Evil and Stupid
America's two party system, and the predictable crisis to which it leads...
Serious investors are directed to review the note below Bill’s essay today. As part of our Private Briefing feature for paid subscribers—we recently interviewed an Australian mineral geologist about the gold sector, and gold miners specifically.
That full Private Briefing, which includes a review of copper, titanium, and other ‘war metals’ is available as an audio recording and transcript to paid subscribers. We include an excerpt today for free readers as a free preview of what you’re missing.
The names of the specific stocks mentioned have been redacted from this excerpt. To become a paid subscriber today and access this and all other twice-weekly paid research from Investment Director Tom Dyson and Dan Denning, please go here.
Bill Bonner, reckoning today from Youghal, Ireland...
“We have two parties here, and only two. One is the evil party, and the other is the stupid party…I’m very proud to be a member of the stupid party…Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.”
—M.S. Evans
No new dots today.
So, let’s make sure we see how the old ones connect.
Friday, we looked at how stocks have become very expensive. We live in an Age of Bubbles. 1999, 2008, 2021…and now, just three years later…a new bubble – this time, concentrated in the Magnificent 7, big tech stocks.
But some things always happen. Bubbles always pop. And it probably won’t be long before the AI bubble pops. Then, people who were hoping to get rich quick, thanks to the spiffy new technology, will get poorer, in a hurry, thanks to the very old boom-bust cycle.
And here’s something else that always happens: when the cost of credit goes up, bankruptcies go up too. This year, with interest rates substantially higher than they were a few years ago, bankruptcy lawyers are back in high clover. Here’s the Financial Times:
Debt defaults at highest rate since global financial crisis, S&P reveals.
This year’s tally of corporate defaults stands at 29 – the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency.
Bubble, Bubble
In the financial crisis of ’09, the Bernanke Fed stepped in, pushed interest rates down, saved many big debtors – including some of the biggest banks on Wall Street – and trimmed billings for the bankruptcy bar. That didn’t have to happen. It was a mistake; Bernanke panicked and set the stage for an even bigger crisis later.
The lowest interest rates in history encouraged almost everyone to go deeper into debt. And no one went farther down that rathole than the US government – adding $25 trillion in new debt since 2009.
And now, the Federal government itself is in over its head…and the Fed is in no position to rescue borrowers or stock market investors with more debt. This is new. And important. In 2000, and again in 2008, the Fed boosted stocks by lowering its key lending rate by 500 basis points…and ‘printing’ up the money to cover deficits.
But that was before the inflation bogeyman was on the loose. Today, the Fed can’t get away with that kind of stunt. Bond buyers will see more inflation coming; they’ll sell bonds…forcing up interest rates, making it even more expensive for the feds to borrow.
When you are already $35 trillion in debt…and counting on adding another $16 trillion over the next 10 years…higher interest rates are not what you want to read about in the morning news. Even at 5%, the interest cost could be $2.5 trillion per year. That, in turn, would force the feds to borrow (and print) even more to cover the interest expense.
That is when we’d see another thing that always happens. When you have to borrow more and more money, just to keep up with the interest payments on previous debt…you are doomed.
The Fed will be very reluctant to get into that situation. It will not want to ‘print’ more money just to keep stock prices or a few high profile businesses from going bust.
A Predictable Crisis
So far, it hasn’t had to take action. Inflation rates seem to be moderating and interest rates are coming down. The vigilantes (who are supposed to punish federal borrowing by demanding higher interest rates) have been on a long break too. They “‘snooze, as Treasury bonds shrug off vast borrowing,” says the Financial Times.
But the feds are set to borrow an amount equal to more than 5% of GDP every year for the next 10 years. That is not something that has to happen; but it is something that will happen. And even those numbers depend on clear sailing, with no troublesome storms. In the event of a recession (almost guaranteed), the feds will borrow and spend more.
Yes, dear reader, the US faces ‘the most predictable crisis ever,’ as debt increases faster than GDP. You can see it coming from a mile away. The obvious thing to do is to avoid the disaster by bringing the rate of debt growth down. And the obvious way to do that is to balance the federal budget. But this is one thing that the evil party and the stupid party agree on: nothing can be allowed to interfere with America’s rendezvous with bankruptcy.
You might wonder: how come the richest country in the world…near the peak of its power and wealth…can’t pay its own bills? Why does it have to pass the cost along to future generations…who have no say in the matter?
We’ll save that question for tomorrow. For now, we connect two important dots. The quantity of US Treasury debt is soaring. The demand for it depends on the interest rate.
And somewhere along the line, the bond vigilantes are likely to hear an alarm go off. Torsten Slok at Apollo Global Management:
“…a really weak auction could wake [them] up.”
Who knows what will happen; but real interest rates will probably go up.
Regards,
Bill Bonner
Excerpt from our recent Private Briefing with Diggers and Drillers editor James Cooper.
Dan Denning: Well, that's why you're here today. It's a really interesting time to be back in Australia and, full disclosure, some of your readers and some of my readers might remember that I was here back in 2008 when we started Diggers and Drillers.
I actually ripped the name off from a mining conference here called Diggers and Dealers, but it was a really good time in the mining cycle. I guess that's my first question for you today. I think we should start with gold because that's the one we got the most questions from readers. Where do you think we are with gold in its cycle or is there a gold cycle?
More specifically, there's been a couple of strange divergences to precious metals enthusiasts.
One is that retail investors aren't really buying the gold exchange traded funds (ETFs). Maybe they're buying the Bitcoin ETF. Yet the gold price has stayed strong, the gold ETF prices have stayed strong.
The real question is what is going on with the miners? Their cash costs are, well, they're variable, but a lot of them are generating a ton of free cash flow at current prices. But we haven't seen hardly any movement in the stocks. Do you think there's an opportunity there or do you see something else going on that our readers should know about?
James Cooper: It is hard to really pick out why there's such a divergence between the underlying gold price and equities. There's a few factors why that could be considering cash flow is relatively strong.
One of the big challenges I see for the gold producers in Australia is just the impact of not putting enough investment in new supplies. So challenges in exploration and just bringing in this next generation of deposits. Whether that's the cause behind a lackluster performance, I'm not sure.
But I just know that that's a problem across the board in Australia where we have a lot of aging deposits, a lot of well-established producers, very focused on these brownfield near mine projects and really just trying to extend the life of mine from their existing pits and really just tapping into the fringes and really sort of getting lower grades.
They're able to do that considering gold prices are quite relatively high, especially in Australian dollar terms. The cash flow still looks pretty strong from that perspective. We've got strong quarterly performances right now.
When you haven't got that new supply coming on board, that could really dwindle quite quickly and I think that's one of the things investors should be looking at, just what have these projects got looking sort of two, three years down the pipeline, not just for the next quarter or not the next few months.
It really is going to be a major challenge and not just in gold. All across commodities and oil and gas, which we'll tap into later on. That could be one of the factors. I don't know if investors are really looking that forward ahead in terms of what is the supply situation looking at some of these companies.
That’s a huge challenge and that comes from the perspective of being an exploration geologist and working at some of these companies. A lot of these big miners, they're just so focused on what they need to do today and putting that cash flow aside, which I guess for a tech company would be R&D or a medical stock would be R&D.
That's what exploration is for mining, thinking ahead and that's going to be the huge challenge to try and get through. We'll probably look at some of the ways that investors might be able to sidestep those challenges or maybe look at opportunities where the development projects are probably more certain.
Dan Denning: Are you tempted, because of the situation you just described to look at exploration stocks that might be considered a little bit riskier, but because it's greenfield exploration and might be in a different country or there might be a bigger upside or it might be more leveraged to the gold price than a producer who's got an old mine and is just cranking out current production? Or, would your advice be to just stand pat and wait to see a little bit more from either the existing producers who might have new projects developed or some of these riskier exploration companies?
James Cooper: Looking at the established companies and just trying to understand what projects, what are their plans for the next three to four or five years and just getting a sense of is the company putting a material expenditure towards exploration or is it entirely focused on production and looking at the life of a mine.
A lot of these gold miners do have quite short life of mines at some of their projects, around five to ten years. If that project's been running for a few years already, that life of mine is probably coming towards its end. As geologists we do a lot of work around existing pits as well and drilling out and trying to find near mine reserves. But it tends to be a little bit uncertain. Sometimes it's better just to look at more greenfield projects for your longer term development projects.
Of course, there is the advantage of trying to develop as much as you can as close to your existing infrastructure. But I guess the other big factor for the big miners is the mergers and acquisitions, and we're seeing a lot of that take place in Australia too. This is a function of some of these projects starting to reach their end of life of mines, so it doesn't really increase the supply.
That's the only problem when you see M&A action. It's not really making any difference. It's just shifting one asset to another. I think looking at the more risky stocks, developers that perhaps have a shovel ready type of deposit and maybe just a year or two out from first production, is probably one of the less risky avenues to go down, and that's perhaps what we're looking at in this part of the cycle as gold prices are really looking to break out.
We've had a lot of producers not really following those prices. But in Australia there are a few examples of producers that are following the gold breakout and just looking at those projects. XXXXXX is one in Australia and it's one of the few producers that's actually performing alongside the gold price.
One of the reasons for that is that its Karlawinda project in the Pilbara is pretty fresh. It's only a year or two from when it started maiden production, and it also has another major development project in the pipeline, which should start in probably two or three years time. So just these projects which are pretty fresh, have a lot of production ahead of them and no sort of expiration or risk that these gold suppliers are going to run out anytime soon. Yeah, exploration is another avenue to pursue. It just depends on your risk profile.
Dan Denning: One more question on that. Is there any opportunity in that M&A space for the smaller fish to get eaten by the bigger fish? At Bonner Private Research we have a watch list of things that our investment director would like to buy, but at the right price. Do you keep a similar list of gold stocks that might get snapped up that people should keep an eye on?
James Cooper: Yeah, definitely. I think that's a good time in the cycle for looking at projects, especially Australian projects. The Australian dollar is still relatively low compared to the US dollar, so that could attract some of the big players in the North American market to look at some Australian assets.
One of the ones I do like, which is a late development project, which has a large deposit is XXXXXX in the Pilbara and Western Australia. Projects like this, which have a known resource, are large which is really, really important for getting the attention of a major is having not necessarily just a high grade deposit, but something that's going to be that economics of scale just really makes it worthwhile for a big player to move in and take over a project and invest the development and especially for an international gold mine to make that move.
XXXX has got a large deposit, it's a multimillion ounce gold deposit that was really just a fairly recent find. I think it was in 2009 that it really started to kick off and since then it's had a number of resource upgrades and it's one of the big success stories in the gold mining sector in Australia, and I think it's primed for a big takeover. Of course, that's not a certainty. But it's certainly a possibility when you're looking at these big deposits with a long life of mine ahead of them.
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