Real Conversations: Defending Your Wealth During Global Crisis → McCullough & Rickards

[Music] hi I'm Keith McCullough and welcome to another real conversation with my friend Jim Rickards the one and only right now Jim thanks for spending spending the time with me today very timely and topical day to be talking about everything that the week that we talked about you've been talking about we're just chatting back and forth of how hard it is to actually have a timely and topical book that fits the times you've had many this one aftermath that we're gonna be talking a little bit about today in terms of having you know some strategies and not everybody has to lose all their money all at the same time obviously and and you've well prepared people for that so we will talk about that but road to ruin 2016 you're just you're just suggesting that that's might even be more popular right now due to due to what you called out as the ice 9 factor maybe we'll start with that you know that's just it's kind of this thing that most people want to say that nobody could see coming but a lot of people evidently still don't know how to deal with it well yeah I saw a few years ago and I took it from Kurt Vonnegut just to give credit Kurt Vonnegut wrote a book in the early 60s called cat's cradle dark comedic novel which I highly recommend but then just briefly in cat's cradle those physicists too came up with an isotope of water and in a vial and had the characteristic of a property that when you poured it into water the water would freeze but every molecule would come in contact and it would freeze also so eventually all the rivers streams the oceans the planet would freeze and life on earth would come to an end so it was a doomsday machine and I took that idea and brought it over to financial markets and the the idea was in a panic or in a crisis everyone wants liquidity that's the best description of a financial panic I've ever heard as everybody wants their money back and so what happens is you certain venues get under stress and you close so you close the stock exchange well that doesn't make the demand for liquidity go away people go and cash in the money market accounts then you got to close that then you people run to the banks and then you have to close the banks etc so it spreads just the way this molecule did and eventually the entire financial system is locked down at least temporarily so I took the ice nine I call that ice nine what's interesting you know I'm busy on Twitter and social medium and and various venues and I see the ice nine phenomena which we just described being repeated over and over and you know as a as an accredited Kurt Vonnegut but in the financial sector it kind of comes from that book the road to ruin chapter one where I describe it but it's not become sort of standard-issue financial jargon after people say oh that will never happen I'm sorry it has many times the New York Stock Exchange was closed for five months from August to December 1914 at the outbreak of World War one the bank's FDR closed the banks by executive order in 1933 never said when they would reopen they did eventually reopen but they were they were just closed for for eight days we've seen well the circuit breakers not quite the same as closing exchange but it is temporarily so in 19 2013 the banks in Cyprus were closed 2015 the banks in Greece were closed so this happens on some skill over the world hasn't and it's it's it's the risk in in these uncertain times and what we were trying to do is just more people about that well I think I mean what I've always had a profound respect for in terms of your work and bodies of work now I mean now you have really the chronicle of books that you've written and they do include the new bowl case for gold that's another great book I mean our currency war I mean you've effectively I think you coined that if you didn't and I'll just say that you did the reality is it like you're all of your work really is grounded in risk management within the context of long super long histories and cycles you know when you started aftermath actually that's how you started you started with the Odyssey I believe in and and and you you try to just pull people back when everybody's pulled forward into this manic media that we've developed and yeah you and I participate in it on Twitter fully loaded because that's where we should be on the front lines of it but really the historical context is what's missing on Twitter and I wonder you know how you feel about how you feel about your process today and if you could go back if you would change anything at all about that you know I mean the books you know kind of stand on their own but you write the introduction to aftermath that's my most recent book I did use the the myth of Scylla and Charybdis for those who aren't fresh on the Odyssey you know DCs senators crew we're trying to get at the end of the Trojan War they were trying to get home to wife and family and they had this voyage and it was full of adventures but one of the things they had to go through were Scylla and Charybdis Krebs know Scylla was a you know kind of monster a a a woman who was a ferocious woman who would you know kill the crew and had a belt of dogs heads that would eat you a lot Charybdis was a whirlpool and he had to sail between them and this was an early study in risk management because what Odysseus said was well if I go close to Scylla she'll kill some of my crew but we'll make it through but if I go to Charybdis it's all or none and we're gonna get sucked down the Whirlpool so he chose Scylla and that's another story but as I say name your poison I used that to analogize the situation the Federal Reserve found itself in beginning in 2014 I've said this for years and it's in the book but the Fed what were they trying to do this is all you know water under the under the bridge but what they were trying to do after the 2008 crisis going through QE one two and three they were trying to get interest rates up to around four percent and they were trying to get their balance sheet down to about two you know a trillion give or take and the point was trying to normalize rates and the balance sheet so that when the next crisis came they would be prepared history shows and statistics very good you have to cut interest rates 5% 4 or 5% to get the u.s. out of a recession and we all know that you know beginning in 2008 the Fed took their balance sheet from 800 billion to four and a quarter trillion so they were trying to get ready for the next recession but the question I raised and this is Scylla and Charybdis how do you normalize interest rates and the balance sheet without causing the recession that you're preparing to cure and I said they would not be able to do it and that's what happened at the end of 2018 j-pal threw in the towel he he said first he said we're not going to raise Ritz anymore it was that December 2018 rate hike rate hike we were talking about not that long ago that led to the Christmas Eve Massacre that we all remember but from October 1st to December 24th the stock market fell 18% not quite a bear market but close enough so first he said we're not gonna raise rates anymore okay then he said well we were thinking of cutting rates then they actually did cut rates by by March 2019 then they got rid of qt remember quantitative tightening and then they went back to QE depending on how you define it with the repo crisis in September or certainly if you say that's not QE because they were short-term assets well we're in it now they're buying long-term assets again so they had to reverse course but the point is rates are back to zero the balance sheet is actually at five trillion I forget four and a quarter they utterly failed to get ready for the next recession I'm not blaming pal because this was the legacy of Bernanke and Yellen and they set him up for this trap there was no way out so so they chose Scylla instead of Charybdis we're still standing but there's enormous damage here and now they're out of bullets I don't care what they say there's more tools in the toolkit know they're on I mean you're the balance she's gonna go to eight trillion all right so at the height of the QE 3 December November 2014 as I say it was four and a quarter four and a half trillion now she's gonna go to a Chile and so on the way rates are zero we can discuss negative rates that's that they don't work I mean that's that's the short answer we can smell a time discussing it but they don't work so the Fed failed to normalize before the crisis the crisis is here they've done all they can but let's understand what this is they have kept the lights on they have you know they built the successive bailouts money market funds primary dealers commercial paper muni bonds corporate bonds all these bailouts have already happened they've either guaranteed these markets or closed them on liquidity they've kept the lights on but don't mistake this for stimulus there's no stimulus if effect in any of this what it does do is it keeps the plumbing going but there's no stimulus from the Fed they are out of bullets from now on I saw a fiscal policy we can talk about that as well but but where they come together is that the Fed has to monetize the fiscal policy which they're in the process of doing so brave new world but yeah that was that was I wrote about that over a year ago and pose the dilemma said that there was no way out that they would fail and they have so I mean if you flush that out let's just say that six trillion will just pick a spot in between or along the way that's around like I think thirty percent of GDP you know what is the current framework from their perspective that they aren't out of bullets I mean as they just continue to increase it or as your point just quite simply what I think my points been which is the feds panics actually perpetuating market volatility and market volatility is what creates market crashes not the feds panic and saying that I have your back and I can stop this how do you how do you think about that well unlike the Federal Reserve research staff which rely on models that bear no relationship to reality I like to stay in reality so let's look at reality so okay we got out of the recession in June 2009 we're now this is we're not in recession we're in a depression and we can talk about that so you had this 11 year expansion but the average annualized growth for 11 years was 2.2 percent now of all the post-1980 expansions the average ghost was 3.2 percent slightly higher and if you go back you know to the end of World War two it was even higher than that between 83 and 86 we had 16% real growth that's real not nominal over five percent a year that's what that's what a v-shaped recovery looks like 5% a year or higher so we had 11 years of 2.2 percent growth versus a baseline if you want to call it that of 3.2 percent and for those who say you know 1% what's the big deal sorry the range is kind of negative 4 plus 5 get your calculator out do 20 trillion dollar economy times 1 percent compounded for 11 years tell me what you get the answer is 4 trillion dollars of lost wealth so that was our recovery that was before everything we're saying now which is you got to go back to 1929 forget 2008 forget to thousand-dot-com in 1998 long-term capital in 1987 one-day crash 22% forget all that you got to go back to 1929 to begin to get a sense of what we're going through right now but I'm McCoy is the Fed you know didn't foresee any of that that what they're doing as I say it'll keep the lights on but it's not gonna stimulate anything and the reason Keith is it's not because the money supply all this you know this Austrian Hayek monitor is Friedman's stuff about you know you print too much money you get inflation it's just not true and it's never been sure that what causes inflation is not money printing it's velocity it's the turnover of money print all the money you want but if nobody borrows it nobody spends it nobody lends it and you don't actually go out and as if they turn it over you don't get inflation actually the problem now is deflation and the greatest liquidity trap in history velocity is psychological the Fed can stick the landing of money supply they can you know you've told me a base money I'm zero they can make it anything they want so they can stick the landing but they can't change the psychology now I grew up in the 50s and you know early 60s I didn't live through the Great Depression but my parents did my grandparents did so I kind of absorbed that mentality they carried that with them through the rest of their lives when I was a kid we used to say rubber bands we used to collect tin cans and take him down to a Boy Scout Depot because why would you waste a tin can they were stealing it you could build tanks and and weapons I mean it was the world war ii aspect of it but that was the mentality that lasted for you know two generations until the 70s came along and then it was you know a party you know a party till you drop well something similar is going to happen now this economic downturn is so severe I I was driving the car there does listen to CNBC I don't mean to pick on CNBC they're all the same but there was an analyst and he actually said you start talking about green shoots and I almost jumped out of the car I mean I was like what because you know for those who recall 2009 was green shoes green shoes every five minutes on CNBC well there were no green shoes we got brown weeds again we got this 11 percent 11 years of 2.2 percent growth green shoots was like you know Chauncey Gardiner and being there that were no green shoes so that expression has been completely discredited whoever was using it must have not have been around that but but now and you know Larry Kudlow and Steven don't you and I mean nice people but boy you know Larry Kudlow is one of the worst forecasting records I can think of outside the Fed self but now they're talking about pent-up demand that's this is the key to the v-shape recovery it's pent up demand there's no pent up demand you know my wife and I often go out for dinner on a Friday night we didn't go out last Friday we're not going out this Friday well okay come June if things are better maybe we'll go out but we're not going to buy three dinners or tendons or however many we skip we're gonna buy one dinner but you stopped a man put your pen up - yeah well Pena pent up in the house but there's no pent up demand for those dinners it just lost well we lost output permanently lost well now I think people lose that like particularly because most people particularly on CNBC that are just talking you know generally just talk with no numbers no dates so I think you give people a healthy dose of that and that's why you know why would you speak to anybody else who speaks any anything else other than math history fully-loaded when it's actually coming out of your mouth what are you actually saying I think that a lot of people have can see the difference but but when you actually think of a company like a lot of these people journalists whatever again nice people but they've never and a lot of investors - I might add they've never actually built or run a company it's the same dynamics at work when it comes to drawing down your cash flows tapping your credit lines digging yourself into a hole you aren't pent up you're just trying to dig back out of that place and moreover there are a lot of businesses like hotels casinos just stuff you know as you know like they don't make any money anyway until they're back to 80 90 percent occupancy so I think that's what people like when I look at the duration of post depression post recession etc guys on slide 34 just so what Jim's saying like actually he's a human being that the numbers that he is saying is actually accurate and he's chronologically going through all of history quite quickly but again we've not had a greater than 20 percent drawdown in GDP peak to trough going back to your point back in the 1930s so again there's nothing in the remote area code of that and by the way you know with the the economic recession is people can see here of 2001 and - OH - you could have lost 50 60 70 percent of your money in the stock market you barely had a recession so I mean this is I think people are way outside of their realm of understanding what's actually happening here within the of history so my question on that is what do we know if anything at all Jim like I mean it quite seriously like why would I just say that it could it could be as bad or why wouldn't it be worse I mean I know a lot of most people that I talked to on the phone and I'm just sitting in my office all day long call after call to institutional investors every single one of them wants to know where the V is the other side can it end in a month and I'm having a harder time actually painting whether or not embarrass enough on this economic calamity well maybe I can help with the HEPA you know you make first we make a couple of our good points Keith number one is that they which I said we haven't seen this since the 1920s I mean we're forget about recession this is a depression so let's get the terminology correct we're down in the second quarter well we don't know in the second quarter is one day all right so but but order of magnitude twenty to thirty percent let's hope it's not worse than that but again you're back to your 1937 slide which was about eighteen percent then before that much higher but the reason the Great Depression by the way lasted from 1929 to 1940 those are the conventional dates from historians it was actually two technical recessions 33 to 1933 to 1936 was actually not I mean there was growth at 1933 was one of the best years in the history of the stock market but it was we were working off such a low level that even after the improvement you know some unemployment went from 25 percent to 11 percent well great but it's still 11 percent and that was the point in that 37 boom we get whacked with another very severe recession so people never never got out of it never got over it so as far as today is concerned you know a couple things so a lot of businesses so businesses shut down okay all the employees are terminated and we got this the cares act and okay I'm not saying don't do that you have to do that but that's two months pay that's what those loans are you're gonna get two months pay okay maybe you make a rent check and you know which we wish everyone well I get you to July then what I mean this is something that's going to linger for years this is that's not not more than just kind of a temporary lift and again there's no stimulus effect is it is like putting a tourniquet on a bleeding patient yeah I learned to tie a tourniquet when I was a 10 years old in the Boy Scouts but that doesn't mean your problems are over it just means you've stopped the bleeding a little bit so that that's one thing and then so let's say you terminated all your employees you shut your doors and that's I see it on the street so you we all do well let's say the crisis the the again the pandemic and the economic crisis are two different things that the the pandemic caused the economic crisis that's clear but that the pandemic will run its course I don't know when I'm not an epidemiologist although I'm pretty good at math I know how to work the models but you know by May or June or something does it die out because of warm weather and we Essen treatments and if you're gonna die you died already and the rest of recovery that's what happens in pandemics but that doesn't mean the economic impact is ever so now you reopen your as well if you laid off 20 employees are you gonna hire back 20 on day one probably not you might hire ten or seven say hey let's let's run lean and mean let's see if we can get through this and by the way loans notwithstanding a lot of businesses for hanging by a thread anyway not just small businesses you know pizza parlor dry-cleaning or whatever but some fairly large businesses and fortune 500 companies where we're on the edge they're not going to come back from this and so we're going to see bankruptcies we're going to see defaults we're gonna see a high unemployment linger you know some improvement yeah but not not nearly back where we were this is not sunk in yet and and you know I try to keep it I only deal with politics to the extent it affects economics so you know vote for who you want I'm not here was a political cheerleader but I'll tell you the market is struggling to we price to discount for the pandemic they're struggling even harder to discount for the depression because they don't know where the bottom is one thing in the market I can tell you is not discounting but this we're going to get a wake-up call was President Biden this election has gone from my models which were highly I create they worked and I predicted Trump in 2016 you know before the election but I had Trump at about a 74 percent probability rising because of the theta and the the optionality of to ninety percent by November well that's out the window because the recession's here or worse so now it's a toss-up you gotta start over and take get new data yeah it's a toss-up so so President Biden you know higher taxes more regulation green New Deal a few other goodies market has not discounted for that and and they're going to have to start thinking about so we're far from the bottom you know the the the markets trying to discount and I mean this quite seriously you know how it works I mean literally every day six calls in a row I have to tell our sales team now forty five minutes max because I'm gonna lose my mind by the fifth call everyone asks the same quote your it's like there's one community of people which is the majority they're like well because it was so bad it has to come back so fast and then you have a minority percentage of the community by which I could see their returns reflect that they're the minority but they have the they actually preserve capital who think by virtue of it being a pandemic you're ensuring that you're having the first recession depression therefore it's going to be much longer than you think so it's you're at a fork in the road like Yogi Bear would say and you got it you got to take the fork but literally literally I'm just using my own experience and and it's not a it's not a qualitative number I'm saying there's probably a third of investors who are positioning for this appropriately and on every bounce you lose some of them because they have to almost there almost forced to believe and that's the bigger thing I struggle with the Jim I truly do it you I need you as my shrink right now like what the hell am I supposed to say to them without pissing them off further and in terms of answering the question if they want the if they want my answer well I'd say a couple things you know and my predictive analytic techniques which obviously do have a very good track record it's a lot of what I learned and you know ten years at the at the CIA because what do you do in the intelligence community always say if you have all the data a smart high school kid can solve a problem yes what the intelligence community has to do is how do you solve problems when you don't have the data yeah you know you had one 9/11 you know Janet Yellen away for you know 20 911s and it's sixty thousand dead and then we'd have a database that would satisfy her we had one and we had to get ready for the next one so what do you do well there are techniques they're not free cuentas statistical techniques you actually use Bayes theorem what is based on incomplete information so you start with a guess and you're honest with yourself it's a guess it's a smart against as you can make it but it's a guess but what you do you update the guess based on posterior information new information that's what the the Janet Yellen type statisticians hate because like oh no give me more data it's like I'm sorry we don't have it let's that's as did paraphrase Donald um so let's go to world with the data we have now what happens is when something happens after your initial estimate you assess the conditional probability of that happening if your estimate were true or false notice what are the what's the probability that that item to would have happened if my original estimate was true well if the answer is you know extremely high then you're like okay now I'm going to improve my odds I'm going to go from fifty to sixty percent is the case maybe or vice versa you go the other way discard it so you you update with the information you get recognizing that that none of this is perfect but it is a very powerful discipline technique so and then let's not underestimate in fact this may be front and center is the the psychological aspects of this and you know behavioral psychology is you know the smart people read Daniel Kahneman and the popular version is Michael Lewis or whatever and Larry Summers talks about it but it has not been incorporated into mainstream economic models that people know about it but so when you combine those two in a little history for good measure what you get is an asymmetry just because the in fact this is not only worse than the Great Depression is much faster than the statistics we looked at for the Great Depression played out over three to four years this happened over three to four weeks and so we we've never seen anything like it before you probably have to go back to the Middle Ages for for something comparable to this and again that the the psychological boundary is enormous so you have a swift rapid decline that does not mean there's no logic behind saying you get a swift rapid recovery you're much likely to chug along the bottom for a long time little by little you'll you'll make your way higher but things will never be the same that's a you know get rid of the denial get rid of the happy talk understand it exactly as I described it and you'll be you'll be much better prepare but you know I mean I think well not only his green shoots been discredited but by the dips hopefully has been discredited also but no I see the same thing Keith in my message traffic and I've consultant clients and consulting clients who haven't called him for years all of a sudden they got to talk to me you know yesterday which is fine I'd like you I take those calls but they're they're so afraid of missing the bottom og is this it is it over can I jump back in it's good way to lose money yeah it's it goes right back to the problem that you and I have in general with the consensus or the the the establishment which is quite simply that they think everything has a linear relationship so a V you know quite quite obviously you go down one way and you go up the other way and it should be linear it should be symmetrical which in real life is total I mean just a couple slides to show that like the front end of this and and by the way thanks for basically reiterating exactly what we do we imply a Bayesian inference process every data point we get we put it on the front end of the historical context that we're riding from and a lot of people miss that we were you know in the middle or near the end of a full employment cycle anyway so this was a very dangerous place just like 2011 was to have an economic shock because it only ensures that you've slowed at a faster rate and a good Bayesian would just assume that that's is there's no lucky or in calling viruses 9/11 pandemics etc but on slide 78 guys on jobless claims that's the real front end of it when you you you have a hundred percent probability of being in a recession and in this case some some version of a depression when you're past your full employment cycle peak but when you take that data point from last week Jimin we're gonna get the next one tomorrow these they're every Thursday no matter where you're gonna go you're gonna get a nonlinear reality in your model and the reality is people don't have models for the slide eighty one where I'm just showing you jobless claims against consumption growth I mean it's not even on the page not even on the page I mean so there's non-linearity and then there's that I mean so to me that scares the out of me I mean I mean as a human being as a as a stock market bearer or a late cycle credit bear you could have done that every single time at the end of the cycle and made money and you know done well for yourself individually but for the for the sake of humanity to have people rub this off as a v-bottom it's it's it's it's beyond ridiculous it's actually reckless I don't know how you classify doctors if they had this this kind of malpractice in terms of their opinions but it's crazy I think it's crazy right on yeah you guys edge has a rigorous model with your your Quad four scenario quadrants one two three four and I follow that closely I have rigorous models with what I talked about your Bayesian statistics behavioral economics and you know history and other inputs into that so our model is different but but the point is they're rigorous and they correspond to reality and interestingly they've produced the same result unlike you know I think can we stop talking about the Phillips curve for a change you know the inverse relationship between unemployment but what we're gonna get we're gonna get very high unemployment and probably deflation not just dis inflation but but deflation but we had very low unemployment for ten years with with this inflation with no inflation so there is no there's no correlation there you can these two things are separate for separate reasons so you just have to throw away these junk models that the Keynesian multiplier is dead dead ah I don't I don't just make statements like that for you know dramatic effect there there are models behind it in here I'm referring to Rogoff and Reinhart Ken Rogoff and Carmen Reinhart do both at Harvard now Carmen was at University of Maryland for a long time but they had that book you know this time it's different that's twelve years old but they've had a series of papers and they they look at the impact of debt to GDP ratios yeah and they've looked at it for across centuries developed economies developing economies everything in between selected for geography for state of development etc and what's amazing is they got the same results every time and it was it didn't wonder how you sliced it the same phenomena appeared which is that once the debt to GDP ratio goes past ninety percent your Keynesian multiplier goes below one so the Keynesian multiplier says you know government you're in a liquidity trap etc can do certain conditions by you borrow a dollar you spend a dollar and you get a dollar 20 of GDP and that's because you know the person you spend it on hires more people and they go an Aryan setter setters and that's that's called velocity or the turnover money well Keynes call this his general theory of you know employment and an engine money and interest rates but it turns out it's not a general theory it was a little bit of Einstein every day on his part it was it's a special theory which mean it applies in certain conditions with what are the conditions one is you're in a recession or just coming out of one you have a lot of excess capacity you have a low debt to GDP ratio and you have a liquidity trap and then government spending can substitute for private spending and increase aggregate demand there's a little bit of a multiplier could he actually be a timing difference but it works in those conditions none of those conditions apply we weren't in a recession Joe told me last month where we were in a eleven year expansion the debt to GDP ratio was not low it was it was a record high other than the end of World War two we did not have a lot of excess capacity unemployment was the lowest in 50 years so none of the conditions appliable now now you got this 2.2 trillion dollar spending bill that the Congress just passed that's the the fiscal stimulus but it's it's a spending bill that spends but there's no stimulus there for the reason I'm about to explain so throw throw two point two trillion of debt on top of a one trillion dollar baseline deficit for fiscal 2020 so of a sudden you're at three point two trillion but buried in a new point two trillion was four hundred and twenty five billion dollars for the Treasury to invest in the Fed and I've said all along you know people what's okay because the feds guaranteed the money market they've guaranteed commercial paper they've guaranteed the primary dealers you know etc and I said today who's guaranteeing the Fed and the answer is nobody but now suddenly but I famous dinner with one of the members of Board of Governors and I just looked at her I didn't mean to be rude but I said you know governor your bank the Federal Reserve is insolvent at the time interest rates were higher so on the mark-to-market basis the tenure notes for underwater and they were insolvent on the mark-to-market basis now we're not I said no one's done that I said well math and I said well I have and I think other seven urine solvent she her mom's and said well maybe we are but central banks don't need capital that's what she said central banks don't need capital I said well try telling that to the American people but apparently they do need capital because they got 425 billion from the Treasury but here's the point the feds gonna take that money and leverage it ten to one which means that will support a four trillion dollar expansion of the balance sheet on top of the four trillion they already have so you're looking at numbers like seven eight trillion dollars or higher that's where the feds going to monetize the three trillion dollars of deficit plus probably more on the way that we're getting on the fiscal side of things but this is uncharted territory but I've bought the way the modern monetary theorists we don't have to spend a lot of time on them my friend stephanie kelton professor at suny who state university of new york who is by the way they had economic advisor to Bernie Sanders and I'd remind people that that campaign is still alive but she's the the big brain of modern monetary theory this is what they wanted all along they said hey what's the problem the Fed can go to 67 trillion and legally they can by the way but they want to spend it on other things that it's actually getting spent on ethical debate but they said you could do this and I said no you can't you can do it legally I'll grant that but there is an invisible psychological boundary no one knows where it is Bernanke and Yellen didn't want to find out they were worried that it was you know so I'm 5 billion range j-pal is going to find out but there's a point at which you don't need a PhD or an everyday American you say you know I don't know what's going on here but I I'm out of here I've lost confidence in the dollar or this can't end well you know get me real estate get me gold get me natural resources I'll take some I'll take whatever but get me out of the dollar and that's where you can go from deflation to inflation very quickly but my forecast my forecast right now is deflation just to be clear about that but that doesn't mean applachian is dead forever you got the dry wood which is the which is the base money but all you need is that velocity match that's the match that turns into a conflagration that could be coming sooner than people expect well I mean by definition you talk about the the wrong side of the V and a nonlinear relationship on the other side all you need are for markets to crash at a faster rate I mean if you take oil to five dollars you can have you can that's one hell of a deflation and then you can reflate from there so I mean a lot of this has to do with like the semantics you can you know reflation is possible from very dire levels so I think I fit on the same side of that view as you just by the way on the just to just to wrap up and then we'll get some get into some of the questions you know because people are obviously gonna ask you know in all the different ways that you suggested they they preserve wealth can you walk through why you think like the last time the Fed looked like they were pushing on a string or just being ineffective and fully loaded with the bazooka and Hank the market tank etc even Buffett was in there in October of o8 it just didn't work you know Goldberg it did have a tough time and interest rates stopped going down from March to October avoid can you buy it you know can you just walk people through how that can happen after gold has already gone up a lot and and and by the way if you think it could happen again a correction right well you people talk about the price of gold and I I think of gold by weight so you know give me an ounce of gold sticking in a juror come back in a year guess what it's still an ounce of gold hasn't reproduced but of course the dollar price can change so there's basically there are multiple drivers but basically the dollar price of gold is the is the inverse or measure of your confidence in the dollar so a higher dollar price of gold means people are losing confidence in the dollar a lower dollar price of gold means people are gaining confidence in the dollar so everyone looks at you know and I'm the foreign exchange traders of course so they look at the dollar you know the euro dollar across trade or the dollar yen cross trade or they you know Australian dollar Canadian dollar if your trade are fine if you're in the export import business pay attention but those are kind of meaningless and the reason they're meaningless is that you're measuring paper versus paper there is no objective yardstick there is no exogenous metric to measure all of the currencies against the metric they're just being measured against each other right and so so that's the purpose goal services so we're heading for another currency where by the way I mean right now the dollar is strong probably make it a little stronger it's gonna it's gonna get a lot weaker by the fourth quarter and I'll tell you why because if the US economy is outperforming we don't mind a strong dollar it's kind of a gift to the rest of the world we say hey you can you can cheapen your currencies you know promote your exports and poor little inflation if you need it whatever we're strong enough to bear that we'll carry that weight on our shoulders because it's good for us to have trading partners but there comes a time when the US economy is so weak we take a different view we say you know what we're the biggest economy in the world if we go down we're taking the world with us and we can't go down so now the time has come for a weaker dollar and this last happened in 2011 2010 2011 that's when I wrote currency wars the the all-time low for the dollar the all-time low was August 2011 and guess what it was the all-time high for gold gold hit $1,900 an ounce the same time the dollar hit an all-time low and I used to Fred feds broad trade-weighted and exited to me that's the best index for this purpose now as far as gold is concerned it has bull and bear markets measured in dollars just like any other asset class if you want to you know privilege the dollar as your numeraire so the first bull market was 1971 to 1989 years it went up over 2000 percent the second bull market was 1999 to 2011 gold went up about 700 percent over those 12 years that's what a bull market looks like now we had two bear markets okay 1980 to 1999 that was a long haul and gold went down 75% 2011 to 2015 gold went down 50% but the the new bull market started akun dated December 16th 2015 you like timestamps Keith and so do I check a chart to December 16th 2015 gold was 1,050 dollars an ounce and I had a conversation with Jim Rogers which always remember we all know who Jim Rogers does you know greatest commodities trader of all time and this is before the bottom we were in the dominican republic and he said Jim because we're both bullish on gold we both see it much much higher I mean I've my latest forecast has it at sixteen thousand dollars an ounce in the next four years but Jim said to me nothing goes to the moon without a 50% retracement and this is talking about commodities that's just the way it is well and I kind of internalized that and thought about well guess what we had the 50% retracement if you use the 1999 base of 250 if that's your base you go up to 1900 so that's a 1650 gain take 50% of that this down 825 1900 - 825 bingo there's your 1050 or you're close enough within $50 an ounce so we had the 50% retracement we are now in the third great bull market and if you just take a simple average of the last two you don't want to get crazy just take a simple average of the 2,000 percent and seven hundred percent you get two you get two thirteen hundred percent or you know 13 times the price working off that up at 1050 base that's how you get into 13 and or higher price for gold and as you know if you don't do it logarithmically if you just do a dollar price every hundred dollars per ounce is a smaller percentage of the prior base so you do get these you'll have these hundred-dollar announced days and a lot of them coming up sets well that's what gold is going to do I I've always recommended 10% don't back up the truck unless you don't have any but you know don't go 50% in gold you should never be my view not not that high and in any asset category annika what it is but gold will probably be the best performing asset class over the next five years and also just so that we get people because people lose their Jim when I don't obviously clarify between the difference between paper and physical gold obviously we know what that is and thank you for again the paper needs to be redefined depending on what currency were you know using the calculation on but right but on physical there's a lot of questions on this and that's what I want to get to necks or questions if you have questions pop them in the queue your the other people will vote on whether or not you know your question is a good question or not but there will be a lot of different permutations of this question Jim which is what are you seeing right now in the physical gold market or physical precious metals overall well you know unlike a lot of Wall Street analysts I actually go in gold mines had been to quite a few open-pit underground I talked to gold dealers people well-regarded well-established in the physical business and one guy very good friend I've been in touch with for years and he's he's in the elite so he he gets his phone calls returned in the situation he called me up and said Jim I just want to tell you what's going on and he said you can't get it and and here's the point you know I record so you recommend $1,100 now $1,200 now it's $1,300 an ounce $1,400 now everybody honest nobody wants it and what I said was you know what are you waiting for because when you really want the gold when you wake up say I got to get some gold you're not going to be able to get it the time to buy it is when it's available so here we are $1,600 an ounce give or take and and the dealers don't have so the world Canadian Mint was closed the Swiss refiners can't ship the gold to the United States because of travel restrictions the one of the biggest gold warehouses in the world is you know we don't know about the Fed but actually it's the Brinks secure warehouse at JFK they were working on half ships because of the coronavirus there's another breaks facility comparable size in Salt Lake City guess what they had an earthquake they had to shut it down to assess the damage from the earthquake this is Murphy's Law of course if I ever catch up to Murphy he's in trouble but so so that the supply chain was breaking down quite apart from excess demand and so now I give your dealers friendly knows you and has a little inventory fine you might you might get a little bit of a delivery by the way the other thing that people don't realize is that you cannot sell physical gold more than 28 days forward or for delivery because if you do you are now a futures contract as defined by the Commodity Exchange Act it's illegal to deliver more than 28 days ahead unless you're on a futures exchange and so but that's what that's how long it's taking the US Mint is backordered for the rest of the year so they are producing gold but don't try putting an order in because they won't fill it because as I say they're back order they're there their output for the rest here is spoken for I've spoken a Swiss refiner same thing like Yale we might make a little more gold but it's all it's all sold in advance so we're at the point now we actually there's a lot of difficulty getting it and that's the the unfortunate flipside of people taking too much for granted but as I I said to anyone who listen and people read my books I said what you know what are you waiting for you get it when you can yeah and if you can't get the physical I mean the paper is not exactly a terrible option I mean it does reflect the underlying not-not-not the fervent demand for the for the physical as you're pointing out right now yeah but whether it was it sorry just quickly with a lot of risk it was a you buy an ETF gold ETF okay tracks the price gives you price exposure but that's not gold that's a that's a share in a trust that's traded on the new york stock exchange and they can suspend trading a redemption any not redemption because you can't redeem it but they can suspend trading at any time or close the exchange yeah just like it's just like people saying well I own a piece of this company because I own a share their stock no not really I mean sure yeah okay so the first question the one that has the most up votes and I if you don't mind I'm gonna take my crack at this so I wanna see if you agree the question is can you guys give us thoughts on whether inflation this is like the the question that everybody wants it to be a all in or all out and and I don't think I think our answers are similar to this let's see can you give her can you give it guys give your thoughts on whether or not inflation or deflation will prevail and a across a broader a time line you know so to me Gemini tell me if you agree or disagree with this I actually think this isn't gonna happen similarly it's never quite the same way but similarly to post financial crisis and recession of oh eight oh nine where you go from deflation you make a ton of money on being positioned for deflation to the inflation off those lows so that's why you know by 2011 to your point gold commodities the index are at all-time highs the dollars that afforda your low you know that's how I see this playing out you have to have your financial crisis and recession or however you want to are calling it a depression first and then we can have that other side of it do you agree with that yes and now let me be specific you know I like to say a lot of smart people out there they're not uneducated they have all the diplomas on the wall but they're miseducated which means they've been taught a lot of stuff that's just not true and the the biggest piece of MIS education as I said earlier is Austrian economics and and a neo monetarism and basically it was always you know money supply equals inflation money supply equals in pleasure which is not true as we mentioned you need the velocity so a lot of people are looking at an expansion of the money supply base money going from you know four trillion to eight trillion which it isn't happening very quickly and upon putting there milton treatment had on say well that has to be inflation and that that's not true and i'll explain why i press that's one thing we have to clarify the other thing is what do we mean by inflation if you talk about consumer price inflation that's different than asset inflation and most economists really think of it in terms of CPI so yeah gold will soar for the reasons I mentioned in some other asset classes could be oil off of off a low bottom will go up but that's not quite the same as CPI CPI is different so but but the things we're going to get very strong deflation now and for certainly the remainder of this year probably into 2021 but as I said earlier that can flip to inflation very quickly and the reason is not because the money supply but because of psychology and all it takes is a little spark somebody said wait a second gee they printed all this money the price of this one I better guess I better guess them before the price goes higher and then it and then it may you may see it in the price of gold thought you will see it in the price of gold and then that could lead to a generalized increase in commodity prices which could lead to the kind of inflation we're talking about so I don't think we have to choose between one of the other Keith you can get both sequentially the sequence can flip very quickly as it did in the 1970s I saw it happen and so my forecast would be a deflation for now chug along the bottom for a while but don't be shocked if inflate comes right behind that but don't don't base your inflation forecasts on money supply you need the change of psychology and that's a much slower phenomenon well the velocity of money you spend a lot of time talking about that I spent a ton of time talking about the volatility of asset classes in asset prices you know do you agree this is not one of the questions of the cube but do you agree that the only way to eradicate an imbalance is for the volatility to perpetuate the drawdown or the deflation of those asset classes well yes but the problem is that has been prevented from happening and it was the Fed the federal intervention got to be so common it wasn't even an intervention anymore it was just policy it was just the steady-state and so most investors saying yeah most investors a lot today don't don't even know what what it looks like for for prices to fall so far that you actually you know as a sham pater said you know created destruction we haven't had any destruction so so that's a very healthy process and now there was a role for government support to help people to help individuals but we haven't been doing that maybe we started last week but we've been propping up corporations and a lot of which should should die or should fail and it's a very very healthy process because assets then get reallocated to higher and better uses so I think we'll see that big now because this crisis is so great it's beyond the capacity of the Fed or the Congress to solve so we're going to start to see some real economic consequences that have been prevented from happening for I'll go back well certainly the 90s the early 90s you know pre LTCM let's go back to the 1994 with the tequila crisis with Mexico when you know Bob Rubin is Secretary of Treasury wanted the Congress to bailout Mexico and I said you kidding get the heck out of here and Rubin went back to the Treasury and use the exchange Stabilization Fund which by the way was was created with the profits of FDR's gold confiscation in 1933 so these things have long long legacies and he bailed out Mexico without congressional approval using the Treasury slush fund and oh by the way where did the four hundred twenty five billion to bail out the Fed go went into the exchange Stabilization Fund so that's their that's their slush fund so but we may be we may be witnessing the end of bailouts this is much more just helping people in need we're gonna see some big failures yeah like you say I mean it's I think it's just north of three thousand bucks per family of four or something like that that's only in the last a certain period of time this question there are a lot of questions on the currency war and I'm always interested in in how you see all the players at the table right now obviously we have MBS in Saudi Arabia Putin we have a lot of different players versus the prior currency wars that you've traded through and risk managed through how do you see this one playing out and what's the endgame yeah my best information is that MBS is being taken to the woodshed in a serious way meaning either you turn off the speaker turned down the spicket get the price of gold up or you know you you might be looking for another job and the the point being so MBS started this price war with Putin because they couldn't agree on output levels and Putin said we're gonna keep selling oil and then B I said fine all up in the spec it's in the price of oil tank if it was just a spat between you know a king and a dictator fine or your crown prince and dictator elite Leland to it but it's not that this is going to kill the permian this is going to kill North Dakota this is going to kill Pennsylvania by the way Pennsylvania is the biggest swings swing state most important prize in the upcoming election I again I don't vote for he want to but you can't ignore politics at a time like this so now in the last oil price collapse 2014 2015 it went from about $100 an ounce the low was around 23 24 somewhere in that zip code the break-even for fracking at the time was about $60 a barrel so as soon as that got below 60 you're well below 60 and stayed there a lot of those guys went bankrupt but it wasn't the end of fracking what happened was the big guys Chevron ExxonMobil you know and other large companies went in and they brought up the assets for 10 cents on the dollar and they lowered the breakeven to around 35 well 35 is a big improvement on 60 but it's still 35 it's not 25 and so if you don't get the price of oil up to 35 or higher fast you're going to shut down the Permian and that is there's a massive job losses and you know with all due respect to you know waitresses and bartenders you know some of my favorite people these are union jobs these are high-paying jobs with benefits and you're gonna kill Texas you're gonna kill North Dakota and you're gonna kill Pennsylvania and that could cost Trump the election so that will not be allowed to happen but a Putin will play ball notwithstanding author of all the Russian nonsense we've had to live through for the last three years he's a sensible player but the message and the Victoria Coates was selected for this mission it won't happen overnight but the message to mb/s is you get the price of oil up or you know you're you're done so so I expect that will happen not in one you know a media gap up but look for the price of oil to recover from here because it has to mm-hmm alright here's another question for you and you do by the way in this in in aftermath you do address this you know coherently the confederates whap lines etc etc keep the dollar down or do we eventually need a new Bretton Woods or is there any way any other way that they think of to get out of this yeah that's a it's a densely packed question so let's unpack it a little bit so the swap lines are open you know line up get your dollars and what's interesting about the this is that me just to explain for the listener so let's say you're a European bank and you have a dollar a lot of dollar loans or dollar investments which they do and you funded that with dollar liabilities which are frequently commercial paper you know short term deposits etc well there's now a run on the banks right everyone wants their money back and they're not rolling over the commercial paper etc and so like any bank you turn to your central bank for dollars but they sent the ECB does not print hours of prints euros so how does the ECB get the dollars to bail out its own banks the answer is the Fed prints up a bunch of dollars the ECB prints up a bunch of euros they swap them the Fed gets the euros and the ECB gets the dollars and then they hand them out to the banks that's how they keep the whole thing going well a couple of things about this number one this is not regulated they can do as much as they want number two it's off-balance-sheet non-transparent no there's a little more transparent than it was in 2009 but not much so we don't actually know the full extent of this we do know that the list of banks getting these swaps has greatly expanded so it's not our buddies that you know you know Madame Lagarde and and the head of the Bank of Japan and Cairo Tucson I mean this is now - a very long list of central bank's the interesting case to me is China that's that's the that's the third rail of this whole thing they need the dollars as much as anyone but they're also an enemy in terms of you know running concentration camps and letting this virus leak leak etc so do they get a dollar swap with the Fed well I'm not aware of one right now that they're doing it is pretty closely hell I don't think there is one in place but if they need that kind of bailout can they get it and will that cause a congressional uproar my estimate is yes it will and so they won't get it so so China is a big big wild card in this whole thing but the swamps turned away but then again what good will do this again is this keeping the lights on yes is it providing liquidity yes is a stimulative no because all you're doing is stopping the bleeding you're not the patient is in the healthy you know running around the track yep people by the way that's and thank you for all the questions in the queue people evidently Jim have read a lot of your books because they're we're going through a lot of different things you've written about one on the currency wars this is back from from from from that from the points you make there do you see the IMF stepping in soon with their own bazooka just like the Fed did Jim for individual cases yes for a global monetary reset no not yet now this is this gets back to a private conversation I had over drinks with the Tim Geithner and my thesis was that when the Fed's balance sheet was foreign a quarter trillion which it was in you know until 2014 that in the they were titled up but in the next crisis they would have to take it up again but they would be limited there's this again what I call an invisible confidence boundary and the MMT people say no such thing we can go as far as we can so we'll find out maybe the hard way but so so I began to ask myself well okay if the feds out of bullets if they can't if the Fed and the other central banks cannot reel iqua fie the world who has a clean balance sheet and the answer is the IMF they're actually not that leveraged their leverage about three to one they can print these Special Drawing rights sdrs you know it's the the name is intentionally geeky so nobody will understand it but it's world money so they can print world money they get handed out by the way if you read the articles of the IMF they can give it to the United Nations they're not limited to member nations they can give it to multilateral institutions including the United Nations so that would be how we would real iqua fire the world in the next panic and I talked to guys about that and he said no he said the IMF is very slow-moving we tried a little bit in 2009 which they did I'm the only one who noticed but they've did print some STRs in 2009 not that many he says slow moving didn't seem to have much of an impact we can't rely on that and I said well what are you gonna do and he selected me and said guarantees in other words it wouldn't be fed money printing it wouldn't be IMF money printing they would just issue guarantees which they did do in 2008 well we've seen a lot of that the Fed is the Fed has issued more guarantees than they have printed money so far you know kind of so far so good but but getting back to the IMF question they'll do individual bailouts you know I would I would think people like Turkey Lebanon small player but they're broke and in other countries we'll get these bailouts yeah that's just the executive committee just increase their borrowing authority so they've got some dust and dry powder but that's not the same as a trillion sdrs which would be about 1.5 trillion dollars stepping or substituting for the central banks they're gonna run the central bank playbook my estimate is it won't work they can do it again don't don't get me wrong when I say these things don't work it doesn't mean they're not going to be tried they are going to be tried they are they are being implemented as we speak but they're not going to work to solve the problem so you get to a point where people do lose confidence in the dollar and by the way it's not like the dollars gonna get weak and everything else is gonna be fine if you lose confidence in the dollar you're not running to yen or yuan or euros you're out of everything you're into gold that's where that's where gold is your your metric but just so the real problem the real problem is deflation because deflation increases the real value of debt and cash is a very good performing asset in deflation because your dollars worth more every day how do you get out of it I could solve them I can solve a deflationary problem in 15 minutes he went to the Fed board room and closed the door take a boat and come out say my fellow Americans as of now the price of gold is $5,000 an ounce and we're going to back that up with a printing press in Fort Knox so if you think that's cheap sell us your gold will buy it and of course they'll print the dollar so it's like an open market operation and if you think that's I'm sorry if you think that's rich sells the gold will buy it if you think it's cheap come and get it will sell you some gold you know is if you use physical gold and the printing press to conduct really what it's just an open market operation no different than what they doing in notes and you you pay a price and you stick to it then the price of gold is $5,000 an ounce now the point of that is not to enrich gold holders they don't care about them the idea is to get the price of everything else to go up because nothing happens in isolation this has been done twice once intentionally once by accident it was done by FDR in 1933 intentionally he the reason gold went up 75 percent during deflation was they were trying to break the back of deflation and it worked was what FDR wanted he wanted I mean he wanted he took all the gold first so he could make the profits which he did but but corn we steal copper everything else went up and it worked the economy started to grow in 1933 the guy who did it by accident was Richard Nixon he suspended Gold redemptions and in 1971 as we know he wasn't trying to get inflation but boy did he get it I mean by 1980 it was 15% I remember I first home on I borrowed money to buy a condo at 13% my mother cried because then occur first mortgages were like 2% but I said mom yes 13% but inflation is 15% so my my pre tax rate is negative 2 and it's tax-deductible so it's really negative 7 right I don't know whether my mother followed that logic but but the point is my after-tax cost of funds was negative 7 that's that's cheap money so that 13% money was cheaper than 2% money once you factor in inflation and if you need that you can get it but you got to raise the price of gold yeah that's a great I mean III think that's said by nobody by the way so thanks for giving people that because you know some of the questions in the queue and unfortunately we've run out of time I think I could speak to you all day and people could certainly listen to you all day so thanks for making so much time you've been very gracious with that but a lot of people really want to like that the questions are like so Jim if you were you know the head of the Fed you know how would you I would just how would you change things enemy and you've had these answers consistently over time in it and I think the one thing a amidst all the other questions because another question Jim people are really you know that you could see people are quite anxious about their assets and and that the confiscation of their wealth and what they should hold and and obviously this book that you've written is is solely directed to ideas around that topic but the number one thing that people need right now that they that they may have not had until they listen to you if it's their first time as an education and that's that's the biggest thing unless you know what the hell's going on I don't know how people can possibly make the next bex best decision whatever you have today if you're in a bunch of spots you know it's like you got to make up your you got to make up your mind and you have to make some good decisions the best decision you can make today is obviously the one with all the information you have today so I highly encourage people to read if you haven't read all of Jim's books and I'd actually read them in order obviously I wouldn't go backwards you're gonna have one hell of an education it might take you a little bit of time but you know there's a lot of time that you waste watching things in the financial media that are of absolutely no value to you at all in term and and you know as we know now Jim time is precious life is precious and we only have so much of that so thanks for again thanks I always thank you for this but I want to thank you especially this time for for providing an alternative education one that's actually based on a lot of truth you know so that people can prepare themselves so thanks thanks thank you very much thank you key that we just show up one one quick footnote obviously I'm grateful of people buy my books but if you want to know what's coming with a slightly longer horizon read a book called the mandibles by Lionel Shriver it's a novel so but you know fictions can sometimes be more accurate but that'll that'll take even further down the road but yes thank you very much and very grateful for people who buy my books and we're grateful for having you on today so thank you very much he's Jim Rickards I'm Keith McCullough you can find him on Twitter he's very active he's out there fighting the good fight getting the truth out there so thank you very much [Music]

Channel: Hedgeye

Views: 62,787

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Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day

Id: NaJsMhkztjQ

Length: 62min 53sec (3773 seconds)

Published: Wed Apr 01 2020