January 29, 2016
With some of the wildest trading action in major markets to end the week, today one of the wealthiest individuals in the business spoke with King World News about the move today that shocked the world and why there is still more carnage to come in global markets.
Eric King: “Rick, we just spoke about the nightmare that Japan has just unleashed on its citizens and the world — your thoughts.”
Rick Rule: “Eric, this is a brand new chapter in two wars. One: It is a new chapter in governments war against their own people, in particular savers. Negative interest rates are probably the dumbest idea since central banking.
The idea that someone would work hard all of their life, and then you would steal the proceeds from their hard work with negative interest rates is the most insane disincentive to the hard work and the savings of the Japanese people, who have turned around the Japanese economy since World War II.
And it’s the latest and most creative chapter in the ongoing currency wars — the ongoing race to the bottom among the world’s major currencies. I guess the Japanese will succeed in decimating the yen, and I guess they will succeed in decimating the savings of their citizens…
Continue reading the Rick Rule interview below…
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Rick Rule continues: “The lesson from this for savers around the world is to save in some form of currency that your government can’t steal — one might suggest gold.”
Eric King: “Aside from what the Bank of Japan just did, we’ve seen some real carnage in the crude oil market. When you look at the Gold/Oil ratio, it recently hit 70-year highs. What are your thoughts on oil and where do we go from here?”
Rick Rule: “Well, you know the oil business has been very good to me. The truth is that there is still more carnage to come in the oil shares. When the annual reports come out in April – May, the public companies will be required to publish 3rd party estimates of their reserves values.
There Is Still More Carnage To Come In Global Markets
They published estimates last year based on $60 – $70 oil, with even higher oil prices in the latter years. Publishing those same estimates with the market at $30 or $35, and less optimistic looks for the out years, is really going to produce carnage in terms of the net-present valuations. And that carnage is going to impact these company’s debt, not just the revolving credit facilities that are the senior secured pieces of debt on those balance sheets, but also the already impacted junk bonds.
I’m looking for the perfect storm in the credit markets in the oil sector. This will be one of those once in a decade opportunities, but it will also create major turmoil in global markets. No matter what lies the oil industry wants to tell itself or tell its investors, it requires $60 oil in order to survive and earn its cost of capital.
So right now the industry is producing oil for $60 and selling it for roughly $30, suffering staggering losses. Well, producing oil at a massive loss is cannibalizing their balance sheets. These balance sheets were fairly strong coming into this down-cycle so the carnage can last for a while but it can’t last forever.
So the rebound in the oil sector will be one of those once in a decade chances for people to dramatically increase their wealth. They will have some pain going in, but it will be very, very pleasant going out. The idea that long-term oil demand is going to decline in our lifetimes is pure fiction. And the longer the $30 or $40 price lasts, the higher the ultimate rebound in the oil price is going to be because you destroy productive capacity with low prices.
The last time we destroyed productive capacity was the latter end of the decade of the 1990s. And the consequence of destroying that productive capacity took the oil price from $15 to $150. The longer this goes on, the higher the resultant spike is going to be. There’s no way around that. That does not say, Eric, that you buy the oil stocks right now. Between now and the 3rd quarter it’s going to be truly ugly in that market.”
Eric King: “What about the gold market?”
Rick Rule: “In 1980, about 8 percent of U.S. savings and investments were in gold and gold-related equities. In the last 3 decades gold has only accounted for about 1.5 percent of the savings and investment matrix in the United States. But right now, remarkably the number has plunged to less than 1/3 of 1 percent.
If we were to have a reversion to the mean in the U.S., that would create skyrocketing demand for gold and gold equities in the largest investment market in the world, and I think that is highly likely in the tumultuous environment that the world financial system now faces.”