As we head into the last quarter of the year, James West questions how important macroeconomic trends are for individual investors. But he does believe stock catalysts in the energy space are easier to understand than precious metals market forces. In this interview with The Energy Report, West updates us on some possible top performers in the space and what they're doing right.
The Energy Report: James, with the U.S. election behind us, we are currently looking at a couple of looming and significant issues. One of these is QE3. You're not a fan of easing; tell me why.
James West: Quantitative easing is just the issuance of more money. Since the onset of the crisis, two episodes of stimulus/quantitative easing injected $2.3 trillion into the economy between 2008 and 2011. Real gross domestic product (GDP) numbers in that timeframe show GDP grew by roughly a net of $2.3 trillion, demonstrating that the "recovery" GDP growth rate of 1.2% was not in fact growth at all, but was merely the addition of 2.3 trillion newly fabricated dollars to the weak and stagnant GDP number. By distributing free money to the top layer of the financial food chain, Obama and Bernanke get healthy numbers. In other words, they are focused most intently on maintaining a delusion, and expend no effort on tackling the real problem, which is income and opportunity disparity.
TER: You have cited the practice of dividend recapitalization as a consequence of near-zero rates. You've written that it leads to a doubled rate of bankruptcies in companies undertaking that strategy. But shouldn't easing promote higher rates?
JW: Dividend recaps are the exclusive domain of private equity-owned corporations. The private equity owner causes the company to borrow so that the owners can be paid a dividend by the company. With such low interest rates, they can completely destroy the company over time, while paying themselves large dividends until the company goes bankrupt, and then they just walk away. They know that the United States can absolutely not withstand a rise in interest rates, or else it would have to declare bankruptcy as the cost of servicing debt would then rise to truly unsustainable levels. Super-low interest rates create the illusion of sustainable debt service levels to persist.
TER: Do you see this practice of dividend recap occurring in energy companies?
JW: Not necessarily. For private equity-owned energy companies, it's possible. But that would only happen if the earnings from energy sales were insufficient to provide income to the private equity owner. If the board of a public company tried that, they would be voted out, as the self-destructive nature of dividend recaps is obvious. The key requirement that makes a dividend recap possible is a strong balance sheet that throws enough cash flow to service a debt, which disqualifies 99% of the juniors. And again, it's not an option for a public company.
TER: Let me ask this counterintuitive question: Do you believe higher rates are important to the health of the economy?
JW: Interest rates are essentially the value of money. If you have interest rates at zero, and money is being created arbitrarily, then what does that tell you about the value of money? Zero interest rates mean banks don't make anything lending or investing money, so why should they? Meaningful and stable interest rates are absolutely characteristics of a robust and healthy economy. Zero interest rates are likely signals of impending economic collapse.
TER: The other major issue looming over the US right now is a threatening fiscal cliff. What could be the upshot of this issue if it is not resolved between the president and Congress?
JW: There's all kinds of posturing by both sides to suggest there won't be a problem resolving the issue, and there won't be! It will likely go to the eleventh hour of course, as each side tries to exact concessions from the other, but at the end of the day, there's no choice. The bigger issue ahead of the fiscal cliff is the debt ceiling. Watch how quickly that gets raised. The US can't afford another ratings downgrade.
TER: How do investors play your general economic theory? Back in the summer you told us you favored energy over gold. Is that still the case? Why?
JW: I don't think individual investors play economic theories so much. I don't think there are anywhere near the number of investors right now that there were in 2007. Yes, I favor the energy sector over the precious metals sector generally because it's easier to understand the market catalysts, which in energy are a little less controlled than in precious metals. The precious metals markets make no sense, unless you subscribe to the theory that the US cannot permit higher gold prices, because a suppressed gold price is critical for maintaining the illusion that all is well in the United States Treasury and Federal Reserve.
The huge disparity in gas prices between east and west hemispheres is creating massive opportunity, and the rapid increase in North American shale-borne production is changing world energy dynamics by the day. In precious metals, you've got all the same fundamentals, but they're castrated by government-sponsored price suppression in futures markets.