Dear Readers,

We are just back from the Recovery Reality Check Summit, which was very informative as well as thought-provoking. We took some time while there to chat with a few of our speakers after their presentations and will be sharing them here over the next few weeks.

Our first conversation is with Rick Rule, the legendary resource speculator. He gives us a powerful primer on being a contrarian speculator, which may help bolster some discipline in the current market climate. We hope you enjoy this presentation.

Sincerely,

Louis James, Senior Metals Investment Strategist
Casey Research

[Rick was one of 31 esteemed financial experts featured at the Casey Research Recovery Reality Check Summit, where attendees heard three days’ worth of illuminating takes on the economy, spirited debate over where it’s headed, and a wealth of actionable investment advice. Even if you couldn’t make it, you can still hear every recorded session with our soon-to-be released Summit Audio Collection.]

(Interviewed by Louis James, Editor, Casey International Speculator)

Louis James: Ladies and gentlemen, welcome. Thank you very much for tuning in. We are at the Casey Research Summit – the reality check on the recovery of the economy. One of our luminary speakers who is always at our events, Rick Rule, is with us here now. We’d like you to give us the quick tour of your talk today and we’ll go from there.

Rick Rule: Sure. My role here wasn’t to do economics; that’s not what I am. I am a speculator, and so I talked about where we are in the context of where people are with their own portfolios – in particular portfolios that are junior-resource centric – which is what I think most of your audience was interested in.

Louis: Right.

Rick: And my point was that there were some good forces in the market: lots of cash on the sidelines; some good work being done; and basically a good market for resources as a consequence both of population growth and demographic growth at the bottom of the economic pyramid, and in terms of historical supply constraints. And there were some bad factors in the market: excessive debt in the system; way too much government interference; very large social takes on a global basis, beginning to impact extractive industries. And there were some truly ugly factors – the ugly factors in particular being poor corporate as opposed to share market performance, and the unfortunate truth that probably 80% of the junior resource stocks on a global basis are valueless. So the sector itself is in perma-decline. Although the performance – as you know from being affiliated with Casey – of the top 10% of the sector can be extraordinary. It often serves merely to focus attention on the worst companies in the sector. And then I went on to say: “This is the set of circumstances that exists, now what can we do with this?”

The fact that the market has fallen, by some estimates, by half suggests by other estimates that the market is approximately half as risky as it used to be. Price has taken care of some of the risk that existed in the market before.

The second factor that we need to take into account on a going-forward basis is the fact that the industry itself didn’t finance as aggressively last year as they did the year before, but although they didn’t raise new capital, they didn’t stop spending. I call this financial roulette. The issuers are engaged in this rather circular exercise, which is very risky: They’re spending money to attempt to get results, to generate excitement, to raise their share price, to raise money. So they’re spending money to raise money, which is a very, very risky strategy.

Most of the issuers will need to come back to market this year, and they’re coming into a market that’s in total disarray. The buyers that existed for the last 10 years – the small hedge funds and the open-ended hedge funds – are facing massive redemptions as we speak, so rather than being a source of new capital, they’re a source of the selling that you see weighing down the market. We are going to have to, as investors, invest with a view to a different buyer on a going-forward basis, and the companies who are issuing equity are going to have to find a different class of buyer for the new financing. So we’re in a time of real change and real turmoil – and hence a time of real opportunity.

My suspicion is that with so many issuers having to access the market and so few market participants that have the capability of differentiating between good and bad issuers, that just as the bad issuers were swept up with the good issuers in 2010, the good issuers are being swept out with the bad issuers in 2012. It’s my supposition that for investors who are willing to work hard, take advice, and segregate viciously in terms of allocation of capital, that this will be the best private-placement investment period that we have enjoyed since 2002.

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