"Wages are rising." - Special guest Rick Rule on the US job market - Weekly Wrap Up (October 5, 2018)

Transcript:

Craig: You are listening to "The Weekly Wrap-Up" on Sprott Money News.

Craig: Greetings once again from Sprott Money News and sprottmoney.com. It is Friday, October the 5th, 2018, and this is your weekly wrap-up. I'm your host, Craig Hemke, and sitting in for Eric this week is Rick Rule. Many of you are familiar with Rick. He is the CEO of Sprott U.S. Holdings and a veteran in the resource sector. It's great to get his opinions this week. So Rick, thank you very much for joining us.

Rick: Pleasure, Craig. Thank you for having me on your show.

Craig: Hey, before we get started, we are approaching the holiday season if you want to look at it that way. It's October now, and so that means Canadian Thanksgiving is just a few days away. And Sprott Money has got an exciting offer for everyone listening. You can buy a 1-ounce gold PAMP Suisse gold bar for just $39 Canadian over spot. That's a heck of a deal. We've been moving these fast and limited quantities are available. So please take advantage of this special Thanksgiving Day promotion today by visiting sprottmoney.com or, of course, you can call us at 888-861-0775.

Craig: It's been a busy week. It's been a busy day here, especially here in the States where we had the latest edition of the employment report come out. Looks like the jobs number was a little less than expected, but wages were right in line. Let me just ask you what you think of that in general. Are we beginning to see an uptick in wage pressure, inflation pressure here in the U.S.? What's your opinion?

Rick: Well, certainly the jobs picture has, over the last 12 months, surprised both the corporates and the analysts to the upside. So it makes perfect sense that wages would be beginning to rise. And it's interesting, too, that wages are rising throughout the spectrum. It isn't just that they're rising at the very bottom where some cities are mandating mandatory minimum wages, but rather it would appear that wages are rising, you know, throughout many employment classifications.

Craig: And as you see that...I mean, we've all been waiting for that it seems, you know. They've been frustratingly low, a lot of economists say. Is that kind of a later growth signal, do you think, to have wages start to rise and put inflation on a pressure that way?

Rick: I have a mixed opinion about that. I think that...you know, first of all, the caveat that I'm not an economist. I'm a credit analyst. One of the things that I have seen in the economy is continued caution on behalf of some employers, not all employers, but some employers, which would suggest that there is part of the economy that, despite the liquidity that seems to be in the economy, may have some concerns about credit markets or the ultimate impact of rising interest rates. It's interesting to note in particular that the temp economy is really, really, really booming, which suggests that there are some private sector employers that need manpower but are afraid to make more permanent arrangements with new hires.

Craig: Yeah. Yeah. And, you know, the benefits that come with that are extra expenses, and that's probably weighing things down too. I tell you, though, it's interesting, the dollar has had another big week this week after the Fed report last week. And Rick, what a crazy week in the bond market, big spikes in yields, especially as you go out here in the U.S. and the 10-year and in the long bond. What do you think of that? Is that, again, just indicative of where the Fed is taking things or do you think at some point that begins to drag on the economy too?

Rick: Well, my gut feeling is that the bond market is telling us a couple of things. One, there is enough liquidity in the system that the markets can take higher interest rates. In other words, the Fed is not as concerned about letting interest rates rise as they would have been two years ago. I think the second thing it says is that savers are beginning to demand higher yields because they do see pressure on the dollar. You know, in the old days, interest rates rose when savers believed that the purchasing power of their savings was deteriorating and they wanted more sort of compensation for that. In the last sort of 15 or 20 years, of course, interest rates have been managed more by the Fed, but I think you're seeing some of both take place now.

Craig: All right, Rick, so what does this mean for gold, my friend? It has been a frustrating and challenging year in that we had...Last couple of years have been pretty good.

Rick: Frustrating if you save in U.S. dollars.

Craig: Well, that's true.

Rick: Remember that in almost every other currency in the world except the U.S. dollar, gold has done what it's supposed to do. It's protected savings very, very well. The strength in the U.S. dollar relative to every other currency in the world, or if you include money, pardon me, gold, every other kind of money in the world has certainly been astonishing. I think that gold bugs or gold investors or even just gold speculators really need to concern themselves with how far the U.S. dollar continues to strengthen if it continues to strengthen. You know, we have this juxtaposition between dollar strength, at least relative to other fiat currencies and mounting concerns on my own part and on behalf of many Americans, with the rising levels of on-balance-sheet debt at the federal level, certainly, the rising tide of off-balance-sheet liabilities, Medicare, Medicaid, Social Security, and stuff like that as well as state and local debt. So one of the things that you have to concern to yourself is whether this trend in motion, which is dollar strength, continues in motion. My belief is if you see the dollar falter at all...and I'm not saying that you will, at least in the near term, but if you see the dollar falter at all, I think you'd see a very, very strong physical precious metals market.

Craig: Yeah, I agree with you there. And do you think, your personal opinion, there's a lot of dollar bulls out there that think King Dollar is returning and that, you know, you get that picture on "The Economist" cover of, you know, George Washington flexing his muscles? What's your opinion at this point?

Rick: You know, one thing my career has taught me is that market expectations are set by the experience in the immediate past. And when any sort of market item does well in the immediate past, the expectation for it is to do well in the future. That's why bull markets get so extended and why bear markets get so deep. People don't project or remember long-term as well as they might. So I think what you'll see with regards to the dollar is that the trend will stay in motion until it doesn't. I realize from a prognostication viewpoint, that's, you know, not very helpful, but I think it's true. And I think the second part of your question with regards to the bond market, I can't tell you when the bond market is going to turn. I can't. But what I can tell you is that this bond bull market began in 1982 with the 10-year interest rate in the sort of 15% range, actually a little higher than that. The 10-year rate fell all the way down to 2 and is now up to 3. So I would suggest that the 10-year interest rate number is telling you that a 30 or 35-year bond bull market is over. The 10-year market is over. That doesn't mean that rates couldn't fall a little bit or bond prices couldn't rise a little bit. But the truth is the move from 15% to 3% suggests that the market is at least a lot closer to the end than to the beginning. And I think the consequence of that, if you believe as I do that gold trades contrary to the strength in the U.S. dollar or particularly contrary to the U.S. 10-year treasury market, would suggest that the gold bull market is much closer to the beginning than to the end

Craig: In our final couple of minutes, Rick, I want to segue that into a discussion of the shares. That's your expertise in the resource sector, obviously. And it has been an interesting, I guess, couple of weeks. The share seem to be perking up now that the metals have stabilized. But at the same time, like you said, trends remain in place until they finally change. And, man, the sentiment and money flows into the mining sector remain just awful. So your thoughts, at least at this point, as you look across the sector, does it look like we could at least finish the year on an up note and begin to move forward next year?

Rick: Yeah, I mean, I think the sector outlook is mixed. The most important thing to note with regards to the sector in the bullish side is that it's not expensive, and that's a good place to start. The move that you've seen in the last two weeks really has come about, I think, as a consequence of the market being grossly oversold with the liquidation of a couple big gold equities funds, in other words, in effect, a dead cat bounce. The other thing, of course, that's helped the market is the merger announcement between Barrick and Randgold, where you create an even larger, more liquid vehicle that will attract some generalist money as a consequence of index buying. But more importantly than that, you're starting to see mergers and acquisitions really across the valuation spectrum in the precious metals equities side, and I think that's going to be the story for the next 18 months. It's going to be a story for a few reasons. Most companies have underinvested in the last 10 years, which means that they need to boost their development and mine pipeline for mergers and acquisitions. It's also true that mergers, if they're done correctly, lower the general and administrative expense relative to assets under management and cash flow and result in higher share prices than would otherwise occur and more liquidity. So I think that the strength that you're going to see, limited strength for the balance of this year but emerging strength for 2019, will be a consequence of mergers and acquisitions, even in the absence of markedly higher bullion prices, although I certainly wouldn't discount the probability of markedly higher bullion prices too.

Craig: And it would seem as if anything that can draw some positive attention to the sector, even if it is M&A activity, at least we get something going in our direction, for once.

Rick: Well, certainly the nice thing about M&A activity is it's often smart money as opposed to generalist money, which I think is very useful. One of the very helpful trends that we've seen, frankly, in the gold juniors for the last two years is that the primary source of financing for the gold mining industry has been other gold mining companies, which are traditionally much more sophisticated buyers. I think that says something to the valuations that are beginning to appear in the sector. I think it's very, very useful.

Craig: Yeah, absolutely. Rick, I tell you, it's some great information. Before I let you go, I want everybody to understand an additional little factoid about Sprott Money. We've actually been around 10 years now, and we are celebrating our 10-year anniversary/birthday. And so to honor this special milestone, head over to sprottmoney.com, or, of course, you can always call 888-861-0775, and you can purchase a 10-ounce Sprott-branded silver bar for just 85 cents U.S. over spot. That's a heck of a good deal. And storage clients can purchase that same bar for 79 cents over spot. These are great low prices, low premiums over spot, great chance to stack some metal. So please open a storage account with Sprott Money. Get those discount, again, or just simply call us. Again, 888-861-0775. Rick, thank you so much for your time. I very much appreciate it. I know Eric's going to be proud of you. You did a great job.

Rick: Always a pleasure and always happy to help our cousins at Sprott Money.

Craig: All right, and have a great weekend. Safe travels. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next week.