Convinced that the bull market is headed for a crash, the mining executive and financier makes his case for investing in tangible assets—and cryptocurrency

When Russell Starr looks at the frothy U.S. stock market, he sees big trouble ahead. “I still think my thesis is right,” says the president and CEO of Vancouver-headquartered Trillium Gold Mines. “And that is, this just doesn’t end well.”

Starr, who is based in Toronto, keeps sticking to his belief that investing in gold—and, theoretically, cryptocurrency—is a smarter bet than following the herd by chasing the latest hot stock.

When it comes to gold, he’s obviously biased. “I’ve been promoting and pitching and involved in the gold space for maybe seven, eight years now, after I left Bay Street,” says the entrepreneur and financier, who previously held senior and advisory roles with the likes of RBC Capital Markets, Scotia Capital and brokerage Blackmont Capital. “And I’ve been wrong for seven or eight years, and I’m willing to admit it.”

To show why he could eventually be right, Starr begins with inflation, which he calls rampant—a state obscured by government intervention. If you took a 1980s formula for measuring inflation and applied it with the same inputs today, inflation would about 8 or 9 percent, he says. (Canada’s average monthly inflation rate last year was 0.7 percent, according to Statistics Canada, the lowest since 2009.) “What governments have done is they’ve used their mathematical mastery and simply changed the formula to meet their objectives.”

The driving force behind that shift? America, which pulled some strings because Social Security was inflation-adjusted, explains Starr, who has a master’s degree in economics from UVic. “If they had let inflation continue on at its rampant rate, it would have effectively bankrupted the U.S.”

Whatever the official numbers say, commodities, housing, food and energy prices are all way up, Starr observes. But to give an example of how the U.S. and Canadian governments measure inflation, home prices aren’t part of the mix. “They actually use rent, and they don’t even use real rent,” Starr says. “They use the rent that you might theoretically get if you rented your house to measure housing price inflation.”

With gold prices nearing all-time highs and bitcoin recently topping US$50,000 for the first time, the precious metal and the cryptocurrency aren’t exactly hurting right now. But Starr maintains that many investors are still making a mistake by shunning them. “Effectively, you just have this bastardized or fake calculation that has everybody thinking, Well, interest rates are low, there’s no inflation, so why would we buy gold? Why would we buy crypto?”

The bubble of all bubbles

The recent GameStop surge is just one sign of a market where investors are piling into stocks with little regard for economic fundamentals. Starr also cites insolvent U.S. car rental provider Hertz Global Holdings, which was trading for pennies last spring when a rally pushed its stock above US$6 in just a couple of weeks. “Hertz was going to do an equity offering at seven bucks when they were effectively bankrupt,” he says of the company, which backed off in the face of potential regulatory scrutiny. “These are just not normal circumstances.”

Helping fuel an irrational investment climate is the U.S. government, which, like its Chinese counterpart, printed a lot of money in and around 2008, Starr explains. But where China spent that cash on infrastructure, the U.S. propped up the markets.

“So you get more and more money chasing higher and higher valuations using worse and worse math,” Starr says. “And then you end up with what a lot of people are calling the bubble of all bubbles, and yet it persists. And there are a lot of people who would say that this can persist for quite a bit longer, as long as the U.S. continues to print money this way. But inevitably, that will come to an end.”

In Starr’s view, it doesn’t help that the U.S. Federal Reserve Board aims to keep interest rates as low as possible. “They just keep buying long bonds, pushing the price up, thereby pushing the yield down, and trying to maintain a low-interest-rate environment where they hope, hope, hope, hope this monetary experiment is going to work out,” he says.

“I guess if you look at it from the perspective of the U.S. stock market, it’s worked out. But when you look at all of the other information—unemployment, the inflation metrics that I was telling you about—it’s not working out. And yet they persist in doing it because they can still point to that one thing, and that’s U.S. equities.”

What value does Facebook add?

Part of Starr’s thesis is that where products used to be things, now we’ve become the product—by giving our personal information away to the tech giants. “I don’t want to pooh-pooh Google or Facebook, but really, what value do they add?” he asks. “The difference between what you see in China or Russia or some of these other countries that are experiencing booms as well is that a lot of those booms are occurring with actual tangible assets.”

Many portfolio managers working today have never seen a real market correction, he notes. “This one is one where everybody seems to be chasing more and more and more and more, without any regard for P/E multiples, without any regard for debt,” Starr says. “All the lemmings are jumping off the cliff, and I’m just going to keep on buying the crap out of Tesla, Facebook, Twitter, Google, regardless of the multiple, because everyone else is doing it.”

Tesla, whose US$787-billion market capitalization is “nonsensical,” Starr says, differs from the others because it makes a physical product. The electric-car maker’s US$800-range stock price hinges on its batteries, whose largest component is nickel. But strangely, investors aren’t pouring into nickel, says Starr, who is also a director of Toronto-based Canada Nickel Co. “And Tesla can’t make those batteries unless they get more nickel.”

So is the answer to get more North American companies churning out real things like car batteries? “Prospectively, yes,” Starr says. “But it’s more that for an economy to grow, it can’t grow with Facebook dominating the market cap of the exchange,” he argues. “I’m not saying it’s not great that [Mark] Zuckerberg made billions and it hasn’t helped people connect over millions of miles. But there’s really no input other than us as a commodity.”

A farce of an investment theme

If Starr is bullish on bullion, he’s less sure about bitcoin. “My worry about the crypto market is it’s such a young market, and it’s simply a value of what people believe it is, versus that tangible value you had in the gold world for decades or centuries.”

Although physical gold has become tough to buy, there’s now a booming market in gold futures and exchange-traded funds (ETFs), Starr explains. Last fall, the U.S. government fined JPMorgan Chase & Co. more than US$900 million for manipulating precious metals and Treasury futures. “There was actually a substantial fine to them fixing and rigging the gold market,” Starr says.

The big U.S. banks could wade into cryptocurrency, too, he reckons. “If crypto was at a point where they viewed it as competition,” Starr says, “my suspicion is they’d either put out another form of crypto to suit their needs or they would create a secondary futures/options market where they could suppress the price by using infinite leverage to sell as much as they can in a very short period of time.”

Looking beyond the U.S., Starr finds support for his gold thesis. “If you’re paying attention to what’s going on in the world, Russia and China are selling U.S. Treasuries and buying as much gold as possible because they see what’s coming as well. It’s only in North America that we have this extremely naive view of what is rational investment right now.”

The gold business has done a poor job of marketing itself, Starr admits. “I think it’s viewed as a bunch of really old guys with white hair, smoking cigars on their leather couches in a dark room with a scotch. But the reality is, gold and crypto are very, very similar mechanisms for dealing with the debasement and erosion of fiat currencies, which is effectively what every central bank is doing right now.”

For Starr, the evidence is plain to see. “It’s just that no one is paying attention to it because we’re being fed what they want us to hear, to continue on with this farce of an investment theme,” he says. “I could be wrong for another decade, but I don’t think I’m wrong.”