Bear Markets Are Not Pessimistic But Realistic

Posted 13 Jul 2010

Welcome to the Podcast. Today's interview comes to us via the Korelin Report, in which Al Korelin and Steve Carr talk to David Tice of the Prudent Bear Fund and Trace Mayer at the Freedom Fest which took place in Las Vegas this July, 2010.

[pullquote]I do not necessarily like being a bear. My mom has chided me in the past about why I cannot be more optimistic, and Americans love to be optimistic. But with your money you need to be prudent. And you need to be neither optimistic nor pessimistic. You need to be realistic about your money.[/pullquote]Al: Okay welcome back, you're listening to the second hour of the Korelin Economics Report.

I am Al Korelin, I appreciate you joining me. Starting out with a couple of folks, one of whom has been on the show numerous times, Trace Mayer, a very, very interesting guy. I guess I should say Trace Mayer J. D. because that's how on all the other websites you are introduced. You know a lot about the resource industry, you know an awful lot about conservative politics, etc. But joining us also is David Tice. David is the purveyor, for lack of better terms, of the Prudent Bear Fund. Among people of our philosophical bent it is a very, very popular place to invest money, tell us a little bit about it.

David: Well, I was the founder, Al. I actually sold the fund to Federated Investors, so it’s now the Federated Prudent Bear Fund. Did that back in December of 2008. I am now the strategist for Bear Markets at Prudent Bear. And Prudent Bear is a negatively correlated fund, we make money when the market declines, we also invest in gold and silver mining companies along with being short stock, and we’re negatively correlated, we make money when the market declines.

Al: Trace, how did you guys get to know each other? I mean, I know that you guys are good buddies, and I know that philosophically you probably are coming from the same spot, but how did you guys get to know each other?

Trace: David is a very sharp investor and we happen to be invested together in some ventures, so I get to ride on his coattails.

Al: What do you guys think right now, when you talk about making money in a bear market, which I think your philosophy is great, what do you think about what’s going to happen in the midterm, let’s say in the next 12 to 18 months in the resource segment of the stock market?

David: Well Al, I think the next even six months are going to be profoundly bearish. I think we had a significant rally off the March low, it’s a kind of a reflex rally, should not have been unexpected, we had our first decline about five months ago, we rallied back, we’ve declined again, now we are experiencing an oversold rally bounce.

But I think we are right at the cusp of breaking through a thousand on the S&P and we’re going to go lower for a while. Now, the resource sector. We’re fighting a tug of war between inflation and deflation. The gold price is going to go down in the first part, in my opinion, of the deflationary scare, and therefore resource stocks could go down for a while.

Al: Trace, what do you think?

Trace: I agree with David. Gold, when you look at what has happened with the Dow; it is actually below 8 ounces to buy the Dow. Even though the Dow was actually up nominally, it’s down significantly in terms of real value, and at, that is primarily what we focus on is looking at performing mental calculations of value, and using gold as that numeraire, or the denomination to use for your balance sheets or income statements. So when you look at the real ability of Americans to earn, priced in gold, that’s going down too. For example, when David came out of school, you probably would have earned $400,000 a year as a recent college graduate in terms of today’s dollars….

David: I wish! It wasn’t quite that.

Trace: Well, when my father when he came out of school, he was offered 25.7 ounces of gold per month. In terms of currency, the two offers were $900 at the railroad or $700 at one of the big accounting firms. Today, an average American coming out of school, with 19.6% unemployment, and those that are going to be lucky enough to get a job, are going to earn about five ounces of gold a month.

And so that’s going to have to keep going down because Americans, unfortunately, they’ve borrowed too much, they’ve spent their future earnings, and now they are going to have to be able to live with some austerity programs of their own, personally, so that of course is going to put a lot of drag on corporate earnings, because people are just not going to be able to buy things.

Al: So you are agreeing with John Williams' The Shadows Stats, when he says that 9.5% unemployment is just a pipedream.

Trace: Yeah, well I mean 9.5%? Recent graduates with a Masters degree are now at 4.2% unemployment up from 3.4 % We are talking about the 2009 graduates having to compete with the 2010 graduates. So unfortunately there’s this huge misallocation of capital with higher education and that’s because the entire US economy is going to need to be retooled.

Al: You know David, I have been tracking your fund for years and years, and I have seen you on interviews, especially a number of years ago when you were actually ridiculed, mocked, heckled…recently, not the same reception. More and more people are saying "hey, this guy maybe was a little ahead of himself, or ahead of where we are at” but there’s a lot more openness to that. Talk with our listeners about what they can do today to help protect themselves, their loved ones, in this environment that we are in worldwide.

David: Well, first of all I think they should invest in education. Really learn and listen to this radio show, you guys do a great job in bringing in guests who see the world correctly. Trace and I are both believers in the Austrian school of Economics, go to the Von Mises website:, and on the other side, once you have convinced yourself that this Keynesian theory is simply flawed and that we’re going to have a price to pay for all the money printing that Trace has talked about, then you’re going to be inclined to be negatively correlated, and you aren’t going to buy in to the theory that you ought to be 70% in stocks all the time. And then you will realize that gold represents the real money that’s out there, because the rest is fiat. And once you do that, the investment picture becomes a lot clearer.

And I think you will invest in funds like federated prudent bear, which is negatively correlated, makes money when the market goes down. I don’t necessarily like being a bear, I mean my mom has chided me in the past, about when I can’t be more optimistic, and Americans love to be optimistic, but with your money you need to be prudent. And you need to be not optimistic and not pessimistic either. You need to be realistic about your money.

Steven: Well, you’ve been right David. I mean, our partner Clyde Harrison has said that we’re going ingot is in a moose market, and if you look at since ’98 it’s been flat. I mean the S&P basically has gone nowhere, so on that side of the equation, you’ve definitely called it right. On the precious metals side of the equation, what are we looking at? $285 gold, $4 an ounce silver? So you’ve definitely been right about that side of the equation. I don’t equate pessimism with not making money, I equate optimism with making money and understanding what’s happening, and being able to protect ourselves and our loved ones. You know, I have told Al my favorite video is tech-ticker, Yahoo Tech Ticker. I know you’ve been on there. And now it’s amazing about half of all the guests who are on there are now basically talking about what you’ve been talking about for years and years and years.

David: Interesting. Going back to that optimism comment, I say that I want to be optimistic and that I want to have money left so that I can do good things for the world. And frankly, many people are going to get this wrong, but if people can get it right, and invest correctly, and have some money when the market does bottom, and I don’t think the market will bottom until we’re at 400 on the S&P and I think that Trace and I both feel like, he likes to measure things in terms of ounces of gold, which is very, very smart.

In terms of the Dow to gold ratio getting back to one or so. When the market gets back to that level, you’re going to want to have some money left, so you can invest then. That’s when you really make a fortune, and then you can do great things and help out your friends and families that are destitute, do great things with your charitable contributions I mean you can really do some great things, you should be optimistic about that.

Al: You know, I think that’s something that’s really worth talking about. What I would like to do is get Trace and David back here in the next segment because I want to elaborate on how we don’t talk here much about doom and gloom on this show, we talk about defensive investing, and we talk about how you can protect your families and your loved ones, you know, and we can take it one step further as David just did and how you can help out society, in general because I have to tell you, I’m convinced that right around the corner, if you’re not invested in the proper segments of the financial market, you know what, it’s almost embarrassing to see how much money you’re going to lose.

DISCLOSURE: Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs or the platinum ETFs.