Several “sound money” assets are undervalued right now, and are long overdue for a major comeback, said Lawrence Lepard, managing general partner of Equity Management Associates.
Kitco news special coverage of the Denver gold forum is brought to you by new Pacific metals, Lawrence, the part managing partner of the EMA fund. Welcome to the show. Thank you. Very nice to be here. They're right there. Nice to meet you finally, your first time on Kitco now your fun manages money exclusively.
And what you call sound money investments, gold, silver miners. A little bit of Bitcoin. We'll talk about that. Uh, I want to get your macro thesis first and foremost by playing a little game. So I'm going to read you a statement. Uh, tell me one to 10 from one being strongly disagree, tend to strongly agree.
Okay. So S and P will reach 6,000 points by year end. We're at 4,400 right now. Medium disagree. Um, could have a crack up, boom, you know, could could, but I don't, I think six thousands, a little aggressive goal to hit 2000 by year end. Uh, I think that's possible. I'd rate that about a six or a seven.
Inflation is going to go higher from current levels where at 5.4% latest reading of CPS. Uh, no doubt over the next few years, um, might be a little bit of a trough in the next couple of months. Uh, it ran pretty hard and they may be able to control it a little bit. The miner's valuations will catch up to the rest of the equity markets by year.
Well, I sure hope so. It's long overdue. We need there's, there's a tipping point that has to occur and there's a recognition point that has to occur. Right. You know, we'll talk about mine and example, mining companies, valuations, and finally a monetary policy. The fed is likely to taper by the end of the year.
Yeah. I, I I'd rate that probably a six or a seven. Uh, there are a lot of people who think they can't because if they do it'll kill the equity market, uh, you know, they might've figured out a work around. And I think they're pretty terrified of inflation. So. They might, you know, Luke, Roma's done a nice job of pointing this out.
They might have a backdoor way to taper, but not really taper the underlying assumption here. Um, from all the, all the people telling me that they can't tape it because equity markets will react negatively. Is that the fake cares about the equity markets, right? That's the underlying assumption is that. I strongly believe that's true.
And there's a lot of evidence to suggest that the mandate though, no, it's not, it's not written down, but it's been talked about Janet. Yellen's talked about it multiple times. I mean, she, she made a comment that she basically said, she thought the fed, one of the tools the fed should have is the right to buy the equity markets.
And I think it's highly likely that they actually will. Um, you know, they'll call it something along the lines of the 401k or the IRA, protect us IRA protection plan. Um, you know, Japan does it and, you know, Switzerland. And so, you know, I think an equity, a falling equity market would I believe be a threat.
I, I don't, I don't understand why the central banks have to be get involved with the equity markets. Well, you and I both, right. I mean, in a purely capitalist society where, you know, the government wasn't running everything the way it is today, uh, I would, I would share your, your belief. I mean, w why should they be doing this?
But you know, what we've created here is just an enormous credit bubble that needs to be. And any crack in the bubble, I believe it's perceived as almost an existential threat to the existence of the system they've got. Yeah. All right. Let's talk about sound money and your, uh, and your emergence into the sound money space.
Now you were telling me a bit about your background. So just for the viewers, for me to know, um, I'll make it really quick because I've told this story many times, I, I spent most of my career as a tech investor from the early eighties until 2003. I got lucky. I got, I got into the internet in 1993. Did some private internet.
Worked out really well. Um, I kind of retired in 2003, but didn't, um, I was doing investing on the side and then 2008 hit. And, uh, I realized that the, uh, the assets I had accumulated were at great threat of being severely debased because, you know, the government had just totally changed the rules. I mean, zero interest rate policy, enormous money creation, et cetera.
Inflation became a very, very clear threat. And so as a result of that, I pivoted and learned how to invest in mining stocks. Not very well at first, but I've been in mining stocks now since 2008. And the reason for that is I think that is the best, um, equity vehicle for protecting against an inflationary environment.
Um, and so, um, so I self-educated in the mining space and, uh, I still believe that to be. Okay. Okay. Let's touch on that point. First. Um, mining stocks is a vehicle to hedge against inflation. Well, inflation went up this year. Money stocks when. More dramatically than somebody expect it to. Can you just explain why?
No, it's a great question. Everybody's frustrated about it. I mean, look, markets breathe and nothing's linear and one has to take a longer term timeframe, right. And recognize that you get these quick zigzags, you know, up and down. I mean, mining stocks went up enormously last year and we're correcting off of that.
I mean, my fund was up 126% last year. You know, this year I'm down 13% year to date. You know, I mean, things breathe while you're still beating the gold miners index. Uh, yeah, by a bit, I think it's found 20 or something, but, but the point is that, um, you know, the stocks breathe and, and everything breeze, I mean, the, you know, the thing I find interesting is the narrative that it's transitory the, inflation's not a real paradigm shift and that we're going to go back to the 40 years of deflation that we enjoyed from the eighties.
I think that narrative is wrong, but I don't think everyone's come to. It kind of reminds me of the early eighties when I was buying stocks and everybody thought stocks are a bad investment because for the past 15 years they'd been a bad investment. And so, you know, the notion right now, I think the belief that prevailing belief is that we will return to a deflationary academy because in the modern world, that's the natural state of things.
And I think that belief is incorrect. And I think as that incorrection, as it becomes more and more obvious that that's incorrect and that we've hit this monetary tip. As Ronnie Stouffer Lee says, yes, I think these stocks are going to come back with a vengeance. I mean, it's, you know, all we really need to do in my opinion is get through 2000 on the gold price.
I mean, and it's, it's interesting. This reminds me so much of the, of the 1980 or the 2008 period. So gold hit a high of $800 in 19 79, 80 went down to two 50. Came back up to 802,008. And it spent a long time zig-zagging around that because an old all-time high, it was very hard to get above that. You went through that and then it went to 1900.
Okay. Let's keep the 1900 and mine went to 1900 and then it corrected down to a thousand. We're now back at the 1900, we went through the 1900 last. Okay, we've come back off of that, but again, not as deep. So what you see here are higher highs and higher lows. When we go through 2000, 1900, the last night high of 1900 was in 2011.
When we go through 2000, sometime in the next six months, in my opinion, this thing's going to take off like a scalded dog. Go go look at the Michael Oliver interview on Liberty and finance. It just came out within the last two weeks and read his, you know, listen to it. He's, he's a brilliant technical analysts.
Listen to his analysis of this. And what you'll see is that we are going to have these numbers go much, much higher and not that far away from, okay. So let's talk about $2,000 gold and just a bit, um, the miners though, it seems to me they've been hard, hit harder than they should have been. I mean, if you take a look at the gold price, it's down three or 4%.
Even just large miners, like bear, it gets down 20% from its highs. Absolutely. It didn't make sense. It doesn't make sense, but, but, but it does in one sense, and that is, these are very highly volatile securities and this is a difficult business. I mean, this is breaking rocks and it's not simple. I mean, it's not, you know, SAS where you have nice recurring revenues, you have to replace everything that you might.
You have to have a good management team, et cetera, to BIC, to make a, you know, a good profit in the mining industry. But furthermore, I think the thing that really has got investors upset or, or the reason that people are so skiddish is that they've been burned many, many times in the mining industry. They had a huge run from 2000 to 2011.
Then they got crushed from 2011 to 2015. I know, cause I was there. Okay. They had a nice bump up in 2016. Then they came down hard in 2017. I mean, this is like Charlie brown and Lucy and the football. Right. I mean, you know, the mining stock and the poor mining stock investor, I'm one of them, you know, we feel like we're Charlie brown.
And so yeah, we had this nice run-up and we made all this money and, and, you know, Lucy's about to grab the football again and we're going to get, we're going to get screwed. Right. I mean, that's kinda, I think that's, what's going on. And I think what we need. It's once we get through 2000, then the Reddit crowd is going to come on and hope or, or, you know, w w and, and the big institutional money is going to come in.
People are going to say when the big institutional money realizes that inflation is not a transitory event and that we are no longer in a deflationary environment, they are going to start to move money into this space. There's four, you get this David there's $400 trillion of Fiat assets in the world.
Okay. Cash bonds. There's $1 trillion of mining stocks, gold mining stocks in the world. Okay. What happens when just a part of that 400 says, huh? You know, there's some inflation here and I'm getting killed. And my Facebook isn't going up as fast. And my Tesla's not going up as fast. My triple QS, aren't performing as well as they used to.
Boy, these gold stocks were up 30% last year, 40% last year, maybe I need to own some. That's 400 that can trace it, chase a trillion. I mean, it's going to be explosive in my opinion, it's really going to be exciting. Do you think just on money evaluations, do you think valuations of some of these companies like Barrick new month, the larger senior producers are even they're even factoring in we're reflecting $1,800?
No, not even close. I think if you were to go to Toronto and ask what the consensus estimates for the next future, several years, future gold prices, people would be saying 1616, 50. I'm still seeing people build models at 1600. We're never going to see 1600. Again, we're going to see 2000 and probably within six.
And so building discounted cashflow model using $1,600, 16, 50, yeah. It's very standard. Well, one of the things that the industry does is they take like a five-year average of the gold price. So, you know, last year was good. This year is okay. I mean, and here's the thing I find very interesting. The gold miners I see here.
$1,800 gold. I mean, you know, we died and went to heaven three years ago, this stuff was selling at 1300. You know, if somebody had told us three years ago that we were going to see $1,800 gold, we just said, hallelujah. Right, right. And they're making huge cashflow, huge, positive cashflow. And yet the stocks are behaving as if they're, you know, as if their dog's right.
They're just the stocks aren't moving. So we're at 18 $100 gold today. You think that one school hits $2,000, but just roughly at about 11% appreciation from today's. Then the mining stocks, I think that's, I think that's the trigger point and it's because there's a lot of, a lot of finance today is driven by these algos and these models, these 200 day moving averages and one of the 50 across the 200.
And it also tends to be driven a little bit by when things take out old, old highs. So the old 11 years ago, the high was 1900. Last year. The high was 2070 for a few minutes. And I don't the closing. I was a little 2030 or something, you know, this year we're at 1800. We dip down below that, but we're kind of steady at 1800 right now.
When we go through that 2000 again, it's going to be, everyone's going to be like, oh, inflation's not transitory. Oh, gold is telling us that we've got a serious inflation issue. We're going to be at 3000 before you know it. And these companies make good money at 1800 and they have relatively, I mean, they're, they're all seeing inflation as the reporting, but they have relatively fixed operating costs.
You have a thousand dollars ASIC and you're selling your product at 1800. You've got $800. You sell your product at 3000, you're going to have $2,000 of margin. All the profits are going to double, right. And these are, you know, and I'm looking at companies here that have, that have cashflow multiples. I'm buying companies that are trading at three times cash flow, which is an insanely low number.
Right. I mean, look at the rest of the market. Right? Okay. Now $200 upside is about 11% appreciation. That's not a lot. What's that? What's your, you know, your, your guests as good as mine, because it's really a human psychology thing. It's when it's, it's, it's when the masses, when the mass of people realize that the Fed's wrong, that they're trapped, that they can't stop printing.
And that inflation is relentless. That's what I think. I think the thing that people are doing, and it's, it's human nature to drive in the rear view mirror. You look at how things have been, you assume that's how things are going to. You know, it's, it's just very, very common and we have not had an inflation problem in this country or really in the world for 40 years.
And I know what inflation looked like. I lived through the last one and once it starts, it doesn't stop and it can get relentless and then you can get fear-based and then it builds on itself and it's a vicious cycle. And so in my opinion, that's going to happen. We have S we have set the table for that to happen.
And, you know, the, the fed saying it's transitory and, you know, fidelity survey, their money managers, or maybe it was Goldman survey, their money managers and 70% believe the transitory theme it's wrong. It's just, it's just blatantly wrong. Do you think this gold policy can help markets equity markets, gold markets.
Let's take a look at the Democrats, a narrative, for example, they want to raise taxes on the rich. In fact, they've already, they've already passing legislation through the house. As we speak about raising corporate taxes and capital gains taxes on investments, corporate taxes will be raised on those households with over $400,000 of income that's happening right now.
Is that going to have any severe impact? Well, you know, I try to avoid politics. Um, and, and I, because I, you know, my view on all, all these guys, both sides, everybody is a pox on all their houses. I hate them all. Okay. I mean, I think they're, I'm a libertarian. I think, I think that all of what they're doing is wrong.
Why are these people in general going to mess things up further? Oh yeah. We can count on that. And are these is going to hurt? I mean, yeah. You know if, I mean, we've got the worst of both worlds going on right now because underlying this, all the economy's not that good. The economy looked good because I mean, this is like we took, you know, w we took the guy who was, you know, close to being dead and we gave him a shot of adrenaline, you know, and COVID came along and yeah, I mean, you put $3 trillion into any economy.
It's going to look better for a while. Right. But the, you know, that's gonna wear off and they're either going to have to put another one in, or we're going to have a punk economy. And so, you know, punk economy, and then you can say, oh, and that's, by the way, that's part of why the deflationists are saying, okay, Larry, you're wrong.
We're not going to have persistent inflation. You know, if the economy gets punk again, the inflational control will come and come in. But, but it's not, that's not necessarily a guarantee because you got supply chain issues. And more importantly, it's filtering into lots of areas like labor. So you start to increase labor and pay.
I mean, those people don't see, you know, it's not like you roll that back. Right. And then they see what they're buying and it costs more and they say, Hey, I need a higher wage to pay for what I'm buying. And, and so, you know, it becomes a psych, a psychological cycle. So it's no problem. You said you worked as an investor in the early nineties throughout the two thousands.
So you've lived through the tech bubble of the early two thousands. Do you see any parallels to. Oh, absolutely. And this one's even bigger. So, so there've been, it's CR it's really tragic what the fed has done here by, by messing around the money supply. Okay. They've created three bubbles within a 25 year period.
Right? So first the tech bubble, because Greenspan was afraid of your, you know, your 2000 and before that, when they bailed out LTCM and all, then secondly, the housing bubble. So they, you know, I mean, Bernacchi basically. You know, we had a T we had a fallout from this tech crash, so we're going to take interest rates down so people can take home equity loans and build their house.
And so that created the housing bubble. We all know how that ended not well. And by the way, each of those reduced the S and P by 50%. So these stock investors, you know, retirees people who had their money in stocks, hoping that that was their savings, or they, you know, over leverage on their house, they all got hurt very badly.
And now we've created the everything bubble. Right. And it's even larger. It's, it's, it's almost an order while it's not an order of magnitude. It's much less. Then the underlying housing bubble was, and it's in everything. And it's at the highest level, which is the sovereign debt in the sovereign currencies.
I mean, you know, and there's no, there's no Dory sex machine. I mean, we can't, we're not going to get solved by somebody from Mars. We can't create a bubble at a larger level. And so this bubble has, has a couple of possible outcomes. It can burst like the others, but I think the people in charge know how dangerous that is for their political lives, or we can inflate our way.
So I think it's an almost guaranteed fact that they will do their very utmost to make us inflate our way out of it. Well, back in the early two thousands late, well, late 1990s before the tech bubble burst it, people were measuring tech companies on ridiculous valuation metrics. Like. Price per click on the cyber side, stupid.
They were making no money. Now, today we've actually got tech companies that do make money, Amazon, Facebook, Google, and so on and so forth monopolies. So do you think those companies are in jeopardy as well? Whereas the smaller ones they are because they're overvalued. Yes. And part of, in part of what, you know, look, I mean, classic business theory, right?
The capital asset pricing model is based on the notion that. Risky equities should provide a return of over and above the risk-free rate when the risk-free rate is zero, which is basically what it is today, that then by definition, every equity ought to be at an infinitive price. I mean, equities are worth infinity because you're not dividing by an interest rate.
And so that's a bubble by definition and, um, it, you know, it will end, you know, Herbert Stein had the great law. I mean, if something can't go on forever, it's going to end. Right. So this bubble will end, but we don't know. We don't know if it's going to be in a spectacular crash of the equity market and then a flood of money and therefore initial deflation, then a flood of money afterwards.
Or if it's going to be in kind of the machine zone where, you know, or, or, or even if it's a crack-up boom, I mean, it's entirely possible that they are going to just keep on doing stem. You know, the fed balance sheet is going to go to a hundred billion or a hundred trillion. And, you know, gasoline is going to cost a hundred dollars.
I mean, we could go the Venezuela. Where, you know, they keep the system going, but the inflation, I mean, we're not just talking three or four or 5% inflation. Of course that's what they report. But in reality, it's closer to 10, you know, it's, it's a real, it's, let's close the conversation back on sound money.
Now you've given me a few acids already. Gold, silver mining companies, oil. You also mentioned to me offline Bitcoin, I'm a big proponent of Bitcoin and unfortunately, a lot of people in the gold business, um, or, you know, don't take the time to understand that study Bitcoin. Um, and, and, and it's tricky because there are a lot of, you know, quote-unquote shit coins and other alternatives.
There's a lot of pump and dump. I mean, crypto is full of a lot of messy stuff. That leads sound typical, sound money investors to go, oh, that's all bullshit. I'm not even going to look at it. Okay. That's the wrong conclusion. You should look at the core base crypto out there, which is Bitcoin, and you should recognize what it is.
Technologically. And what I would say that is, is it's an incredible innovation, because if you think about what money is, money is nothing more than a ledger. I mean, before we had gold or currencies or anything else, we sat in caves and we kept score of, I killed one bison, you killed two bison, you owe me one, et cetera.
So money is just a way of keeping track of who owes, who, what, right. And if you can create a digital ledger that is immutable and can't be cheated on that's arguing. Arguably even sounder as, as a form of money than gold, because it's triple entry accounting. Everyone can see it. Whereas with gold, they've managed to corrupt the gold price because the central banks have got control of, of, of the banks and the banks have control of the gold and they've created a lot of paper gold.
So, so in a, in a sense, what that makes is it makes Bitcoin as the only there's the loudest monetary fire alarm in the system right now. So, you know, one of the things I would say. Most goldbugs feel the way I do, which is they're astounded that here we are with the most massive money printing operation in the history of the world.
I mean, 30% of the money in existence has been created in the last year and a half, two years. Right. And yet gold is not at all time high. I mean, what's up with that, right? I mean, it should be, you know, and yet Bitcoin noticed, I mean, Bitcoin went from 10 to 60. Well people arguing to three characteristics of money, right?
Something has to be a store of value. Something has to be a medium of exchange and a unit of account. Right? All three things have to be satisfied. Do you think Bitcoin meets these characters? Yeah, absolutely. Going to meet them all in spades. In fact, arguably because it's talked to flow is going to be the next, having it stocked a flow will be, um, better than goals.
You know, it's arguably better than gold in terms of, you know, uh, The other two characteristics that meets us. Well, the only thing it doesn't mean it's not as easy to transact him today, although it's easier than cold. I mean, people aren't using gold coins to do transactions, but that's all going to get solved.
I mean, go look at strike, go look at check modelers, go look at the lightning network. They're going to, they're going to solve that. So, you know, yes, I do think that. Is emerging as a very important form of sound money. Yeah. Excellent. Excellent. Thoughts, Lawrence. Thank you very much for coming on. Thank you for having me on joy being with you.
Thanks. Pleasure. I'll speak to you again soon. Okay. Thank you for watching Keiko news. I'm David Linn and stay tuned for more at the Demco forum. Kitco news special coverage of the Denver gold forum is brought to you by new Pacific metals.