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KMW Blog Nov 18, 2018: KMW Blog Nov 9, 2018: MIF Presentation: Back to the Homeland or Stay Abroad?

Posted: Nov 18, 2018JK: KMW Blog Nov 9, 2018: MIF Presentation: Back to the Homeland or Stay Abroad?
Published: Nov 18, 2018MIF: KMW Blog Nov 9, 2018: MIF Presentation: Back to the Homeland or Stay Abroad?

The November 9-10, 2018 MIF conference in Vancouver took place just over a month after the September 28-29, 2018 MIF conference so not much had a chance to change other than the outcome of the November 6 US mid-term elections. None of my current SVH or BF picks presented at this conference at my behest, but you can track down the presentations and interviews involving other speakers and companies at the MIF YouTube Center. My presentation Back to the Homeland or Stay Abroad raises the question as to whether globalization will prevail, allowing both commerce and resource juniors to operate abroad, or undergo a fragmentation that forces commerce to return to the homeland, as the juniors would have to also do if they are to maintain title to their projects. Home bases for the juniors are countries like Australia, Canada, the United States, Mexico and certain other Latin American countries. Some pockets in Africa and Europe may remain workable jurisdictions. The continuing resource sector bear market and the shrinking of available capital pools as they get siphoned off by conceptual bubbles such as cannabis already make a case for juniors sticking closer to home. In my presentation I argue that the world is on track to a fragmentation of global trade into smaller zones which will have price consequences for some metals whose supply is skewed to a few regions. But security of supply stories only affect a small number of resource juniors. The metal that affects most of them is gold. I argue that the realistic prospect of a global trade war leading to conflict between major powers will create a tipping point for gold that creates new demand from parties who no longer take the globalization status quo and the role of the US dollar as the single reserve currency for granted. For now, as we head into the eighth year of a junior resource sector bear market, we need to focus on discovery exploration oriented juniors, because only a new discovery can deliver big gains while metal prices stagnate.

The impulse is to give up on the junior resource sector as having fallen below the extinction threshold where recovery is no longer possible. Personally the two stocks on which I have the most hope pinned, not just because they are my biggest positions, but because these companies are positioned to deliver big gains in the next six months are Nevada Exploration Inc and Scandium International Mining Corp. But both of these companies have disappointed and frustrated me multiple times during the past decade, and so I have learned not to count on them to a degree where the outcome really matters. That is why neither gets a mention in the MIF November 2018 talk. In early 2016 I declared that there will never be a better batch of bottom-fish than the 2016 Edition, which I am about to retire as the 2016-2018 Edition. 2015 was a horrible year with pitiful trading volume and value in TSXV resource juniors. The survivors were very conspicuous. 2018 is starting to approach the 2015 conditions, but they are not quite as bad. Heading into 2019 the survivors are not as conspicuous. But they are present and can be found. A recent example is Westhaven Ventures Inc. This poor junior headed by Gareth Thomas and Shaun Pollard managed to go public in 2011 when the bear market started. They picked up a land position in that great disappointment of an "area play" that began in 2002 as the "Spences Bridge Gold Belt". Year after year they toiled, funded by cheap private placements of which the lion's share was taken down by chairman Gren Thomas. Every year the results sucked. Then this year a new zone on the Shovelnose project started to deliver the sorts of grades and intervals the market wants to see. Westhaven is now in S-Curve territory. If a couple of 100 metre stepout holes now underway deliver more of the same, all hell will break loose. This is what hooked me in the 1980's and it is what keeps me anchored in the resource junior space.

Kaiser Research Online features about 2,000 resource companies listed on the TSX. TSXV, CSE and ASX which you can find listed on my Free Corporate Profile Index (the full KRO profiles are now restricted to active KRO members). My 2019 KRO Watch Edition will feature companies classified as representing Good, Fair and Bottom-Fish Value. What unites this group is that these companies are run by people determined to be survivors in the junior resource sector. Although I suppose you would not guess it watching the MIF video of my talk, I am quite bullish about 2019.

Maybe that is because I do not believe we need to give up on higher metal prices making brilliant the strategy of staying exposed to the resource juniors. It is time to dust off the gold bug story and think intelligently rather than ideologically about it. We now have a situation where the Democrats control the House but the Republicans have improved their control of the Senate. This means that Trump can continue to stack the Supreme Court with the sort of nominees he thinks his "base" wants, but, just as was Obama's predicament after the November 2010 mid-term election when the Tea Party gained control of the House, Trump will be unable to push through any legislation without support from the Democrats. He also faces a situation where the Democrats can push for greater accountability, which, if they go after his private affairs, he has declared will constitute an "act of war". This is the sort of language authoritarians invoke to justify suspension of democratic processes. In 1935 Sinclair Lewis, the American author who chronicled the American middle class during the 1920's through works such as Babbitt and Main Street, published It Can't Happen Here, a speculative portrayal of an American slide into German style fascism. Keep in mind that this was written in 1934, well before Hitler turned Nazi Germany into the horror show now well documented in the history books. As it turned out, Lewis' warning novel proved ironic in that what he imagined did not in fact happen in America. But it has since happened in other parts of the world and today populism with authoritarian undertones is on the rise everywhere, inspired in no small degree by the example set by Trump. Underlying the willingness of otherwise decent people to embrace thug leadership and the scapegoating of identifiable minority groups is raw fear about the future and a sense of impotence. The root of this state of mind is documented in George Packer's 2013 non-fiction book, The Unwinding: An inner History of the New America, which documents the lives of several relatively unimportant individuals from 1978-2012, interspersed with brief accounts of considerably more prominent Americans.

When the United States won the Cold War in 1990 it became the guarantor of "globalization", the libertarian idea that all nations and individuals should participate in a global free market where the economic winners are those who can deliver the best product or service at the cheapest price. Walmart, which established the "China Price" as what its suppliers needed to deliver their goods at, was a major player in the spread of globalization. The result was consumer goods cheaper than any American had ever experienced. The engine was the rise of China which created a hybrid capitalist-central command economy that was able to deliver the China Price through low labor costs and lax pollution controls against which American based businesses could not compete. During the George W Bush presidency from 2000-2008 the ability of Americans to benefit from cheaper goods despite the loss of middle class manufacturing jobs was underpinned by the real estate bubble created by Wall Street's securitization of mortgages peddled to investors with the false claim that the underlying borrowers were solid income generators. That all fell apart in 2007-2008, followed by a financial crash that nearly took down the global economy.

The conventional solution on how to avoid a thirties style depression was to combine monetary easing with fiscal stimulus, but that dual strategy hit the wall after 2010 when the Tea Party controlled House mounted a blockade against legislation that would have increased the national debt, legislation such as funding for an infrastructure renewal program that would make a deteriorating America great again. The Republicans achieved their goal of killing Keynesian stimulus by threatening to withhold support for the vote needed to periodically increase America's debt ceiling so that the United States could continue to fund its obligations and not grind to a halt. Obama tried to work around this extortion threat through executive orders, and the US economy grew only grudgingly, not enough to wash away the fear among ordinary Americans that the light at the end of the tunnel was diminishing. Various factors converged to result in the election of Trump as president in 2016, with full Republican control of Congress. But chief among them was the perception that the Clintons were synonymous with the forces behind globalization. The irony is that during Obama's presidency manufacturing jobs stopped declining, and began rising as China exhausted its own ability to exploit cheap labor and convince an emerging middle class to suck up dirty air, a heavy metal contaminated food chain, and dirty water as the price that had to be paid to make China great again. Furthermore, as China reset its sights from dragging its people out of the Communist garbage can to becoming a super power that rivaled the United States, it deployed a strategy of forced technology transfer, outright technology theft, and an uneven domestic playing field for foreign businesses which became an impetus to reshore manufacturing to the United States. The Transpacific Partnership trade agreement that included nearly every nation except China was designed to isolate China and force it to even the playing field. But when Trump took charge he embarked on an obsessive white supremacist dogwhistle mission to "wipe the black stain from the white house" by undoing anything in which Obama had a hand, no matter how counter-productive this was for American interests.

Ironically, complaining about the forces of globalization has historically been a Democrat narrative, which, much to the dismay of most Republicans, Trump embraced as his signature complaint. He repackaged America as a nation on its knees that needed to be made great again, declared America First as the lead motif of a winner-take-all trade war strategy, and paid off the Republican party with a major reduction in corporate tax and an income tax deduction that benefited the masses so little that no Republicans talked about it during the campaign for the mid-term election. Now we have a situation that is completely the opposite of 2010 where today it is the Democrats who can appeal to the economic pain of the "base" by arguing that Trump's protectionism does not go far enough, and can point to the rising debt as endangering the future of all Americans unless something drastic is done (they are now twisting the old GOP accusation of "tax and spend" into "no tax and spend"). Furthermore, they are in a position to withhold approval for debt ceiling increases unless Trump agrees to concessions that benefit the American people and will make America great again. Will they do it? I don't think the Republicans have a monopoly on destructive, power tripping cynicism. Would the Republicans cave to save the country? I would bet on gold.

This lameduck situation is a huge trap for Trump whose primary goal right now is to win the 2020 presidential election, ideally with Republican control of the House restored and control of the Senate preserved. The Democrats are equally obsessed with the 2020 election, but with the problem that they do not have clear leader around whom voters can rally. Right now a bunch of upstarts want to keep Nancy Pelosi from resuming the role of House Speaker she lost in 2010. Don't assume the Democrats will operate as a cohesive machine. Had Trump retained control of the House, and the sort of stuff Sinclair Lewis imagined in 1934 did not in fact start to happen here, I would be expecting an extinction event for the Republican party in 2020 on a much bigger scale than Canada's Brian Mulroney accomplished for the Conservative party in 1993. But with the current situation it is impossible to predict what will happen during the next two years and in the 2020 election. Given that the whole world is watching with trepidation, why is gold just bumbling along? Is it time to trot out that old conspiracy theory that when everything looks so screwed up it really isn't so as long as gold is flat or trending down?

My presentation is thus about standing back and looking at the longer term picture. I point out that the real conflict is not about the masses versus the elite, liberals versus conservatives, or Republicans versus Democrats. It is about working people versus retirees with the latter including all the baby boomers, the last of whom retire in 2030. When you look at from where federal revenues come from, and to whom they go, you see a one-sided situation. Why should retirees have universal healthcare while working people pay through the nose? While the debt keeps rising and rising, crushing the future of today's workers? Who pays for the healthcare of the growing gig economy? There is an intergenerational battle looming in which both the Democrats and the Republicans will be the enemy.

The fear hurting the resource sector is that the next two years will result in a deterioration of the global economy. The US dollar is seen as the only safe haven, "TINA", or, "there is no alternative". Populism inevitably gets mixed up with nationalism. Trump is a big fan of populism in Latin America and Europe because it keeps these smaller countries from creating a united front to confront the United States. Xi Jinping and Putin share Trump's sentiments. We are back to a Cold War competition for the world's resources, except this time around it is Russia that is the also-ran, not China. The best scenario for the world is one that restores globalization in a form that allows countries to protect their interests but also forbids them from letting elites exploit the masses in defining their country's economic relationship with other countries. That requires an orderly transition of the United States from sole super-power to a more balanced situation. That is not the objective of the current administration which is to preserve the United States as the dominant super-power and the US dollar as the sole reserve currency. Although gold is not a currency, it is an asset class unto itself which can serve as a bridge during major dislocations. The United States will fail if it seeks to project itself abroad. How many conflict fronts can the US military handle? When the retiree generation cheers for war, will the worker generation line up to enlist to be sent abroad? I don't think so. The alternative is for the United States to withdraw from the global stage, perhaps forming an alliance of the Americas. I have been talking about the fragmentation of the world into distinct economic zones since 2008. When this starts to happen there will be major raw material supply shocks. Finding and developing mineral deposits closer to home will become a mandate for the resource juniors.

If the global economy fragments into smaller economic zones, it will be the end of the US dollar as the single reserve currency. If China is forced to give up exporting to the United States and establishes a protective umbrella for the countries that make up Australasia, which includes those countries targeted by the One Belt One Road Initiative, what need is there for the US dollar in trading goods? And what if China achieves its 2025 goal of electrifying its transportation fleet? If China no longer needs to import oil, what will it need US dollars for? This fragmentation does not need to happen and it will not happen overnight. But it is a threat that will become ever more palpable, eventually reaching a tipping point where everybody scrambles to buy gold, at precisely the instant when every gold owner sees the wisdom of not parting with their gold. If we look at the Democrat seizure of control of the House in 2018 as akin to the Republicans gaining control in 2010, and acknowledge the correlation between the latter and the start of the bear market in gold and resources, then we might expect continuing weak prices for gold and metals. But history never repeats itself exactly because there is always something different going on. In this case it is a very misguided perception that America is no longer great. It is a world starting to grasp that, even if it was a falsehood in the beginning, policies undertaken in the name of making America great again are creating a retroactive truth. And it is peripheral players like Kim Jong Un with nothing to lose starting to push the envelope. There is so much that can go wrong during the next couple years that stronger gold prices are inevitable. And they will be real price gains, because although there is no currency alternative to the US dollar, gold is an alternative. When gold rises against all currencies, and there is little evidence of rampant inflation, that is really good for the resource juniors.


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