Grant Williams: The Economic Consequences of The Peace | SKAGEN New Year Conference

so I start off with a warning the traditional disclaimer I don't use but I should caution people there are pictures of canes in this presentation so if anybody gets a little bit squeamish when they see him we're trying to decide it's interesting that I whenever I do these things normally the stuff I talk about is a little bit out on the wide but today a couple of things that I'm going to mention have been touched upon briefly so hopefully we can tie the whole thing together with if this will work for me you sound guys no sound careful cuz it's gonna be really loud now okay well what you would have heard had the soundman working was the theme tune to Fawlty Towers which as many of you know I'm told it was very popular here in know it was a very popular British sitcom and there was one episode entitled the Germans when a heavily concussed Basil Fawlty that's not him that's me I'm not quite sure what's happened we start again here we go heavily concussed battle faulty insisted on giving the same invoice there we go magic thank you [Music] it's almost like I can tell the future is it so that was the thing chin to 40 tears we've already discussed and the episode I was talking about called the Germans Basil Fawlty heavily concussed keeps giving the same advice over and over to his staff don't mention the war and this is advice that he himself fails to follow to spectacular effect and I'm like basil I'm going to ignore that and I'm going to talk about a few wars some of them passed some of them potentially future and I'm going to begin as I tend to do these things by going back a couple of hundred years now the 19th century was a time of great upheaval right across the were there were no fewer than 321 major conflicts in that single century essentially which encompassed in Napoleon Wars the Boxer Rebellion u.s. Civil War the spanish-american war the open wars and the Boer War that single century saw no fewer than 52 major conflicts in Europe alone Britain is the world's pre-eminent superpower of the time was involved in an astounding 73 conflicts in that single 100 year span France they fought in 50 Wars and Spain contested 44 how crazy was Europe in the 19th century well Britain France fought on the same side in six major conflicts the Spanish and the French sided together on nine separate occasions and Britain and the Spaniards found themselves in alliance in seven different Wars however Britain and France fought no less than eight separate Wars between 1803 and 1815 the French and the Spanish battled each other on four separate occasions and the Spaniards and the British were at each other's throats six times and people wonder why the EU is such a tricky proposition the serious point though is that once it comes to war former alliances count for nothing anyway as the 19th century made way for the 20th en bloc a Polish banker wrote a book entitled is war now impossible which was inspired by the crushing defeat of the French army by the Prussian German alliance in 1870 now in it he predicted that the Lightning Wars of the past were cavalry ranks and imagery meant for hand-to-hand contact combat and decided victory in defeat in short and very brutal fashion were to be replaced by drawn-out grinding trench warfare it's a cheerful read if you ever want to read it it's it's great fun but despite these dire predictions the first decade of the 20th century was blissfully people there were no conflicts anywhere on the European continent between European powers but by the time 1910 rolled around political tensions were rising across Europe the franco-prussian war which had so inspired Bloch had led to the creation of a German Empire the ascension of Wilhelm a second to the throne in place of arch diplomat Otto von Bismarck had led to Germany becoming more bellicose Russia had lost most of its Baltic and Pacific fleets in the Russia of Japanese war of 1905 and that had led to a revolution and that defeat in the Far East for the Russians forced the country to turn his attentions westward towards the Balkans a place which she died very greedily along with its old rivals austria-hungary meanwhile in 1907 Britain and France had signed the ontong cordial which finally put to bed 1,000 years of basically continuous conflict between the English and the French or when I say put an end to it it basically reduced the warfare between the two two bouts of French impoliteness countered by bouts of tutting by the British in 1908 austria-hungary had annexed but Bosnia Herzegovina and in 1912 Serbia Greece Montenegro and Bulgaria formed the Balkan League to challenge the Ottoman Empire after some classic in fighting when Bulgaria turn on its airlines only to be defeated within a month the Balkan League emerged victorious and this was a problem this victory disturbed austria-hungary who feared nothing more than a strong Serbia on its southern border so here's where Europe stood in 1914 Great Britain her power receding was struggling to play the role of the world's policeman newly industrialized and ruled by very nationalistic ruler Germany was puffing out its chest to the rest of the continent and good old France was in steady decline still and no doubt painfully reliant upon her old foe Great Britain for support and yet with geopolitical turmoil everywhere the man in the street was remarkably sanguine about the state of the world the projects and politics of militarism and imperialism of racial and cultural rivalries of monopolies restrictions and exclusion which were to play serpent to this paradise were little more than amusements of his daily newspaper now those words are written by none other than everybody's favorite economist John Maynard in his book the economic consequences of the peace of publication which made him a household name right around the world it's a sad indictment on today's society that in order for a modern-day economist to achieve Keynes's level of peace he basically have to become a serial killer or marry a Kardashian but if we go back to Europe in 1914 and despite the numerous mounting problems as Keynes had pointed out everyday life went on as normal and the men and women of Europe in general and the UK in particular assumed that nothing untoward would happen the politicians would just find a way of getting it all sorted out and there on the 28th of June 1914 amidst all these known knowns a young man called Gavrilo Princip stepped up to a passing current Sarajevo and with a single shot became a Black Swan that changed the course of history now we don't have time to go into World War one at this point of the narrative anyone I'm told there have been a few books written on the subject but suffice to say blocks sombre prediction of grinding drawn-out trench warfare turn out to be uncannily accurate now after four years of war that tore the world apart like never before a peace was finally reached but it was a peace about which one man in particular was somewhat vociferous in his condemnation ok calm down people calm down anyone that's nervous about case but it's just sort that out for you that normally calms people down a bit now Keynes had left Cambridge University to work at the Treasury in 1915 and he'd been hand-picked to attend the beside conference as an adviser to the British government he was staunchly against reparations of any kind and advocated to total forgiveness of all war debts go figure but in the event his advice to focus on an economic recovery was completely disregarded and Keynes resigned in fury returned to Cambridge and went and sat in his garden scribbling furiously in his notebooks and just two months Keynes wrote the book that would make him a household name around the world the economic consequences of the peace in that book he was highly critical of the peace that was struck at Versailles and he said it would he was sure it would lead to further conflict in Europe he described it as a Carthaginian peace the three major figures on the Allied side of the negotiating table at Versailles were President Woodrow Wilson of the USA president georges clemenceau of France and Britain's Prime Minister David Lloyd George Wilson wanted what he called a fair and lasting peace which was based upon his famous 14 points plan and would create a League of Nations which was a forerunner to the UN and reduced the armed forces of all country the French well they were just pissed understandably they wanted Germany to be punished and they proposed severe reparations alongside punitive confiscation of land arms industry and even people Lloyd George was caught between a rock and a hard place privately he agreed with everything that Wilson proposed but public opinion in Britain dictated that he side with Clemens oh now on the other side of that table obviously was Germany and in truth if you basic purely on the numbers Keynes's claims about the nature of this piece are very hard to dispute Germany was forced to pay 6.6 billion pounds in in reparations and put that into perspective that's about 320 billion pounds in today's money or half a trillion dollars now if you want a little bit more perspective the amount of money that Germany was forced to pay back after World War one an amount so severe that it led as we'll see shortly directly to World War two was conjured up out of thin air by the Bank of England inflation-adjusted I ought to stress in just 33 months between January 2007 and September 2009 but there's more along with those reparations Germany lost 13 percent of its land 12 percent of its population 48 percent of its iron ore production 15 percent of its agricultural land and 10% of its coal which was given directly to the French along with that the German army was cut to a hundred thousand men the Navy 236 ships and no submarines and it was forbidden from ever having an Air Force again the piece hammered out of a site would end up having grave consequences just 20 years later as the economic straightjacket into which Germany had been buckled enabled firebrand former colonel in corporal in the Bavarian army to seize control of the country and once more plunged the world into the darkness of war alongside warfare there are a few things that affect a greater proportion of a nation citizens than economics and as hard as it is to believe given today's apathy towards the subject before the advent of cable TV the study of economics was the stuff of rock stars until six Mundy's nouveau Principi economy politic was published in 1819 classical economists had either denied the existence of the business cycle or blame them on external factors chiefly amongst them funnily enough being war in 1860 the French economist Clemens juggler have identified repeating economic cycles which lasted seven to eleven years and Joseph Schumpeter expanded upon jugglers work by identifying four separate stages with the invisiblur cycle expansion crisis recession and recovery now these four stages are form what is understood in the modern world to be what we used to lovingly refer to as the business cycle and I say used to because half of the business cycle has been abolished by the federal reserve for reasons that we'll come to shortly however in 1920 just one year after the Treaty of Versailles was signed a Russian economist called Nikolai Kondratiev founded something he named the Institute of conjuncture not conjecture conjuncture at which he and a team of fellow economists studied conjunction or business cycles and this was with the particular focus on the long waves that they identified within those cycles now over the years there's been a tremendous amount of debate as to the usefulness of such long term prognostications but there's one very good reason why I and many others I think believe that there's significant advantage to be gained through the study of long wave cycles and it's this which I have to say is plenty good enough for me now contractive being a Russian of course took the long view he took Schumpeter's four stages and equated them to the four seasons in a calendar year once he identified what what he felt to be the correct length of each spring summer autumn and winter kondratyev had his wave as it turned out that wave ran for approximately 53 years in 1925 when he published his book the major economic cycles using existing data kondratyev overlaid the wave on world history and projected it forward meaning that as far as the Kondratieff wave goes at least everything for the last 89 years has been conjecture on his part not conjuncture conjecture how'd he do well as it turns out surprisingly well contractive nailed far too many major turns to have his work simply dismissed and as it turned out his most recent turn into winter came in 2000 or for those of you measure the passing of time by such things precisely at the moment the tech bubble burst the blue shaded area here shows how far into the current contrasty of download' we are and perhaps more importantly how much farther we might have to go before things are supposed to turn around but what are the inner workings of a contractive winter look like and are we actually in the middle of one as a near 90 year old forecast would have us believe [Music] [Applause] the the four seasons in a conductive wave are broken down like Schumpeter cycles and characterized by the phenomena usually seen during each specific phase of the full cycle now I won't go into all four now as we have time but we'll concentrate on the longest phase winter as it's the one we currently supposedly find ourselves mired in now in a contractive winter the first major phenomenon is about of deflation so how are we doing on that score well in the USA after a short belt during 2008-2009 the Fed has managed to turn the ship around rather nicely the eurozone well as we know and today is confirmed there in the middle of a pitched battle against the forces of deflation and not to put too fine a point on it they getting their asses kicked the UK a country utterly addicted to debt is in fine health assuming of course you measure a country self by its strong inflationary forces and its massive debt load and unfortunately ever-increasing number of people do these days and then of course there's our old friends Japan the country these kinds of discussions are absolutely impossible to have without mentioning Japan's suffered from a prolonged period of deflation lasting the best part of 20 years but abenomics has seemingly fixed those little problems for now at least so I think it's safe to say that there is no outright deflation so it's also equally fair to say that there's an ongoing struggle so we'll hold off on making a definitive judgment on that little piece of the puzzle next up is the premise that equities will be in a bear market during a kondratyev winter and as these charts demonstrate and everybody in the room knows only too well that is clearly a big fat fail which brings us to another sign of a contractive winter which is the mass repudiation of debt now during winter one of the major causes of that onset of that particular season debt is repudiated people want nothing to do with it as you can see from this chart as the world went into the kondratyev winter in 2000 far from repudiating debt we'd been embracing it like never before by the end of 2007 before things got nasty the total global issuance of debt securities as measured by the BIS had doubled since 2000 to reach a staggering 69 point two trillion dollars from there well it's not exactly what you'd call repudiation in fact another twenty one point six trillion has been added to the mountain of debt hanging over the world why the massive surge well that would once again be down to our old friends at the Federal Reserve and we'll come to that shortly the truth is we've all been beaten over the head with stories of the credit crunch by now tales of austerity or how difficult it's been to access credit since 2009 but as always the reality is somewhat different since December 2007 the total debt in the financial sector has increased a mere 0.5% it's a start it's not exactly repudiation however the non financial sector has taken the baton up with some relish and run with it increasing their total debt by 67 percent in just over six years and then of course there's government's a body of men and women to whom austerity means spend more so they also they've laid on another 67 percent of debt burden while struggling manfully to balance their budgets it's just Michael okay so that's another big fat fail and our old friend Conrad kondratyev is starting a little bit unhinged however now we get to the middle of the order and this is where things pick up a little bit bankruptcies well they spiked in 2005 as people rush to declare themselves bankrupt before a new set of rules came in that would make it harder to do so the new rules slashed personal bankruptcy filings by 75 percent in 2006 but guess what up they went again straight afterwards this time on a far steeper trajectory than that prior to the alterations to the rules so finally I'm taking that one banking crisis you've got to give me that one and obviously I'm taking the credit crunch which brings us nicely to rising interest rates now is there anybody in the room old enough to remember those anybody no I didn't think so of course rates have been falling and then falling some more for decades now and let's face it as the major tool available to help supposedly smooth out the business cycle you'd expect this chart to look somewhat more cyclical in nature many people assume that once rates got to zero they couldn't go any lower how can we be so foolish zero is only the lower bound in interest rates in the real world but we now live in this central bank created Fantasyland so the normal rules don't apply either way sadly I have to stick another one in the fail column currency crises well has been plenty of oceans to turn the century include several bubbling away right now in places like Russia and Ukraine and Belarus so I'm taking that one too which just leaves a rising gold price now it seems a long time ago for those of us who believe in the value of holding gold that it rose year after year but from the beginning of the kondratyev winter gold climb relentlessly and even though the setback to the past couple of years have put a dent in that that's not enough to steal this one from me we can wrestle outside but I'm taking it so there you have it it's close and it's hardly conclusive but by a narrow majority it looks as though we are in a conductive winter however the fact that the score is so close is actually a little bit misleading so let's take a look at the missing ingredients and see if they have anything in common now the misses deflation equity bear markets debt repudiation and rising interest rates are all of course inextricably linked they all flow directly from interest rate policy rising interest rates generally dictate that equities into bear markets deflation becomes a threat or the very least the inflation becomes less of one and debt is discharged or defaulted upon of course the policy of the Fed has been one of lowering rates consistently and at the first sign of any trouble in the economy trouble they used to be called a normal part of the business cycle and those falling rates have had a predictable effect on equities debt and inflation falling interest rates every central bankers first and until recently last line of defense against the downward part the business cycle by lowering rates to zero and thereby staving off those three important facets of the kondratyev winter the Fed and its cohort around the world have optically at least made things look as though they're not so bad but even interest rates I'll beholden to the law of diminishing returns and if the zero bound is reached and the effect to another marginal cutting rates diminishes to virtually zero new measures are called for those new measures have largely been in the form of quantitative easing these past few years but even magic money conjured out of thin air has its limits in terms of effectiveness which is why the Europeans are now experimenting with negative interest rates the longer this goes on the more desperate the measures become and the question of course is why and the answer has its roots in another peace treaty of sorts that again involved Keynes this time the Bretton Woods Agreement which was thrashed out at the Mount Washington Hotel in New Hampshire to write off the World War two now that agreement like that at Versailles in 1919 went against the recommendations of Keynes it established the IMF and the World Bank and cemented the dollars status as the reserve currency it also ushered in an era of unprecedented economic peace as a quarter of a century passed between the signing of the Bretton Woods Agreement and the oil shocks of the 1970s that economic peace however would have far-reaching consequences now if we take a look at the growth of both credit and GDP in the US after World War two ended we see a remarkable story unfold now clearly credit growth has accelerated away from real growth and the reasons for that acceleration are clear if we add in a few additional pieces of information firstly we will add our old favorite the Fed Funds rate and as you can see here from the end of World War 2 both credit and GDP grew in lockstep so what changed well of course the soundness of money changed accordingly I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators dick when Nixon closed the gold window on August the 15th 1971 to protect it from these evil speculators we keep hearing about he also ensured that credit creation would essentially become as easy as saying yes immediately after the dollar was saved from speculators the divergences you can see here between growth and credit began to expand even as interest rates soared due to the inflation unleashed by Nixon's actions finally though interest rates reached their peak and began their journey lower from a little over 18% to where we find them today and that meant the gloves were off and credit creation took off like a rocket fueled by those rapidly declining rates and a growing sense that the Fed would lower rates some more at the first sign of any trouble business cycle was so 1960s interestingly enough if we highlight the period between 1954 and 1969 we see that credit and GDP both grew steadily despite interest rates increasing eleven fold now a close-up look at this particular period is even more instructive when it comes to the unshaped business cycle now as I pointed out between October 1954 and October 1969 rates climb unfold but more tellingly during that 15 year period they fluctuated along with the business cycle adjusting up and down as conditions warranted during that single span rates quadrupled fell by 5/6 rows nearly 7 fold fell by three-quarters quadrupled again carved then doubled in the space of a 15 year period however if we overlay the business cycle represented by the PMI composite index we see something that today would be considered extraordinary a business cycle that absent flows without ever really getting out of hand despite the extreme moves contained within that snapshot in fact as you can see here the PMI was in expansion which is the blue shaded area far more than it was contracting despite a difference in interest rates from bottom to top of 8 and a half percent nobody care to hazard a guess what would happen to the US economy of interest rates hit 9% today it wouldn't be pretty we zoom out and look at the PMI over a longer period of time it only hammers home the point with the x-axis left blank spotting the chart pattern we just looked at in amongst the broader picture is basically impossible it's here for anyone who is actually curious now we stick with this chart it's easy to see the next consequence of this peaceful economic environment and easy credit and that's an explosion in equity markets with the S&P 500 following the trajectory of the expansion and credit until the mid-90s when it became abundantly clear that the feds default response would be to slash rates in the face of any forging of the business cycle and in the party really got going we had a reversion to the trendline when a tech bubble inevitably bursted in 2000 followed by a return to trend growth along with more rabid credit creation and then came 2008 and the feds massive blitz of funny money which is absolutely vital in order to stop everything falling apart and the lines of credit and growth converging again in a hurry you can see the tiny little blip there that actually represents the global financial crisis but not everyone has been fooled by the deluge unleashed by the Federal Reserve or the game of keeping this economic piece intact volumes on equity markets around the world have plummeted despite the seemingly endless procession of new all-time hires being made by indices all around the world as investors who was shaken up by 2000 got completely chased out by 2008 but the twin milestones of the closing of the gold window and peak rates are creating even more instability elsewhere next up the US budget deficit and once again you can see the difference made by banning of the gold standard compounded by the peaking of interest rates the u.s. monetary base has followed a similar path at least up until 2008 when after dropping rates to essentially zero and running headlong into that law of diminishing returns I spoke about earlier the Fed were forced to expand it from eight hundred billion dollars to his current four plus trillion or face a shattering of this economic piece all of which brings us to the Federal Reserve's balance sheet the cost of maintaining this economic piece is staggering beyond anything we thought we understood just a few short years ago as its on the Federal Reserve balance sheet now stand at over four trillion dollars as opposed to nine hundred and twenty five billion they owned on September 10 2008 but it's when we add the Fed to total capital to this chart that things get a bit more interesting it looks okay yes right up until the point where you look at the y-axis on the right-hand side of the chart in order to keep the piece with interest rates already pegged at zero the only option open to the Fed was to massively increase the wrong side of its balance sheet which of course they did without hesitation now if we take a dozen snapshots each of them twelve months apart and do a little measuring we start to get a better sense of the ledge out onto which the Fed is so gleefully walked if we add back in the Fed total capital this time on the same scale as its liabilities we can see that their solvency is that's not for this delicately questionable issues there or it would be if they couldn't create money out of thin air of course now back in 2007 the issue of leverage in the investment banking community which hadn't mattered to anybody for many many years suddenly mattered to everybody seemingly overnight for the usual reason in such cases people started to worry about losing money now amazingly having financial institutions levered 30 times became something to fear seemingly overnight and of course while things like that can go on for a long time once the fear takes hold it's game over today at the end of 2014 after the massive expansion of its balance sheet in the name of keeping this economic piece intact the further leverage is literally off the charts if we want to get some real perspective on this we have to do a little shrinking now the price of peace has been very very heavy indeed and generally speaking throughout history when the price of peace becomes too extreme the pendulum tends to swing back to the other extreme now you may or may not have noticed it but since the turn of the century and the onset of this contrat e of winter that we're talking about the number of wars in which we've all been embroiled one way or another has taken a significant high wow that base is heavy there are Wars going on everywhere and some of the enemies being found to rally people against our little abstract to say the least nonetheless the drums are beating however there's one war that is far more insidious than any of the overt conflicts you hear about from endless boring men and women like me standing on podiums behind a microphone it's the one war that isn't talked about and it's the one war the public isn't making a fuss about which is a shame that it's the one war that affects just about everybody it's the war on savers the last remaining pool of untapped capital in the war is the world savings and that's firmly in the sights of central banks and governments everywhere if you think about this war in its basic terms it's actually quite scary we've already seen the expansion of the last 40 years has been down to one long orgy of credit creation and that orgy has required more and more punch to keep the party going over that time however the increase in real GDP generated by each additional dollar of debt has plummeted it was four thousand 61 cents right after World War Two it's eight cents in 2012 at this point the charts were getting a bit depressing so I've made this one flowery just to make a few people smile now all the while every major central bank in the world has been trying its damnedest to create this magical 2% inflation which will help lessen the impact of the soaring debt burden and that's a debt burden enabled by two things one the dollar state assist award doesn't have currency and two the economic piece now because allowing the imbalance is created over the last 40 years to correct themselves would plunge the world into a depression desperate measures are called for and the Fed as well as every other major central banker everywhere around the world has been forced into doing absolutely anything necessary to maintain this economic peace and keep the expansion of credit going including abolishing the downward half with a business cycle to try and ensure that deflation and all the other deadly facets of the kondratyev winter are avoided it has opposed you in the room who have either read the book or seen movie of Sebastian youngers book the perfect storm you would assume that not many of you okay for those you haven't it's it's an amazing true story about a group of sword boat fishermen on the grand banks who get caught in the biggest storm of the century and faced a life-and-death battle for survival in the climactic scene ruggedly handsome skipper George Clooney who it has to be said looks nothing like anybody I've ever seen holding a fishing rod and ruggedly handsome fisherman mark wahlberg ditto having battled hundred foot waves for hours finally catch a glimpse of the sunlight and i think they've made it to the other side of the storm immediately though the sunlight disappears and the skies darken and they realized that they're back in the middle of the maelstrom once again were still they find themselves faced with one more giant wave 150 feet high Clooney guns the boats weary engines and they tried desperately to climb the near vertical face of this wave but everything near the top the forces of nature are simply too much for the boat and it plunges down the face of the wave is turned over and vanishes forever the Fed the Bank of England the Bank of Japan ECB they're all on the face of that way of gunning the engines for all they're worth and running into diminishing returns everywhere they turn as this suffocating debt load threatens to overwhelm them zero percent rates qe1 qe2 qe3 Operation Twist ABS purchases the doubling of the Japanese monetary base and now negative interest rates they tried everything and this wave continues to rise up to meet them at some point maybe soon the forces of nature that drive the business cycle will overwhelm their ultimately futile efforts meanwhile in the background the continuing stealth efforts to create this inflation with the aim of getting citizens to pay for government profligacy continues apace Keynes was never more right than when he identified the pernicious effects of inflation in today's disengaged society just makes the task that much easier kondratyev research into cycles turned up another extraordinary phenomenon that further cemented the link between economics and war it became apparent at those same 53 year economic cycles could be relied upon to mark major conflicts as well as major economic turning points now as you can see the bad news is that these long wave cycles are uncannily accurate at predicting major conflicts but the good news is we seem to be right in the middle of a cycle which was that we are as far away from a major conflict as we could be but of course just as kondraki have expanded upon jubler and Schumpeter's shorter cycles to find the larger way of the process works in two directions and so within that 53.3 cycle is a shorter 17.7 one-year cycle and the news from that one isn't quite as good I'm afraid now war and economics have always been inextricably linked and they will forever remain so if you're not used to the idea then you need to get used to it and you need to get used to quickly the worse the economic situation gets the higher the likelihood of a conflict that's been the case since the dawn of money and is true today regardless of the fact that most people firmly believe that a major war is now impossible now remember this slide from what probably seems like about two hours to you guys it showed the geopolitical state of the world right before the outbreak of world war one now exactly a century on the echoes of the past are too loud to simply ignore for the UK the world's policeman at the time you can safely read the USA Germany has morphed into China and the French have been replaced by the Japanese is our fading giant and we even have our own uncle Maynard now not only is the big picture eerily reminiscent of 1914 but if we dig a little deeper into the detail we find that though the names have changed the mechanics that make up the world today are a little too close to comfort of those of 1914 territorial claims religious unrest heavily-armed unstable nations proxy wars terrorism and above all complacency but it doesn't end there I'm afraid fear in the West over the growing economic strength of China China's own desire for a much bigger role on the world stage globalization increased tourism are all prevalent as is the general assumption that war is unthinkable and there's that word again the khazars description of life right before the outbreak of world war one could have been written for today only instead of his daily newspaper we'd have to substitute American Idol or Big Brother or my own favorite the Great British Bake Off now this is a top-rated show from the UK about which one of a dozen ordinary people can bake the best cake seriously that laughs an argument on that show between this man or is he areas and this woman in the UK about a month or two ago about two Baked Alaska knocked both the Ukraine and Isis off the front pages of the broadsheet newspapers for a week I despair honestly a Treaty of Versailles I should in an era of peace after world war one but that peace was short-lived because from an economic standpoint it heaped enormous pressure on Germany pressure that was enough to drive the Germans back to war just 20 years after its signing the Bretton Woods Agreement a new financial system recognized as being so crucial it was hammered out while the world was still at war demonstrated that the lessons of Versailles had been learned to a degree at the point of the importance of money in relation to warfare was understood its signing began an era of economic peace that lasted a quarter of a century but that too began to fray in the early 70s as the dollar came under pressure from those evil speculators and I should probably interject that by evil speculators what Nixon minute was the de Gaulle administration of France who was swapping their dollars for gold as they were perfectly at liberty to under the Bretton Woods Agreement but I digress now in order to keep that peace America was forced to renege on the Bretton Woods Agreement but by doing so the money spigot just got open wide and they embarked upon this era of credit creation which just got more extreme the more it continued consequence-free the bursting of the tech bubble was the first real sign that something was wrong but the response from the Fed was both instant and desperate and designed solely to prevent the wheels coming off a decision that would merely set the world on course for a bigger disaster many people thought that in 2008 we faced that day of reckoning and we survived but the truth is 2008 was just another tremor albeit a major one warning of a future massive impending quake the real day of reckoning when this unconscionable level of debt has been built up during the fiat money era finally topples over under his own weight like the wait in the perfect local the wave in the perfect storm lays ahead of us both war and financial collapse occur in cycles and a subject to the overwhelming laws of nature now these inherent castewart characteristics of the natural order are permanent they cannot be altered or the Fed and the rest of the central bank's have done in trying to rewrite these natural orders laws of human behavior and finance is likely to lead to either a war or a collapse in the financial system or both at this point in time the exact outcome is undecided but the options have narrowed considerably now the past six years those at the helm have pulled every lever pushed every button available to them in a desperate attempt to stave off this inevitable and natural cleansing of the business cycle because all those years of economic peace have resulted in an unprecedented credit inflation and as my good friend Dylan Grice recently said if you've had an unprecedented credit inflation than you will have an unprecedented credit deflation now all the economic peace of central banks of the world have desperately tried to maintain these past several decades ended up doing is making that credit inflation larger and therefore infinitely more dangerous than anything that's gone before it the consequences will be dire now as I was driving in Sydney a few weeks ago I found myself set behind a small SUV which had this decal on the on its spare tire cover now the quote from the book Fight Club as a movie which was ironically released at the end of 1999 at the height of the Nasdaq bubble sums up the world of today quite nicely I thought but I sat staring at this this tire cover as we crawl their way through Sydney traffic in each traffic light up close with this thing again and I realized that this whole thing can be actually boiled down to something even simpler than Chuck Palahniuk pity prose we buy things with money we don't have now how does that possibly end well you've been very patient and I thank you very much [Music] thank you a grant for that - a tour of the world and the great economists I only have actually one one question shoot and that's how you you're also an advisor for the woops investment fund so adding all of this where should people put that money well we've we've um we've watched these markets bond markets equity markets so when we talk about marketing talking listed markets just become more and more waiting stretched over the last couple of years we've gradually been exiting markets and moving our money into assets into we bought farmland we've bought real estate and we still think there are pockets of value those around the world we've got a healthy allocation to cash because we think just from an asymmetric respuestas and I work for a guy who who ran a volatility fund through the crisis he was long volatility in short credit made an awful lot of money so his his his investment thesis is really governed by those asymmetric risk payoffs and we just think that you know there's a very negative asymmetric risk profiles of being in equity markets at these levels and particularly government bonds you know we wouldn't touch those as a passport so yeah cash and and real assets which we think are going to continue to get inflated as what I've just talked about continues to to go forward that's a sounding good advice thank you very much for coming great pleasure big a round of applause to brown brilliant thank you very much

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Keywords: skagenfondene, SKAGEN, SKAGEN Funds, funds, fond, Grant Williams, Economics, war, peace, Keynes, John Maynard Keynes

Id: jQIi3LHve6Y

Length: 38min 1sec (2281 seconds)

Published: Fri Aug 23 2019