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Exclusive Interview with Steven Saville of The Speculative Investor

One of the people who has most influenced my life is Doug Casey. Stumbling upon his writing somewhere around 2003, it was like a whole new world opened to me. He said a lot of the things I had been thinking... I just never knew it was okay to actually say them!

Soon after, as I learned more about liberty, I came across another person who, it seemed, on a bi-weekly basis made clear how the economic world worked and made a big impact on the way I saw the world. He was saying things that I certainly never heard in the "mainstream".. a mainstream that never seemed to make any sense. His name is Steven Saville and he writes The Speculative Investor newsletter.

I followed him for years and read his twice weekly report which is Austrian economics based poetry. He has an excellent way of seeing and describing the world in a way that can make even the most difficult subjects seem stupendously simple.

One of the most bizarre stories I have is how I met Steve. I had been following him for years and put him on the website I founded, Stockhouse.com, and since I knew he was living in China, when I found myself in Southern China, I emailed Steve. Now, remember, I knew he lived in China but I had no idea where.

I was in a small town that no one has ever heard of and I was only there because the producer of a Hong Kong movie, including Jackie Chan, lived there and I was "helping" to produce the movie. The name of the town is Panyu and it is about an hour outside of Guangzhou. So, I emailed Steve and told him I was near Guangzhou and asked him where he lived.

He emailed me back and stated that he, too, lived near Guangzhou. I wrote him back and told him I was in a city no one has ever heard of, called Panyu.

He emailed back and said he lived in Panyu. Shocked, I wrote him back, questioning what the odds would be that I would be in the same city as him. I told him, "I am staying at the Cliff Hotel/Apartments".

He wrote me back and said, "That's where I live."

We met five minutes later in the lobby and went for some delicious Chinese seafood... and that was how I first met Steve.

Many people have probably heard of Steve. His public articles get picked up on quite a few gold-related websites... but no one has ever met him. He's a bit of a recluse. But I think he is one of the wisest speculators in the market, so I asked him if he would do an interview with us and he obliged.

Steve now lives in Kota Kinabalu, Malaysia and the following is my exclusive interview with Steven Saville.

The Dollar Vigilante (TDV): Thank you for doing this, Steve. To start, please give our readers some background on yourself.

Steve Saville
Steven Saville

Steven Saville (SS): Certainly, Jeff. I'm happy to. I grew up in Western Australia, where I graduated from high school and then spent four years at university obtaining an engineering degree. In my working life I don't think I've ever used anything I learned at university, but going there wasn't a waste of time because it helped me get an interesting job managing projects and eventually provided me with the opportunity to leave Australia and experience more of the world.

The opportunity I'm referring to cropped up in 1995 after I had been working for the same engineering company for about ten years in various roles. I told my boss at the time that I needed a career change and was going to resign. My plan was to become a full-time stock market speculator. The company then made me an attractive offer. Rather than resign, they suggested that I relocate to Hong Kong to manage contracts associated with the New Hong Kong Airport project (the biggest construction project in the world at the time). This wasn't the career change I was originally looking for; it was something better because it led to me becoming internationalised in every way. Also, knowing what I know now it is clear that I was not financially or emotionally or experientially ready, back then, to become a full-time professional speculator. So, the opportunity to manage engineering projects in Hong Kong got me out of Australia and set me on the road to being a PT (permanent tourist).

In Hong Kong I met my wife and became a father. The family subsequently, in 2003, moved to China -- first to Panyu, where we met in person, and then to Shanghai. Our main goals were to experience life in China and for our son to become fluent in Mandarin. With the Mandarin part of the plan having been accomplished and with Shanghai's pollution beginning to wear on us, we recently moved to Kota Kinabalu in Malaysian Borneo. We're building a house here and plan to stay for at least a few years.

TDV: When and why did you turn in to a full-time investor?

SS: As mentioned, I luckily had my plans to become a full-time speculator temporarily derailed by the chance to work in HK in 1995. In 1998 I finally pulled the plug on my day job (my engineering and project management career) and began trading/investing for a living. Why? Because I'm fascinated by the inter-relationships between economics, politics, the news of the day, human psychology and history, and these inter-relationships are reflected in the financial markets. Also, the financial markets routinely throw up great money-making opportunities. This is especially the case with the stock market, which is the least rational of the major financial markets. The less rational the pricing within a market, the greater the chance for a speculator or investor to make a substantial profit.

TDV: When and why did you start the Speculative Investor newsletter?

SS: Like many things in my life, www.speculative-investor.com came about largely by accident. I've always enjoyed writing and ever since my late teens I've been fascinated by gold's role in the world. After I discovered the internet in 1996, my interest in gold (and gold-related investments) took me to the Kitco discussion group and my interest in writing prompted me to post regularly at this site. Vronsky, one of the proprietors of GoldEagle.com, was also a participant at the Kitco discussions. He liked what I was writing and invited me to write articles for Gold Eagle. This, from memory, was in 1997, when I was still only a part-time investor.

The articles I wrote at Gold Eagle, initially under the name "Milhouse", garnered a significant following during 1997-1999, but at that stage I had no plans to make a living from the writing. It was just something I did for fun, although I did find that having to present my thinking on economics and the markets in an organised way improved my understanding of what was happening in the world.

By the way, at that time I had heard of Ludwig von Mises but I knew very little about "Austrian" Economics. I was operating under the misapprehension that Milton Friedman was the world's most important free-market economist/thinker.

In 1999 I established speculative-investor.com with no intention of ever generating any income from it. Whereas the articles I was posting usually dealt with longer-term issues and general concepts, the website in its early days focused on the current market situation. But like the articles I was posting, it was really just a way of using the internet as a creative outlet.

I decided to turn the website into a business (a subscription-based newsletter) in mid 2000, largely in response to emails like: "You should really be charging for the stuff you write". This worked out well, not because it brought in a lot of money but because it gave me an income stream that was totally separate from my trading. I didn't fully realise it at the time, but for psychological reasons it is vital that a trader never be in the position of having to draw on his trading capital to pay living expenses.

TDV: You are incredibly gifted at deciphering actions in the market through the lens of your Austrian economics groundings. When and how did you get into Austrian economics?

SS: There wasn't one point in time when I "got into" Austrian economics. It was a gradual process over a period of years spanning the late-1990s and early-2000s. I would read an article that looked at a particular issue from an "Austrian" perspective, and it would usually make a lot of sense. A lot more sense than any of the competing perspectives. This would encourage me to explore further. The more "Austrian" stuff I read, the clearer the picture became of how the economy worked and how government/Central Bank policies affected the economy.

Take the example of monetary inflation (creating new money out of nothing). Monetary inflation is institutionalised counterfeiting, which means it is a form of theft. Although it is (or at least should be) intuitively obvious that the economy could never, under any circumstances whatsoever, benefit from an increase in the amount of theft, it is unlikely that someone without a grounding in Austrian economics would be capable of understanding or explaining, in practical terms, exactly why this is so. After all, during a financial crisis it can seem as if a shortage of money is a large part of the problem and that 'greasing the wheels' with more money is just what's needed to get us through the rough patch.

To fully appreciate why monetary inflation is always a practical problem rather than just an ethical problem, you have to understand the relationship between money-supply changes and the boom-bust cycle ("Austrian Business Cycle Theory"). More specifically, you have to understand that the most important adverse effect of monetary inflation is not the reduction in the purchasing power of money that it eventually leads to, but the distortion it causes in relative prices. These relative price distortions lead to widespread mal-investment and the large-scale destruction of wealth. Think of how much wealth was ultimately destroyed by the monetary-inflation-fueled boom in US residential real estate. The reduction in the dollar's purchasing power is trivial in comparison.

TDV: Your newsletter has a heavy emphasis on the precious metals and the gold and silver stocks - although you cover almost every aspect of the markets from bonds to stocks to currencies. The precious metals have been a very good investment for the last decade. The mining stocks, however, have seriously lagged the metal for about five years now. What do you see in store for those who own precious metals stocks?

SS: The idea that many people have that the average gold stock offers upside leverage to the gold price is wrong. At least, it's wrong when taking a long-term perspective. The idea is based on the simplistic notion that if, for example, the gold price is $1000 and a company's cost of production is $800 then an increase in the gold price of only 10% will lead to a 50% increase in the company's profit margin. The real world doesn't work that way. Firstly, mining costs rise in response to monetary inflation. Secondly, even well-managed mining companies suffer setbacks due to unexpected political, geological and/or environmental issues. Thirdly, most mining companies are not well managed, so errors tend to be made that reduce shareholder value. Fourthly, most listed mining companies, especially the small ones, continually increase their share counts by doing equity financings and doling out options. Fifthly and perhaps most importantly, gold producers have to spend a lot of money every year to prevent their reserve base from diminishing. The combination of these factors caused the average gold stock to underperform gold bullion over the course of the 1960s-1970s gold bull market, and the same thing is happening this time around.

Barrons Gold Mining Index

This doesn't mean that gold stocks should be avoided. It is unrealistic to expect that gold stocks, as a group, will do better than gold bullion over the course of a long-term gold bull market, but during a long-term gold bull market there will be a few 1-3 year periods when the stocks do outperform the bullion. These periods generally occur a) after gold stocks become very under-valued relative to gold bullion (e.g. the rallies that began in Q4-2000 and Q4-2008), or b) when a rise in the gold price is accompanied by a shift towards risk (e.g. the rallies of 2003 and 2005-2006).

The key is to take plenty of money off the table when there is a lot of enthusiasm for the stocks, so that you will be in a position -- at some undefined point in the future -- to take advantage when the stocks again become very cheap. In other words, the stocks should be treated as temporary house guests, not as adopted children.

TDV: And, so, is now a good time to be buying gold stocks?

SS: Right now the stocks are uncommonly cheap relative to the bullion. They could get even cheaper, but this is a good time to be accumulating the gold stocks; especially the juniors. [Editor's Note: TDV Senior Analyst, Ed Bugos, believes the same. If you aren't already a Premium TDV subscriber, Subscribe Now to hear which stocks Ed Bugos believes will provide big profits in the coming months and years]

I don't know when the next speculative surge will happen, but I know that there will eventually be another speculative surge that creates wonderful profit-taking opportunities for the owners of gold stocks. I also know that most owners of gold stocks will ignore the opportunity when it arrives, because they will be confident that far greater gains lie just around the corner.

TDV: Do you foresee a complete collapse of the western monetary system as being the endgame of the turmoil we are currently involved in? If not, how could this system be salvaged? And, if so, any guesses at how it will all unravel?

SS: There will eventually be a complete collapse of the global monetary system, but I don't have a strong opinion as to how we will get from here to there (other than generally via the rapid creation of money out of nothing) or when we will get there. Anyone who does have a strong opinion (ie. an exact date) on the timing and the specific details is, I think, kidding themselves.

Rather than trying to figure out the unfigurable, it is better to pay close attention to what's happening in real time and adjust your positioning accordingly. It's not like the collapse could happen next week. At least, the US$ is not going to collapse next week or even within the next 12 months (although the euro might). Some things are bound to happen well before the US$ collapses, chief among them being a huge rise in the T-Bond yield. We are not, for example, going to see the US$ collapse with the T-Bond yield at 3%, or even with the T-Bond yield at 8%. Before the US$ collapses we will see the T-Bond yield move well into double digits.

To address a likely objection to the previous comment: In the event that the Fed buys enough T-Bonds to keep the T-Bond yield low indefinitely, we could use the yield on investment-grade US$-denominated corporate bonds as our reference.

TDV: And, what if the Fed then buys up all US dollar denominated corporate bonds?

SS: Well, then...

TDV: Let's not even go there (laughing). Let's change subjects. You have been a permanent tourist since before I first met you in person in Panyu, China. You have since lived in Shanghai and now live in Kota Kinabalu, Malaysia - a place I helped turn you on to. How have you enjoyed the expat life? Any advice for those who may want to live in China or Malaysia?

SS: Most of China's cities are very polluted.

TDV: Yes, I actually visited Guangzhou for the first time in 1997 and you couldn't even see across the street for the smog... and I remember once, when I was there, a woman coming out of a restaurant and pointing to the sky in a panic. Everyone came running out. Turns out it was Chinese New Year and so all the factories had shut down for the week and, as she told me, this was the first time she'd seen the moon and stars in years.

SS: Yes. This may not be a deal breaker if you are strong, single and only planning to be there for a couple of years, but the pollution presents a significant health risk for young kids. Also, there's a good chance that China's economy will tank within the next couple of years. For a cashed-up speculator a bad economy can throw up as many money-making opportunities as a good economy, but I'm concerned that there will be major civil unrest in China due to the weakening economy. China is therefore not currently near the top of my list of suitable countries to live.

Malaysia, including Malaysian Borneo where I have lived since August of 2011, has a lot to offer an expat. The Malaysian government encourages foreigners to move here via the "Malaysia My Second Home Program", and the local people are friendly and welcoming (at least, they are in Kota Kinabalu). Where we are there is minimal pollution, the weather is warm all year round, there are beautiful beaches close by, and there are many good eating and shopping options. Kuala Lumpur, Malaysia's capital city, is crowded and polluted like most major Asian cities, but it is still much better (pollution wise) than China's major cities and is probably worth considering for someone looking for everything a big city has to offer.

In comparing China and Malaysia, the final point I'll make is that you can get by with English in Malaysia whereas if you live in China it is important to be able to speak Chinese or live with someone who does.

TDV: What would you recommend, say, to the following three people (with obvious disclaimers that there is no way to ever know what is best for anyone): a young person who lives in the US and has the option to go to 4 years of school at a cost of $50,000+ or do something else? A person in his 40s with a decent retirement savings in the western world but still has lots of productive time ahead of him... and an older person with a decent nest-egg?

SS: Everyone's situation and goals are different, so there isn't any 'one size fits all' advice. However, here are a few general thoughts:

Whether a young person should choose to go to university will depend on the career they want. If they have their heart set on being a doctor or a lawyer, then they will have to get the piece of paper that allows them to practice medicine or law. However, they wouldn't necessarily have to go to university right after finishing high school. They could, instead, first spend 2-4 years earning money and getting some real-world work experience. If at the end of this period their heart was still set on becoming a doctor or a lawyer or something else you can't legally do without a university degree, they could then go to college with, hopefully, enough money put away to avoid having to take on a lot of debt. For someone who either doesn't yet know what they want to do or wants to do something that doesn't necessitate a university degree, it would probably make sense NOT to go to college.

People in their 40s who haven't already done so should do what you have been strongly advocating at TDV, which is to internationalise themselves (have at least two passports or residency visas) and their assets (spread financial assets across multiple jurisdictions). For someone with a large chunk of their net worth tied up in a 'tax efficient' retirement account, this could involve taking a tax hit now in order to ensure the safety of what's left. The bottom line, here, is to avoid being in the position where you are relying on any single government playing fair.

The advice to 'internationalise' yourself and your assets actually applies to any age.

My only other piece of general advice is to not bet the ranch on a single extreme outcome. For example, don't bet everything on the idea that the US is going to experience hyperinflation in the near future. The US will eventually experience hyperinflation, but the probability of it doing so within the next two years is close to zero. As far as this year is concerned there's more chance that the US will experience genuine deflation (a decline in the supply of money) than hyperinflation, but both of these extreme outcomes have very low probabilities when taking a short or intermediate-term view.

TDV: Do you foresee the coming decade as being more or less 'dangerous' than the previous few decades? And do you see any danger as being as much opportunity as it is risk?

SS: I'll answer indirectly by saying that I'm not as optimistic as you are about the way things are headed economically and politically. Although there is an element of "doom and gloom" in the stuff you write, I get the impression that you expect a collapse of the current monetary system to usher in a period of greater freedom. This is certainly possible, but I don't think it is the most likely outcome. As Doug Casey pointed out in a recent article, in a time of extreme economic hardship it is often the people who are the most political and have the most rabid statist ideas who rise to the top. These people tend to be best at grabbing the public's attention and garnering support because they promise the most goodies. They promise greater financial and physical security, and all they ask in return is that you give up some freedom. Doug gave the historical examples of the French Revolution (in this case, the overthrow of a tyrannical king led to the rise to power of even greater tyrants), the major economic problems in Germany during the 1920s and early 1930s that paved the way for Hitler's rise to power, and the replacement of Russia's Czarist regime with a regime that ended up being much worse.

So, if a bigger and more intrusive government equates to more dangerous, then I think that this decade will be more dangerous than the past few decades. This will especially be the case for the people who live in the major cities of the US, Europe and China.

Fortunately, in some parts of the world it will still be possible to survive and thrive. I expect, for example, that there will be a few countries in South-East Asia and Latin America where a productive person could be prosperous and relatively free. For those desirous of a "Western" environment, Australia and New Zealand could be reasonable options despite excessive government regulation. These countries will probably benefit from being geographically isolated and largely self-sufficient.

TDV: Yes... we agree that the coming decade will be fraught with risk. Thank you very much for taking the time, Steve.

SS: My pleasure.


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