I recently sat down with my good friend J. Reeves who writes the must-read Palm Beach Daily.
We discussed my #1 investment for next year, and what I think the #1 Black Swan Event of 2017 will be.
I think you’ll enjoy our conversation.
Until next time,
J. Reeves: 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?
Nick Giambruno: I’d say meeting Gideon Gono with Doug Casey was the most memorable moment of the year. Gono was the head of Zimbabwe’s central bank during the country’s 2008–2009 hyperinflation. He's “the man who made everybody trillionaires.”
Gono told us he knew printing money would cause hyperinflation. He and everyone else knew what they were doing. But they had to do it because Zimbabwe was broke. And they needed to pay the army. There was no other option.
You're asking for serious trouble if you don't pay the army in any country, but especially in Africa. Gono was ordered to print money to placate the army. So he printed. That's what it really boiled down to.
He described it as being “in a car without gas,” and the government was ordering him to drive from point A to point B. Basically, they gave him an impossible task.
Photo: From the left, Nick Giambruno, Doug Casey, Gideon Gono, Florence Chideya
The episode shows the dark force behind 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.
Gono’s central bank essentially did the same thing the Federal Reserve does with quantitative easing (QE), which is just a euphemism for money printing. As you know, the Fed has printed trillions of dollars to buy US debt, which helps finance the US government.
The big difference is that, for now, anyway, the US dollar is the world’s premier reserve currency. That gives the US government much more room to print.
The Zimbabwe trip also yielded a great stock pick for Crisis Investing. I recommended a local company that’s up over 48% right now.
One of the most profitable plays of the year came from a trip Doug 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 circumstances. Debt wasn’t a problem.
It was a genuine blood-in-the-streets opportunity. We pretty much caught the moment of maximum pessimism, where every last person who wanted to sell already had. It was around the absolute best time to buy.
After researching the situation, I realized the company could not only survive the war, but thrive. A little over four months later, I closed out the position for a double.
J. Reeves: 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 Giambruno: 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’s the most hated of the resource markets.
People just don’t like uranium. It’s yucky. It’s politically incorrect. And it makes some people 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 with worse sentiment.
But that’s 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 Hoover Dam through a garden hose. In the case of uranium stocks, it's more like a soda straw.”
Paladin Energy is a great example. Doug recommended Paladin during the last uranium bull market, and it leaped from one penny to $10 per share. That’s a 1,000-fold increase.
It means 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. It’s almost unbelievable. But it’s possible because of uranium’s unique supply-and-demand quirks.
Now the spot price of uranium is less than the cost of production again. 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.
Right now we’re positioning Crisis Investing subscribers 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 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. Current production only satisfies about 75% of current demand. Global inventories make up the rest.
Of course, 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.
Right now, 8% of global uranium demand comes from China. But it’s expected to overtake the US as the world’s largest uranium consumer by 2030. The Chinese think nuclear energy is the best solution to their huge air pollution problem.
The increased demand from China alone should ensure that uranium prices rise. But there’s also the Trump factor. He’s strongly pro-energy, and pro-nuclear in particular.
Trump 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.
This is why uranium is my #1 investment for 2017.
J. Reeves: What crisis markets should people avoid?
Nick Giambruno: I wouldn’t tell you to blindly bet against the crowd. Sometimes the crowd is right. Plenty of cheap assets deserve to be cheap, and sometimes prices fall for good reason.
You need facts and a cool head to know when the crowd is overreacting to bad news, and when it’s reacting appropriately.
If an investment idea makes most people, including your close friends, think you’re a bit crazy, you might be on to something. But don’t buy just because the price has dropped through the floor, or because an investment is unpopular. Some dangers are real, and sometimes a real danger is underestimated.
You have to understand why the crowd is wrong. That’s the key to investing in crisis markets successfully.
J. Reeves: How do you distinguish between a "good crisis" and a "bad crisis" in terms of investments?
Nick Giambruno: Let’s face up to a hard question. How can you know the exact best time to buy?
The hard answer is 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. And that’s good enough to make you a lot of money.
First, I look for negative investor sentiment. Mass media can be a big help. A hot market, basically anything the financial media loves, is exactly what I’m not looking for.
Second, I look for hated markets. If there’s bad news about a country or industry on the front page of the newspaper, it’s a sign that most investors have thrown in the towel.
Third, I look for beaten-up markets. When a market falls to a low not seen in a decade or more, it’s worth a closer look.
Then I look at stocks. In a crisis, all stocks plunge—good and bad both. Extreme negativity can compress the prices of quality companies like a coiled spring. I want to pay next to nothing for sound, productive, well-run businesses that make money and pay dividends.
Next I look at valuation metrics. I like markets that are at least 66% cheaper than their historical average.
Finally, I look at dividends. Without question, dividends are the best single indicator of true value. Reported earnings are unreliable. The right fictions can pump them up too easily. Accounting rules and fact stretching can distort financial statements. But a dividend payment is cash in your pocket. You can’t fake that.
While I analyze earnings, book value, and other reported market figures, I mostly focus on a company’s dividends.
Double-digit dividend yields are a sign that sellers have panicked. They’re a clue that investors have dumped 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. Reeves: What does your "crisis barometer" indicate about Trump's America in 2017?
Nick Giambruno: Unlike every other president in recent memory, Donald Trump is openly hostile to Saudi Arabia.
Recently he put out this on Twitter:
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 one of the largest foreign investors in the US economy, particularly in media and financial companies.
The Saudis openly backed Hillary during the election. In fact, they “donated” an estimated $10 million–$25 million to the Clinton Foundation, making them the most generous foreign donors.
The Saudis did not want Donald Trump in the White House. That’s important because Saudi Arabia is the lynchpin in the petrodollar system.
After Nixon severed the dollar’s final link to gold, the US needed to concoct a new arrangement to give foreign countries a compelling reason to hold and use the dollar. This is where the Saudis came in.
In the early 1970s, the US made a series of agreements with Saudi Arabia. The Saudis agreed to make sure all oil transactions were priced in US dollars. And the US agreed to protect the House of Saud. That’s the petrodollar system, in a nutshell.
The US picked Saudi Arabia because of its huge petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.
Oil is the world’s most traded and strategic commodity. If foreign countries need US dollars to trade oil, it creates a very compelling reason to hold large dollar reserves.
Imagine Italy wants to buy oil from Kuwait. Well, first it has to purchase US dollars on the foreign exchange market to pay for the oil.
The system creates an artificial market for US dollars. The dollar is just a middleman in countless transactions that have nothing to do with US products or services.
Ultimately, the arrangement boosts the US dollar’s purchasing power. It also creates a deeper, more liquid market for the dollar and US Treasuries.
It’s hard to overstate how much the petrodollar system benefits the US dollar. It’s allowed the US 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 US investors.
I think the collapse of the petrodollar system is the #1 Black Swan Event for 2017.
I explain why in great 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. Click here to learn more.