Editor’s Note: As the clock winds down on 2016, this week we turn to the top minds in finance to learn how to navigate 2017’s choppy investment waters.
Today, globetrotting “crisis investor” Nick Giambruno suggests an epic “black swan” event for 2017 that will radically alter life for every American…
J. Reeves, editor, The Palm Beach Daily: You’ve been all around the globe in 2016—Ukraine, Turkey, Zimbabwe, and other hot spots—chasing crises… and making crisis investments. What was your most memorable journey? What was your best-returning crisis investment?
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Nick Giambruno, senior editor, Crisis Investing: One of the most memorable moments recently was when Doug Casey and I met Gideon Gono, the former head of the central bank of Zimbabwe during the 2008–09 hyperinflation.
He’s “the man who made everybody trillionaires.” He told us he knew printing money would cause a hyperinflation. He, and everyone, knew perfectly well what they were doing.
The reason they had to print money is because Zimbabwe was broke and they needed to pay the army. There was no other way to do so. You’re asking for serious trouble if you don’t pay the army in any country, but most especially in Africa.
So, in order to placate the army, Gono was ordered to print money. So he printed. And that’s what it really boiled down to.
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To explain his impossible task, he used an analogy. It was like he was “in a car without gas, and the government was ordering him to drive from point A to point B.”
Photo: From left, Nick Giambruno, Doug Casey, Gideon Gono, Florence Chideya
The episode illustrates what I believe to be a main purpose of central banks.
Even though most politicians, economists, and pundits in the mainstream media won’t admit it, central banks exist to help governments finance themselves… at the expense of the average man. It’s the hidden, but real, reason they exist.
To fund the government, Gono’s central bank created large amounts of Zimbabwe currency. It was very similar to the U.S. Federal Reserve’s quantitative easing (QE) program, which is just a euphemism for money printing. As you may know, the Fed has printed money by the trillions and used it to buy U.S. debt, helping to finance the U.S. government.
The big difference is that (for now, at least) the U.S. dollar is the world’s premier reserve currency. That gives the U.S. government much more room to print money than Zimbabwe has.
Meeting Gono was the most memorable moment of the year.
The Zimbabwe trip also yielded a great crisis investment. I recommended a local company that is—as of right now—up over 48%.
One of the most profitable plays of the year came from a trip Doug Casey and I took to Ukraine.
I recommended an agricultural company that operates in the eastern part of the country, which is an active warzone.
At the time, the company was trading at less than 10% of book value—literally pennies on the dollar—and less than half of the cash it was holding in the bank. The company was still producing earnings in the most volatile of circumstances. Debt was not a problem.
It was a genuine blood-in-the-streets opportunity. The moment of maximum pessimism where every last person who wanted to sell had already done so. In other words, it was the absolute best time to buy.
After researching the situation, I found that this company had a great chance to not only survive the war, but thrive.
After a little over four months, I closed out the position for a double.
J.R.: Now, you don’t just invest in countries in turmoil… you invest in “crisis markets,” too—sectors and industries at a point of “maximum hate” (and thereby maximum upside). What crisis sectors/markets are you excited to invest in in 2017 and why?
Nick: If I were putting my own money into something today, it would be uranium, hands down. It simply has the most explosive upside right now. It is the most hated of all the resource markets.
People don’t like uranium. It’s yucky. It’s politically incorrect. Some hear “uranium” and think “cancer.” Many get emotional because of its association with Hiroshima, Nagasaki, Chernobyl, Three Mile Island, and of course Fukushima.
Besides that, investors are terrified that uranium prices have fallen over 85% from previous highs. It’s hard to think of a market where the sentiment is worse.
This is why I’m excited. Crises and extreme sentiment don’t scare me. They attract my interest.
Doug Casey says, “When the market wants into gold stocks it’s like trying to force the contents of the Hoover Dam through a garden hose. In the case of uranium stocks, it’s more like a soda straw.”
Take Paladin Energy, for example. Doug recommended this company during the last uranium bull market, and it leaped from one penny to $10 per share. That’s a 1,000-fold increase.
In other words, a $10,000 investment could have exploded into $10 million.
Even the worst-performing companies in the uranium sector delivered 20-to-1 returns during the last bull market.
Uranium can deliver these almost unbelievable returns because of unique supply-and-demand quirks that create colossal bull and bear markets.
Now, once again, the spot price of uranium is less than the cost of production. This is great news for us. The current uranium supply-demand imbalance has a lot in common with the last market cycle. It’s setting the stage for the next uranium boom.
Now is the time to get positioned for the same kind of explosive returns we’ve seen in previous uranium bull markets.
I can’t think of a commodity with more upside and less downside than uranium right now.
I expect the coming uranium bull market to be at least as explosive as previous ones. The price will likely overshoot, since it will take years for production to catch up with increased demand.
In not very much time, shrinking supply and increasing demand should turn the uranium market around.
Global production is around 50,000 tonnes and shrinking.
With global demand at 68,000 tonnes, there’s an annual deficit of around 18,000 tonnes. That means current production only satisfies about 75% of current demand. Global inventories make up the rest.
It’s difficult to get accurate figures on global uranium inventories. Governments and companies keep it confidential. But they won’t allow inventories to get too low for energy security reasons. Most experts I’ve talked to say there’s around a year left before reserves drop into the danger zone.
Demand for uranium is also increasing. New nuclear power plants in China, India, Taiwan, and South Korea guarantee it.
China, which currently accounts for 8% of global uranium demand, is expected to overtake the U.S. (29% of demand) as the world’s largest uranium consumer by 2030. The country sees nuclear power as the best way to reduce its huge air pollution problem (nuclear energy has essentially no carbon emissions).
The increased demand from China alone should ensure that uranium prices rise.
Then there’s the Trump factor.
Trump is strongly pro-energy, and pro-nuclear in particular. He has said, “I’m in favor of nuclear energy, very strongly in favor of nuclear energy.”
Nuclear energy fits right in with Trump’s “America First” platform. It’s critical for securing the country’s energy independence.
For all these reasons, uranium is my No. 1 investment for 2017.
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J.R.: All right, Nick. What’s the key to identifying a good crisis market?
Nick: Now, I’m not telling you to blindly bet against the crowd. Sometimes the crowd is right.
Plenty of cheap assets deserve to be cheap. Sometimes prices fall for good reason.
The key is the ability to tell these situations apart. You need facts and a cool head to know when the crowd is overreacting to bad news… and when it is reacting appropriately.
If an investment idea makes most people, including your close friends, think you’re a bit crazy, you might be onto something.
But don’t buy just because the price has dropped through the floor… or just because an investment has become unpopular. Some dangers are real, and sometimes a real danger is underestimated.
You need to be able to see why the crowd is wrong. That’s the key to being able to invest in crisis markets successfully.
J.R.: So how do you distinguish between what is a “good crisis” and what is a “bad crisis” in terms of investments?
Nick: Let’s face up to a hard question. How can you know the exact best time to buy? How can you be sure that the moment of maximum pessimism has arrived?
The hard answer: you can’t. At least not until after the fact. You’ll never recognize the exact bottom… except through the rearview mirror.
But you can recognize the signs that a market is near a bottom. That’s good enough to make you a lot of money.
Here’s what I look for:
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Negative investor sentiment. The mass media can be a big help here. A hot market—anything the financial media has fallen in love with—is exactly what I’m not looking for.
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Hated markets. Look for bad news about a country or industry on the front page of the newspaper. The media is flashing you a signal that most investors have thrown in the towel.
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Beaten-up markets. When a market falls to a low not seen in a decade or more, it’s worth a closer look.
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Stocks. Are shares in great companies dropping almost as much as shares in junk companies? This is key. In a crisis, all stocks plunge—both good and bad. Extreme negativity can compress the prices of quality companies like a coiled spring. I want to pay next to nothing for sound, productive, and well-run businesses that are earning money and paying dividends.
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Valuation metrics. I like markets that are at least 66% cheaper than their historical average.
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Dividends. Without question, dividends are the best single indicator of true value. Reported earnings can be unreliable… the right fictions can too easily pump them up. Accounting rules and stretching of the facts can distort financial statements. But a dividend payment is cash in your pocket… and you can’t fake that.
While I analyze earnings, book value, and other reported market figures, I focus most on a company’s dividends.
Accounting and reporting standards vary widely across the world. Dividends, on the other hand, are actual cash payments landing in your pocket. They are real, and nothing is easier to measure.
Double-digit dividend yields are a sign that sellers have panicked. They’re a clue that investors have dumped shares in profitable companies. Plus, it’s nice to collect a fat dividend check from a quality company while you wait for a crisis market to rebound.
It’s astounding what you can get in dividends alone when a market nears its bottom.
J.R.: Okay, so what does your “crisis barometer” indicate about Trump’s America in 2017?
Nick: Unlike every other president in recent memory, Donald Trump is openly hostile to Saudi Arabia.
Earlier this year, he put this out on Twitter:
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“Dopey Prince @Alwaleed_Talal wants to control our U.S. politicians with daddy’s money. Can’t do it when I get elected.” |
The dopey prince that Trump is referring to is Al-Waleed bin Talal, a prominent member of the Saudi royal family. He’s also one of the largest foreign investors in the U.S. economy, particularly in media and financial companies.
The Saudis openly backed Hillary during the election. In fact, they “donated” an estimated $10–$25 million to the Clinton Foundation, making them the most generous foreign donors.
The Saudis did not want Donald Trump in the White House.
Why is this important?
It’s important because the Saudis are the lynchpin to what is known as the petrodollar system.
After Nixon severed the dollar’s final link to gold in 1971, the U.S. government needed to concoct a new arrangement to give foreign countries another compelling reason to hold and use the dollar.
This is where the Saudis and the petrodollar came in. It filled the void after Nixon took the U.S. dollar off of gold.
In the early 1970s, the U.S. government made a series of agreements with Saudi Arabia, which created the petrodollar system.
The United States handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.
In exchange for making sure all oil transactions were priced in U.S. dollars, the U.S. government gave total protection to the House of Saud.
Oil is the world’s most traded and strategic commodity. If foreign countries need U.S. dollars to trade oil, it creates a very compelling reason to hold large dollar reserves.
For example, if Italy wants to buy oil from Kuwait, it has to purchase U.S. dollars on the foreign exchange market first to pay for the oil.
This creates an artificial market for U.S. dollars. The dollar is just a middleman in countless transactions that have nothing to do with U.S. products or services.
Ultimately, the arrangement boosts the U.S. dollar’s purchasing power. It also creates a deeper, more liquid market for the dollar and U.S. Treasurys.
It’s hard to overstate how much the petrodollar system benefits the U.S. dollar. It’s allowed the U.S. government and many Americans to live beyond their means for decades. And it’s the reason the media and political elite give the Saudis special treatment.
With the rise of Donald Trump, though, the petrodollar system is about to bite the dust. This has enormous geopolitical and investment implications for U.S. investors.
I think the collapse of the petrodollar system is the No. 1 black swan event for 2017.
I explore this topic in detail in this month’s issue of Crisis Investing.
Crisis Investing brings you a perspective you won’t find anywhere else—certainly not in the mainstream financial media.
Each month, Doug Casey and I report on the crisis-born opportunities we find lying in the rubble of economic collapse, civil unrest, revolution, war, and geopolitical turmoil. Detecting fear and the bargains it creates is our specialty.
Call us storm chasers. But unlike the pursuers of F5 tornadoes, we’re not in it for the adrenaline. We’re in it for the profit.
That’s why Doug and I look for trouble. History shows the greatest opportunities for wealth creation have happened during times of crisis. After all, that’s how Nathan Rothschild, Warren Buffett, Jim Rogers, and John Templeton made their fortunes.
J. Reeves: Outstanding. Thanks for taking the time to share these insights with the Palm Beach audience, Nick.
Nick: Anytime.
Reeves’ Note: You might get the impression from Nick’s stories that his brand of extreme crisis investing only works overseas. Not so. As he alluded to above, the next major crisis-investing opportunity will arise in the U.S.A. Click here to learn how America is “Ground Zero” for the next great global crisis.
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