Markets Tell the Truth

by Douglas French

People can't get enough of predictions. There is that basic human desire to know the future and capitalize on it. People especially like hearing predictions that confirm their view of the world. Hearing prognostications that match up with your own makes you feel smart. And in turn, you view the predictor as smart for confirming your bias.

The big question: are we headed for deflation, inflation, hyperinflation, stagnation, stagflation or Obamanation?

As in past years, doom and gloom was the predication coin of the realm at FreedomFest 2012. Using Austrian economics as a framework, TraderView proprietor Ty Andros told those attending the "Where Do We Go From Here? All-Star Prediction Panel" that the next leg down in the global financial crisis has begun.

Bert Dohmen is equally bearish. However, an obnoxious Donald Luskin was quick and insistent that Dohmen and Andros were wrong a year ago and continue to be mistaken. Luskin, a frequent guest on tout TV, is more hopeful for the markets and insists that Congress must be pragmatic and raise the debt ceiling to avoid creating another financial crisis.

Enabling a government that is borrowing and spending its way to oblivion will provide for smooth market sailing, according to the argumentative Luskin. Save the fiscal budgeting for a later date,. he says.

Rounding out the panel was the noneconomist and Agora Vancouver favorite, Rick Rule, the world-class resource investor who describes himself most positively as a "credit analyst," and at other times, a "shylock" or "pawn broker." Rule credits reading Benjamin Graham and David Dodd's Security Analysis for saving him from going to law school.

The founder of Sprott Global made only one prediction, and that is that markets will be very volatile. He sees the potential for "a true psychotic break" in the markets, like 2008. This is a situation he relishes. A market gully washer inspires Rule like a trip to the Ann Taylor outlet excites my wife. Rule loves buying stocks on sale.

Rule contends that nothing has changed since 2008. None of the market dislocations have been addressed. Market turbulence is dead ahead. But the crisis will bring opportunity. Investors must be contrarians, or they will be victims as citizens and lumpen investors get what they deserve "good and hard," Rule said, paraphrasing H.L. Mencken.

While governments meddle and distort, "markets always work," says Rule. And the opportunity in resource markets is that millions of people around the world are enjoying a higher standard of living. As these people climb out from under the thumb of oppressive governments, their living standards rise — not to buy iPads, but to buy stuff requiring natural resources.

So while demand for metals, energy and food worldwide is (and will continue to be) on the rise, the last two decades have seen an underinvestment in natural resources. The hard-nosed pawnbroker Rule sees this as an opportunity.

However, Rule often cautions that the majority of companies in the exploration and natural resource spaces are worthless. As prolific as the Fed's Ben Bernanke is at creating currency, the free market is even more efficient, says Rule. Resource companies in Vancouver take every opportunity to issue additional shares. Most of the shares have no real worth.

Environmentalists, politicians and drivers may rail at the big oil companies for high prices and increasing the carbon footprint, but the majority of energy production comes from sovereign oil producers. Saudi Aramco, Pemex and the rest of the government oil producers have been using profits to fund government social programs, instead of investing in exploration. Peak Oil or no Peak Oil, this means that long term, production will fall, while demand will increase.

In the short term, Rule says there's a "three-way dumb presidents contest" ongoing between President Obama, Benjamin Netanyahu and Mahmoud Ahmadinejad that could cause a closure of the Strait of Hormuz. This could send oil prices soaring.

Rule loves uranium because the Fukushima disaster has made uranium and uranium stocks "cheap, cheap, cheap." The Chinese are still building nuclear plants, and Japan must have uranium. He sees "light at the end of the tunnel" for natural gas prices, but thinks LNG will be cut in half.

The resource market has been brutal for investors. The stock prices of companies that have secured natural resource deposits are unloved and may get more so, setting up what Rule thinks will be the "best resources M&A [mergers and acquisitions] market ever." That is, unless that cataclysmic market break occurs.

The Sprott Global founder doesn't earn his living making predictions, but instead by making good investments for his clients and himself. Resource markets "are as bad as they've ever been," says Rule, "and for me, that's as good as it gets."

Rule is prohibited from offering investment ideas to conference attendees by SEC ("Swindler Encouragement Committee") rules. But he does provide "conflicts of interest." He listed nearly a dozen companies that he was increasing his "conflicts" in. Count that as yet another workaround to the problem of government regulations.
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Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.

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