Stifel Financial Corp. (SF) Earnings Call Transcript & Summary

Okay. Thanks for joining us. I'm Andrew Breichmanas from Stifel. And I'm happy to have an excellent panel, some of whom have already presented today. So I think the goal of the session is really to sort of discuss further some of the things that we heard earlier today and talk a little bit about some of the themes that we heard from the company presentations. So I'd like to introduce Lord Ashbourne, Charlie Gibson, Director of Content at Edison, Garrett Gargan from the Golden Portfolio and Alasdair Macleod, Head of Research at GoldMoney.

So maybe I'll start with Alasdair. The quote that I wrote down from your presentation earlier this morning was gold is money, everything else is credit. That seemed to be the sort of overriding theme of the presentation. Maybe just for those that maybe didn't catch it, could you do -- give like a quick summary of you discussion and what you see going forward?

Yes. Well, I put forward sort of 3 questions at the opening. Why is gold rising? Why are bond yields rising? And how should that affect one's investment strategy? I mean gold is rising because it appears to be rising. Actually, what's happening is the value of credit, hence the bit, gold is money and all else is credit, it is credit going down, not gold rising. And I think when you grasp that concept, you begin to understand seriously what is actually happening. And the reason it's happening is amazingly because bond yields are rising. Bond yields are rising. Why? They're rising because the U.S. government is in a debt trap. And the way I could summarize that is that rising interest rate is just going to make the situation worse. At the moment. The gross value of the debt or the gross debt outstanding is something like $34.6 trillion. In the last 90 days, they added $1 trillion. It is quite likely going at that rate, there will be another $4 trillion by the end of this year. Given that this is an election year, given that the economy is in recession, and don't believe the growth thing, that's all pumped up by government money being pushed into the economy incidentally. This is not productive money. It's money which will undermine the purchasing power of the dollar. Basically, main street, small and medium-sized businesses in America, like in Europe, are dying on their feet. They are over indebted in many senses, in many cases. Private equity business has leveraged businesses to the hilt and, of course, rising interest rates kill that. We've seen the commercial real estate business falling apart. The banking system is in crisis. From central banks who've got huge, great unreported losses on the balance sheets downwards into commercial banks who are trying to reduce their [indiscernible] balance sheet leverage, which again means basically restricting the availability of credit for overdrafts, driving up the cost of borrowing, interest rates, of course. In fact, Jamie Dimon came out with something on that overnight, I see, more or less confirming what I was saying, but in slightly more polite language. So you're going to see interest rates rise. I wouldn't be surprised if we have the value -- the total government debt at the end of this calendar year, close to $40 trillion. I mean this is a very serious situation. This is a debt trap. It's spiraling out of control. Chinese and the Russian see this, they're going to protect themselves if they don't take aggressive action. They will take action to protect themselves. I would not be surprised to see Russia in particular, on a gold standard by the end of this year. They can do it. They know how to do it. Same with China because they'd be forced to go that way, perhaps against their will. So how does this affect one's investment strategy? Well, the answer quite simply is you're going to lose a bundle investing in industrial stocks, FANGS, whatever, bonds. I mean they're all going to go down the tubes. So what an investment manager does is he switches. He switches into something else. And the only thing that's going to be rising partly because the dollar is falling, will be commodities. But the other reason that commodities will be rising is if you look at the longer-term outlook for Asia, they are rapidly industrializing, thanks to the combined partnership of Russia and China. This is the industrialization we're trying to stop by the way. The effect of that is that there will be demand for commodities over and above. The increase in their value due to the erosion of our purchasing powers. So that, I think, is where a lot of the future investment profits are going to make. That's where investment managers are going to swing their portfolio emphasis. So actually, the timing of this conference, I think, in that sense, is very, very interesting. And I would really like to see people begin to think seriously about the entire resource sector not just precious metals, energy, other metals, base metals, raw materials. There are going to be food shortages as well. So this is going to be a time of huge, huge great change. There's going to be a big wealth transfer from the West to the East. We know that there's been transfer of gold bullion from the West to the East, but wealth will go with it. Why? Gold is money, the rest is credit. It's credit that's going down the tubes and that is why gold appears to be rising. Brief summary.

Excellent. And earlier this morning, I know you didn't have time for questions at the end of your presentation. So I'll make sure that there's time at the end of [indiscernible]. So anybody has questions, we'll be able to get to them. I guess, consensus seems to be -- well, I guess, expectations for interest rates were that -- at the start of the year were maybe 6 cuts throughout the year, and it seems to have been dialed back to 2 to 3. It seems to be kind of changing on a daily basis, which seems that adds to what you're talking about, is that a matter of time scale or...

No, it's a matter of idiocy. Basically, the investment establishment has divested the interest and always being bullish. They're thinking inflation[ "it's late", it's not ]. If you actually look at the month per month increase in the CPI, it's been increasing every month since last October. Don't look at the annual trailing number. Just look at that. But it's worse than that. It's not actually the inflation thing, which, to my mind, is driving all this. It is the debt crisis and that is what's going to push up interest rates. Anybody knows that when there's a shortage of credit because banks will be drawing in their horns, as I said, the price -- the interest rate, if you like, of credit goes up. I mean, it's a no-brainer. Yet everybody seems to be ignoring this very basic fact. And the Chinese are now -- I mean the second time in 12 months, Janet Yellen has gone to China to talk to Chinese, treasury teams have been over there. Why do they go there? Forget the headlines, they're talking to the Chinese by trying to persuade them to buy U.S. treasury debt or at least stop selling it. I don't think they necessarily get anywhere because the official story is they are lecturing the Chinese about how to behave with their industrial investment. Wow, isn't that going to get them on side, certainly not. Japan is the other major buyer. So the major -- the major buyers on the margin that set the price. Japan has got its own problems. It's tried to suppress interest rates at 0 bound. They still got them at the 0 bound having been slightly negative and is definitely defending the yen at the 151 and a bit 152 level. And it's got to sell dollars in order to do that and it sells dollars, sells U.S. treasuries in order to do that. So you got both Japan and China for different reasons, sellers of U.S. treasury debt. And this heightens the crisis. What's going to happen to the yield. I mean, the only thing that the treasury has been able to do is being able to fund itself out of short term, out of the T-bill market. It has absorbed pretty much all the liquidity that was available in the market in the process. At some stage, it's going to have to go out along the yield curve a bit, and then you're going to see auction failures, and that will drive up bond yields big time. And already the relationship between bond yields and equities is very, very stretched. I mean you don't have an equity market with the S&P at these current levels. You don't have that with bond yields at these current levels. I mean they have risen very, very sharply. Admittedly, they're consolidating a bit. So there's a lot of hope in the market. That's going to change. That's going to change very rapidly. Probably overnight, you suddenly woke up and think, "Oh my God, I wish I'd sold." It really is one of those situations. I've seen it so many times.

So maybe I can bring in Charlie for a bit of perspective. The gold price, I checked just before coming up was $2,355 earlier today. Consensus estimates for 2024, were $2,055. For 2025, were $2,050. This is averages. And for 2026 is $1,888, and the range of those estimates was from $1,500 to $2,280. So as a fellow analyst, do you think that just reflects a lag between people catching up to the realities that we're seeing in the market or a lack of conviction in what we're seeing with the current price?

I think the answer is probably all of the above, who was a [indiscernible] I think it says that forecasts were very difficult to make, especially when they're about the future. And I think that's true. And I think you could go back -- if I were to pick up on what Alasdair was saying, I think we're in a situation which is very akin to the late 1970s. And one of the features of that period was there was incredible volatility in a lot of things. Two of the things although there was a lot of volatility in were inflation and surprisingly enough, U.S. interest rates. And I don't mean bond yields or anything like that. I actually mean the Fed funds rate, which is not something you would normally expect to see volatility in. But there was a huge amount of volatility in that period as all the commentators look at these conflicting signals to some extent, and they try and make sense of them. And then you have another group of people who are -- and that allows you, if you want to be, if you want to take that parallel and say, okay, we're like the late 1970s and you're a gold analyst, then you can see January 1980 in front of you, and you can be very bullish. But then you also have people who sort of started their careers and I think some of us might fall into that category, in the late 1990s, and they think it might be [ time to ] miserable, absolutely miserable for gold then. And they have a natural tendency to always be conservative. And so whatever the consensus appears to be, whatever -- wherever the price is now, they tend to knock 20% off of that and say, there's your number. So I think that partly explains why the range is so huge. I look at that range and those figures and I think -- and it's very difficult because gold can be a very volatile thing. And it certainly was in the late 1970s. The time it took to go from $500 an ounce to $800 an ounce, it was nothing at all. And then back down to sort of $500 an ounce in not very much more time. So I think one of the things we have to expect is we do have to expect volatility. From an investment perspective, it's going to be -- I always think mining is hard enough anyway, and I think gold is hard enough anyway. It's going to be harder. There are going to be huge opportunities out there. I'm afraid -- sorry, that quote from Callahan has just come to mind about the gnomes of Zurich. So when all of this volatility is going on and when this transfer of wealth is happening. You might find yourself being blamed. And my apologies for that. But isn't that the way the modern day world works. It's going to be the first person with the sand bite, and I thought that will be a Grommrpile, sort of, person will be saying, oh, [indiscernible] in Zurich. I mean maybe, it won't be, maybe he'll blame China, Shanghai or Hong Kong or something like that. But I think the watch word going forward is volatility. I think there are great opportunities there. I think there are great opportunities there in gold. The dust will settle sometime in the same way that it did in the late '70s, early '80s. Now it took a pretty miserable recession in the early 1980's for the dust to settle. The thing I'm going to -- I'm going to plug this shamelessly. Alasdair was fortunate enough, he did present this morning. I'm presenting tomorrow morning, so I'll have some slides to go up around this. But the thing I look at is real interest rates, and that's where I expect the volatility to occur where I certainly expect you to see that volatility in there. I think -- but there will be opportunity. As regards to the transfer from west to east, I think the equivalent thing that happened in the '70s was a huge transfer of wealth from the U.S. and U.K. through Japan and Germany from the sort of the old industrialized nations to the newly reindustrializing nations after the war. And if you look to the Deutsche mark, the Deutsche Mark in 2000 was pretty close to the Deutsche Mark in 1980, but the Deutsche Mark in 1980 bore no resemblance whatever to the Deutsche Mark in 1970. There had been a huge shift in exchange rates. And just to give you an idea of what that shift in wealth means. I was talking to a graduate and he'd gone to Cambridge and he'd been at Cambridge in 1947, and I was sitting next to him on a plane. And I'm saying to him that must be a pretty miserable time. And he said, it was a pretty miserable time. But he said, but one of the things I remember is as an undergraduate if -- as an undergraduate, if you bought wine for your table at Cambridge, you got [indiscernible]. That's how wealthy they were in 1947, paying with pound sterling, I don't know, $4.80 or $4.40 per pound. That's what they could afford. And I think the crisis that happened in the 1970s, I think, was created because of the intransigencies and the constraints set up in that 1947 sort of that Bret and Woods era. I think now we're seeing the same sort of crisis happen 30 years on from the constraints that were put in place in response to that 1970s crisis. So yes, volatility and opportunities is my feeling.

Okay. Great. And Garrett, we haven't forgotten about you.

Still here.

I wanted to get you to sort of recap your presentation as well. But before you do that, and we shift the focus to the equities, just maybe some thoughts on what we've just heard in terms of -- and how you -- your thoughts on sort of the gold price and how to position.

Yes. People talk a lot about demand from China, and it's happening. One of the charts that I look at on Bloomberg, it's Shanghai Gold. The price of gold in Shanghai, what it's trading at. It's been trading at a big premium, like a $50, $60 premium to the COMEX Gold. It's almost like COMEX in London are losing their pricing power to China. That premium has come down with the gold price explosion over here in the United States in the past couple of weeks. But that's one indicator that was very interested in that foretold the demand and that it's going to eventually drive the price higher. And you can see that in Shanghai Silver as well. Shanghai Silver was trading for like a $4, $5 premium to silver trade in London and COMEX, and that gap has narrowed also to basically $1 now. So it's a little bit more even, but that demand, it's continuing and it's not going to stop anytime soon. One thing that's interesting is one of the charts that I look at that I like is that 10-year minus 2-year that yield curve spread. That shows whether the Fed is easing the monetary policy or tightening the monetary policy. And in my chart, I overlaid it with the gold price. And what you can see is that every time the yield curve started -- moved negative and then started increasing back out of there, the gold price doubled. It happened in 2000, it happened in 2006 and 2019. And right now, it's starting to go positive and it's ready to go for a ride right here, suggesting gold is going to double here as well. But one thing to note regarding all these times that the yield curve went negative and cross back to positive, there was a massive financial disruption. 2000 was the huge tech [indiscernible] that blew up. 2008, we all remember 2008. 2019, there were some bankruptcies, I believe, in the banking sector in the U.S. And then like we're seeing that in the U.S., just people -- you look at the stock market, you think everything is great and wonderful, but the stock market is not the economy. And one of the articles I just wrote, like I like Twitter. Twitter is a pretty interesting tool because you can create you own news feed, people that you like and that you respect. And one of the things that kept popping up was this commercial real estate broker talking about commercial real estate deals. This one got 1 in New York, got sold at 50% discounts since the last sale. This 1 in California sold at a 75% discount, [indiscernible] one in Boston, they gave it away for $0 because the shift from people being able to work from anywhere, a lot of office buildings aren't being used as much. And I live in Florida, and Florida is just jam, there's so many people that have come down in the past few years. But bottom line is that this commercial real estate, I believe under the radar. It's the smaller bank, there's Huntington Bank shares and a couple of other New York banks that specialize in these [indiscernible] of loans. And I wouldn't be surprised to see this manifest over the next weeks, month into some sort of crisis where more banks have to be bailed out. The Fed doesn't want to start lowering interest rates, but they're going to be forced to. And that's what I think is going to happen. The economy is going to force the Fed's hand. A couple of other things. The real interest rates is interesting because I've tracked that a lot as well, and gold has always tracked real interest rates really well, right? Up until, what, like 3 years ago?

Yes.

Yes. And then it's -- real interest rates have gone straight down and gold's has gone straight up. But I don't have any -- like what do you think what's going on with that?

There was the COVID effect. And one of the big differences between now and the 1970s was there was a COVID crisis and they did crop up about, what, 4 years ago. I think that's one of the complicating factors. And I think then -- but we were also coming out of [indiscernible] and then we were trying to taper. And then the Fed said something, oh, no strains in the repo market. Do you remember that one in 2019?

Oh, that was it.

And we're going to stop -- we're going to stop the tapering and then gold popped up then, and then we got to 2020 and so they reduced interest rates.

Yes. And like I said, every time there's a major disruption, the stock market gets racked and like I think we're setting up for something like that. And then the Fed comes back in, lowers rates, starts quantitative easing or some sort of QE again, and then gold just goes ballistic.

So maybe staying with Garrett, your presentation is sort of focused on the golden portfolio and sort of your investment philosophy and how you look to invest in companies. Can you maybe summarize that really quickly, and then we can maybe talk a little bit about some of the companies that we saw present today -- or some of the themes that we saw from the presentations today?

Who do you want, Garrett or me.

Sorry, [indiscernible] second to Garrett.

You want me to start. How did you -- what -- and describe my investment philosophy.

Yes, but the golden portfolio.

Golden portfolio. Yes. Okay. So on NBA, CFA, I like numbers. I like proof. Theories are fun. Everyone has their opinion. But at the end of the day, the only thing that drives share prices is cash in the bank, profits, free cash flow. So I evaluate that extremely closely. And then people look at charts and they say it's going to be different this time. The majors are going to go for a ride, but it's been the same history for 50 years, where the majors have basically underperformed the market. And then I do a lot of quantitative research where I build model portfolios and I back test them. And just quite simply, I built a portfolio of the royalties back since 2007, the returns were like 17,000%, like 32% of your CAGR better than Buffett. And in my presentation, I explained why? There's many, many reasons. They're structured to get lucky. So that's one of my products that I'm focused upon. And then the other product was, I believe that a lot of the value that is generated in [indiscernible], it's generated from the drill bit. And a lot of this is very successful, investors and gold investors, they know this. Even the majors can have a great drill hole like a Kirkland at Fosterville and it could propel the stock, a tremendous amount higher. And then you really see the torque and the leverage in the junior space, the ones that have a lower capitalization. But I got to be honest, it's hard. You're betting on like which tree is going to get hit by lightning. You know lightning is going to hit, but you don't know which tree. But that's why you need a larger portfolio because you -- 3 or 4 are going to do well, the rest might not do so well, but the gains from those 3 or 4 are going to power your portfolio for a while. And one thing also regarding managing your own portfolio, don't sell your winners. A lot of people average down their losers. They take the grants, don't do that. Your winners, those are the ones that compound, those are the ones that keep going. The losers are the ones you want to throw away.

So Charlie, maybe we can talk a little bit about some of the presentations that we hosted today and whether there's any themes that you could extract from them. For me, I introduced a number of royalty companies, and they seem to have become kind of a core part of the capital structure for the sector and their pipeline seem pretty robust. So that was certainly one thing that I took away. And the other thing, I guess, from the producers was they seem to be in maybe the best position that they've been in the last 15 years and seem very focused on per share accretion in terms of reserves and production and cash flow. So that all seems very positive from an investor standpoint, but I was just wondering what your takeaways were.

Yes. I think the lots of opportunities there. And I think you're absolutely right about the royalty companies. It's one of my favorite business plans. And one of the reasons for that is what they can do with their costs as opposed to -- and when I say royalty, I mean the streamers as well and in particular, they can keep their costs or the majority of their costs much more constant then -- because it's all prearranged via a -- by an agreement they have with the producing company. And so it's one of the business plans that I like most. So I would say in constructing your portfolio, now look I'm guessing we're all here we all like gold and we all see the opportunities there. So I would start with gold. It's outperformed the Dow Jones since 1960 something, possibly not if you take income into account as well. But certainly, in capital terms it has. Now when I started in the gold market late 1990s, you know it was a miserable time for 20 years down there -- sorry, very nearly 20 years, the gold has gone down. And there seemed no prospect of it turning up. Andy Smith, you've met Andy Smith, the analyst at UBS, permanently bearish saying, why do you hold gold when you can hold the U.S. treasuries and down gold would go. But -- so start with gold, I think there are opportunities there, then build your portfolio out from that. Some of the majors -- they're more exposed, I think, to inflation than they would like to admit possibly. You have to be a bit careful, but there's always a case for having a smattering of majors. One of the most interesting pieces of research [indiscernible] was on juniors. And my forbearer, Edison [indiscernible] profile 10 juniors that we're going to go from explorer to producer because he said that's where the money was to be made, and I agreed with him. But he profiled these 10, and I was able to come in 5 years later and say, let's see how they did. And this is how they did. So of your 10 stocks, 7 had lost almost all their value. 7 had gone from -- they basically lost more than 80% of their value in U.S. dollars. 1 had stayed where it was, 1 was up 3x and 1 was up 5x. And this is the difficulty that Garrett was talking about, you're having to predict where lightning is going to strike. You have to be very, very fast when you the juniors. And you also need quite a diversified portfolio because in that portfolio, if you held all 10 in equal amounts by an unweighted index, so just you had equal money in each, you would have come out 5 years later with roughly the same money that you put in. But you couldn't afford not to have the 5 bagger or the 3 bagger there because if you lost them, then you lost all your performance. That's one of the difficulties, I think, with the juniors. And you have to think how to play those very carefully. What I would observe, if you take an index of junior mining stocks is when they really perform is when the gold price runs but is not really expected to. And that's when you get the real performance in the juniors as a group. As otherwise, you have to focus on the nitty gritty of the drilling results and what they're getting from those. And then actually, one of the areas -- I like the medium-sized ones. The medium-sized producers, I think they will be the winners. I think the majors might be too exposed to inflation around the world and currencies and debt and credit and all of those sorts of things that they are naturally exposed to. I think the medium-sized producers who can -- who are able to operate in a particular geographical area that they know well. I think they're the ones who are best able to control inflation. Juniors there are -- they're not a whole different ball game, but you got to decide how you want to play them and try and play in that space. But diversification is something you can't avoid. And then the royalties and streamers. I always say, look, if you know nothing else, but you want geared exposure to metals prices, and you don't want cost risk, don't want CapEx risk, and all of the -- but you do want greenfields upside, then it's the royalty and streaming companies. That's your -- if you just want one stock, that will do all those things for you, that's where I'd go. Now you're going to pay a little bit more, then you're going to pay for the -- certainly the major miners, but it will absolutely do the job that you want to do. So that's the philosophy that I would bring.

Excellent. Let's leave some time for questions and make sure we get to everything that the audience might be interested in. So if there's any questions, please raise your hand and let a microphone make its way towards you? Anything.

I can't -- can you see into these lights. I can't. I couldn't see if there were any questions.

I think there's one right there. [indiscernible].

Rather obvious question, but what do you all think when the Fed starts cutting rates?

Sorry, I didn't hear that.

What are your thoughts when the Fed starts cutting rates.

Well, yes, I think we'd love to cut rates, but I don't think we're going to really manage to do it. I mean it might get one cut through or something like that. But I really can't see any justification for it. The problem, I think, that there's a huge great tension between the Fed and the government. We're in an election year, obviously. I think the Biden administration does not want anything upsetting at all. The Biden administration would like to see rates cut, happy campus in the electrode and anything that Powell does to stand in the way that will not be popular with them. So that's the tension. And from what I have seen, this is actually common with a lot of central banks. At the moment, they're beginning to see the dynamics that I've just put forward at this meeting. Yet when they talk to the listco class, the politicians, they're just getting a blank. They really are. And the political class, I'm not prepared to do anything on the fiscal side at all to help out. This is a major, major problem. And I think this issue is going to become more contentious in the coming months. And I actually think that what Powell is doing by saying, just delay, delay a little bit more, is he realizes that the last thing he should do is actually raise interest rates. So he's not saying we're not going to raise interest rates. He's saying, we're just delaying it. And the market is sitting there hoping he's saying, well, we will cut. And not only will we cut, but when we cut, we'll probably cut quite big. I mean there's a huge great dilution in markets about this current situation. I cannot emphasize that enough.

I think the risk here is sort of unexpected inflation which the central -- which no one has forecast because no one is for everyone's forecasting inflation to come down. And then they say, well, interest rates are a function of inflation. So if inflation keeps going down, then we can lower interest rates. So I think they will cut this year because of the political investments, the Fed also has in the U.S. economy and in the U.S. political system, and the administration has as well. So I think they will cut. And what I think you'll get then is you will probably get unexpected inflation and everyone's going to, "Oh, my gosh, inflation didn't see that one coming." And no one's going to quite know how to react. And probably to begin with, I suspect what's going to happen is that the Fed will say, "Oh, it's transient. It will go. So we don't need to move interest rates. We'll just wait for it to come back down again, and it's a bit embarrassing, but don't worry." And then what we might see is you might see inflation go up again. And that's where I think you're going to get the volatility from now. I'm going to sort of preempt your question a bit, what do I think is going to happen? If when they can't, I think the numbers that I look at, and this comes with a few disclaimers. But I think it's possible gold could hit $3,000 in the way that gold hit $850 in January 1980. Now I think there's an outside chance that it could go much higher than that, $4,500 is the figure I have. I'd say in my head, it's not in my head. It comes out of some numbers from some of the models I look at. Those are the sort of numbers I think it could go. Now if it does hit $3,000 to be honest, I'd have to say you've got to take profits. $4,500, I think you got to sell everything. But those are the numbers, the sorts of numbers that I do think it could go to. Do you think it could be short term, but I think your investments -- this is an investment environment where you're surfing a wave, and you want to get as much of the upside as you can and try and get out from the downside. While there's always that story in 1980 that someone going to a Swiss bank and saying, would they take his gold watch and they said no they wouldn't take a watch. They handed it back to him and he smashed up and said, "Well, give me the value of the gold." But that's the environment that I think we could be moving into. That's the sort of thing that might happen at $3,000 gold I think. Does that answer your question?

My thoughts, the Fed only cuts when their hand is forced. Like if you look back at the times they've cut, the only times they've cut, there's been an absolute economic disaster and they were forced to cut rates because the economy was in a crisis mode. Therefore, they weren't worried about inflation more than they cut. And I think there's some unforeseen something out there that who knows might occur. And if it does, that's when the Fed will cut. However, I could also see this market continuing along and hire steadily and long and higher as it has been without any rate cuts because that's what it's been doing for a year or so already.

Thanks. Any other question. If not, thank you, everyone, for joining us. I believe there's a cocktail reception outside. And we look forward to seeing you tomorrow for more presentations and meetings. Thank you.

Thank you.