Introduction: Ned W. Schmidt, CFA has nearly forty years of experience as a value oriented investment manager and researcher. He publishes the Agri-Food Value View, the premier investment newsletter on agriculture and food, as well as well as Agri-Food Commodities, a quarterly review of returns produced by Agri-Commodities. His investment activities have included management of $3.5 billion of discretionary portfolios serving individuals and retirement plans. Ned was the value editor for the Global Advisor published in Toronto, and successfully managed an offshore mutual fund for that firm. In his effort to save investors from financial abyss of paper money, he publishes The Value View Gold Report monthly and the weekly Trading Thoughts.
Daily Bell: Thank you for taking time to sit down with us. Tell us about your background. Where did you grow up and go to school?
Ned Schmidt: I grew up in Southern Illinois with something of an agricultural background. After the Army, and an all-expense paid year in a beautiful Asian location, I attended Southern Illinois University. From there I went to the University of Georgia for graduate school. My degrees are both in Finance and I am a CFA Chartered Financial Analyst.
Daily Bell: Give us some background on your professional career.
Ned Schmidt: My first job out of school was as the oil analyst for a major trust investment operation in Atlanta. They made me the oil analyst in January 1974 because oil was not very exciting. They were obviously wrong on that one, and I had to scramble to learn about places no one knew of like Saudi Arabia and Kuwait.
From there I went on to be a portfolio manager in Nashville, Tennessee. And yes, I did have some accounts, though small, for some famous people. Living in Georgia and then Tennessee gave me great appreciation for catfish and barbecue.
Then I was on to Tulsa, Oklahoma. There I became the manager for an investment management group. Investors in that region were interesting. Some made their money in the highest risk industry, drilling for oil and gas. However, their investments were far more conservative. They were interested in return of investment first, and return on investment second. They were also very global in their view. Many had worked all over the world in the oil fields.
Daily Bell: You are a financial engineer specializing in global capital flows. What does that mean?
Ned Schmidt: All markets are connected in some way. Money flowing into some market is coming out of some other market. When an investor puts money into a stock, that money is flowing out of the money market. The same is true on a global basis. The flows are just bigger.
For 20 years, where in the world money was flowing to and where it came from created opportunities. Today, one has to understand where the money flowing to China is coming from and where it will flow. Those flows give an investor more opportunities.
Thinking like a financial engineer means considering all the methods of building a financial bridge to the future. Many think gold will benefit from the growing wealth of China. Well, where is that wealth coming from and is that creating any more interesting opportunities? The answer is yes, in the form of the Chinese renminbi. China's growing economy means that the volume of transactions in renminbi is growing, and in general at a double-digit rate. An investor is likely to double one's money in renminbi in the next ten years, and that may be better than Gold.
Daily Bell: You've been an advocate and practitioner of value-oriented investing for 30 years. But if the market is efficient, then can value investing work?
Ned Schmidt: Market efficiency is a process not a state of being. The market is always moving toward pricing that fully reflects all known information. That does not mean on any single day the market is efficiently priced. The reason for that is new information flows into the market constantly.
Value investing recognizes that the information flow on an investment, say a company, can be negative for a long period of time. Value investing, through the use various financial measures, is assessing when that price probably reflects that negative information flow. The value investor then simply waits for the information flow to be less negative and the price of the asset to rise.
Daily Bell: What about the idea that 95 percent of gains are found in the asset class not the individual instrument (stock)?
Ned Schmidt: Which asset class to buy is clearly an important decision and one on which investors spend too little time. Those investors in the 1990s who chose precious metals over stocks have clearly won the race. Which gold coin they bought is not as important as simply buying gold. Further, picking assets classes is a lot easier than picking stocks.
Now, consider the situation today. Bonds have been in a bull market for 30 years, and yields have been driven down to totally irrationally low levels. Bonds as an asset class are screaming sell. Those invested in bonds today are going to lose a tremendous amount of money.
Daily Bell: In the 1980s you were manager of an investment management group with discretionary responsibility for about $3.5 billion. What was that like?
Ned Schmidt: That experience was like going to graduate school ten hours a day. The investment world was making a major transition to a new set of investment ideas. We bought some stock, though no one really got many shares, in Genentech's IPO. That company was a whole new investment concept.
New techniques were becoming acceptable. We ran one of the few hedged equity funds that turned in positive double-digit returns in 1987. The whole idea of using derivatives in portfolios for regular investors was just developing.
And then there was the computer. I bought the first portable computers the institution owned. New MBAs working for us were invaluable. They were the only ones in the building that knew how to use them.
The job itself? Call it stress on steroids.
Daily Bell: You also taught institutional investment management as the Roland George Visiting Professor of Applied Investments at Stetson University. Did you teach value investing?
Ned Schmidt: The Roland George program at Stetson was one of the first in the country to create a fund managed by the students. Roland George was an interesting man. He believed that failure could be an important learning tool. Of course, everyone wanted the students' ideas to work but the goal was for them to learn from doing analysis and seeing the consequences of their decisions.
We used a value approach to a large extent, as it focused on financial statement analysis. That approach to investing begins with the numbers, and understanding those financial numbers is important. Still today I see Street analysts who really do not understand how financial statements work.
We also emphasized thinking about the future for the companies in a realistic and pragmatic way. I wanted them to learn to never worship a company. All managements and companies will have good and bad periods. I taught a lot of disrespect for managements.
Daily Bell: You publish The Agri-Food Value View and The Value View Gold Report. Tell us about these publications.
Ned Schmidt: I have written on gold since the mid-1990s. That effort ultimately became The Value View Gold Report. This effort is analytical, treating gold as an investment not a religious icon. If it has a goal it is to avoid all the emotional nonsense that is so prevalent in that which is written on gold.
Agri-Food Value View is in many ways an educational tool for investors. Agriculture is a complicated topic on which most investors actually know little. Most investors have never actually walked in a cornfield or driven a tractor. The entire spectrum is covered from the Agri-Commodities to Agri-Equities to Agri-Land. The readership is even more global than the gold letter. About half the readers are outside North America, from Singapore to Romania.
Daily Bell: Is farmland a good investment? Why?
Ned Schmidt: Farmland is a unique form of real estate. A building can be built on almost any type of land. Not all land will produce food. A building can be built in the desert. But one would go broke trying to grow wheat in the desert.
Farmland is land where the dirt is of the kind in which plants can grow. It also must receive sufficient rainfall to grow those plants. Land that meets those two requirements is actually limited, and becoming rarer in the world.
The demand for the crops, from corn to tomatoes to beef to apples, is growing faster than the productive capacity of the world's existing farmland. That demand is fuelled by the increasing needs of China and the developing world.
All of that uniqueness should allow land values to rise. At the same time the land produces a cash rent for the investor. As the price of Agri-Commodities rises that cash rent should also rise. A nice feature also is that the value of the land does not have the volatility of market-traded assets. The value is not subject to the daily whims of those in the trading world.
So yes, I like farmland a lot. The problem is that it is difficult to buy. To buy a good piece of farmland might take months to accomplish. It is also bulky. Minimum investment starts at a quarter of a million. And so many kinds exist that investors need to do a lot of research. Twenty minutes on the Internet will not do it. At the present time Midwestern US cropland prices have been bid to excesses, and are likely to be stable to slightly down for the next few years. Pastureland is probably the type some investors should be considering. It may have more potential.
Daily Bell: Is gold finished, or will the price continue to rise?
Ned Schmidt: Gold has finally secured a place in the investment world it has never had. For the first time in modern history gold is now part of mainstream investing. Gold is in most asset allocation models today. All of that means that the amount of gold to be owned by real investors, not traders, will rise over time. So gold is not finished. However, those looking for a price explosion to ridiculous levels immediately are going to be disappointed.
I have no interest in silver at today's prices. Sell it.
Daily Bell: Are the 2000s like the 1970s?
Ned Schmidt: Every decade seems to have a unique set of risks and opportunities. The 1970s were about the crash of the Nifty Fifty and the explosion of oil prices. The latter changed the world in a dramatic way, a near total break with the economics of previous years. Today the change is the shift away from debt that is developing. Traumatic but different.
Daily Bell: Okay. Let's ask some more general questions. Is the state of the world better or worse economically than it was a few years ago after the crisis of 2008? What's driving the world today? War?
Ned Schmidt: From the 1930s until 2008 the attitude was that the world could never have too much debt. Debt was the route to wealth and prosperity. The world lived the Keynesian myth.
The private sector has learned that debt is not the route to prosperity. The value of their real estate reminds them of that every day. Individuals have developed an aversion to debt. People want to pay off credit cards, not get another one. This move by individuals to deleverage themselves is far from complete. As they direct income to debt reduction rather than increase debt to buy stuff, the basic growth of the global economy is worsened. However, the risk level in the private sector is declining. So in the private sector the state of the world is getting better because they are reducing risk, and have done so much to reduce debt. This source of economic drag will continue but at the point that consumers are satisfied with their debt levels their income will be directed toward spending.
The problem is in the public sector. In Europe and much of the US the attitude continues to be "why work when one can vote?" Politicians still want to use government spending to buy votes. However, those being taxed to support those who do not want to work are starting to revolt. That is what drove the battle in the US election.
Those nations in Europe that have financial problems are demonstrating clearly that the Keynesian mythology is dead. Government debt and spending is not a road to prosperity. Roughly half the voters in the world know that. Ten years ago the public had no understanding of government debt at all. The size of total government debt is not yet shrinking but the trend is in that direction. In the short term all this makes the world more painful. In the longer run the turn away from debt will reduce economic risk and make the world a better place.
By the way, France is the next EU nation headed for the toilet. Investors should avoid that nation.
Daily Bell: Is there free trade in the world?
Ned Schmidt: Consider Europe. Due to the EU and the Euro zone trade, commerce, people and money now move between nations with minimal restrictions. Trade in Europe is freer than it has ever been in all of history.
Consider China. Prior to 1979 China barely traded with the world. They barely talked to the world. Today, trade with China is the global economy. The trade between China and the Pacific nations is gigantic, freer than in all of Chinese history.
The constraints on free trade are still political. Obama, for example, like every government leader in history has acted to protect his supporters with tariffs that interfere with trade. That will always be a problem. But any comparison to history would show that interference is lower today. Politics is what kept Russia out of the WTO, but it is now going to be involved in freer trade.
So I would say free trade is alive in the world but not free enough.
Daily Bell: What about the financial meltdown? Is it over?
Ned Schmidt: Meltdown? Yes, it is over. Now what we have is a small piece of ice sitting in the sun slowly withering.
Daily Bell: What's your take on gold and silver manipulation these days? Does it exist? Who's doing it?
Ned Schmidt: We can't print my words for the manipulation theory. Pure rubbish! Nonsense might also be applicable. Those pointing to manipulation generally have forecasts for gold and silver that never seem to happen. They need something to blame for their forecasting failures. Further, most of the talk is by people who are clearly ignorant of how markets for contracts for future delivery function. In that market, on an exchange or OTC, for every short a long must exist. They do not understand that simple reality.
Daily Bell: Give us an idea about the best investments for the next few years.
Ned Schmidt: My favorite at this time is the Chinese renminbi. Template for that view is the Japanese yen. In 1970 the yen traded 360 to the dollar. In 1995 the yen was at 80 to the dollar. Over those 25 years the value of the yen went up 350%, compounding at more than 6% a year. All one had to do is stuff that paper money in a shoebox and a nice return developed. The renminbi should appreciate by at least at 100% in the next ten years.
Daily Bell: What about some popular modern themes? Turns out that a lot of what we're told to fear is probably untrue. Update on how you see the global warming debate unfolding?
Ned Schmidt: Global warming was and is junk science. It has been so debunked the name had to be changed. Now the lunatic fringe uses the term climate change. The whole matter was about how to generate funding for university academics trying to avoid real work. Consider Florida, for example. By now we were to be ravaged on a regular basis by storms, and the water was to be now rising above our shore. Florida has not had a major hurricane in the past five years.
Daily Bell: Oil scarcity?
Ned Schmidt: Oil is moving toward a less scarce situation. The US, for example, has a surplus of natural gas not seen in decades. That will displace oil consumption in the US. The world is running away from consumption of oil. Every nation in the world is trying to find ways to use alternatives to petroleum, and coal and nuclear.
In the US, shale oil is changing the entire picture on oil. As the US reworks the delivery system oil will be increasingly abundant where it is needed.
Daily Bell: Water scarcity?
Ned Schmidt: Water scarcity is just starting to become an issue. Time is going to make the issue far worse. In China the biggest constraint on long-term growth is water. Forget all the other issues discussed. That nation is rapidly depleting its store of water and the water table is falling.
In the US the Ogallala Aquifer supplies nearly all the irrigation water to the Midwestern US. That aquifer is slowly being depleted. Usage of that water to irrigate will probably become highly restricted in 10-15 years. Most of the irrigated farmland in the US will ultimately be abandoned.
Hard to describe how bad the water situation is in India. Government subsidizes irrigation so the aquifers are being depleted rapidly and the water table is collapsing. Irrigated crops will become a rarity in India. The rest of the nation's water system is one giant ecological disaster. The water in the rivers of India could not be put through a sewage plant in the US; it is too dirty. It would have to be cleaned before it goes in a US sewage plant. Most of the nation does not have running, clean water 24/7. Forget global warming; the Indian water situation is the really big ecological disaster on the horizon.
The problem is how an investor takes advantage of the situation. Very few real ways to do so.
Daily Bell: Will the world come out of the current financial crisis with the current financial and economic system intact?
Ned Schmidt: No. The financial world is evolving into something new and old. Banks are going to be forced out of the risk businesses. They will have to return to being banks like we once had. They will have to make a living being nice to customers and lending them money. The new financial world is going to be a real shock to many bankers.
Daily Bell: Will the EU survive?
Ned Schmidt: Yes, and that issue was never real.
Daily Bell: How about the planned currency region of America, Canada and Mexico?
Ned Schmidt: When Hades freezes over.
Daily Bell: How's the war on terror going? Is it a real war?
Ned Schmidt: The war on terrorism is yesterday's issue. A far greater concern today is with Putin in Russia. He is a very real threat to the world. He will run Russia for the next twelve years. He is ruthless, gaining absolute power over the nation, and has visions of grandeur, for want of a better word. Putin is the most dangerous government leader to arise since the early 1930s.
Daily Bell: Is the US coming out of its slump?
Ned Schmidt: Yes, but very slowly. The US economy is being totally restructured. For decades the US economy was built on housing construction, buying and selling houses and financing that game. It ended. The infrastructure to finance that game has been destroyed and it will not return. Will take decades for the US, and several other nations, to consume the surplus of housing that now exists.
All those who earned their income from the housing-centric economy are now being forced to do something else. This kind of economic restructuring does not happen overnight. It takes years.
Daily Bell: How about Europe?
Ned Schmidt: The financial/political/economic restructuring of much of Europe is going to take years. Like I said earlier, France is next in the toilet. A decade? Probably, but now is a great time to buy a vacation home in Greece or the Iberian Peninsula.
Daily Bell: Is China going to escape recession? What if China becomes depressed as well? How will that affect the world?
Ned Schmidt: With China, investors spend too much time on national income accounts, like GDP. China had a construction boom that imploded and that along with the slowdown in orders from the US and EU are causing their economy to look weak.
But investors should be looking below the surface. An incredible amount of economic activity is taking place in China. China is adding eight movie screens per day. Per day! McDonald's is in the process of hiring 70,000 people. China is going to begin buying 50,000 school buses a year. They need to buy one million of them. SUVs are hot in China. Seems the soccer moms there like them, too. Yes, China has soccer moms and their kids love expensive shoes and cell phones and pads. I say forget the national income accounts. Look at what 1.3 billion consumers are doing.
Daily Bell: Thanks for your time.
Thanks to Ned Schmidt for an insightful interview. A lot to agree with here and a little bit to expand upon, as well.
He tells us persuasively that gold has "finally secured a place in the investment world it has never had. For the first time in modern history gold is now part of mainstream investing. Gold is in most asset allocation models today. All of that means that the amount of gold to be owned by real investors, not traders, will rise over time."
He also tells us that those who are "looking for a price explosion to ridiculous levels immediately are going to be disappointed."
We agree with the former statement but are not so sure about the latter. The financial economy is so stretched and seemingly delicate currently that it seems to us there is a possibility for bad things to happen quickly, which could have a powerful impact on gold … and silver, too.
Schmidt is dismissive of silver, though we think the same fundamentals that have raised up gold (and silver) will continue to have an impact on both.
Silver's price has risen nearly tenfold, while gold has gone up about seven times. Yet the ceiling for silver − assuming you believe in the silver/gold ratio − gives us an even more promising outlook for silver than gold.
We also think Schmidt has a point about farmland and its rising value in a world where food and food crops, in our view, are being manipulated. There is seemingly an enforced scarcity taking place (we believe this is observable) that will affect both food and water − and those who have invested in farmland may well benefit from it.
It's simple, actually. The world is facing a massive inflation of assets based on all the money central banks have printed − trillions and trillions. Ned Schmidt is correct in his viewpoint about how all this will play out, at least from a purely financial view. But we think including silver into the mix makes sense as well.
Notwithstanding its status as an "industrial metal," silver has been "money" for thousands of years. Some things don't change.