Never before in my lifetime have I seen Washington play a bigger, more direct role in business and financial markets!
And never before have I had the opportunity to talk with a Washington insider, one-on-one, who has greater knowledge about the government’s impact on business and markets: Newt Gingrich, former Speaker of the U.S. House of Representatives.
Whether you’re a fan or not in the world of politics, if you are a serious investor, I would recommend you pay close attention to his objective analysis in the world of business and finance.
Everyone knows Speaker Gingrich as the man who led a revolution in Washington and then, in a historic bipartisan alliance with President Clinton, went on to help balance the budget and lay the foundation for a decade of growth in America.
And more recently, everyone knows Speaker Gingrich as one of the most knowledgeable candidates in this year’s race for the White House.
What some people may not know about Speaker Gingrich is his many years of experience with business and investments.
In fact, I think it’s safe to say he has probably helped more businesses and their investors make more money than any other Washington insider of our era.
The following is an edited transcript of our recent conversation:
Martin Weiss: Newt, we are honored to have you with us on this call.
Newt Gingrich: Well, listen, I’m delighted to be with you and share with the folks who look at your research work my observations and my ideas. And I think, knowing you and the work you’ve done, this will be a very interesting conversation.
Martin: I think so too. Also joining us today is Don Lucek, the man whom my wife and I have handpicked to manage $1,000,000 of our own retirement money — always, of course, with caution and protection against downside risk.
Don, my expectation is that you will continue to use hedges to help make sure we can protect my capital when the stock market goes down and even make money from the decline.
I expect that you will continue to rely on your own to research to pick the safest stocks with the most potential.
And, at the same time, I expect that you’ll help us transform the insights that Speaker Gingrich provides today into specific profit opportunities.
Don Lucek: Yes, Martin, that’s why I’m here.
Martin: Newt, we’re all very anxious to hear where you see the investment opportunities in these unusual times we are experiencing.
But first, I’d like your opinion regarding one of the most consistently powerful forces in the markets today — and that’s Mr. Ben Bernanke.
Newt: Chairman Bernanke has taken on his shoulders a level of authority and power that no Federal Reserve chairman has ever had.
He has singlehandedly moved to shape the markets and to define our future, taking what I think are some very, very big gambles.
The essence of his model is that we are in such enormous danger of deflation and we’re in such enormous danger of total collapse that any risk on the side of inflation is irrelevant. And so, he has poured levels of money into the system that I don’t think we’ve seen in modern times.
You’d have to go back probably to Weimar Germany to see this level of inflation of money.
Now, the economy has been so weak that the velocity of money — the rate at which it changes hands — has been so low that the growth of money to the sheer quantity has not had the inflationary effect I would have expected.
If you had asked me three years ago and said this is how much money he’s going to put in, I would have said, “Gosh, I don’t see how he does it.”
The other thing that has helped him is that we continue to be the last center of stability. And when Greece gets in trouble or Spain gets in trouble or the French go to a radical increase in taxes on wealth or Hugo Chavez gets reelected, people bring money to the U.S. as their last safe haven. And that has allowed us to remain much more capitalized than you would have expected, given the Federal Reserve policy.
Martin: We recently completed a study using the Fed’s own data and we determined that they are currently building their assets at a pace that is 57 times faster than what the Fed traditionally did years ago. What do you think about that?
Newt: People don’t realize that this is a great experiment by Bernanke, based on his theories; and when he said at one point that if necessary, he’d get in a helicopter and fly around, throwing cash out the window, he meant it. He was taking a purely Keynesian approach to avoiding deflation.
The other thing that people have not really studied enough is that his model explicitly helps the biggest banks.
The deals that were cut through Dodd-Frank and the deals that have been cut by the Federal Reserve and the Treasury are all very favorable to the largest banks — and all assume that the stability of the largest banks is the most important single characteristic of the economy.
And as a result, they’ve actually increased the market share of the banks that we were told in 2008 were “too big to fail.” So they’re now bigger than they were when they were already too big to fail — and this is exactly the wrong direction for the country. It increases centralization and it increases instability.
Every model that I know of says that inflation is a simple function of quantity times velocity. They have massively increased the quantity, as you pointed out — 57 times bigger increase than any time in the history of the Federal Reserve.
In theory — and as a historian, I always try to look at facts rather than theories — the minute this economy starts up, you’re going to get a spike in interest rates which will choke off the growth. This is exactly what happened under Jimmy Carter.
What happens is that you create a cycle where every time the economy starts to recover, interest rates go up. You cut it off. You go back into recession.
I think Obama would be very comfortable with continued asset inflation.
Historically, he represents an ideological movement that doesn’t see any great value in a stable dollar … so they don’t have any concern for people like my mother-in-law who, at 80 years of age, is looking at her savings — and it’s not giving her any significant returns, because of the Bernanke policy, which is a pro-spending, anti-savings policy.
Martin: In that scenario — four more years with Mr. Obama — which assets do you think get inflated the most?
Newt: My sense is that it has a different impact on virtually every asset. Because it is distorting the allocation of resources.
In the case of gold, you have people who are very inflation-averse piling into gold. And they have had a couple good years of run-up of gold prices without inflation, which makes you wonder: If you start getting inflation, what would happen to gold prices?
Martin: What is your view of the fiscal cliff and how do you think that’s going to play out?
Newt: I increasingly think that it depends on who wins. If Obama wins, I think you will disintegrate into a series of tactical Band-Aids that are much smaller than people currently expect. Just because it’s hard for me to see how they are going to reach a grand deal with a Republican Congress, which will be very resolutely conservative with a liberal democratic president.
If Romney wins, depending on how the Senate race works out, I think you could see, because of Ryan’s knowledge, a path toward a fairly grand strategy that gets 60% or 65% of what conservatives want.
Don: Speaker Gingrich, you help many major U.S. companies figure out how to navigate Washington, including some of these industries that we spoke about, so you know how public policy and rapid shifts to public policy can make or break industries.
So here’s the $64,000 question, if you will: Which industries do you think will have the most immediate and potentially the biggest growth opportunities after the election?
Newt: If you look at oil and you look at the impact of North Dakota, you remember that some place like North Dakota becomes a boom. It’s not just the guys at the oil well. It’s also the people down at the local café. It’s the people who run the hotel. It’s the gas station itself.
It just spreads through the whole area. Williston, North Dakota, right now has 0.7% unemployment. And that’s actually a misstatement, because there are more jobs available in the Williston area than there are people unemployed.
So, in a sense, if you’ve been truly clever, if you’ve been able to go in and buy land in and around Williston just before the boom started, your multiples would have been unbelievable.
You have the same thing starting to happen in eastern Ohio. They just announced in August that the Utica shale has both natural gas and oil. In a five-county area around Akron and Canton and Youngstown, there are probably 5 billion barrels of oil. They didn’t realize before August that it was even there!
You start thinking to yourself: How many things is that going to affect in that area?
So, part of it is situational: If you can find a potential boom site and invest in a wide range of possibilities, you can get very nice returns on your investment.
That’s one thing to think about. The second thing to look at is, what are the unmet needs, many of which people may not even know they have yet?
Very few teenagers realized that they needed an iPod before it was invented. Very few young people realized that they needed to send text messages before it was invented. All of a sudden, they have this passion and desperate need to do something that didn’t even exist the day they were born.
But here’s the nice thing about this kind of investing: If we get the right breakthroughs among our research doctors and we get the right startups …
Martin: For example?
Newt: Let’s say for growing your own kidney out of your own cells — so you have no problem with rejection and you can replace a whole range of kidney diseases by literally helping you [avoid] getting diabetes …
Then you may have a company which ends up deciding it’s going to test it in Japan or Europe or China or India just because the U.S. Food and Drug Administration is so bureaucratic and so hostile. Yet you have a company that is likely to make a lot of money.
So for somebody who has a little bit of taste for risk-taking or would like to be very high in multiples, I recommend looking seriously at regenerative medicine, because as people both age and get wealthier, they like living longer. They like living independently. And they pay more for a whole range of services.
So despite the Obamacare, if you think of investing in companies that will be in a world market, there are some very big upside opportunities coming down the road in that particular zone.
The other kind of wild-catting area that we’re just beginning to see break wide open — and it will be one of the great revolutions of the next 20 years — is online learning. It is going to blow apart the giant cost of higher education.
And there are a whole range of for-profit companies. I was just talking with Chancellor University and with Kaplan, [as well as] a number of other schools. And we have no idea how this is going to evolve. If you go to Khan Academy, which has over 3,000 hours online for free, you’re seeing the beginning of a revolution.
The last area to look at is, frankly, anything which reduces cost. We just have been working with a little company called New Tech. Their specialty is putting together backgrounds for small businesses, so that you can outsource virtually all of your cost of running your small business. They are an example of something that is going to grow very dramatically, which could be applied to local governments.
At a time of very difficult economics, when I find a way to take 10%, 15%, 20% out of the cost of running my business, all of that goes to my bottom line, makes me more survivable, and increases my profit margin.
And I think any business you can find which seems to have a very solid capacity to lower cost is worth exploring, because it could suddenly come up with explosive growth.
Martin: You mentioned fracking. What’s going to happen there?
Newt: Well, first of all, the great winners in fracking and hydraulic technology so far have been the independent companies.
The really big oil companies have been mostly focused overseas, and they aren’t the folks who go out and develop a North Dakota, the Eagle Ford in Texas, or the Utica in Ohio.
This is largely being done by smaller independent companies, some of whom are just having amazing runs.
I had dinner the other night with a guy who, in his career, has opened up 10 different natural gas fields. And he sold each one of them off after he got it developed. He has really good geology and he has a good sense of where these things are — and that’s a level of expertise that’s dramatically more common among the independents.
You’re also going to see the rise of liquid natural gas facilities to export, for example, to China. And that’s going to be a very interesting development. That’s exactly the reverse of what people expected back in 2000, when they thought we were going to run out of natural gas and we’d be building liquid natural gas facilities to import. So that’s a primary effect.
A secondary effect is a healthier U.S. chemical industry. The chemical industry relies very heavily on natural gas; and we’re now the world’s largest producer of natural gas again. That means that low-cost natural gas is going to be a genuine renaissance of the U.S. chemical industry. So that’s going to be a winner in all of this.
When you think about this stuff, remember, all of these fields have companies that supply them and there are a number of firms.
There’s a firm that makes the sand that is used for fracking, a very niche, narrow specialty, which now has grown dramatically because it’s a much more common a procedure than it was 30 years ago.
U.S. Steel is producing the quality steel. The Chinese, for example, cannot produce the quality steel you need for horizontal drilling, which has unusual stress in the way they do it. U.S. Steel is doing a great job there.
So you start looking at the suppliers who create possibilities for the oil companies. When lots of people think about investing in energy, they forget that there’s this whole “ecosystem” of supply and support that’s also a pretty potentially good investment base.
I’ve worked with Scott Noble at Noble Royalties and we think that just getting back to a historically normal robustness in energy is worth about $750 billion in royalty payments over the next two decades.
Martin: Let’s move on to the next industry. I want to talk about the health, especially because of all your work with the Center for Health Transformation.
Newt: There are other aspects of healthcare that are going to continue to be interesting, and I want to go back to one of my core themes here: Anything that substantially lowers cost has the potential to grow dramatically.
One of the side effects: Whether it’s Obamacare or it’s a much more decentralized, market-oriented system, the pricing pressures are going to force people to look constantly at how to lower cost. And anybody who can develop an approach which lowers costs is going to have a huge advantage.
For example, there are breakthroughs in treating burn victims where you can help them recover dramatically faster.
There are new breakthroughs, new therapies that help people be able to get out of the hospital or turn an in-patient experience into an out-patient experience, which is very important at multiple levels. Anytime you can avoid being in a hospital, it is to your advantage to do that.
There are also some hospital management systems that are just very, very good at what they do and that are worth looking at.
The cell phone is going to become the most powerful public health instrument that we have as we put more and more capabilities in it.
You’re going to see more direct ties between doctors and nurses and patients and the public health service — and more focused on communicating, whether it’s via your iPad or cell phone or whatever devise you’re using. I think all of that is going to continue to accelerate.
Martin: Where do you see the biggest dangers and opportunities in the banking sector?
Newt: I’d like to see, frankly, independent banks grow more as a share of the market than big banks, because I do think there’s an inherent instability in having a handful of institutions handle such a high percent of your financial transactions.
But having said that, I think the biggest concern, in the short run, has to be what happens if Europe implodes. What is the American exposure if Spain or Italy or Greece literally cannot pay their debts? Somebody told me that German and French banks are three times more leveraged than we are, as a share of debt.
Martin: Exactly. Our ratings for U.S. banks have improved, but the ratings for most European banks are at their lowest ever —far lower than what S&P, Moody’s or Fitch are saying.
Newt: I am not an expert in this area. I’m just a historian and former elected official who tries to bring a sense of history — a sense of looking at the entire system — and then try to apply common sense. I actually like nonbank banks more than banks. I like areas that have efforts to develop capital and to develop an ability for lending that isn’t tied into the really large banks.
Martin: We’ve covered a lot of ground here and, Don, I know you’ve been anxious to jump in.
Don: Yes! As I’ve been listening, I’ve been smiling from ear to ear, because I’m thrilled to see that virtually everything that Speaker Gingrich has said dovetails pretty nicely with my own research, especially my research based on the ratings that we developed over 10 years ago.
I’m really amazed that both our approaches — his approach based on his vast knowledge of public policy, and our approach based on vast databases of financial data — coincide so perfectly!
Martin: Newt, what is your assessment of the political situation?
Newt: Under any circumstance, you’re going to have Republicans controlling the House. And that’s a revolution in American politics.
When we first won in 1994, it was the first victory in 40 years; and when we were re-elected in 1996, it was the first re-election since 1928. It’s easy to forget that now. But a Republican House was a very rare thing for the entire period of 1932 to 1994. For a 62-year period, we assumed the Democrats would be in charge of the House.
We are now moving towards a period where the Republicans may have the kind of lock on the House that the Democrats used to have. That’s a very fundamental shift to the right in the structure of power in Washington, D.C.
Martin: Gentlemen, you’ve given us a lot to think about. Newt, it was a pleasure having you help us sort out some of these hot but thorny issues.
Newt: I enjoyed doing it, and if sometime in the future if you wanted to do it again, I’d be glad to.