Jim Rickards: A 2008-Style Liquidity Crisis + Recession Is The Big Threat Now

but this is a conundrum for a lot of people because they look at it the u.s objectively okay our our debt to gdp ratio is over a hundred thirty percent highest in u.s history but when you look at other countries in the world you say okay who who's at that lunch table you know 130 percent the answer is lebanon greece uh italy those are your those are your lunch partners so to speak welcome to wealththeon i'm wealthy on founder adam taggart i'm happy to say that you're in for a real treat here folks stephanie palmboy is stepping into the guest host chair again today and she's interviewing one of the top macro icons in the business today jim records enjoy don't adjust your dials folks this is in fact the wealthy on channel uh i'm stephanie pomboy of macramens and i am guest hosting for adam taggart today um so we're third time hopefully will be the charm here um this time i have the great privilege of interviewing none other than jim rickards and i've been just so excited really looking forward to this interview because i honestly think there is no one smarter on the macro scene than jim uh if he's written so many books i can't even list them all here um but just a really shrewd observer of the macro scene and uh the currency markets in particular which is what i'd love to kick off the discussion with today so jim welcome and thank you so much for doing this with me thank you steve it's great to be with you and uh yeah i look forward to this i um i've been fortunate to have a lot of really smart hosts and journalists to ask questions um it's rarely the case that the host knows more technically than i do but that's okay i'll try to rise rise to the age but i'm looking forward to it you know it's not good to start an interview with a bald-faced lie but it's flattery i'll call it flattery thank you um but you are definitely the expert here um but i'm going to i'd like to start if we could um with a very narrow lens and then we can step back and broaden it out but the narrow uh focus i'd like to start with since it's the topic of the day is the dollar um and you know i'm going to throw red meat to the wolves here by uh citing a headline across bloomberg earlier from larry summers talking about how the dollar should continue to move higher because the us has all these great fundamental advantages this comes you know 24 hours after another bloomberg headline talked about the unstoppable strength in the dollar so there's the red need for you and i'll let you gnaw on that for a little bit well it may come as a surprise i think i think larry summers was half right i've met him a number of times he's a brilliant brilliant guy he's always i i almost always agree with his analysis and then disagree with his policy so i always have to stop here with larry summers like good analysis larry but you're going going the wrong way um but yeah i think he's right that the dollar will get stronger if that's even possible and of course it's possible but it seems like it can't go on any longer but i think it will and i think the bloomberg headline uh is probably correct also where i disagree and this is critical is the reason why the dollar is getting stronger for some very bad reasons meaning bad in terms of the macro economy what's what probably lies ahead what it's probably telling us um so let's just maybe step back and not be larry summers for a minute but just be everyday investors and asset allocators and analysts and and say um and i hate to use the word conundrum because greenspan used it but conundrum is a fancy way of saying i don't really understand what's going on but um but this is a conundrum for a lot of people because they look at it the u.s objectively okay our debt to gdp ratio is over 130 percent highest in u.s history um tons of research coming from um obviously ken rogoff but really carmen reinhardt vincent reinhardt and others but many others not just them that says um at those debts gdp ratios you um you can't grow uh you you can maybe refinance and muddle through but it always ends either in default which is unlikely because we can't print the money that much is true or extreme inflation where here's your trillion dollars back good luck buying a loaf of bread so we'll we'll see how that plays out but the way it's playing out in real time is that the u.s economic growth is incredibly weak so we've got high uh sky high debt to gdp ratio by the way when you look at other countries in the world you say okay who who's at that lunch table you know 130 percent the answer is lebanon greece uh italy those are your those are your your lunch partners so to speak this is like the scene from animal house would you like to meet fighting jug dash and muhammad that's a good that's a good comparison um economic growth is weak uh we're in a recession i don't care what janet yellen says i don't consider her expert on the topic but we've had our two consecutive quarters of declining gdp like it or not that's the definition of recession um the fact that the national bureau of economic research which is a private group by the way but they're the recognized referees on recessions and recoveries the fact that they haven't said so doesn't mean anything because they never do say so until you know nine months or a year um after it happened and for that matter most recessions are two quarters some three some have been longer but but most recessions are a couple of quarters the the national economic research usually declares a recession after it's already over like it started it happened it's over we're in recovery and they go oh by the way we had a recession last january um okay so they'll probably get back to us i would bet heavily after the election but um we'll we'll hear from them at some point but we're in a recession now people say what about the third quarter um and it's interesting because i do put some weight on the atlanta fed gdp now i do think it's a very good tool they miss sometimes they're not always accurate but it's the best tool out there but very few people understand their statistical technique uh because what wall street does uh you get a whole bunch of components for gdp and they come in at different times with different lags and you add them all up and you get gdp um and what wall street does they look at what they have and they project all the rest based on regressions and correlations which you know don't necessarily hold up but here's what we think here's our forecast for third quarter gdp based on uh projections of what we don't know atlanta doesn't do that atlanta takes what we do know hard data and they ask a different question they say what would gdp be now if this was all we had and they put out a number but uh they don't guess that the stuff they don't have and it fills in as it goes along so it's much more bayesian in that sense um but because of how the data comes out that the time sequence to which the data comes out it typically fades as the quarter goes on it's not because they're using uh bad methodology it's just because that's how they do it um and so just in the last uh week nine days or so it went you know everyone was cheering with september 1st it was 2.3 maybe a little higher but about 2.3 two days later it was 1.6 and now it's down to 1.3 so it's following that pattern i would expect by the end of september we've still got three weeks to go given what i said about how it fades it it doesn't have to be negative but it could very well be negative maybe three quarters of declining gdp but whatever it is it's going to be weak so if it's positive you know two tenths or three tenths i mean that's okay but you're still rounding her away from recession it doesn't mean the problem's over so uh debt to gdp sky high economy weak at best probably had a recession in the first half maybe that's continuing um people talk unemployment close to an all-time low went up a little bit in the last report yeah but even at 3.5 percent or so uh that that is extremely low i mean i go back to the 1960s and that was that was low by the measures of the 1960s but that completely ignores probably eight to 10 million americans who were perfectly able of having jobs and working um primates 25 to 54 years old who are not in the workforce um that's that's that measures picked up in labor force participation rate which is uh low i mean that was that peaked around 70 percent in 19 sorry in 2000 uh man up from the 1970s and that was women coming into the workforce and other factors uh but now it's down to around 62 and change it ticked up a little bit in the last report but it's still extremely low it's never 100 i mean there's always you could be um a homemaker a student um they're they're uh retired early retirees there are a lot of reasons people are in the workforce but not you know taking 10 off for 14 decline from the starting place in um over 20 years that's uh so if you if you throw those people into the un they're not called unemployed because they're not looking for jobs but if you threw them in unemployment would be closer to 10 which is a recession or a depression level actually um so and and i could go on but the point is there are all kinds of signs of weakness so you know if we have the deficit uh where um you know the baseline deficit is a trillion that's before an extra 2 trillion for trump's covert relief uh an extra 3 trillion for biden's covert relief if you include the uh ludicrously named inflation reduction act and you know and and the american rescue act and the infrastructure act call what you want it's it's still three to four trillion two for trump that's six on top of two baseline that's eight trillion dollars in two years so your deficit's out of control and your trade deficit's out of control so what's not to like um yeah and you you look at all that you say what you kidding me i mean get me out of the dollar get me go get anything else uh why is the dollar so strong and the answer is for this you have to go behind the curtain you have to look into the what's called the plumbing of the international monetary system and i had a discussion um and this goes back this is 1980. uh so i'm a you know an up young up-and-coming vice president of city bank that's back uh back in the days when it was a bank before they turned it into a hedge fund uh so i'm like at 27 or whatever a 28 maybe a year old lawyer um but i'm i'm talking to walter wriston it's a one-on-one conversation he was for those who don't know the name or don't recall he was probably the second greatest banker of the 20th century after pierpont morgan so i'll give morgan the prize uh but he left around 1910 uh but um and richton was the inventor of the euro dollar oh so the the negotiable certificate of deposit your dollars are around a little bit earlier but he took the cd that that represent was your interest in the euro dollar made them negotiable and tradable um so i'm having a conversation with them and i i had just seen this movie which i highly recommend chris christopherson hume cronin and jane fonda it's called rollover uh and it's again 1980 but all star casts yeah i got a murder mystery a little sexton but it's uh it's basically about the collapse of confidence in the us dollar and human cronin plays the wall diversion part um and basically the idea was the remember this is during the the arab oil embargoes the iranian oil embargo and price of oil quadrupled in eight years and all that so the theme was the the arabs are taking the money out of the banking system and buying gold and they're stashing the gold away and this is the collapse of the financial system and that was sort of the plot so i said yeah mr wriston uh uh what about that you know everyone took their money out of the system and uh bought gold wouldn't that collapse the system and he looked at me like i was a new kid on the block which i was and he said well what you have to understand is that you can take your money out of the bank and you can buy gold but the person who sold you the gold got the money and they put it back in the bank so it doesn't go anywhere it's a closed circuit and of course now i'm like oh oh yeah you're right of course he's right um and he said so the the stability of the system doesn't depend on who sells what for dollars yeah it affects exchange rates a little bit and um interest rates who with the price of gold but he said the money always it can't literally disappear it has to go back into the system it's a closed circuit and of course that's how the euro dollar system works um but the one thing we um uh but it presupposes that you can always borrow in the euro dollar market in other words that closed circuit uh analogy is correct provided the big banks are willing to lend to each other so if the my example of pbs was selling the gold and to the arabs and they got the money and they put it back in citibank nassau it's all good um but what happens if that money supply now i'm talking about euro dollars uh actually shrank uh and that is a heart attack in the global financial system so now uh we're like well okay what's going on and believe it or not there's a global dollar shortage and when you say that people say wait a second you're kidding me the fed printed you know the fed's balance sheet in 2008 at the start of the global financial crisis was 800 billion dollars it was four and a half trillion by the time we got to the end of the taper in in november 2014. then okay um yelling a little bit but mostly powell got it they started quantitative tightening they got it back down to around 3.5 trillion by the time kova came along and boom it's up to seven and a half trillion might have gone higher than that and that's m0 um you know m1 was was exploding even more so people go listen the fed printed you know seven and a half trillion dollars how could there be how could there be a dollar shortage um and that that has a two-part answer one is the money printing at least m0 is irrelevant it just doesn't matter because they how do they print the money well they the fed buys securities from the primary dealers and i i was after i left citibank i joined one of the biggest primary dealers and i was there for 10 years so i had a front row seat that was that was back in the days when the fed was actually it was actually tough on people i i was once uh i used to go to the fed all the time i was once sitting in new york fed anyway there was a guy i won't mention his name kind of legendary he actually started to come across the table at me like it was like a threat of violence because he didn't like what i was doing a lot of irish running in the bank at the time so they were they they could be that way but um i'm part irish so i can say that but uh they were but he started coming over the table at megan uh but uh that um that we got through that so but my point is um i was at a council of primary dealer we talked to the fed every day and so the primary dealers are the ones where the fed open market desks the new york fed does monetary policy they buy so they call up goldman sachs or city or wherever she offered me you know five year notes or two-year notes or whatever there's a price done the the banks send the securities to the fed and the fed pays for it with money that comes out of thin air there's there's nothing more to it than that but here's here's the here's the part that matters what do the banks do with that money they give it back to the fed in the form of excess reserves and the bank deposit at the fed in effect so that money never went anywhere it was created it is on the balance sheet but it all went to the asset side which were securities and it never went into the economy so where does the money come from that runs the economy if you know you or i want to go shopping or go out to a multiplier right well it comes from the commercial banks it comes from m1 yeah there is a multiplier but it that's in m1 and m2 which is created by the banks at will and the fed those commercial banks have as much printing power as the fed they just do it differently by lending money or or um we're buying securities and and paying for them with money that they create so and and that never happened um it happened to some extent but not nearly to the extent that what the what the fed was doing with m0 so m0 didn't really matter i mean i had to break it to people with the fed kind of right doesn't matter commercial banks do matter euro dollars do matter that's how we run the system do you think it didn't happen this time because of the lack of demand for money or an unwillingness to make that those loans on the part of the commercial banks or was it a combination of the two that is a great question stephanie and the answer is both uh but but the two are related in other words the unwillingness to to lend and the unwillingness to spend are two sides of the same coin it has confidence it's reflexive confidence uh where are you gonna invest you know um i talked to top people at exxon mobil they're like why should you know uh a new oil project why would you it's got a 10-year horizon so so you want to do you want to go to your board with a 15 billion dollar exploratory infrastructure project it's got a 10-year horizon to completion and a 20-year payout and here you have the white house saying like today on a daily basis we want to put an end to fossil fuels we want to end the oil and natural gas industry go get yourself an electric car and that's not that's the secretary of energy uh and uh and and others so so you've got to be crazy as a ceo to go to your board and ask for that kind of so they're not doing it right they just buy back shares instead and that's buyback shares or i don't know what to do with it but probably still doing write-offs from russia but um but the point is uh no we're not getting the investment and whether you finance it in bonds or bank loans the banks underwrite the bonds it doesn't matter it's not happening and by the same token uh individuals unless you're stressed meaning uh you know you lost your job or your savings are depleted and you've got to pay you know 450 a gallon of gasoline to get to work you might use your credit card but there are limits on that so um and and the third point is that even to the extent that m m1 and m2 did did go up not as much as one might have expected based on m0 but to the extent they did go up velocity collapsed uh and for listeners who may not know velocity is just a fancy word for the turnover of money so um but if i have a dollar and i go out to dinner and tip the waiter and the waiter takes an uber home and the uber driver puts gas in her car in that example my dollar has velocity of three it supported three dollars of goods and services the typical ride and and the gasoline um but if i stay home watch tv my money velocity is zero i left in the bank and i remind people 24 billion i'm sorry 24 trillion 24 trillion so i get used to that for dollars 24 trillion times zero is zero at least where i went to school so you don't have an economy without velocity and since 2008 depending on the measurement m1 velocity has since 2008 so uh with the 14 years has gone from 10 to about 1.3 if you look at look at the graph it looks like an included a red bull cliff dive yeah um so we're not getting and that was the that was the biggest failure in milton friedman's thinking uh milton friedman got some things right but he got a couple big things wrong and he used the quantity theory of money which is just a money supply times velocity that's the turnover equals nominal gdp broken into a real part and an inflation part and a price index and and friedman said well a mature industrial economy can really only grow about three and a half four percent in real terms and that's true that's that's about right you get surges it can be worse but that's that's a good estimate of what it can do and you want um inflation or that number the p in the equation to be one meaning you know nominal gdp times one equals real gdp uh or sorry real gdp times winding was nominal gdp you don't want it to be inflation or deflation and then but then he said velocity is constant so if you know the other three parts of the equation it's like a thermostat you can just dial the money supply up or dial the money supply down maximum real growth with no inflation that's central bank nirvana he used to joke that you don't need a central bank or you just need a computer but where friedman was wrong and this is where irving fischer was right going back to the early 20th century velocity is not constant and it was actually from 1950 to 1980 it was so to credit friedman during the bulk of his career it actually was constant but it wasn't during the great depression or 1919 and it's not today it has collapsed now um but even at that our our austrian friends say you know that money had to go somewhere you know even even in the other measures but um but what what that misses uh is that people say well how can you have a dollar shortage with with you know trillions of dollars in new money you have one quadrillion dollars of derivatives of balancing derivatives in the banking system as a whole so that slice whether it's um the seven million sorry seven trillion of uh of m0 or a larger number perhaps you know 24 trillion of m1 that has to support one quadrant 1 trillion derivatives um and uh and by the way for those who who don't know a quadrillion is a thousand trillion that's what a quadrillion is so um now it's not dollar for dollar you know jamie dimon said well who cares just purple collateral but uh but you had to put up some collateral not a quadrillion dollars worth but uh but a lot and then you get into the collateral issues like what's good collateral and the the answer is what this is what the banks are saying to each other and this goes back to my conversation walter wriston and movie rollover and all that the banks are and in fact what happened in 2008 the banks are looking at each other saying i don't want your corporates i don't want your mortgages i don't even want your tenure notes give me at a stretch i'll give you i'll take a two-year note with a haircut or what i really want a 90 day bills i want treasury bills and so you got to go out and get the treasury bills and they're dollar denominated which means you need dollars so if you're a credit swiss or barclays or hong kong shanghai or deutsche bank you don't live in a country that prints dollars the u.s does but the european central bank doesn't um and so so there's this enormous demand for dollars not because they love the dollar but because they need to buy dollar denominated collateral of a very high quality in order to pledge as collateral to support the quadrillion dollar balance sheet derivatives position and plus any other trading they're doing and so that's that's the clue that's the secret that on unlocks or the key that unlocks the whole mystery which is it doesn't matter what the debt for now anyway it doesn't matter what the gdp ratio is the total debt is the deficit is the labor force participation rate the weaker none of that matters what's going on not in m0 but an m1 and euro dollars in particular is a mad scramble uh for dollar based high quality dollar base collateral and that's what's driving the dollar and what's amazing about that that was a phenomenal um you know way to put us where we are today and how we got here um but the frightening thing about it is obviously people are actually debating you and i aren't but other people are debating whether we're in a recession and then to the extent anyone really agrees that we're in a recession they imagine that it will be short and shallow and there's no chance that we go through another 2008 type scenario again but it seems to me that's not even not remote a possibility given the amount of debt we've accumulated and you know just the um how stretched consumers are with negative disposable income and corporations you know zombie companies they can't even service their debt at rates from a year ago blah blah blah so if we go into another financial crisis given what you just highlighted where does the dollar go then do we reach a point where the dollar pushes to a level where something breaks and everything resets and and if so envision that playing out that's exactly the right word something breaks so everything i just described is playing out and there's data to back it up and we get into not just an inverted treasury yield curve which is interesting you know in the kind of twos to tens and um uh well choose the tens of the main sector where it's inverted um and we'll talk a little bit more about what that means but even more profoundly in the eurodollar futures uh curve which is yeah i i call the treasury yield curve um a uh a short-term uh bet on a long-term rate the euro dollar futures curve is a long-term bet on a short-term rate because what the euro dollar future is it's like i'm bet we're betting on what an overnight rate is going to be two years from now and so so okay long-term bet on a short-term rate um and it's inverted and it shouldn't be inverted that should never it does happen but it should not happen yield curve should be upward sloping just because time value of money and uncertainty etc if i lend to for a longer period of time or make a further forward bet i should get a higher rate well how come people betting on overnight rates uh a year or two years from now think that rates are going to be lower well the only exponent and that shouldn't happen the only explanation for that is we're going to go into recession it's going to get a lot worse but but going back to your question steph you made um a really important distinction between a recession even a bad one uh let alone we've been in a depression since 2007 and a financial crisis because they're two different things they they can come together but for example in 1998 uh we had an acute financial crisis and with long-term capital management and i had i negotiated that bail out that front row seat on that one but 1994 um the tequila crisis um and there was the bomb market massacre um yeah there have been these financial crisis but there was no recession in 1998 in fact the nasdaq went to you know whatever it went to the moon we were like long-term capital we were licking our wounds after the meltdown and you know turning on cnbc and like watching you know uh pets.com the sock puppet and jdsu and the guy with the beret and all these things they're going to the moon like we just got wiped out um but the but the opposite is true you can have a um recession without a financial panic uh 1990 we had you know kind of a mile recession there was no financial panic then uh 2020 was interesting that would i don't know what to call i mean technically a recession but you know the the economy drops 31 annualized and they say two quarters first and second quarter of 2020 but it was really two months i mean if you break it down it was march and april they just happened to be they happened to fall in two quarters and took both quarters negative but it was really two months down 31 percent and annualizing two months and then up 35 by the third quarter that was crazy so maybe that's technically a recession but that that's well that's just what happens when you shut down the economy we don't need to be macro economists or say hey you should you close down the economy that's what happens but there was not a financial panic stock market fell but the banks didn't fail um and nobody was worried about you know nobody's lined up to take the money out of citibank etc um but sometimes they so you can have recessions without panics you can have panics without recessions october 19 1987 dow falls 22 one day no recession but sometimes they do go together in 2008 they did we had both we had the honest goodness financial panic uh everyone knows you know bear stearns fannie mae freddie mac lehmann aig but um i can tell you and i've spoken to a lot of people morgan stanley was days away if you talk to john mack he's like hey i got no time to bail out lehman we're trying to keep afloat ourselves and then goldman would have been behind that probably city and um and maybe jp morgan would have been the last one standing um so uh and the economy collapsed in the stock market fell uh well over 50 i think 60 so that was an example of both and what i'm concerned about again this is to your point is we may be heading into both and it was every if everything i said about what's behind the curtain the plumbing the financial system acute dollar shortage scramble for collateral which leads to deleveraging because if i can't get the collateral i got to take the trade off yeah leveraging the balance sheets etc uh which are the early warning signs of a global financial panic and a likely recession again we've had the two quarters it could get worse even if the third quarter is positive maybe it could drop hard in the fourth quarter once we get into the winter and winter weather and you know shutting down german manufacturing uh right yeah people in germany around the woods shopping on trees right now i know people in germany chop and naturally something yeah and interesting the the extension course don't go the far so they need gas-powered chainsaws to chop down the trees so i don't know what they're doing irony is beyond right so so that will get a lot worse but we could very well and and there's a fee their feedback loops of course so we could very well be looking at a severe recession and a global liquidity crisis two different things but they could converge this winter and that's definitely cause for concern yeah i would say so um and yet the markets you know at least as judged by the last few days seem to view the odds of a fed pivot is extremely high and therefore you know the dollars probably peaked and uh why not just get long risk assets again uh what's your view on that well here we go gotta give a little credit to uh to robert schiller he wrote a great book about three years ago or not that long ago three four years ago maybe called narrative economics and uh i i highly recommend it and he it's interesting because i'm reading it in a really good book and then he gets to his math models like oh i know that one because he um he used the epidemiology model what's called the scir model uh which um i studied years ago and have used it in my own models um but uh you know you always hear the word you know the term financial contagion you know like when bear stearns and lehman and you know whatever financial contagion well it turns out the math is the same i mean the way a virus spreads or bacteria infection spreads mathematically in terms of super linear functions and recursive functions is exactly the same as a financial pattern so that so when he imported that model i was like yeah you got it that's that's the right way to look at by the way scir stands for uh susceptible meaning you could get the disease um e uh is exposed so you actually got near it i is infected and r is recovered um so susceptible exposed infected recovered scir model what they leave out is d for death there's people die in in pandemics but uh but then they're out of the population but it's it's a way of um seeing like i remember in the early days like even in january 2020 um you know very early days of the pen of the uh cov2 uh pandemic um as covid uh is the disease thesaurus is the virus um looking at uh because johns hopkins put that website up early that you know that leaderboard uh and i started i wrote a book about it later but or not not much after but uh i said yeah yeah unless you were really watching that website a lot but you would see um you know with the milan fashion week when the when the chinese came over to milan uh leave aside whether they the chinese were pushing them around the world that's a separate issue but there'd be ten cases in milan and then the next day there would be you know 20 and then three days later it would be like 105 or something like that but wall street was sitting there saying it's a hundred cases i feel sorry for him but but if you do but if you do the math that's a super linear function you don't have to be uh uh you know vermont to say that's going to go into the hundreds and thousands and millions very in a matter of 30 days which it did so um but i was i was watching the um the the exponent not the abs the number and it was going up that way but um but the same thing with financial so anyway so schiller has this book now narrative is just a fancy word for a story it's like okay you can call it a narrative and it means a lot of people buy into it but it just means there's a story that people believe and this goes back to uh the greatest sociologist of the 20th century robert k merton i was uh i did have the privilege of meeting him late in life because he was the father of robert c merton who was my partner long-term capital when robert seymour won the nobel prize in economics there is no nobel prize in sociology but if there were robert k merton would have won it but he's the one who came up with the phrase the self-fulfilling prophecy and the classic case is you wake up in the morning the bank's fine but somebody gets nervous and they run down and take all their money out and somebody sees them again what are you doing i'm getting my money out of this bank okay i better get my money out too next and everyone's like i don't want to be the last one out next you know there's a line around the block and by the end of the day the bank shuts its doors and they're bankrupt um but they weren't bankrupt at nine o'clock in the morning it's it's because a story spread uh people believe that people acted on them that's the key do you act on the story you can make the thing you're worried about come true even though it wasn't true when the story started and um and by the way that in the 19th actually happened in the 1930s but there was no social media but there's word of mouth i mean we've had that's social media it goes back to the length of civilization so um uh and then he had you know some great narratives about the you know the the first first half of the great depression 29 to 32 yeah unemployment was high and the output was down and it was bad banks were shutting but not everybody was unemployed not every business was shut but if you if you had a job or you had a business or you had money or you're wealthy it was bad form to spend it it was like well you know my neighbor's laid off or my friend's business is shut i don't want to be out buying a new car right now looks bad um but then when roosevelt was elected in 33 32 his election but 33 sworn in it flipped it was like hey happy days are here again and go out and spend the money and the economy actually grew between 33 and 36 the fed screwed it up again in 37 but but it grew and stock market went up from 33 to 36 in the middle of the great depression but his point was um the narrative that it was bad form to spend money or you better go spend money two different two opposite narratives but a flip from one to the other but they both drove the economy nothing would have been better in 1930 for than for people to go spend money because that would have increased aggregate demand so that's that's a classic case study but what so i kind of knew a lot of that but what i learned um is that narratives can be true sometimes often they are but they can be false you know there's a completely false narrative can be extremely powerful if enough people buy into it and that's what i'm saying about the fed pivot the fed pivot is a narrative and it went like this um so inflation takes everyone by surprise and last fall late 2021. november 2021 j-pal says time to retire the word narrative he actually said that in transitory sorry transitory time to retire the word transitory i think he said that some congressional testimony uh and then inflation goes to the roof january february march april the stock market goes down nasdaq started going down actually last november dow s p start to go down in uh january and we're in a bear market by by june um it's still going down but then after the fed raised rates in march may and june and then the yield curves inverted and some people weren't looking at them but some people were uh the narrator is like well wait a second the yield curve inversion is telling us that rates are going to be lower six months from now inflation is cooling off a little bit and it has you know the price of gas has come down a little bit um and so they're going to have to cut rates that was the pivot they're going to have to cut rates in january february and rate cuts are good for stocks so buy stocks so then then we get this rally in july and august and the stock market's you know we're covering a lot of this not all the lost ground by the way but but a lot of it in the stockholm's rally all based on the fed pivot narrative which i never bought into i mean i you don't want to stand in front of a moving train i wasn't going to short the s p but i i did not buy into the narrative i said for two reasons number one oh inflation came down from nine to eight well that's nice but you say you want to get it to two you're a long way from two and how much demand destruction how many rate hikes uh how much you have to do to really destroy the economy to get inflation down to two the answer is a lot uh and tell me why that's good for stocks and it's not right but the other reason is and this is a little more sophisticated analytically but just because the yield curves are telling you that market pros think rates are going to be lower doesn't mean the fed's going to cut i mean that is the message but it doesn't mean the fed's going to get the message how many times does the fed get things right the answer is never zero exactly and then of course this goal comes to head i think august 26 at j pal's jackson hole speech i've never heard of fed chair we've been following this a long time never heard a fed chairman use the word pain twice in the same paragraph but he said this is going to cause pain it's going to be very painful uh and then so that kind of bursts the bubble of the pivot narrative and then the stock market goes down i think six straight days they get a little so what's going on now i don't know maybe a little shortcut ring maybe you know the the by the dips crowd have not gone away they're still around um the the i'll say talking heads uh i guess someone but you know the the cheerleaders i'll put it that way uh the wall street cheerleaders have never gone away the wall street always wants to sell you something the um people who think the fed knows what they're doing there's some of those a lot of those actually bloomberg um and uh and so and the buy the dips craft so yeah okay but but the fundamentals have not changed the recession is here or if if it's if we get a little breathing room it's going to go down really hard this winter all the problems we talked about and most importantly jay pal told us i always say that forecasting the consequences of fed policy is really difficult but forecasting fed policy is the easiest thing in the world because they tell you what they're going to do you just that you just have to listen and know there's a little so you need a dakota ring there's some secret language and you got to know who that they always have a reporter du jour there's one reporter that they speak to in the old days when they before they did this there was primary deal or economists you know you know great guys like lacey hunt and you know people had already lanced in and you know some of the lesser-known primary dealers the fed said nothing publicly they were black hole but they would leak it to their favorite primary dealer of the week um and you could kind of front run the fed legally because they're part of the government uh for a while now they do it through reporters but right now it's a nick timmy harris of the wall street journal so if i read it in usa today i'd throw in the trash but if i if nick timmy arrow says 75 basis points i'm like okay 75 basis points but the hard part is is what's going to happen as a result of that and the fed's thinking maybe hard landing but not too bumpy uh and i'm thinking more like a plane crash yeah i'm with you i mean i'm just blown away by their complacency about raising rates i mean we um people give me a hard time for saying this but on a percentage basis is true the fed has never raised rates this aggressively in this short period of time in history not even during volcker i mean he doubled fed funds um you know they've taken it up tenfold in less than six months and the idea that the level of rates is still low is obviously irrelevant because all the companies who are borrowing at those record low rates are going to have to roll their debt at substantially higher rates so you know it seems to me like there's this overwhelming complacency both on the part of the fed and then the people who are buying into this pivot thesis that well you know we'll get through this it'll be short and shallow and the fat'll pivot and we'll be right back to the risk you're exactly right and assuming they do 75 basis points since september 21st which is my forecast but like i say they kind of told us um right now you're at um the target rate for fed funds is now three percent um well yeah sorry three and a quarter but uh at the top of the range but um it was zero on march first so for people to say oh three and a quarter doesn't sound that high it was zero on march first three right half percentage points in uh eight in eight months or less uh that's unbelievable and they got two more meetings this year and even if you know you could say 50 basis points in november because it's you know three working days before the election they don't want to be too you know j-pal may be right j-pal may be a republican but he's but he's smart enough to know the fed wishes they could keep out of politics now they can't and they don't but they wish they could and the last thing he wants to do is 75 basis points three days before the election so three working days because they got the weekend in between so um so let's just say 50 but you do another 50 in december i mean now you're four and a four to four and a quarter range in uh nine months yeah that's three that's extraordinary well we already are getting a window into what's coming down the pipeline with housing i mean it's obviously the front lines of the economy being the most interest sensitive sector and i mean we've seen what is it 40 decline from the peak in new home sales i mean these are breathtaking and the peak wasn't even a year ago that's not even year on year that's like nine months ago down 40 percent and i you know i always say if volume precedes price this you know this is going to get ugly and that's just the first warning sign i don't know i mean like maybe i'm too bearish but it just seems to me like the fed is maybe pushed too far already but they've got to keep going because as you pointed out you know with the inflation at eight sure it's down a little bit but that's not a number that anyone's going to view as reasonable right including starting with the fed they uh um they they say too now i read one analyst he said well maybe we'll just get to three uh well first of all jay powell's not saying that and secondly good luck getting to three uh without enormous damage and uh and stuff not not to get too geeky but like sometimes i can't help myself there's something there's a concept it's not that difficult it's called db01 which is the dollar value of one basis point and what it means is if interest rates go up uh you know whatever 25 basis points are down to 25 basis points what's the change in the price of securities uh i know what's the you know the rates are prices down rates down price is up that's just basic bond map but but it's not uniform or linear at all levels of rates so when you at higher rates the db01 is lower and at lower rates the dv01 is higher which means the impact of every basis point increase in interest rates is greater in terms of the lower uh at lower levels right so in other words raising rates from i'll just say two to four for a range is much more damaging to prices than going from uh eight to ten eight to ten percent much higher interest rates whole different world but the impact of that on bond prices is less than going from two to four where it's like you're just putting these bonds in the seller and that plays out in derivatives world so that's another factor um along with scarcity of collateral the shortage of dollars uh you know quadrillion dollars in notional dealer regime balance sheets and a higher db01 meaning these interest rate hikes do more damage per basis point to bond prices than if they were at a higher level so so far from saying we're low levels who cares is quite the opposite at low levels that's when the damage is done yeah which kind of brings us to the question of if the destruction is going to be so much greater um and the fed in my view i don't know what your view is how do they respond to that when it's clear you know when the market's down let's say 50 percent the economy is in a severe recession not just some two-quarter brief fair um i presume the fed will then pivot um or what is your view it seems to me like they not only pivot but they are going to have to print more money than we've ever seen before yeah i stephanie's interview with jim will continue over in part two which will be released on this channel tomorrow as soon as we're finished editing it to be notified when it comes out subscribe to this channel if you haven't already by clicking on the subscribe button below as well as that little bell icon right next to it and be sure to hit the like button too while you're down there and remember we're continuing our new practice of publishing my top takeaways from these weekly videos to get mine from stephanie's interview with jim for free just go to wealththeon.com adamsnotes and finally if the challenging macro outlook that jim is detailed in this interview has you feeling a little nervous about the prospects for your wealth then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth keeping in mind the trends and risks that jim's mentioned here just go to wealththeon.com and we'll help set one up for you okay i'll see you next in part two of stephanie's interview with jim rickards you

Channel: Wealthion

Views: 271,406

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Id: A18Q-dJAa9A

Length: 49min 25sec (2965 seconds)

Published: Thu Sep 15 2022