Economists Uncut

Inflation In 2025 – David Lin (Uncut) 01-25-2025

Kicking off the Vancouver Resource Investment Conference for us is an old friend of the channel, Rick Ruhl, founder of BattleBank, former CEO of SpotUS and president of Rick Ruhl Media. Hey, welcome back to the show. Thank you, David.

Pleasure to be with you. Rick, a lot is going on in 2025. Let’s start off with your top investment themes for 2025.

What are your favorite asset classes this year? A lot of geopolitical, political, and monetary policy changes. For a North American audience, particularly for a Canadian audience, my favorite theme is Canadian oil and gas. Canada has always been competitive in oil and gas, both because of natural resources, which is to say the geology of the Western Canadian sedimentary basin, but also in terms of human resources.

Canada is a great exporter of human talent in the oil and gas business and could be a much larger exporter of oil and gas. The problem hasn’t been technical, it’s been political. Your soon-to-be former prime minister decided that there was no business case for Canadian natural gas, despite the fact that it sold for $2 a million BTU in Alberta and $14 Canadian dollars per million BTU in Rotterdam or Shanghai.

Now that Mr. Trudeau has decided to pursue other employment opportunities and also because in the US there’s probably a change for four years in the regulatory regime around Trump, I think we’re headed into a period that is extraordinarily bright for the Canadian oil and gas business. And if I understand you correctly, what you’re saying is a play on Canadian oil and gas in particular, not just the underlying commodity of oil, which we can talk about in just a minute, but why Canadian and not American producers? Oil will do well, gas will do well, gas will do better than oil, but Canadian will do better than most because the governmental constraints to the production and export of both Canadian heavy oil and Canadian natural gas are really, really, really changing. Your prime minister didn’t understand the business case for Canadian natural gas when the whole world was dying to buy it at a huge premium.

That problem may be gone. At the same time, the transmission infrastructure blocks in the United States that occurred during the Biden era are likely to be gone too. So we’re coming into a circumstance where Canada can exploit their natural resources and their human resources, something that has been constrained really by politics for eight to ten years.

The Canadian oil and gas sector, in terms of policy, what has primarily limited their production outputs? The opposition of the Trudeau government to carbon-based energy. The lack of willingness to approve transmission projects to the coast for the liquefication of Canadian natural gas. At the same time, the tacit support of the U.S. government’s unwillingness to expand the Keystone pipeline to bring much-needed Canadian heavy sour crude to the U.S. Gulf Coast refining industry that was set up to process just that type of crude.

What happened in that circumstance was that both Venezuela and Mexico, as a consequence of underinvestment in their oil and gas businesses, began to produce less and less. And the refineries on the U.S. Gulf Coast, which were set up to that, wanted to buy Canadian crude. But there was opposition both in the United States and in Canada to the egress of Canadian heavy crude to the Gulf Coast refiners.

So in the first instance, natural gas will now be able to be liquefied and transferred either in the Pacific through British Columbia or in the Atlantic, even if we don’t have Canadian seaboard access, selling Canadian natural gas through the U.S. transmission system through U.S. natural gas liquefaction to Europe. This is a huge, huge, huge change. How seriously are you taking the threat from Canada’s officials, Doug Ford, Premier of Ontario and then Melanie Jolie last week came out, Foreign Affairs Minister, she said that nothing is off the table when it comes to retaliating against Trump’s 25 percent tariffs against Canadian imports, including, up to and including, banning the export of natural gas and oil energy products into the eastern seaboard? David, this is an unpopular point of view in both Canada and the United States, but you can tell that politicians are lying when their lips are moving.

Trump is not going to impose any tariffs. The U.S. industry, picket industry, is part of a global supply chain. Think about, if you were, David, an American manufacturer and your new president came in and he said that he was going to raise your component cost by 25 percent and you’re supposed to be globally competitive against the Mexicans, against the Chinese, with a 25 percent higher cost structure, this is a non-starter.

This is completely a non-starter. This is Mr. Trump pandering to his base, among other things, old, bald, fat, white, factory workers. Wait a minute, Rick, there is a precedent for this.

Last term, Trump 1.0, he did implement tariffs on a few select Canadian goods, not broad-based tariffs. Correct. That is maybe what you’re projecting, not on everything, is that what you’re saying? Absolutely.

Targeted tariffs, and I think he’ll have a hard time imposing them. He had a very difficult time making those tariffs stick with the customers who needed them. So then, I guess you’re not taking the serious, the threat of cutting off energy exports.

And by the way, most of America’s energy imports come from Canada. I know imported energy is only a small percentage of the overall consumption of energy, but Canada is still the most important energy partner. And if the regulatory constraints with regards to the transmission of both Canadian oil and gas improved, Canada’s market share in the U.S. energy business, particularly in the U.S. west coast, would be much higher than it is.

Yeah. Shale production has created an economic and energy super house that is the United States. Scott Besant wants the 333, and part of that 3 is to increase oil production by the order of 3 million barrels per day.

What will that do to the underlying oil market? Well, first of all, I don’t think it’s going to happen. Okay. I know that mine is a minority view, but when you talk to the big shale producers in the United States, what you see is that they’ve drilled through at current technologies, with the current cost of capital, about 75% of their grade A locations.

If technology improves or if interest rates fall, if the cost of capital falls, some of the B locations get upgraded to A locations. It’s really an economic circumstance. But we’re, at current pricing, using current technology with the current cost of capital, we’ve drilled about 75% of our A quality locations.

So the ability to increase U.S. production is more challenged than it might otherwise seem. There’s a new problem emerging in the Permian Basin, too, which is that you produce an awful lot of oil, pardon me, an awful lot of water alongside that oil, and the disposal of the water has become a real, real, real problem. There’s a lot of problems with the way water is disposed now.

If it’s disposed with too much back pressure, the water can come up wellbores and can go into freshwater basins. Not a good thing in West Texas where there’s not much water. The second thing is that seismic events are increasing in frequency.

We are actually running out of capacity for saltwater disposal. Now, this is a problem that we’ll solve in 10 years. We will be able to use seismic, as an example, to find sedimentary horizons where we can dispose of water.

We haven’t done it yet. And in order to increase oil production by 3 million barrels a day, we probably need to increase saltwater disposal capabilities by 30 or 40 million barrels a day. We can’t do that today.

Well, the other thing is, more broadly, how the government would incentivize the private sector to even increase their production. What the government could do best, what they could do that would be the best would be to get out of the way. Don’t incent it.

Just don’t constrain it. Suppose the government were not to implement this policy, do you think that the natural course of production for the private sector in the U.S. would be up or down in 2025 and beyond? I’m not sure I understand the question. If the government were not to propose a policy of increased production, do you think that oil and gas companies naturally would be producing more anyway? Yeah.

If the government gets out of the way, Mr. Biden didn’t have a legislative policy against new natural gas transmission or natural gas liquefaction. But there was an overall regulatory constraint around, in particular, infrastructure for liquefied natural gas. I think that’s off the table with Trump.

I don’t think there will be any opposition to massively increased infrastructure investment. Mr. Trump doesn’t need to incent this. He doesn’t need to give any subsidies.

He just needs to get out of the way. And I think he is inclined to do that. I think he will allow American production to increase.

But I don’t think that American production will increase as rapidly as people think. Understand that in the last 11 years, we’ve already doubled U.S. production. We’ve enabled a lot of technology, by the way, including some that’s Canadian, to take the most heavily drilled piece of real estate on the earth and double production from it.

If technology improves, there are some technologies that might improve. It might be that because of technology, some of these B-grade locations become A-grade locations. But understand there’s several factors that go into this.

One is oil price and gas price. A second is technology. A third is the cost of capital.

And without all three of those working very well in tandem, increasing production as much as Mr. Trump would like is a bit of a challenge. Monetary policy has been something that’s affected the markets in the first couple weeks of January. A couple of data surprises have shocked the markets to the downside, including a very strong jobs report.

The last CPI report that came out last week saw headline inflation come down, or go up rather, but core inflation go down. That shows me that the energy prices and food prices of the previous month’s reading came down, but overall services are still high for Americans. That presents a challenge for the ordinary person.

Is inflation still going to be sticky for 2025, do you think? Yeah, I mean, we could talk about the CPI all day long. That’s a flawed index. We’ve talked about this before, you and I on your show.

First of all, core inflation doesn’t include food or fuel. Your audience said, look at me, any index that doesn’t include lunch is of no interest to me. Right.

I eat, I drive. But let’s just use common sense. Ask your listeners to think back to the year 2020 and then fast forward to 2025.

Think what’s happened to the price of their groceries. If they’re American, think what’s happened to their health insurance or their health care costs. Think what’s happened to rent or mortgages or groceries.

These are all political issues. The idea that the basket of goods and services that you consume to run the Lin family has only gone up by 2.5 or 2.6% a year compounded in the period 2020 to 2025 is farcical. And yet people look at this index as though it were real.

This is just common sense. In the United States, there’s a huge incentive to have the CPI under state inflation. That is that all of the entitlements, which we can’t afford, are geared to the CPI.

The CPI cost of living increase for Social Security, as an example, is set to the CPI, 2.6%, when in fact, the underlying depreciation of the purchasing power of the U.S. dollar is probably more like 7.5 or 8%. And frankly, it’s worse, not better, in Canada. So what needs to be done to increase or improve the living standard for the average American consumer? Get out of the way.

Just get out of the way. Just deregulate. I mean, listen, I could go on about this forever.

Right now, the cost of the federal government, not state and local governments, the cost of the federal government is 36% of GDP. If you reduced tax, you would lower the cost of living of every single working American and Canadian family. I’d like to get your take on this, because incoming and outgoing secretaries of the Treasury have completely different opinions on how the tax structure should be implemented.

So Scott Bissett has said recently, last week, As we begin 2025, Americans are barreling towards an economic crisis at year end. If Congress fails to act, Americans will face the largest tax increase in history. He testified to Congress that should they not renew the 2017 tax cuts, Americans would face an economic calamity, I believe he said.

His words were that the middle class would face the largest tax increase in history. Janet Yellen, outgoing secretary of the Treasury, said the exact opposite. Tax cuts would be, she said, would roil financial markets.

Okay, so which side of the spectrum are you on? Neither. We don’t have a revenue problem. We have a spending problem.

The difficulty, I mean, yes, they charge too much. The reason they charge too much is because they have to. Because they spend too much.

Right now, government expenditures are 30% higher than government revenues. Government expenditures in the U.S. are 30% higher than government receipts. This is not a tax problem.

This is a spending problem. Let’s look at the numbers if you want. This could make a very boring show, but it’ll be interesting to me.

The on-balance sheet liabilities of the U.S. government are 36 trillion dollars. That’s what we owe the bondholders. Rather than getting smaller, by the way, U.S. GDP is 30 trillion dollars.

That number, rather than shrinking, is growing by two and a half trillion dollars a year. But that isn’t the real problem, David. The real problem you can see by looking at me.

There is the net present value of off-balance sheet liabilities in the United States. Medicare, Medicaid, Social Security, federal pensions, military pensions. This number, not according to some cranky old fat libertarian, but rather the Congressional Budget Office.

The net present value of unfunded liabilities is a hundred trillion dollars. Three times the on-balance sheet liabilities. And that number grows by two and a half trillion dollars a year.

So, every year we get five trillion dollars deeper in consolidated debt. Now, the gross federal government revenues, before they spend a dime, the gross revenues, tariffs, taxes, everything, is five trillion dollars. In other words, the debt grows every year by gross federal revenues.

This is unsustainable. This is completely unsustainable. Unless they increase the money supply and raise the debt ceiling to infinity.

I absolutely think they’re going to do both. Yeah. I absolutely think they’re going to do both.

Which would make this problem, quote unquote, sustainable, in a way. Well, it would for them, but not for you. We did this once before in our country.

Yeah, absolutely. The decade of the 1970s, you weren’t born. Right.

But, beginning in the 1970s, the United States had fought the war in Vietnam, which we lost. And we fought the war on poverty, which we lost. There was a guns and butter policy.

Coming into the 1970s, we had unsustainable debt service, unsustainable entitlements. And we couldn’t raise the taxes anymore, because the highest marginal tax rate then was 70%. What we did was devalue the purchasing power of the U.S. dollar.

So, we honored the nominal value of our obligations. So, some old codger, who in 1970 was getting $800 a month in Social Security, still got his $800 a month, but it bought $200 worth of goods and services. According to the Office of Management and Budget, the purchasing power of the U.S. dollar in the period 1970 to 1980 fell by 75%.

This is a government number, not my number. Not coincidentally, in the same period of time, the price of an ounce of gold went from $35 to $850. Yes.

Yes. But going back to your original problem, this isn’t a revenue problem. This is a spending problem.

A lot of the spending actually is on non-productive things. Debt repayments, interest expenses, so on and so forth, right? I struggle to find any of it that’s for productive purposes, but that probably is a different narrative between you and I. Also, Trump has said very clearly that he does not intend to cut Medicare, Medicaid. Of course.

You don’t get elected by… Let’s say that you’re running for president of the hog farm. You don’t get elected by telling the pigs you’re going to feed the mice. There’s a really interesting book, which I urge your listeners to read, called The Triumph of Politics by David Stockman.

David Stockman was the director of the Office of Management and Budget in the Reagan years, and Reagan actually had a mandate to reduce the size of government. He won by a landslide. Trump won by an eyelash.

And in the book, The Triumph of Politics, David Stockman talks about how politics derailed the Reagan revolution in the first 120 days of Reagan’s first term. I urge people who believe that the Department of Government Efficiency, run, by the way, by a billionaire who’s enjoyed several billion dollars worth of subsidies. The idea that the Department of Government Efficiency is going to greatly reduce the size of the U.S. government is laughable.

Anybody who would like to contradict that for narrative purposes should read The Triumph of Politics. The Grace Commission during the Reagan administration tried this. Right.

What’s different this time? Nothing’s different. It’s not going to happen. I mean, the biggest expenses that we have, particularly because of American demographics, are entitlement expenses.

Yes. Anybody who runs for president, threatening to reduce the unsustainable benefits to voters, is going to lose. Yes.

It’s an unsolvable, conventionally unsolvable problem. So let’s go back to my very first question, and perhaps look at it from a different angle. Which other asset classes do you think, or investment themes overall, would be dramatically changed, if not impacted by executive orders signed by Trump during his first week in office? This week is inauguration week.

I don’t think any. I mean, I think if you look over the four years of his presidency, the gold price is going to do very well. Yes.

I think it’s going to do very well, because I see the only political way out of our economic dilemma is, as you suggest, increase the money supply to print. We can’t fund the expenditures with tax. The bills for entitled that are coming due, our society is becoming older, more beneficiaries, fewer workers.

The only way out of this circumstance is to reduce the purchasing power of the dollar. Traditionally, that’s been extremely good for gold. What about the dollar this time? The bullish argument for the DXY is tariffs.

Tariffs imposed by Trump on other countries would lower other currencies vis-a-vis the dollar. I think that is a near-term narrative. I think that the underlying strength of the U.S. economy isn’t politics.

It isn’t Trump. It’s the strength of the American commercial culture. The fact that the United States, despite all its difficulties, still invests $25,000 in capital expenditures per U.S. worker every year, about double the global average.

Our culture also traditionally has been, like Canada’s, very, very welcoming of immigrants. And it’s also been a culture where five or six young kids could take over a garage in Sunnyvale, and out pops Google or out pops Apple. I mean, the ugly truth about America’s culture, or maybe the great truth, depending on your point of view, is that our individual persistence, our individual tenacity has funded our collective stupidity.

The problem with that is that politics is trying to dumb down that individual initiative while increasing the collective stupidity. Yes. Gold, then.

One of the narratives of some of the panelists at this show that we’re attending currently, the Vancouver Research Investment Conference, is that we should be investing in gold because we can’t trust the banks. Now, you’re the founder of a bank. Right.

How would you respond to that narrative? Well, if the banks that you’re talking about, in particular the central bank, I agree wholeheartedly. I also agree that most very large commercial banks don’t have the interests of the customers in mind. Whether or not that’s good or bad for gold is a different circumstance.

We could have a long discussion about banking. As you know, I’m a career banker. I think the principal reason why one owns gold is the inevitability of the decline in purchasing power of the U.S. currency, of the Canadian currency, of the euro, of the yen, of the renminbi.

Right. What about this argument? I’d rather, as a long-term hedge against the devaluation of fiat, just own banking stocks because everybody needs a bank. Well, I’d be hard-pressed as the founder of a bank and as an integral part of seven preceding banks to argue with that.

Banking is a very, very, very good business. Right. You need to understand how to analyze banks the same way that you need to understand how to analyze mining stocks.

Yes. If you buy banks as a class without knowing much about banking, it is very likely that you will experience a decline in your net worth. If, by contrast, you understand the banks for what they are and you learn how to analyze them as individual businesses, banking, with the possible exception of property and casualty insurance, is the single best business on the face of the earth that I know.

It’s a wonderful business. Why is that? In the current market, in the U.S., your retail cost of funds is four and a half percent. Yeah.

And you are putting out that money at prime or prime plus, which means you’re taking the deposits of four and a half percent. You’re lending that money out of eight and a half or nine percent. You are leveraged nine to one.

So if you enjoy a two and a half percent spread on assets and you’re leveraging that ten to one, your returns on equity are insane. Yes. All you have to do, well, you’d have to do two things.

You have to not allow your expense ratio to get too high. Yeah. And you can’t make lending mistakes.

You can’t make too many lending mistakes. If you do those two things, you don’t have to be the hyper genius that too many bankers try to be today. You have to pay attention to the fundamentals of banking.

You have to lend industries that you understand. You have to treat your customers, your depositors well. You have to make very sure that you don’t make very long term loans.

That are funded with overnight deposits. Right. So you get caught in the interest rate trap.

Yeah. If you mind those P’s and Q’s, the basics of banking, the 400 basis point or 450 basis point gross spread, the two percent cap on non-interest expenses, and the fact that you secure a dollar’s worth of assets with seven or eight cents worth of equity, makes it an extraordinarily good business. Yes.

If you just don’t make mistakes. A good banker in an economy where there’s too much competition, shrinks his balance sheet. Do you care if the Fed Fund’s rate is, by you, I mean a banker, care if the Fed Fund’s rate is five percent or zero? Sure.

Sure. Because it goes to the underlying strength of the economy. Okay.

I’m not concerned about it in terms of my credit spreads. Right. I’m concerned about it because my customers need to be able to pay me back.

What is the future of retail banking in terms of the products that you offer? Suppose I were to say, Rick, I’d like to deposit gold in your bank or use gold as a collateral, as a loan. How would you respond to that? Part of the business plan of Battle Bank is that we will be the first major U.S. chartered bank which will offer credit facilities secured by retail holdings of gold and silver. I consider gold to be a really, really, really good piece of collateral.

If I loaned you money, David, to buy a house and you didn’t pay me, it would take me about nine months to foreclose and then it’d take me a month, perhaps, to sell the house. If I have your gold collateral and you don’t pay me, I could sell that collateral 24-7 in 10 seconds. Okay.

It’s wonderful collateral. What about blockchain and cryptocurrencies? If I were to have the same question, but with Bitcoin, how would you respond? With Bitcoin, I don’t know enough about the asset class. I don’t know enough about how to sell it.

For me personally, I’ve been in the gold business for 50 years. If your customers were to approach you and say, look, we would like banking solutions in cryptos, would you explore that possibility at all? If our bank were to be able to develop expertise in crypto, the answer to that is yes. My banks have always competed only in industries that they understood well.

I understand. Part of being a lender is that you can analyze the business from that business person’s perspective and that you can underwrite the loan, understanding the value of that collateral. Right.

I’m uniquely qualified to do that in the mining business, in the gold business, in the oil and gas business. I’m reasonably conversant in agriculture. Okay.

But that’s a subsidized credit. I don’t want to compete with the federal government who’s willing to lose money. Yes.

But in crypto, I have no such advantage. Wow. What I’ve learned in banking is that people who fail at banking try to lend to 500 industries where they don’t understand 500 industries.

Yeah. The people who succeed, every bank I’ve been involved in has been a bank that focused on something. Yes.

Did what it did better than other people did. And that’s what this bank will do. I think people in the comment section of our last interview have asked when Battle Bank is going to launch.

We hope, you know, David, that we’ve tried to launch a de novo bank. As I understand it, there are 120 something banks in application in front of the FDIC. Yes.

The FDIC approved two in 2024. I’m 71 years of age. I don’t have 60 years to wait.

So what we’re doing is we’re buying an existing bank. Yeah. Something we should have done two years ago.

My hope in answering your question is that we’re open for business in the second calendar quarter of 2025. Okay. Excellent.

Rick, an absolute honor and pleasure to host you in person. Thank you very much for joining us. Where can we learn more from you and your show and Battle Bank and everything that you’re doing right now? Offer goes like this.

If you care what I have to say about natural resources or investing in general, go to ruleinvestmentmedia.com, my website. List your natural resource stocks for free. For free, I’ll rank them.

One being best, 10 being worst. I’ll comment on individual issues if I think my comments have value. If you care about my bank, which is to say, if for any reason you’re unhappy with your current bank, I suspect all your listeners are in that camp.

Yeah. In the question and comment section at ruleinvestmentmedia, write bank. Or visit battlebank.com. You’re a very busy man.

How do you still have time to interact with, I presume you get hundreds if not thousands of requests to look at their portfolios? David, building Sprott, to build the retail constituency at Sprott, we began by relying on conventional advertising. And we wasted every single dollar we spent. When we went in 2011 to investor education, social media, to interviews like this, where rather than saying, buy our stuff because we’re Sprott, we educated customers.

We built an advertising machine, an unconventional advertising machine, where we gave away paradigm, but built trust. We did the same thing at Everbank, our prior bank. Those entities, in the case of Sprott, became a $30 billion behemoth in publicly quoted physical precious metals trust, not by advertising, but by doing interviews.

At Everbank, we built a $28 billion bank the same way. All the money we spent on conventional advertising, we wasted. All the time we spent doing this, communicating ostensibly one-on-one, but really one on 3,000 paid dividends.

That’s looking back $60 billion in asset management acquisition that we did one investor at a time. Through this exact process. That’s a very interesting business model.

Give me something to think about on my own. Well, thank you very much again, Rick. And please make sure to follow Rick in the links down below.

We’ll put a link to all the ventures he mentioned. We’ll speak again soon, Rick. Take care.

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