Unraveling the Central Banks’ Misbehavior (w/ Jim Grant & Bill Fleckenstein)


Jim Grant: Hello. I’m Jim Grant. I am with my friend, Bill Fleckenstein. And let me just say that I met Bill during
the panic of 1907. And we have known each other so long, we could
almost—Bill Fleckenstein: Almost finish each others’ sentences. JG: It’s true. I think, actually, we got to know each other
during the fabulous 1980s. BF: Correct. JG: And by way of background, ladies and gentlemen,
you are in the presence, in Bill Fleckenstein’s presence, with one of the great amateur athletes
of America. Now, he’s not going to say– he’s going to
deny it. But I’m going to embarrass him, and not for
the first time during this interview. I’m going to relate to you that he is– he’s
told me, I’m hardly in– I hardly made the top 50 ranked amateur tennis players in my
age group. Now, there are, like, 340 million people in
America. Almost all of them play tennis. Can you imagine being, like, number 49 and
1/2? That’s one thing. Second thing is he pairs extraordinary eye-hand
coordination with, like, a sub-three-hour marathon time. You got to process that, too. So he’s not that smart. He’s a good athlete. BF: Yeah. But he can’t do any pull-ups. JG: He’s a very smart dude as well. And one of the evidences of that is mathematics
degree from the University of Washington. And he got into the investment business shortly
thereafter, having had a little bit of exposure to tech. And we’re going to explore, ladies and gentlemen,
how it is that this eminently qualified intellectual and physical specimen came to a light on the
short side of the markets. In a way, it’s kind of a tragic story. Let’s get down to it. I want to ask about– first of all, about
technology and you because whereas others began, perhaps, in a Merrill Lynch training
program, your first experience of making an actual living was in the world of tech, no? BF: Exactly. At the University of Washington, where I got
my math degree, computer science was a budding thing in the mid-’70s. And I learned a handful of computer languages,
one being ALGOL, which is in the– was sort of the precursor to C and all the things that
run the computers today. And Burroughs Corporation had those kind of
computers. And since I could program in ALGOL, I got
a job. And so I was a software tech for a couple
of years. But I became interested in finance, much to
my, perhaps, disfortune, and left– JG: To your great fortune in this way. I think Mrs. Fleckenstein, if she were here,
would agree with that. BF: There was plenty of times along the way
where I thought, did I really make the right decision leaving tech, given what happened? JG: We’ll get around to that in a second. BF: Anyway, so I started out programming computers
and was very fascinated with everything technology. But as I got in the investment business originally
in 1980 and the books that I read led me to be a value investor, and the interplay between
value and tech doesn’t happen so often, and oftentimes– is I found that over the course
of my career– that when then tech stocks get demonstrably chief, oftentimes, they’re
on the way to zero. And sometimes, you have to find a different
way to value them. They can be cheap without looking Graham and
Dodd-like cheap. And that’s a little tricky thing to learn
how to do. JG: Well, the whole story of a successful
investment career is one of adaptation. It’s adapting to different valuation ideas
and different received truths. Sometimes, in the marketplace, people will
say, ah, yes, paper money– very, very questionable item. We must hedge against that or invest against
it. Other times, they will say, precious metals–
have you realized– do you recognize they don’t yield anything? That will be another thought. So these– everything is cyclical, as Howard
Marks is wont to say. BF: Yes. JG: And the trick, I suppose, is to hold on
to a set of primary beliefs that are important to you while being adaptive in tactics. BF: Exactly. And of course, a lot of this you only learn
over time, as you make mistakes. And I think initially, when you come at it
from a value standpoint, as I did, it’s easy to be dogmatic. And it was a lot easier to be dogmatic in
the ’80s because stocks were demonstrably cheap. I think the much harder hand to play was to
be value-orientated– orientated– it’s not a word– oriented as multiples rose because
interest rates collapsed. And I think learning how to find a Disorder
margin of safety and all that sort of thing– you had to leave the textbook behind to some
degree, at least as — JG: Well, let’s help the viewers imagine or revisit the scene in
which both of us really got started. I think I’m a little bit older than you are. Fine, I’m a lot older than you are. But in 1980, we were one year away from a
truly epochal peak in interest rates. In the spring of 1980, there was a Treasury
called the “DC-10.” It was a– kind of a morbid joke about a plane
crash, where the 10s, too, crashed. And they became, by the fall of 1981– they
became 15% yielding securities. So you were present at the tail end of the
35-year bond bear market. I think it was Napoleon who said something,
in effect, that everything you think is colored significantly by the experience you had in
your early 20s. And so you came of age in finance at the time
of arithmetically very cheap equities, owing to the interest rate backdrop and to a general
revulsion against financial assets. BF: Correct. JG: And here we are today, more than 35 years
later– another– a great subsequent bond bull market with a different set of precepts,
a different set of prejudices implanted in the minds of investors– namely, that financial
assets are for all time and that interest rates are made to go down and that multiples
are made to go up. BF: And that the experience of anyone who’s
been in the business now since about the mid-’90s, which is probably the bulk of the practitioners,
has seen central banks do things that some of us with a longer historical perspective
would say are insane policies. But they’ve only seen them work, but for a
couple of years of pain in the early 2000, one year in ’08. So there’s been a 25-, 30-year run of what
we might think of as monetary abuses that have, net-net, been nothing but a gigantic
W. And so I think a lot of the behavior– what people have learned in this– what they–
what’s been ingrained in them at a younger age has been that this stuff all works when,
in fact, it’s not going to. JG: Well, let’s get back to the timeline of
your life in investing. So there is the Burroughs prelude. And there is the value investing formative
years. And you worked for an outfit called Olympic
Capital. BF: Yes. JG: And you came in as an analyst, I suppose. And what happened then? This was about 1980- ish, right? BF: Yeah. Yeah. We were all portfolio managers. There was some older guys that took me under
their wing and showed– well, they weren’t that old. But they were older than me. And we were very successful in the– on the
value investing side of things. It was a good period. JG: Because John Crowell was one of your mentor. BF: John Crowell was the– yeah, he was my
mentor. He’s still around. And we were fortunate as a firm, and I was
fortunate and unfortunate, because in ’87, we saw trouble coming. I actually understood that portfolio insurance
was going to lead to a huge disaster because there was not going to be a back door when
everyone tried to hit it at the same time. Consequently, the funds that we ran– we did
quite well that year. We raised a lot of cash in the wake of the
crash. And then after, we put it back to work because
we didn’t feel like the crash was going to lead to a depression. It wasn’t going to be an economic event, as
so many people assumed at the time. And I had one particular client who wanted
me to do some short selling for him. So I’d been learning that craft, so to speak. JG: Dark art. BF: Yeah, dark art. And it was– I was quite successful in ’87
with that. And then at his prodding, he said he thought–
and his words were– in about ’88 or ’89, he said, Japan must be a bird’s nest on the
ground. That was this exact thing. And we needed to go pick that bird’s nest. JG: I got to interject something here because
I have in my lap– and the witness will now consult his notes– I have in my lap a piece
of– from Grant’s Interest Rate Observer dated July 7, 1989. And the headline is “Nikkei Put Warrants.” It was a– kind of a non-flamboyant headline. But it was about your thoughts on how to play
the coming troubles in Japan. And to set that scene in July 1989– as clear
as it looks now in retrospect, that was the last gasp of the euphoria in Japan. It looked for all appearances as if it would
keep on going forever. But on offer were these warrants. And why don’t you tell us about it? BF: Correct. So I had been doing a little battle with the
Japanese stock market for this one fellow and for myself starting sometime in ’88. And there was all kinds of games being played. They’re kind of childish now relative by today’s
standards, the way they were painting the tape and all the things we all know now. And it became– it was, A, impossible for
the market to go down. And then you’d get bought in on your shorts
all the time. And it was a nightmare. In any case, I kept looking around to try
to find some way to capture this. And trading in Singapore, there were futures
in Singapore. So that traded where the Nikkei’s futures
traded. And I found a brokerage firm where I found
a couple of guys in Japan who saw it just like I did. There was one guy there who said– he said,
I’m so bearish, I’m a seller at $0. I love that phrase. JG: Remember the guy who wrote for The Nikkei
news– BF: Yeah, “On the Diddle Again.” JG: Initials were MVP, as in Most Valuable
Player. BF: I still have his last article, when they
ran him out of the journalism business because he wouldn’t give the CNBC version of everything. He basically told what was really going on. His last column was called– JG: That’s not
the way forward in journalism, by the way. BF: His last column was called “On the Diddle
Again.” I swear to god, I have it at home still. In any case, these guys thought just like
I did. And I found these– or I can’t remember if
I found them or they put me to them. Salomon Brothers had issued some put and call
warrants as part of a debt offering. And long story short, this was before the–
they were manufactured by everybody on Wall Street in 1990. These one were denominated in yen, traded
in Singapore. And there were three different strikes with
different time horizons. I had the 28139s that had about 18 months
to run. And there were others. And the beauty of them is– today, almost
any derivative you want to buy– somebody’s on the other side of that. JG: And watching. BF: Exactly, and making sure it’s not too
mispriced. Back then, it was just– these were just out-offavor
OTC stocks. Nobody gave a damn. They didn’t trade very often. And so they got ridiculously cheap. You were able to buy way too much. The premium was way too cheap for what you
got, at least in my opinion. And I’ll never forget– it was my first real
market insight from a trading standpoint. You start out in the value school. And you think technical analysis isn’t really
worth very much. And then the longer you’re around, you may
not think it’s the holy grail. But you realize that, hey, I’d rather try
to be with the trend than always against it. So you want to pin some heed to that. In any case, the market had been bulletproof
in Japan. And early 1990– I’ll never forget– all of
a sudden, it didn’t act the way it had before. And it was the first time. And it had been a little dodgy in the prior
couple of months. But I thought, this shouldn’t be happening. It was a little like at your conference, when
Stan Druckenmiller talked about how noting when something didn’t happen the way it should
vis a vis the news. And I recognized that. And I increased my position. And from all- – there was all gravy after
the torture. So that was my first– JG: I so remember the
turn in 1989/1990. It turns out that– I think that, actually,
the peak was New Year’s Eve of 1990. BF: It was. JG: And at that time, Tyson got knocked out. It was as if the stars were coming into a
line to say that something is different because Buster Douglas knocked him out, I think, in
Tokyo, no? BF: I don’t know. But it could have been. That rings a familiar bell. But I do remember one thing is- – and I remember
there were some Japanese brokers that would call me from time to time because they wanted
to get the scraps of business that I had. And they kept saying, you cannot be short. They’re going to– the Postal Savings System
was going to be liberated in 1990. And therefore, the market could not go down
because there’s a giant wall of money coming. And oh, by the way, of course, that’s– as
you just said, that’s right when it went down. JG: We had a– had a conference devoted entirely
to Japan. It was kind of a stub conference, one half
of a day. And we have the Union League Club. And we had chairs for 150 people. And we didn’t need all the chairs. There would be, like, 50 or 30 people show
up. And that includes a couple of spouses of the
speaker. But it was– there was– one side of this
thing seemed to get in the world– BF: Well, and then last– something on Japan is, because
it relates to today– so I told these guys, when I was– when the market was trading 39,000,
40,000, or 30,000, all up there– I said, listen, when this thing prints in the teens,
I’m coming to Japan to take you guys out to dinner. And I’ll never forget. It was sometime in 1990. One night, my broker called– this British
guy calls me and says mate, implied’s just hit 100%. It’s time to sell the puts. I said, you’re right. I flushed my position. The implied vol had gotten to 100%, which–
that was the level of panic. And it was the first peek into the teens. So I booked the trade from there and moved
on. But when I went to Tokyo to take the guys
out to dinner, they took me to the floor of the exchange. And they informed me that there was a radio
show that had been broadcast live from the exchange, talking about moving around this
steel stock and that type. And I thought it was the most hilarious thing. Can you imagine a radio show about the stock
market? Little did I know– JG: You know what it’s
like? It’s like bottled water. Who’d buy that? BF: Little did I know that I was– what I
thought was hysterical was the wave of the future. JG: Alex Porter, the late, great, unfortunately
late, Alex Porter, once said to me, musingly, apropos of I’ve forgotten what– he said,
boy, there’s sure a lot we don’t know. BF: Boy. Well, and of course, the longer you’re in
the business, the more you realize that there’s a lot you don’t know. JG: Well, speaking of ignorance– BF: Let’s
find another subject to talk about. JG: So from that triumph comes the 1990s. And I remember them as if they were two decades
ago. But let’s pick up in the mid-1990s because
that’s when things got kind of frisky. And you and I began talking about how things
might be a little overblown. And I set out to write a book that– finally
titled it The Trouble with Prosperity. I might have titled it The Upside of Prosperity. But I chose The Trouble with Prosperity. And it was a critique of the monetary regime
and of the way things were being managed under the system of paper currencies. And that came, as it happened, in 1996, the
very year that Alan Greenspan ventured that things were becoming irrationally exuberant. And I want to– I want you to tell the viewers
about your experience, the short side. So after that triumph and your success in
1987, you got– you caught a little case of what Stan Druckenmiller calls bear-itis. BF: Yeah, bear-itis. So I decided that– I believed the combination
of the move away from defined benefit plans towards defined contribution plans, the 401(k)
plans, which would allow people to manage their own money instead of, say, more sophisticated
investment committees– that, combined with what I saw Greenspan doing, which I thought
was horrible, the way he was being reckless with monetary policy– it was kid stuff, relative
to now. But at the time, it was still reckless, in
my opinion. JG: Yes. BF: I thought that as a value investor, there
was no way we would be able to survive what I thought I saw coming. So I had the quaint idea that I’ll start a
short fund. I’ll make money on the short side. And then when this crazy period ends, I’ll
go back to the long side. And I’ll have some credibility because I had
seen this coming and stepped away. That was the grand plan. JG: This was a reversion to the mean– the
RTM Fund. BF: Right. That was my clever name for it. I came up with the Reversion to the Mean Fund. JG:It was my clever idea. BF: That’s right. It was yours. JG: Of course, I didn’t make the investment
decisions. BF: Just like all the clever phrases in the
book, which we’ll get to, perhaps, were thanks to you. But we’ll get– that’s another subject. So anyway, I set out to raise money to– for
a short fund. And I thought I knew how to do it. I thought I had learned some valuable lessons
in Tokyo. One of the most valuable lessons I learned
watching the Tokyo experience was when something gets crazy, it’s not going to revert to the
mean. It’s going to get crazier first. So that helped me later on, when we got to
the dot-com craze. So I went out to raise money. And at the time, I– my short fund– my mandate
was to always be short because– this is going to sound really silly today. But back, then people thought that if you
weren’t short at the time when the trouble started, you might not get there because — JG:
It was like enlisting in the Army in August 1914 because you might miss the war. BF: Yeah. So any case– it was still possible to make
good money. But I was mostly involved in tech stocks. And I would have big draw-downs. But then I would have even bigger success
when the market broke or the group broke, or whatever I was doing, until 1998, in the
fall, when Greenspan really took matters into his own hands in the wake of the long-term
capital crisis, when he virtually made stuff up for several months about what the economy
was going to do, which we found out later, when the FOMC minutes were released, which
I covered in the book. And then it became impossible. So for the next 18 months, I got destroyed,
even though I wasn’t involved being short the imagination dot-com stocks. And if you may recall, in 1999, there was
a lot of fear about Y2K. And virtually every piece of hardware on the
planet was replaced. And so I believed strongly that there was
going to be the functional equivalent of a nuclear winter for hardware in the following
year and the– a lot of these hardware components and makers were going to be in big trouble. And that was where I was focused. And in fact, that’s what played out, but not
exactly on the timeline that I thought. In any case, in early 2000, I decided it was
not possible to always be short, that if I would take a tactical approach whereby– decide,
is the environment conducive to putting on short positions in the anticipation of a catalyst
and then have it work, maybe take most of it off or get smaller, that was a better way
to go until such time as you could identify that we might be in a bit of a bear market,
in which case, it made sense to press the company on the bad news. And so making the change to more being tactical,
where paying attention to what the Fed was doing, which was the enemy number one in terms
of short selling, in my opinion– the liquidity, the allocations that they have undertaken–
so that, combined with a bit of technical analysis, combining to the way the market
responded to news, gave me a set of rules that I could use that allowed me to be short
and do well through– up to and through 2008, in which case, after 2008, when they came
with QE, I knew it was going to be all over for the short sellers, at least for a little
while. JG: And you closed your fund. BF: I closed my fund to get the money back
because I– JG: In 2009, March– BF: The early 2009 because I thought it would be rather
difficult to make money on the short side. JG: Tell me and tell us why you chose to give
the money back and not to go long. BF: Good question. I always felt that it was very important to
be small as a short seller, given the way I wanted to do it. I wanted to be able to be out of every position
I had within an hour or two. So I always felt I couldn’t run very much
money. I thought that $150 million, a little higher
than that, because I might leverage it from time to time in the right environments– so
I didn’t want too much money. And it turned out by the time that ’09 happened
or ’08 happened, my biggest clients was a fund of funds. And what they wanted me for was they wanted
me to be the hired gun to do well on the short side for them. And one of the catalysts in getting me to
give the money back was they kept pressuring me at the wrong time. They wanted me to get bigger. And I was getting smaller on the lows. And, oh, by the way, I was right. They were wrong. But that made me realize they weren’t going
to hire me for a long manager. And I didn’t really want to get long because
I thought that this money printing wouldn’t work and then when it didn’t work, I could
figure out what I wanted to do next. I never dreamed that it was going to take
10 years and a tripling or quadrupling of the S&P for it to “not work.” But that was how it’s turned out so far. JG: I think that people mostly associate you
and your public persona with precious metals, and in particular with silver. And tell us a little bit about your odyssey
with silver. And I want to ask you presently about your
experience as a long-serving director and lead director at Pan American Silver. Tell us how you came to be interested in silver
or the metal and when that started and why and how it’s played out. BF: Well, OK. Again, I was just a little early. JG: That’s no sin where I come from. BF: I started to think about silver as a hedge
to the– what I thought were the over-easy policies of Greenspan. And while I didn’t understand then what I
know now about money printing and how all these things work, I thought that the consequences
of being irresponsible might lead to me– more inflation or might lead to a distrust
in the central banks and might cause people to want to buy some precious metals. And silver was demonstrably cheap as an asset. And so I took an interest in it. Back then, there was no such thing as a silver
ETF. So you could either roll– try to make money
at the silver futures, which is not easy because it never went up– there was a good-sized
contango– or you could try to go miner. But there weren’t any really good choices. So I was bullish. And from time to time, I would try to be long
silver futures. And I would get my brains beat in because
it was the wrong idea at the wrong time. But eventually, I came across Pan American
Silver and Ross Beaty. And so I made a small investment. I finally got a silver company that had a
chance to do well, was run by a smart guy. At the time, the go-to stock was Coeur d’Alene
Mines. And it’s one of this most– I don’t know about
the current management in the last five years. But for a long time, it was the poster boy
for the serial destroyer of capital that so many mining managements get tagged with now,
whereas a lot of them aren’t that bad. They were the poster boy. So anyway, I found Pan American Silver. And as Ross tells the story, I kept calling
him so often, asking him details about what was going on, that he finally felt it would
be easier to put me on the board than have to talk to me all the time. JG: What year was this? BF: I joined the board, I think, in– sometime
in early to mid-’96. JG: Now, explain, if you would, what goes
on inside the boardroom of a precious metals miner and what do you, as an outsider, contribute
and, I guess, more importantly, what do you learn? BF: Well, if you’re a finance guy, like we
are, you’re going to learn a lot because there’s a lot to know that you wouldn’t know. And so as I– when I was a board member, we
just had one mine. And it was one of these mines that always
seemed to only have seven-year reserve life or thereabouts because that’s all we– was
needed to drill to make the mine plan. But, in fact, the mine ran for 100 years,
and is still running. But what I learned that might be useful to
people who are thinking about investing in the mining– in various mining entities is
that you have to figure out who knows the stuff that you don’t know. Now, in my case, it was a long list. I needed to know who was the guy– let’s take
the pedestrian stuff– who was the guy who really understood all the legal stuff and
all the documents. We had one guy who read every word of everything. And he did that. Then you had to know who was the geologist
and did he know what he was talking about in terms of just what are these– what do
these ore bodies look like, what does it mean, who’s good at the mine engineering, who’s
good at the metallurgy, and who understands the political environment. Now, it turns out Ross Beaty is one of the
few people in the world that’s pretty much good at all that. And he attracted great people. So I was fortunate. And one way I was fortunate– in other words,
I had a– the problem of bear-itis in that I was spoiled by the quality of people that
were at, and are still there– almost all the executives are still there. And so people always talk about what you want
to buy comes with good management. Well, sometimes, it takes a while to figure
out are they good, are they not good. But in the industry, there’s– guys have a
reputation. And you can figure that out. So the thing that I think is most important
is you have to know the things you don’t know and figure out who’s got your flank on that. So as the– if you’re– for other people that
are doing this, then you have to sort them into piles. Am I going to go with a big, generic company
because they’ve got lots of mines, they got lots of jurisdictions? No one mine flaw can take them down. You can take that approach. But there’s– then you’re a hostage simply
to the price of gold, which is not necessarily the worst thing, unless it’s been the last
five years, or you can find ones that you think have the ability to grow, which means
then you need to know somebody who knows about geology and metallurgy and all these other
tricky things. So you have to understand what– so what’s–
which pond you’re in and then who are you going to rely on for the stuff that you don’t
know because you just can’t take anything on faith, basically. You can take on faith somebody you know that
knows something that you don’t know. And you’ve seen him operate. And you can believe him. And what he says makes sense. But the average person trying to read these
press releases– it’s hopeless. JG: So you got into the precious metals business,
I say, because– in part because of a moral conviction. You believe so deeply that what the central
banks were doing was just plain wrong. And you were positively furious about it. We had hours on the telephone comparing notes
on this stuff. I’m not sure how we were comparing those–
the same set of notes. But so what to do? One time, you said to me, Greenspan– what
am I going to do about him? And I said, well, Bill, when– actually, there’s
not much. But you decided that you would write a book. And I said, Bill– BF: “I’m experienced in
this. You sure you want to do this?” JG: You sat in the board of a precious metals
company. I’ve written books. I told you– well, anyway, you did it. And as Greenspan’s bubbles– and what year
was– BF: Published in January of ’08. There’s an interesting little side story,
if you’d like to hear it. JG: I would. BF: I don’t know that I ever told you the
full– so it turns out that because I had been vociferous in my ranting about him–
JG: Vociferous is a word. BF: –on any TV outlet that would listen,
basically, through the stock mania and then through little bits of the real estate mania,
McGraw-Hill came to me and asked me if I would be interested in writing a more factual-oriented
book to be published about the same time that Greenspan was going to write his own self-congratulatory
tome, The Age of Turbulence. And it turns out that there was a board member
at McGraw-Hill who was afraid– he was blaming Greenspan for the crazy stuff that S&P was
doing and didn’t want S&P to get tarred with what was going to happen in the fall. He saw what was coming. So he wanted somebody to write a critical
account of Greenspan. So it turned out to be me. And I remember consulting you about that. And I said, I don’t know if I can do this. And you said, there’s only one way to find
out. You got to sit down and write– whatever you
said– 2,500 words a day or 3,000 words a day every day until it’s done. And so that’s what I did. And it came out in early ’08, at same time
Greenspan’s book came out. And let’s just say that– JG: That was a piece
of exquisite timing. BF: Yeah, which– I was just pure serendipitous. JG: And so what’s your next book? BF: You said one and done. And even though you’ve chosen not to go down
that path, I am totally in the one-and-done department. Look how much of an impact– I naively thought
not that I was going to change, anyway, but I thought if we just shed a little light on
this crazy behavior, where they– and you so correctly said it– they’re the arsonist,
and they get to pretend they’re the firemen. They create the bubble. And then they fix it with more of the same. Then let’s do it again and do it again. I actually thought that if it was illuminated,
people would see it and we could stop the. Nonsense that’s how naive I was about that. JG: Well, not– just principled, and I’d say
idealistic, too. And you little– remind me a little bit of
Jim Chanos, who– and he cringes at this, and you might, too. But I say that Jim Chanos is basically an
investigative journalist manqué who is in the business of making money, but actually
has a selfdirected moral remit to improve the world through exposing wrongdoing. And I think you are very much in the business
of exposing monetary wrongdoing, not the business of it. But I think that is one of your missions in
life. BF: Yeah. I think you could call it a jihad. JG: So let’s get back to what we do about
this. So central banks are doing what they– not
only what we had not imagined they would do, but we couldn’t conceive of them thinking
of doing what they have actually done. It was just– and if we had been told so many
years ago that central banks would– the Federal Reserve would go from a balance sheet of,
say, $850 or so billion to $4 and 1/2 trillion and it will be– they would persist in this
for the better part of 10 years and that over much of that span– that the federal funds
rate would be 0% and then told, at the end of this, the price of gold would be about
$1,200, where it was, almost, not quite, where Bear Stearns failed in 2007, was it, or 2007–
I think it was 2007– so two-part question– what happened to the price of gold in the–
why did it respond more to this seemingly phenomenal stimulus to– from central bankers? And when you answer that, I’ll get to– I
got another one for you. BF: Well, of course, no one knows for sure. But I’ve had plenty of time to think about
it, as I’m sure you have, too. And my best guess is that while QE was helping
move the market up– we look at ’09 and then ’10 and ’11. And while it was– QE was helping the market
go up, the economy wasn’t exactly very powerful in the wake of that. And then you had the basket. And it had Europe’s mess and all of that. And so I think people weren’t– people were
more persuaded that QE might not quite work. And gold had been doing well. And there’s nothing like something doing well
to do well some more as the people to buy that sort of thing feed on it. And then all I can think of is when they really
got out the big QE guns and it started to really go and we started to really do a lot
of it and Europe joined in, I feel like people decided, ah, now it’s going to work. And if it’s going to work, maybe I don’t need
gold at the margin. And I think part of the– I belatedly realized
that I think part of the upside in gold that we had from say one to Bear Stearns and after
that was we had two buyers that we don’t really have now. We had the initial people who were going to
be able to accumulate it via the ETFs that hadn’t been around before. And then you had a lot of managements that–
mining companies had set up hedges, Barrick and Newmont. And they had to take them off. JG: And central banks started to buy it, too. BF: Yes. Exactly. But so you had a dynamic where there were
a lot of buyers that needed in. And then on the way to 1,900, they got filled,
I guess. And then you had this perception that maybe
all this is going to work. And so then gold, in the face of the moment
in time where it looked like it ought to work the best or should work the best, didn’t. JG: Well, it certainly worked to this radical
policy. It certainly worked as Bernanke set out to
have it work that is to say, in 2010, was it, he came out and said that we– what we
want– this famous Washington Post op-ed– we want asset prices to go up. We want people to feel richer because their
stocks are going off. We want them to spend. And certainly, stocks went up. People actually didn’t react to that in just
the way he anticipated. But if you judge the success of this radical
policy by the behavior of the bond prices and the stock prices and real estate, it was
a success. BF: Right. Well, that’s the thing about money printing–
is that it’s like any addictive drug. It’s just swell as long as you have it. JG: And more of it. BF: Yeah. And more of it. And so those of us who thought that QE was–
when we– when– I’ll speak for you. And then you can tell me if you don’t like
the way I said it. But I think those of us that say that QE doesn’t
work– we mean that it will move asset prices and it won’t move them in the predictable
ways you necessarily think. But it’ll move asset prices. And it’ll move some consumer prices, too. But when you try to stop and unwind what you
did, you will have a bigger problem on your hands than you did before. Now, you won’t have the exact same one because
we had time to repair the bank system. We’ll have new disasters. But I think it was Kyle Bass that said that
you can’t leave ZIRP. I would assume you can’t leave NIRP or ZIRP. And the attempt to leave is going to lead
to real trouble. Now, one of the mistakes that I made– I won’t
put you in this camp– was that I thought that just– I originally thought that just
the hint of stopping QE could undermine the stock market. If that had been the case– it was plausible. None of us have any data about this. We don’t know how it’s going to end. So one idea was that it would– the hint of
stopping QE would unwind the stock market. That would impact the economy. It would then be shown that they couldn’t
even think about leaving. And that, I assume, will be positive for gold. And it would be negative for equities. Now it’s turned out that because the mania
went on– my pop psychology– because the mania went on long enough, people forgot that
the QE was responsible. And they all believed the economy, the tax
cuts, and all this other stuff. So now it’s taken a full-on almost $50 billion
a month of QT to actually get us to where the other side of QE isn’t going to work. So it’s taken longer. And I think– and then that’s part of what’s
hurt gold. JG: In December ’15, December 2015, the Fed,
I think, lifts the funds rate for first time above 0%- – comes January. And the stock market doesn’t like it, pulls
back, pulls back 8% or 10%. And Janet Yellen, in the midst of the pullback,
says something to the effect that, well, we might yet have to– one day, we’ll have to
implement negative interest rates, interest rates below 0%. And I thought, if it takes only an 8% pullback
in the stock market to trigger the chair of the Federal Reserve system, isn’t this the
moment that people are going to reconsider the efficacy of these extraordinary measures
and perhaps take a new look at gold? BF: Well, they kind of did for five minutes. JG: But I’m an investor. I wanted eight or 10 minutes. BF: So they did. But this leads to, I think, a really important
point. And that is the power of psychology because
it’s so important. It’s a difficult variable to get your hands
around for obvious reasons. But think about this. That’s a variation of the theme that I originally
thought– that the hint of leaving QE might have mattered. Well, think about election night of ’16. They were burying the spoons when they thought
Hillary was going to win. And then all of a sudden, we got “The Donald.” And it was party time because it turns out
that, without trying to make any of this political– it turns out that Obama’s policies were a
business retardant. And Trump’s policies appear to be a business
accelerant. And they have then– during the tax cut and
the monster deficit spending. And so they released the animal spirits on
top of– all that juice had been there before. And now that all those fumes hit a match. And we got this last powerful leg of the last
couple of years in a moment in time when the money was going the other way. Perhaps if Hillary would have won, the market
was going to go down. And it would have– everything would have
played out differently. JG: So let us say that one of these days,
the world reconsiders these monetary doctrines and comes to believe that digital currencies
materialize with the stroke of a key, or maybe voice command is now going to create money. But in any case, effortlessly created digital
currencies may, in fact, pose a danger. I think it was you, and you may have still
this up on your site, that in social democracy, all roads lead to inflation. BF: I’ve held that view for a while now. JG: I wrote the inevitable is certain, but
not necessarily punctual, I always say. So I think both of us– again, if I can presume
to talk for you, too– both of us are looking forward to the time at which scales fall from
the eyes of an important segment of the investment community. People who say, I really act on reflection,
I really don’t trust what they’re doing, and I want to invest in monetary disorder, not
to hedge against it, because we got it– I want to invest in monetary disorder and preserve
capital. So at that moment, perhaps, the gold price
going to go up, and particularly, perhaps, if it goes up in the face of a turnabout by
the central bank because we suddenly lose credibility because they have– they’ve shifted
from QT back to Quantitative Easing, to QE– that’s the setup. So anticipating that setup, how do you get
positioned for it How do you invest it? BF: Well, I think that that has two aspects
to it because if we’d have talked about that two years ago, I’d have said, well, the market’s
going to start to smell that out and gold will start to go before it’s really clear
to everybody. Now we’ve gone through, because we’ve spent
so much time in QT and gold’s taken a beating six straight months down in a row– that I
think people think that the Fed’s being tough and rising rates mean gold can’t go up. Obviously, none of them know what happened
when Volcker jacked rates in October of 1989, the price of gold doubled in four months. But that’s the story from yesteryear. Rising rates aren’t necessarily negative for
gold. But that’s the storyline right now. JG: Well, in fairness, that storyline– gold
competes with interest-earning assets. And if Treasury bills yielding nothing, but
something closer to 2% or a 3%, that’s competition. BF: Yes. But my point is that the price of gold went
from $400 to $800 at the same time Greenspan was taking rates up through double digits. So again, I’m talking about– I’m trying to
illuminate the power of psychology. Nobody believed them. They didn’t believe him. JG: Volcker, not– BF: Yeah. They don’t– didn’t believe Volcker. Now they believe these guys. He was doing the impossible thing, raising
rates and getting– and people hating him. And they’re doing the easy thing, printing
money and getting patted on the back. And they think that they’re the heroes. And in any case, I think that the breaking
that we’re starting to see in the stock market is probably a consequence of a lot of things
that have to do with QT. But I think they also have to do with exhaustion. My belief is that manias are a state of mind. Events don’t end them. And I could argue that that’s happened in
all these manias. And when that happens, there will be some
fundamental that gets placed as the catalyst. So we’ve got emerging markets blowing up. We’ve got emerging margin currencies and problems. We’ve got bond market problems. And now the stock market stopped– JG: And
journalism provides the pretext. Guys like me provide the explanation later. BF: Right, so in any case, now you’ve got
a situation where it looks like perhaps the tide’s going out. It might not take much to get people to say–
that have been negative on gold to say– well, I’m going to cover my short because it was
a big short position. A couple of buyers come in. And this price starts to percolate. The price is going to have to get up to–
you tell me– $1,250, probably $1,354. There’s going to be a price where the recognition
that we’re talking about that, oh, something more material than just– it ceased to work
happens. JG: There was a phrase way back when. And I remember this from my work about Bernard
Baruch, the great speculator of the turn of the 20th century. And the phrase was, to quote, “to break the
continuity of bearish thought.” BF: Right. Right. JG: And price action does that, right? BF: Right. Exactly. So I think that the market breaks very much–
you’re going to break the discontinuity of a bearish thought about gold. And metals can do a little bit better. And the miners, as well– they’re so depressed. But I think the moment in time you’re talking
about, where the scales fall from their eyes, is probably a little ways down the road. I think there will be a moment there where
people realize that you can’t stop QE because when you try to, bad things happen. The question I don’t know the answer to, and
no one does, is when they come around for the next round of this, when the market drops
far enough, what’s going to be this response to the outside markets, the dollar … But
I think it’s a virtual lock at this point that, in that environment, gold is going to
go up. And let’s hope for those that have suffered
a lot. JG: So let us say that there is a germ of
possibility in all of this. And you want to get positioned in such a way
as to benefit. You don’t want to buy an option because you
can’t know the time. But you want to buy, in effect, a living option. You want to buy an equity interest in a miner
that has capitalized for longevity that has reserves that are going to come into fruition
at a higher gold price. And at a much higher gold price is going to
be a true home run. So I think that something you’ve been keen
on for a long time, Pretium answers that description. And I want you to tell us about Pretium. BF: Okay. But let me take a step back for a second and
set the stage as to what I think is worth noting about what to look for in general,
at least from my perspective. So if you own the bigger, safer names because
they’ve got lots of assets and they’re big and they’re well-researched, supposedly, there’s,
whether you want to talk about gold, corporate barrack, or any of those, that’s one way to
go. But you get no– you’ve had almost no joy
in the last couple of years. If you traded them well, you were fine. So then you could take the other path and
try to find some that have the ability to grow and have, because they found something
exciting, like a Kirkland Lake or a Wesdome, where they found these potentially unbelievable
ore bodies in terms of richness– you made one point about finding the marginal producer. I think it’s too early in the cycle to buy
anything that’s a marginal producer. The guys that have a gram or less a ton or
small grades will have huge reversals. But if you get the timing wrong, it can be
a problem. Some of the lower grade ones that have suffered,
like Detour and some others– part of it’s been because of you don’t– you have such
a small margin for error when you have low-grade. So I think right now, until things start to
turn, it’s best to focus on the ones that have very high grades. So I mentioned a couple. And Pretium is in that camp. Pretium is uniquely controversial because
of the fact that they have an ore body that looks like, essentially, a loaf of raisin
bread, where the gold is the raisins. So there’s a lot of stuff in between. And the feasibility study suggested that maybe
it’s going to be 16 grams a ton. Those things you never know till you, again,
produce them. So far, they’ve been producing for a handful
of quarters. The grams have been 10-ish to 14-plusish. That’s a very, very rich deposit. Now there’s stuff in– their waste rock is
five, six, seven grams a ton. The problem is where it’s located. They can’t just make a big, open pit mine. So they have to do an underground mine. So the reason it’s so controversial is because
when they first started to plan ahead for this thing, they had two engineering firms. One, called Strathcona, didn’t like the way
they were doing the sampling– all kinds of crazy inside baseball stuff. A lot of people got in their head that the
whole thing was a fraud. Now, it just so happens the guy that runs
it is a guy named Bob Quartermain. And I’ve met him. I don’t know him well. But I know people that know him. And when I first got involved with Pretium
when it was $3 or $4 some years ago, it turns out that the people that I respected most
in the mining business had looked at the ore body and said, this is the real deal and we’re
buying the stock. So I had some– the head geologist at Pan
Am and Ross Beaty himself saying, this is a real ore body. So I knew that it was an ore body. If it was an open pit mine, it’d be the–
probably the most prolific one in North America, if not on the planet, but it’s not. So because they were in the penalty box, people
thought that it was a giant fraud. And there was recently a big thesis written
by a group of bears that– elaborating why this is such a giant fraud. But they– as a guy who’s been a short seller
his whole life, I think I know a thing or two about frauds. And if somebody’s promoting a fraud, they
do it so they can make money. No one’s got– JG: Not for the public interest? BF: Yeah. No one’s gotten out. And the thing that fraudsters do is they report
good news right off the bat when they need to. And Pretium stubbed its toe in about the third
quarter. So if they were capable of all these great
things, of cooking the books that the people that think it’s a fraud think, why would they
have stumbled right out of the box? And what are they doing it for? And in fact, since that report came out a
couple of months ago, they have spent a couple hundred million of their own internally generated
cash to buy back a stream that would have been given a royalty to a Cisco of– on their
silver and gold sales. And now if you were really a fraud, why would
you bother to do that? Who cares about the future? This is what you do for the future. They also had some debt, which came due either
this year or next year, depending on whether they wanted to pay a fee. And they wound up restructuring that. So it’ll be spread out in the next few years. So the big controversies about it– is it
a fraud– I don’t have to worry about that. I know it isn’t. They’ve eliminated the balance sheet risk. And they’ve done something that is very meaningful
long-term in buying back the stream. Now they have to produce. So the quarter– they just announced their
production figures. They were a little below what people thought
at 94,000 ounces and 12 and 1/2 grams a ton. The quarter before, they were a little over
100. They think there’ll be at 120. I don’t think these numbers really make a
difference. What you have here is an incredible ore body
that has a lot of drilling potential. So there could be a lot of ore behind what
they’ve already found. Remember, in an underground mine, you only
have to drill out so far. And you prove up some reserves as you’re drilling. If you want to go do extra exploration stuff,
you got to spend extra money. And in the environment we’ve been in, there
hasn’t been that much of that, although they’ve done some. So I believe this is going to turn out to
be an incredibly rich, though lumpy, ore body. They’ve learned more about it and figured
out how to drill it. They’ve got a special– a piece of equipment
that they didn’t have in their first quarter of this year, when they stumbled. And now they– the thing didn’t work right. Now they’ve got it working. So I think they’ll be able to report results
that are not quite so lumpy. Wall Street hates lumpiness. I think about the mining business. And what I know and I think to think about
playing the game of beat the number in a miner, it’s just crazy. But if you have real crooks running mining
companies, it would be so easy because you can play so many games with inventories and
things like that. But most of mining managements that I look
at are pretty honest. Some of them are incompetent. But at least they’re honest. So this is a company where you have this incredibly
rich ore body. They are, hopefully, going to get– find out
that they’re going to be able expand the size of the mill here shortly. So they’ll be able to produce more. I think it’s all about what are the quarters
going to look like forward. Right now, people think that quarters are
going to look crummy. So you got all that in front of you. You have the drilling in front of you. And I think that it’s a tremendous risk-reward
opportunity. I don’t think the downside is very large,
other than– and I don’t look at these sorts of things. But the guys that really hate it– they’re
down to one thing, that the ore is not really going to be there. We’ll find out about that. But there’s– when you have 20 million shorts
and is something that only trades a million or two a day, it wouldn’t make me especially
comfortable if I was short it. But we’ll see how it goes. But I really think it’s very difficult to
rely on Wall Street research because it’s literally an oxymoron when it comes to these
mining companies. These guys that follow them hate them. I’ve had more success following a handful
of people on Twitter that are ex-mining guys. So that’s all they do. And you can learn about some of the ones that
have real growth potential. JG: Care to share some of the names? BF: Yeah. There’s a company called– oh, the guys that
I follow? Yeah. Well, I happen to have a Twitter feed. I don’t care if anyone follows mine. And if you go to mine and see who I follow,
it’s only about 15 or 16 people. There’s a couple of mining guys. One guy’s name is Mark at IKN. He writes a letter. He’s extremely irreverent. And he pisses me off sometimes, what he says. But the guy owns his mistakes. And he’s really good at all this stuff. There’s another young guy named Luis Garcia. The guy’s phenomenal. Between the two of them, they found a couple
of doublers in this tape, if you can believe that– Wesdome, which is going to be an unbelievable
home run, I think, and Kirkland Lake. Now, the interesting about Kirkland Lake,
and this is the other thing you can pay attention to– about a year ago, a year and change,
Eric Sprott, who knows a lot about mining, depending on whether you like him or don’t–
it doesn’t matter– was buying the daylights out of Kirkland Lake. Well, I know enough about being on a board. When you already own a gazillion shares and
you go buy a gazillion more, you’re not doing it because you think there’s a couple of good
quarters coming. You’re doing it because you’ve seen drill
results. Now, the thing about drill results is you
need a whole bunch of them for it to be a fact. So you’re not subject to inside information. If you can connect the dots in a way that
you can connect them, but it’s not– they’re not legally connected, you got a hunch. You’re betting a bunch. But your hunch is pretty informed. And they were all over this Kirkland Lake
at $78– and insiders, as well, and the same with this Wesdome. So it was a combination of them seeing the
insider buying for real and understanding enough about what the ore body looked like
and what it could mean and all that. And I’m weak at that. But that’s where I say you’ve got to find
guys who have your blind spots covered for you. JG: Well, to get back to the imagined individual
who thinks that there is nothing so certain as the unfrocking, the unmasking, of these
monetary experiments as something very dangerous and something certain to be unsuccessful and
certain to be followed by something better, perhaps having to do with a new monetary regime,
or at least a rejection of this one– for that person, that person’s going to want mostly
the– a certain survivability of one of these equities/options. BF: Yes. JG: Right, now, which of the names you just
mentioned would be the most suitable for that person who is agnostic about timing, but certain
about outcome? BF: Well, I think that person has to have
a small basket. I think it’s really– I guarantee if you just
pick one, they’ll be the one that doesn’t work. JG: Right. BF: So if you set– if you started with the
filtered, like that I use, I only want mines in safe jurisdictions. And that’s a relative term because North America
is so much safer than even Mexico or places in South America. But if you just pick the safe places, that
cuts the list down. And so if you look at some of the bigger names,
like Agnico Eagle, they have great management. Their mines are in great places. Their growth’s going to start to accelerate. But it’s expensive if you look at– on an
earnings basis, on a what might they do kind of basis. And knowing how institutional money– it’s
going to be one that goes up a lot because they’ve done everything right. But it’s more expensive than the others. If I’m giving you ones that are just– have
been hitting the ball well, then there is Kirkland Lake, which has no debt, and Wesdome,
which has no debt. They’re both smaller and kind of two-trick,
three-trick ponies in terms of the number of mines. I’m OK with that. Others might not be. Then there’s Pretium. Now, that’s got a certain kind of hair on
it that I just described. In terms of the– if you– for silver exposure,
I don’t happen to believe there’s anything better than Pan American Silver. But what they’ve done in the last few years
in terms of getting their costs down through mine mechanization and things like that I’m
really shocked at. I look at what their costs are now versus
what they were when I left the board in 2012. Maybe getting rid of me helped. I don’t know. But they’ve really done a great job. And so I don’t think there’s anything quite
comparable in the silver world to them. JG: Tell us the story of New Gold. Both you and I were keen on this. We both dared. BF: Good. Good. JG: And what did you learn about that? I’ve learned about — BF: Well, so one of
the reasons why I never really got involved with Detour was because I didn’t like the
grade. And I let that trump my concern about New
Gold because of Pierre Lassonde. I felt like he knew what he was doing, he
would have the right people in there. And I, honestly, took my eye off the ball. And I made the mistake of I believed what
I believed when I started instead of– what you have to do as a short seller constantly
is you’re constantly rechecking because it’s always– everything’s– you’re battling everybody. You’re always rechecking stuff. And I thought to myself, why did I do that? I relied on– and there was plenty of warning
flags– turns out I have a reader of my column who worked for a contract driller and sent
me an email and said, hey, they were sloppy about this, that, and the other thing. I could tell it wasn’t– they weren’t following
it very closely. So I basically, as the story changed– I never–
I was never critical. I just assumed that– I saw how cheap it was. I said, well, Pierre stepped away. And I really– I let that slip. I totally screwed up. Fortunately for me, when they brought in Hannes
Portmann, he didn’t last very long. And when he left– I knew had to be big trouble. So I got away from it in the middle $2’s,
down from the– so the moral of the story is when red flags get raised, you have to
run them down. And there were plenty of red flags where a
lot of guys who’d been bullish on it who correctly got negative and got away– the couple of
guys I’m– I was talking about them– this mining feed. They hated it for a long time. So I at least recognized the problem when
it was– when it– the big one came out. But I didn’t rationalize it. There have been a lot of red flags thrown
at Pretium. In fact, this 47-page bear report made up
stuff that wasn’t even true. But think about this. They wrote that report. And two banks agreed to refinance the debt. Now, they had all the ammo in the world to
say no. And they had all the places to look for skeletons. And guess what? They refinanced the debt. So they didn’t believe that. I think the moral of the story is you’ve really
got to– you got to run things down. And just because you liked it once doesn’t
mean you need to keep on liking it because it’s a difficult business. And things change. And you learn that. At least, you learn that on the short side. I am so quick to get out of a short position
that doesn’t seem to be working. I have no patience for that. That doesn’t mean I don’t let them go against
me, though I haven’t done much in the last group of years. And I think you need to have a little bit
of that about you. It became much harder for me to admit my mistakes
on the long side after I ran money on the short side. I used to be terrible on the long side of
getting away from something I liked. And it took me a while to learn how to do
it on the short side. You either learn that or you die. JG: Well, here’s to not dying. Here’s to life ever after, especially after
a career in short selling, and an altogether fabulous career, if I may say. I just did say so. So Bill Fleckenstein, thank you for being
with us, Real Vision. And I don’t know. Thanks to you, ladies and gentlemen. It’s been really fabulous. BF: It has been blessed to do this with you,
Jim, after all these years. Thanks for letting us do this.

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