The Gold Report: Mike and Chris, it's always a pleasure to talk with you. Thank you for joining us for this Father's Day edition. I want to start with that theme. Chris, what's the single most useful thing your father has taught you about investing?
Chris Berry: That's a difficult question to answer because so many things come to mind. I've been privileged to have learned about investing by following my father's career as a professor at a top-tier business school and then as a portfolio manager for a mid-market cap value fund. I have been able to see both the "theoretical" and "practical" sides of investment analysis. The opportunity to hone my analytical skills through these two differing viewpoints has been invaluable.
I think the most valuable lesson I have learned thus far is in the approach to evaluating markets and publicly traded companies. There is no substitute for intellectual rigor and intellectual honesty. The ability to recognize and eliminate biases is crucial. Emotion is definitely your enemy in this business. It's also vital to have a solid vetting process and to stick to it regardless of the volatility in the macro environment.
TGR: Mike, today Chris is a standout analyst doing terrific diligence on his coverage, and I know that makes you proud. What has Chris taught you about investing?
Michael Berry: Chris is always on top of the issues. He has helped me develop and refine the 10-point grid we use in our Discovery Investing discipline. Chris gets down to the fine points and assesses each problem in very granular detail. In this respect we complement each other quite well. What I have also learned from Chris is that he has a very sharp memory and can keep several companies—say in the graphite or rare earth space—in close analysis. He is really good at differentiating the "wheat from the chaff," and this just seemed to come naturally to him.
Chris also is very good at assessing detail, listening carefully and dissecting companies when he is in the field. I am always surprised by the next step he takes in his analytical career. It's been a lot of fun working together. It is evident that Chris loves what he does and is good with people. I am learning from him!
TGR: Chris, you just spoke at the Cambridge House Resource Investment Conference in Vancouver. Your focus seemed to be deflation. You presented a barrage of 10-year bond charts that showed consistent declining yields over the last two decades. What was your point? What will be the effect of this deflationary environment?
CB: A large part of the research I do is focused on the macro economy and where we are cyclically in the market. In the wake of the financial crisis and the central banks' response to it, there has been a great deal of ink spilled surrounding the debate over the aftereffects of policies such as quantitative easing—specifically the implications for inflation or deflation in the economy.
While I think the U.S. economy is headed for inflation at some point in the future, based on expansion of the Federal Reserve's balance sheet, I do not see enough evidence to lead me to believe that an inflationary episode is imminent. In fact, when I look at a broad array of data, I think deflation is the more pressing issue. Government bond yields are at historically low levels, inflation is "in check" (I know this can be manipulated), unemployment is at a structurally and historically high level, and various metrics like gross domestic product, industrial production and capacity utilization are all operating at levels below the historical trend. In my Cambridge House presentation, I said that the global economy is "treading water." There is growth out there, but it is mostly sluggish—and in the case of the Eurozone, contracting.
This paints an ominous picture for many commodities in the near term. Slowing demand in countries like China, which has been the engine of the commodity supercycle, has put the prices of any number of commodities under pressure since mid-2011, when the commodity complex began its downward trend. With substantial slack in aggregate demand, it's deflation that is the worry, and not inflation.
TGR: Mike, Chris tweeted out a June 1 column in Project Syndicate written by New York University economist Nouriel Roubini entitled "After the Gold Rush." Roubini listed and commented on several factors favoring a bearish scenario for gold. To be fair, he did say that all investors should have a "very modest" exposure to gold as a hedge against extreme tail risks. But the gold rush is over, he said. What is your impression of Roubini's thesis? Chris, do you and your father agree?
CB: With more evidence pointing toward deflation as opposed to inflation, I can see gold trading sideways until these dynamics change. That said, if you're a believer in inflation getting out of control, perhaps sooner than many think, this is an ideal time to acquire both gold and silver bullion, as well as select junior mining equities involved in precious metal exploration.
MB: Roubini is wrong. Gold has stood the test of millennia. Since we discarded it in 1971, our economy has loaded up with debt and is now sick. I am not suggesting a gold standard or even a currency backed by gold, simply that gold will always hold its value in deflations (which I believe we are in now) and inflations (which is where we are likely going). I want gold in my portfolio under these circumstances.
TGR: Thanks for your insights.
From 1982–1990, Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, during which time he published his book, "Managing Investments: A Case Approach." He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.
Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Chris holds a master's degree in business administration (finance) with an international focus from Fordham University, and a bachelor's degree in international studies from the Virginia Military Institute.
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