that because I enjoy talking to all our guests.
So that's another great interview and another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did. We do provide a transcript for every episode, just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode, know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com. Do me a favor... Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review.
Follow us on Facebook and Instagram – our handle is @investorhour. Our handle is @Investor_Hour on Twitter. Have a guest you want us to interview? Drop us a note at [email protected], or call the listener feedback line, 800-381-2357. Tell us what's on your mind to hear your voice on the show. From my co-host Corey McLaughlin... till next week... I'm Dan Ferris. Thanks for listening.
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