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11/20/2017 - European Central Bank Proposes End To Deposit Protection
11/20/2017 - Dr. Albert Friedberg Sees Accelerating Inflation Ahead, Will Be Problematic For Central Banks
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11/11/2017 - The Roundtable Insight: Yra Harris And Peter Boockvar On The Trends In The Financial Markets And Monetary Policy
FRA: Hi welcome to FRA’s Roundtable Insight. This is Richard .. Today we have Yra Harris and Peter Boockvar. Yra is an independent trader, a successful hedge fund manager; global macro consultant trading foreign currencies, bonds commodities in equities for over 40 years. He was also CME director from 1997 to 2003. And Peter is the Chief Market Analyst with The Lindsey Group and the co-chief Investment Officer with Bookmark Advisors. Peter has a newsletter product called The Boock Report. Spell book B-O-O-C-K-REPORT.COM. It offers great macroeconomic insight and perspective with lots of updates on economic indicators. Welcome gentlemen.
Peter Boockvar: Thanks Rich.
Yra Harris: Thanks. Rich.
FRA: It’s great today to start off with a quote that you had in your recent writings, Yra, on flattening yield curve. “It’s the ECB and Bank of Japan policy that is flattening global yield curves as investors search for extra yields” and you made the analogy to something similar which may be happening to the 1994 Orange County bond disaster. Just wondering if you can elaborate on your thoughts.
Yra Harris: OK. So when we look at this you know we were comparing it to Orange County. I do because that was a classic case .. it was actually a meltdown as the Fed started to raise rates and everybody was crowded into a bond trades. We saw first of all the yield curve seeping out dramatically even though it was a shortened because so many people crowded into that trade. But what you really found out what Orange County exposed is that Robert Citron, who was the Treasurer for the Orange County at the time, was busy chasing a little bit extra yield 25-30 basis points and there are many sell side firms who came to him and they were offering him these products and they were exotic products, very exotic at the time. And so in order to please his bosses he chased extra yield, very little. So at 25, 30, 35 basis points and I know this from Sheila Bair’s committee, which I sat on in Washington, in which we analyzed what went wrong there. So I had a pretty good behind the scenes look at it and it reflected in that. So when I look at the world today and I know Peter’s written to me this is a real problem in that people are taking on so much risk in an effort to chase so little return when you’re in a world where Italian bonds are yielding 1.75. You take on all kinds of risk as you search for an extra 30, 35 basis points because 35 basis points in today’s world is a lot. And for those who are trying to outperform the market and these are people who manage institutional money and big pension funds and insurance companies. They are taking on a lot of risk and that’s what keeps me up at night. And I think we’re getting close to crunch time in which some of these trades you know as Warren Buffet would say you know when the tide goes you can find swimmers naked. Well I don’t think there’s many babies who have been sold at all so I think we’re probably more what is it called the hedonism. I’m too old to know and to partake in that. But I think we’ll find out that there’s a lot of nudity in the waters of central bank liquidity.
FRA: Peter do you see a similar 1994 Orange County environment.
Peter Boockvar: I like that analogy. That was great. Yeah I do. It’s good to follow the money. OK so next year even in January when the ECB cuts their QE in half and the Fed goes from draining 10 billion a month to 20 billion a month. Liquidity is going to go to almost zero. Between those two central banks. So that’s a major change. I mean this year on a run rate the ECB was buying net of 700 billion euros of securities and you cut that in half next year and then you subtract what the Fed is taking out and that is almost going to nothing. And that is a really big deal. At the same time the Fed is raising interest rates and the BOJ is buying less ETFs and they’re buying less JGBs. That liquidity flow is going to turn into a drip next year and leaves no room for error anywhere else.
FRA: What about if we look at the U.S. Yra you asked how does the Fed deal with a flattening yield curve in your most recent writing. Noting it’s gone lower than 73 basis points. Any thoughts on that? I mean you did suggest something on the cutting the short term rates on that to make it similar steepened like the German 2/10s.
Yra Harris: Yeah because I compared, Peter and I actually went back and forth of this yesterday on this because I showed them that German 2/10 versus U.S. And if you were a wagering person you say well the ECB is doing all this buying. The Fed is as Peter says has stopped. And in fact is now in contraction. You say well the curve should actually be steepening in the U.S. based on those mechanics. And we should be flattening in Germany, but it’s absolutely the opposite. German curve is out to three year highs and 110 basis points while the U.S. curves was at 70 basis points and flattening. So when you look at this it was a word you used yesterday. You’re absolutely right. They said this is like wild. I said yeah that’s exactly what it is. It makes very little sense and makes in fact no logical sense whatsoever and I don’t know how the Fed, Ron Paul going to have to face this because the Fed has already told us they don’t understand that their models have been wrong and they really don’t understand what’s going on in the inflation world. They don’t understand it. So now they are going to tell us that they don’t understand why the curves are flattening. Because when you look at it and you throw in this tax plan is not tax reform it’s a tax cutting and it’s stimulative by everything that I hold dear to me. This curve should be seeping dramatically. Bond should be getting terrified of what they’re facing. And as Peter says you know next year they’re going to be shrinking. This curve should be steepening and yet it’s not. So if they do and then they’re going to tell us they don’t understand what’s going on with the curve and I know that the curve is one of the big indicators. So if you don’t understand that, you don’t understand inflation. You’ve made a four and a half trillion-dollar wager on the effectiveness of the QE programs. That doesn’t go well with me. So I think that’s what it was. So you can either cut rates which would throw the markets in absolute turmoil. That’s just the way it is there’s nothing else they can do or they can as I say they could increase the amount that you know .. I say if next January if the ECB was cutting to 30 billion or maybe the Fed should be always be selling more than the ECB is buying and you get the curve to steepen and I guarantee that.
FRA: Peter your thoughts?.
Peter Boockvar: Yeah I agree. You know just to quantify the dramatic effect that the ECB had on the entire yield curve in Europe relative to the U.S. and the Fed is that the Fed when they were doing QE infinity, they never bought more than the net issuance of debt that the U.S. government was issuing. In Europe the ECB was buying 7 times the net issuance. It was just so dramatic it was literally the elephant that was stomping everything in its sight. And granted having negative interest rates continuing into 2019 will certainly keep a big anchor on the short end. But because of the dramatic extent that the ECB was buying bonds I have to believe that there is going to be some response when they stop buying bonds. Now again the negative interest rates in the short end will be an anchor. But you know imagine even when that ends. I mean one thing that that we have to take notice, Draghi is now becoming more defensive about negative interest rate. He’s now having to explain himself. Here we are this is three and a half years after he initiated negative interest rates and he is still defending negative interest rates. You have the European Bank Stock Index that is still below where it was three and a half years ago. So I think that the politics around negative interest rates will get more and more difficult as bank profitability continues to be under pressure. And you know that there’s no question that accidents are going to occur here. I just know none of us are smart enough to know how it exactly plays out. But come January when things are shifting in a more dramatic fashion, I think everyone has to be really really careful.
FRA: And so what will happen, your thoughts on the new Federal Reserve chairman nominee Jeremy Powell. How do you see his policies and what will his monetary policies be like in the coming years? Yra you want to start?
Yra Harris: You know I’m not sure .. when I had the opportunity last year to directly ask a question, you know about who guarantees the ECB. It was a two-part question that I asked was who guarantees the ECB and do you think that all sovereigns should be carrying zero weight. Because I know what his expertise, his strength is within the Fed and he was subdued. I was wild about the answer so I would have given him some crap, but I do think that he’s a good choice because he’s very pragmatic and I think he’ll know how to adjust or hopefully. So his response to me on the ECB was they have a printing press, which he didn’t even have to think about that and that came right to him. And the fact that there’s zero weighted. That’s all we have to care about. They are zero weighted and I was never comfortable with those answers, but I think he brings more to the table. I think he is unlike some of the people who do sit in that room with their high level math and Ph.D.’s are too arrogant for the job ..
FRA: And Peter?
Peter Boockvar: Yeah I mean I think while he is very similar to Yellen in that he voted for every QE, he voted for keeping interest rates at zero for as long as they did. So he voted for the committee every single time. There is talk that he was not a big fan of QE. So that’s a positive for the sake of manipulating markets. It won’t necessarily be a positive for markets when we get the next 10 to 20 percent decline and everyone’s screaming oh the Fed save us, the Fed save us. I think he’d be less inclined to be the markets sugar-daddy, which I think is a good thing, but maybe it’s not what the market necessarily wants to hear. Now he’s not going to obviously be as potentially hawkish as Taylor or Warsh would have been. But I think if the market thinks he’s a Yellen look like I think they may be a bit disappointed that he’s going to be thinking more outside the box and he’s not going to believe in John Maynard Keynes to the same extent that Yellen has.
FRA: Just going along the discussion from Europe. Peter you’ve written recently on how higher inflation in the Eurozone is a very under-appreciated risk. Can you elaborate?
Peter Boockvar: Yeah. I follow the market monthly numbers and I like to read their commentary now it’s very anecdotal. So we have to separate the anecdotal commentary from business surveys that they do from the actual consumer price index that the Eurozone comes out with. But on Monday we had the Eurozone services and manufacturing composite index come out and I’ll just read to you what the inflation commentary was. Inflationary pressures have meanwhile lifted higher with price charges for goods and services rising at a rate not seen for over six years. Some price rises merely reflect the pressures of higher cost, but companies are also reporting stronger pricing power as demand conditions continue to improve. Which suggests underlying inflationary pressures are becoming more ingrained than yesterday. Market came out an index on German construction and they talked about intense supply chain constraints contribute to a sharp rise in input costs. The incidence of delivery delays is one of the greatest seen for over a decade while purchase price inflation was pushed to a six and a half year high. And they also reported a retail Purchasing Managers Index for the region and they talked about gross margins facing Eurozone retailers continue to be squeezed. Contributing to this was another rise in average input prices. Moreover, the rate of inflation quickened to a fifty seven month high and remained substantially greater than the long run average. So how that translates into actual inflation. I don’t know what PPI will eventually look, like what CPI will eventually look like I don’t know. But to me when I read that tells you that there’s price pressures that are .. any potential surprise on the inflation numbers in Europe I think will be to the upside using this as as potential evidence. And even with cutting QE by 50 percent there’s still going to be buying 30 billion a month and they still have interest rates deeply negative. So they’re wholly unprepared for a multi-month march to lets just say 2 percent CPI. And I think that that is a major risk for the European bond market. And to me the European bond market is the epicenter of of of the global credit bubble.
FRA: Do you see similar conditions Yra as the biggest bubble being the European bond market?
Yra Harris: Well yeah Peter’s been on the strength of growth and on Europe as he says you know he’s been very bullish in European equity markets, but he’s a more than a little concerned as he’s just talked about about what the banks have done because the interest rate policy is of course the ECB. But you know the issue where we may differ is do I think that Draghi cares about what inflation is? I don’t think so because you know as I’ve talked to Peter and I have discussed I think I’m with you Richard that he has a bigger thing going here and that he’s trying to load that ECB up with as much debt as possible because it’s the only outcome can be of course would be the creation of a Eurozone bond .. The European Commission has not been able to move it forward and you know the talks that came from the Crown was to push it farther and faster. And you know there is of course Germany is more than reticent because they know what’s going to be settled here. So he keeps going and going and going. I agree with Peter once we get over 2 percent inflation. I know what the response is going to be because that’s what you know. They basically use the same kind of dynamic stochastic models that the Fed does and others well you know they’ll call transitory they’ll call this so if it’s the same .. Then if it’s the same for three or four months they’ll have a serious problem and you could see that there is pushback. You know he didn’t talk about it at meetings but there were five dissenting votes to even the cut of 30 of 30 billion, only big movie from 60 to 30 billion and leaving the negative interest rates. And with all that forward guidance so there was pushback and the pushback is coming from just where were the sources from the Dutch the Austrians and now we’ll see even more from Austria because of their political situation. But Merkel’s in severe trouble .. Germany may have to go to a new election because they cannot put together a coalition here because the Free Democrats, they want the Ministry of Finance which, Schäuble used to run and he was fairly hawkish. But they want more. And their issue is you know of course you know with the ECB and their overall policy and that’s the effect on German savers. So this is very very dangerous. In fact, one of Merkel’s ministers, one of her close people came out .. They’re trying to load back the Social Democrats. I don’t think that’s possible. So because the Social Democrats would have to eat such a phenomenal crow it would be it would be the end of them. They could be in this coalition. Well they’ll continue to lose power, but if Germany winds up going into a new election, Merkel is going to get trounced because there’s no way .. So there’s a lot of things yet to play out in Europe again and this is more laid out as Peter and I started the discussion offers her new letters. There were of course was that there’s so much complacency in the world and yet these things are on the boil and I know we haven’t even gotten to the next topic you’re going to go to which puts it more, but Germany is still an unknown yet. And it’s the unknown not because of anything really positive for Europe. It’s a negative for Europe. So she’s got to figure out just what’s going to go on here and who’s going to get one. And she’s trying so hard not to give the free Democrats win there the Ministry of Finance because then he’ll really have a voice. And it’s not going to be a pro-European voice. So a lot of things to be played out here. And as Peter has talked about, where are the banks .. who have really so badly underperformed with this .. the banks are way under-performer as they are in Japan. I mean I’ve been owning Japanese stocks for longer than I care to admit but at least I’ve had some dividends in earnings and they haven’t done anything. But if things are so good why aren’t the banks rising. We’ve seen fairly significant rallies this year in the U.S. Banks and that’s you know even with a quote unquote flattening yield curve. So there are so many uncertainties.
Peter Boockvar: I mean just just to quantify the Japanese TOPIX Bank Index is still 20 percent below its 2015 high. I mean I think the reaction of banks has basically repudiated negative interest rates and central bankers desire to basically destroy their yield curves. And if banks are the transmission mechanism of this sort of policy you wonder how central bankers can contain the circle of damage and profitability of the banks, but continuing on the same path of monetary easing.
FRA: What about now the effect of Saudi Arabia. We’re seeing some incredible events happen over the last week. And you know given all the complacency well how could Saudi Arabia, what’s evolving there affect the financial markets and the global economy. Yra do you want to start.
Yra Harris: Well I believe that you know and I’ve blogged about this the other day too. And this is truly one of my areas is the great strength is the geopolitical events are taking place. And usually it’s for the North Korea statements or nurse those are one off things and I always caution people you know what those moves you can trade them, but don’t look at them as anything longer than a one-day trade or two-day trade because wars don’t push gold higher; wars you know or let’s say some type of conflict. Those are quick one off moves, but what’s going on and I go back to October 5th when we had a seminal event in international relations which is that the King, not the crown prince, but the King of Saudi Arabia went to Russia to meet with Putin for the first time. And as I tongue in cheek say it’s like Nixon going to China. Very unexpected. And ever since that day you can plot a chart take a look at it. Oil prices have risen eight dollars in a steady upward beat and then you had what came out this weekend. But it’s been a steady thing the oil keeps rallying. It’s not a headline grabber. But there are movements of foot here and the Saudis are very concerned about the Shiite influence throughout the Middle East. The role in Syria, the role in Iraq, the role in Lebanon. And then you get of course you know Hariri, who is the Lebanese prime minister, who was in Saudi Arabia and resigned on Saturday night. Now really is interesting because Hezbollah actually assassinated his father. And Hezbollah is a Shiite militia and you know somewhat of a governing group that the Saudis are very worried about as are others in the region. And that has now shown to be even more and then of course you have the downing of a helicopter. So on the Yemen-Saudi Arabian border with some high level Saudi officials supposedly .. You know as I say it’s like the Gulf of Tonkin. We don’t know certain things, but there are movements afoot here and that is you know the Middle East is still a very significant area. It’s significant for China not as much of the United States is used because we don’t get as much oil there. But this is a very dangerous time. And again the equity markets don’t price any of this risk in. It’s like you know I watched Sunday night with what went on and I was amazed that the market was short gold. And I said I’m getting I figured I was going to lose 10 or 20 dollars. It opened basically unchanged and lower. I got this a reprieve I actually turned around and went long. So you know but the market none of this is like if it doesn’t occur on Twitter nobody cares. These are the type of systemic events that take place underneath the radar screens that will when they start to be exposed.
FRA: Peter do you see similar impact from Saudi Arabia and what will be the effect on oil prices?
Peter Boockvar: Well I agree. I think Yra said everything there was to say. I just want to add on that what’s going on with the oil is you know we’ve also had multiple years of a big reduction in the rate of them investment in oil production particularly offshore. You’ve had trillions of dollars of projects get canceled. Yes. And we’ve seen that also in the mining space in the industrial metal space. You know that’s what their markets do and that’s when companies start to focus on returns on capital and cash flow. They spend less on drilling and mining and I think it’s really been the supply side that’s been under more discipline that has created a lift in oil and industrial metals and this rising commodity prices. So I think that’s something to pay attention to that. Yeah this is partly geopolitical, but I think there has been a concerted effort in trying to control at least the supply side and even in yet in the U.S. I think people are waking up to the economics of shale and that markets aren’t necessarily going to be so friendly to continue to finance all the shale drilling where a lot of these companies aren’t generating any cash flows. So while U.S. production will grow over time I think a lot of it’s going to be cash flow driven and less of that just the reckless spending just to drill a hole and create more barrels ..
Yra Harris: And you know what Peter brings up a very good point. For another reason but with the rise in oil prices has pushed the high yield debt of energy companies to the highest levels not yields levels but price levels. And yet when I look I’m looking at JNK the high yield ETF HYG and JNK and those are both have moved underneath the 200 day moving averages which is another warning. There are signs that are developing because what would drag them down, you know last year we did or what sent high yields of course when the energy bonds and all the structured notes that they did were under trouble. Now they rise in the value and yet the high yield indexes, the yields are rising .. So that’s another one of these divergences that really is flashing for me.
Peter Boockvar: Yes, I agree. I think this rise in the cost of capital and expansion .. But you have to remember that the rise in short term interest rates is a really big deal because there’s hundreds of billions of dollars that are seeing a rise in their cost of capital every single day. With this rise in short term interest rates I mean the one-year T-bill is yielding 152 today, the S&P 500 dividend yield is 1.9 percent. These are still obviously very low numbers, but in a world of many years of zero interest rates ..
Yra Harris: In what Peter said that’s such a great point. You know that I’m celebrating 152. I mean world where you know I’m dancing and I’m doing this just because you know.
Peter Boockvar: It’s like shocking to say.
Yra Harris: It’s shocking.
FRA: And maybe we can end with your thoughts on New York Federal Reserve president William Dudley stated “we had a woefully inadequate regulatory regime, it as much better now in place, there is still more work to do” .. In reference to the financial crisis and what’s happened since. Yra you mentioned that was pure rubbish.
Yra Harris: I mean really it’s pure rubbish because the Fed had all the macro prudential tools that they needed, if they wanted to put a halt ..
Peter Boockvar: Yeah and I think Dudley’s comments reflect just an extreme level of delusion that Bernanke had as well. And that for them to, with a straight face, saying that it was regulation that was not in place. That was the cause of the crisis, I’m trying to think the right word, but it’s actually dangerous because they’re deflecting any self blame on monetary policy. I mean monetary policy is the liquor that feed the drunks and where for Dudley and Bernanke before to say well it was the lack of regulation that was the cause. It’s actually scary to hear because it tells you that they don’t understand. They don’t understand and they don’t want to admit the unintended consequences of price fixing the cost of money and that typically goes awry and it has in the past and it is now and it will again. And to think that it’s a regulatory structure in place and that a bunch of bureaucrats are going to somehow manage the economy from that perspective and and create these buffers around economic cycles is just I don’t know if it’s hubris or just complete delusion.
Yra Harris: Really That’s like sums it up and it was a when somebody responded in a blog and I wrote look at Greenspan not only did he not try to curb it he encouraged it. He said use your house as a piggy bank .. refinance it and create demand by spending the money that you can extract from this taking out of course more debt at the same time .. And number two Bernanke he didn’t, as Peter rightly said, they fueled this; this is contained which is no worry here .. They did nothing. I mean at first blush they could have raised reserve requirements to start squeezing the leverage that the banks were employing … Well how do you know it’s a bubble and what if we’re wrong. Because monetary is a blunt instrument you know squeezes the entire economy. Well you know what. Don’t tell me that you didn’t have the tools and you had the tools.
FRA: Exactly agree very much on those thoughts. And that’s great insight. Gentlemen how can our listeners learn more about your work Yra.
Yra Harris: Send money. No Bitcoin .. J just kidding .. I post blogs and Notes From Underground. If you can find register to look up to you but that is a little humor.
FRA: Peter?
Peter Boockvar: You can go to boockreport.com – you can see my daily writings and also you can go to bookmarkadvisors.com.
FRA: Great. Thank you very much gentlemen.
Submitted by Boheira Manochehrzadeh <bmanoche@ryerson.ca>
11/05/2017 - Yra Harris On The Greatest Act Of Financial Alchemy
“The Swiss National Bank (SNB) has pulled off the greatest act of alchemy by printing copious amounts of Swiss francs (CHF) and turning the currency into real corporate assets. The SNB has grown its balance sheet to CHF800 billion from CHF500 billion in 2015, 85 percent of which is foreign exchange holdings in various forms. As the SNB struggled to weaken the franc to prevent the ultimate safe-haven currency from strengthening and putting the Swiss economy into a DEFLATIONARY SPIRAL. The Swiss experiment began January 15, 2015 .. The recent rally in BITCOIN pales in comparison to the wealth created by the Swiss printing presses.”
Notes From Underground: A Celebration Of The Greatest Act Of Financial Alchemy (Ever)
11/05/2017 - Dr. Albert Friedberg: Military Conflicts And Inflation Remain The Two Largest Risks Facing The Market
“We remain very bullish about our present positions, though ever cognizant of the possibility of sharp setbacks on the way to final heights . Military conflicts and inflation remain the two largest risks facing the market; the former is difficult to hedge but not so the latter, where we feel the risks are manageable and may even lead to trades that will be conducive to interesting profits.”
11/03/2017 - The Roundtable Insight: Daniel Lacalle On How Central Banks Are Nationalizing The Economy
11/03/2017 - Chris Whalen On The Return To Derivatives By Big Wall Street Banks To Manufacture The Appearance Of Profitability
“For some time now, we have been concerned that the FOMC’s overt manipulation of credit spreads has embedded future credit losses on the balance sheets of US banks. But now we are starting to see even greater signs of stress as the large Wall Street banks again return to derivatives in order to manufacture the appearance of profitability ..
The moral of the story with Citi and other large banks is that there is no free lunch, but sadly no one on the FOMC seems to appreciate this subtlety. When the Fed pushes down interest rates and then manipulates credit spreads to achieve some illusory goal in terms of monetary policy, the result is a change in the behavior of investors and lenders that is profound.”
11/01/2017 - The Roundtable Insight: Alasdair Macleod And Bosko Kacarevic On Why Physical Gold Makes Sense
FRA: Hi welcome to FRA’s Roundtable Insight. This is Richard .. Today we have Alasdair MacLeod and Bosko Kacarevic. Alasdair is the head of research for GoldMoney and an Austrian economist. He has a background as a stockbroker, banker, and fund manager. Basko is the president and CEO of Kindigo Capital, a Canadian based private equity firm in Windsor, Ontario, Canada. The whole financial licenses and commodity derivative stocks mutual funds and private equity. Welcome gentlemen.
Alasdair Macleod: Nice to be here.
Bosko Kacarevic: Thank you for having me.
FRA: I thought we’d do a focus today on physical gold. Why physical gold why does it make sense where to store it, how to store it. And then perhaps a comparison to what’s happening in the Cryptocurrency world, sort of Gore versus cryptocurrencies debate and further where we kick it off with if you want Alastair with why physical gold why does it make sense?
Alasdair Macleod: Well the the the basic sense behind physical gold is that it’s nobody else’s liability. It is Money, is money not an investment. And I think that’s an important point. But as money it tends to retain. In fact, over a period of time it tends to increase its purchasing power measured against commodities and if you like the items that are manufactured of commodities. And if you want proof of this basically from 1969 to the present day the dollar priced in gold has lost over 97 percent of its purchasing power. So that’s how strong on gold is. But if you’re going to hold gold in paper form someone can come away and change the rules. Your paper might go bust if let’s say you’re in an ETF, which invests in synthetic gold. If you try and invest in gold on the futures exchanges, sort of rolling contracts. That again is subject to really try and take delivery. You may not get your delivery. The one thing that really matters is that you have the physical gold. Now obviously you can store all your gold at home if you’ve got any significant level of assets. So you need to find if you like a really good LBMA registered faulting company who will store all your gold and that’s basically what we do is go money. We act as custodian; our customer’s gold is not on our balance sheet it’s it. It operates on the Canadian Belman laws. I think that’s the technical term. So if we have some sort of financial accident, there is absolutely no dispute about the ownership of gold which we have as custodians, it belongs to our customers. We have both a metal audit and also financial audit every quarter. So that again you know it’s all recorded, it’s yours and you’ve got a choice of vault around the world. So if you’re an American and you have a fear that the American government might be in a sort of command you to submit your gold in America. It’s not under the American government control, it be put it into a foreign jurisdiction. I mean we you know Switzerland or Singapore or somewhere like that. I wouldn’t say that you break the rules but it just makes it a bit more difficult for your government to get the gold. So there are all sorts of ways in which you can ensure that your money capital if you like is is is safe at all times and that basically is the function of gold stored in a proper vault.
FRA: And your thoughts Bosko.
Bosko Kacarevic: Yeah I have to agree with Alasdair. We approach the gold as a form of currency. We already regulated securities dealer in Canada as an exempt market dealer. So we provide as well storage facilities for investors in physical gold. Our one of our recent announcements was a we have a platform where RSP investors retirement accounts can put physical gold into their retirement accounts and have it stored in LBMA approved vault and they can trade the gold buy and sell it at any time. When the gold is in your RSP account because it’s in trust for the retirement then it can’t and the clients can’t take delivery of it. But the physical gold is there it’s accountable, it’s audited, and there we offer a basically a non fungible system. So when our clients purchased their gold it’s in a specific container, it’s allocated, and segregated to their account. So the exact same gold Maple’s gold bars that someone purchases is the exact same that they’re going to be selling. So we try to explain to people that you know a properly diversified portfolio should have some physical gold and silver in it depending on suitability. You know you might have 10 percent or 20 percent, but it all depends on the rest of the portfolio that the client is holding and at Kindigo we focus on our clients are mostly accredited investors. So there’s considerable due diligence that we do. And the KYC forms that have to be filled out, according to the compliance requirements in Canada.
FRA: And Alasdair what are the risks for for storing gold or ways in which you can have it from your perspective in terms of the industry. Like what are the advantages and disadvantages of different ways of storing gold?
Alasdair Macleod: Well obviously that I think we’ve just agreed the best way to store it, but you know unless you’re talking about small change at home if I can describe it that way is in LBMA registered vault. And again if you have it in a different jurisdiction from the one in which you live that you like is another safeguard. The other safeguard that’s a proper LBMA registered vault gives you is that gold that goes into the gold basically is proper bullion. We ensure that anything that comes in for our customers is bullion and not Tungsten painted gold colour, that unfortunate experience that happened in Canada earlier this week. So that’s terribly important say you’ve got to ensure that you know the gold comes from proper refiner. So it’s not conflict gold. This is another thing which is becoming an increasing issue in our politically correct world. So I would when it comes to dealing with set incentives, such as some of the refiners in Dubai. I sometimes wonder what the source of that gold is. So it is important I think to to deal with reputable people. Storing gold at home does give you potential problems because if you’re careless and you let someone know that you might have an gold at home then you know you’re probably open to being robbed. And if it’s a lot of gold then you know the story gets out then you could actually be robbed by some very very nasty people. So I think that is what I would keep at home is probably fairly limited. I would actually look past having a proper vaulted gold. Physically yes I think we’re OK. But you’ve got to understand that that you don’t have possession of the gold, you have possession of a piece of paper which gives you an entitlement to some gold and you may not even have a direct entitlement to some gold because when it comes to submitting your ETF shares, well stock in return for gold usually it can only be done through authorized banks who are on the list to be able to do it. So that again is is a bit of a problem.
FRA: And your thoughts Bosko.
Bosko Kacarevic: Yeah. You know our system is a closed loop system so we eliminate any possibility of any counterfeit gold products entering our platform because it’s all done through our office. I inspect every product that goes into the vault for my clients and we are providers to the Canadian man to other gold refiners. We have direct relationships. So there’s no that gets out into the public. The the article that Alasdair mentioned regarding the Canadian Mint at RBC you know it seems there was a case I think a few years ago that they found the gold bar or counterfeit bar at a jeweler and always seems that it’s a jeweler or a pawn shop that these things are discovered. You know I haven’t experienced any counterfeit products coming through our business. I don’t think any anyone who wants to pawn off any counterfeit products would go through our business or Alasdair’s business. I’m sure that these people that are attempting this are staying away from reputable dealers because they’ve been caught right away. The Canadian Mint has issued a statement to their defence. I mean I guess we’re an approved a billion and a dealer with the Canadian Mint. So they said that that the gold product was and wasn’t even produced by the Canadian Mint in the Royal Bank is saying that they didn’t even sell their product. So how this came into being I don’t know. But I think people need to understand too that you know the the ownership contract that you own the gold and you know people have to do their due diligence in their background checks on who they’re dealing with. Because at the end of the day when you want to sell you have to make sure that you know the gold is available for you that you’re selling. So when it’s in our vault you have title ownership of the gold and even the clients that are keeping their gold at home. You know we don’t pay out to people when they come into our office right away. We have the gold inspected and we always just to cover ourselves. We tell them they have to wait 24 hours before they receive their funds. So anyone trying to pawn off a fake gold bar isn’t going to leave our office and let us inspect it for 24 hours so we’ve never come across anything like that. And I think this is an isolated incident. But I think people need to be aware of it. If the ownership contract when you’re storing your gold in a vault the title ownership of your gold is what the important thing is.
Alasdair Macleod: Richard can I just add to Bosko saying there, one advantage that you guess of having gold in a proper LBMA vault is that it should be properly insured. And we also have to ensure all our customers gold. So I think that’s a very important point. Another important point to realize is that if you take delivery if you go ahead and you want to sell it, you have to effectively make sure that you know to convince the buyer that it is authentic and that will involve it being tested. So the marketability of gold which leaves the vault is not nearly as good as gold that is kept in the vaults. I just wanted to add those two points.
Bosko Kacarevic: I agree with that it’s very important, the insurance aspect too. We have clients that are storing, some people even for a large quantity of gold and silver at their homes and it’s just too risky and then what eventually happens is when they want to sell it you know in the case of silver. People are holding a few thousand ounces of silver. It gets pretty heavy and it cumbersome moving it you know. And when it’s in the vault for us it’s very easy to identify. Each container has a specific number. I have clients you know across the country and in Europe that they just pick up the phone they call us. We sell the specific holdings and wire them the funds so that people are unable to do that when you have your gold at home and you’re travelling or you’re you want to liquidate it quickly because one of the other issues that comes about is when people call and they want to sell it. If the market’s moving fast or are very volatile I won’t lock in a price for a client unless the gold is in our office. You can’t call me. But if the gold is in the vault I know it’s there. I know the identity of it so I can lock in a price for a client over the telephone and send them the money. But if they have it in their basement and they want to lock in the price you know it’s not possible they have to bring it in person. And once it’s in my possession then we can discuss locking in price.
FRA: Now in this day and age with the advent of cryptocurrencies does physical gold still make sense? So if we look at what’s happening with Bitcoin and other Cryptocurrencies. Is there a migration of investors holding physical gold towards holding cryptocurrencies either together or as an alternative, Alasdair?
Alasdair Macleod: What a fascinating question. I think Richard the answer to your question whether there’s a migration from buying gold into buying Cryptocurrency. I think there must be. Yes. We can’t deny that. The reason I would say that is because so many people who deal in anything really don’t actually understand the underlying economics of what they’re doing. What they understand I think a trend and quite simply if you see a trend moving or speculating you just jump on the trend. So you are going to have people who will see who take the view that gold is less exciting than Cryptocurrencies, has potentially less return over at whatever time frame that they’re putting in their mind. So they will sell gold and buy Cryptocurrencies, of that I have absolutely no doubt whatsoever. What is interesting in this however and I did actually write a piece on this in I think dated August the 10th. So for anyone who’s interested if you go on to Goldmoney sites and go into research and go into the insights then you will find. August 10th I wrote “Cryptocurrency- its status as money”. Now this is very important because I won’t get through the article. Basically my conclusion is that Cryptocurrency are not money. I mean it is not just a question of volatility, its the origins of it and all the rest of it. But cryptic currencies are the media for speculation par excellence. And you know with the limited supply and all the rest of it and the fact is that so far the people who got into it are basically geeks. If I can be that rude to call them that. The hedge funds are beginning to wake up to this. The authorities are beginning to wake up to it. I mean they even bought it yesterday the CMA decided that they’re going to introduce a bit you know a Bitcoin future. Various governments have sort of taken on the technologies, some are being frightened away by the volatility in the things in it. So I think the Chinese have sort of tried to close down Chinese based operators, but basically the public has yet to buy it. And if you look at any bubble which is essentially what the Cryptocurrencies are, it’s only when the public are really into it that you can say this is time to get out. It is getting dangerous. It is going to collapse. We are some way from that. But what I can’t see is what’s going to stop these Cryptocurrency is rising in the meantime because you know if it’s becoming you just my street futures exchanges and so on and so forth you are going to get asked a lot of hedge fund type money, speculative institutional money if you like yet to buy these things. So I see them going considerably higher than this. You know please don’t hold me to that. That if you like is the theory if you like the madness of crowds as Charles Makai wrote back in the 19th century. We are seeing it and this is pure. It’s like tulips without the bulbs. I mean it is amazing. I get very unpopular for saying this by the way because everybody in Cryptocurrency is convinced it’s money, convinced it’s some sort of new paradigm. And it was ever thus, every bubble is like that everybody involved believes that this is a new future and whatever. What fascinates me you know we’ve looked at it so far in terms of Crypto versus gold, which was the basis of your question. But I think at some stage it’s going to move on from there. What we’re going to be looking at is that potential for Cryptocurrencies to destabilize paper currencies. I’m trying to get this one. Trying to get my head on this one at the moment and I’m planning to write an article on this front shortly. So this to me is a fascinating topic. It really is.
FRA: Could the momentum into Cryptocurrencies keep a lid or a cap on the price of gold in U.S. dollar terms Alasdair?
Alasdair Macleod: As a follow-up, no I don’t think so. There is actually a far bigger story going on gold and it’s all to do with the declining use of the dollar in international trade and this is something that’s being forced on to the rest of the world outside of America by China and Russia working together as head of the Shanghai Cooperation Organization. I think that we’re likely to see. I mean my information is that we’re going to get in an oil contract settled in Yuan on the Shanghai futures exchange by the end of this month, November, and between Yuan on contracts countries like Iran, who either off a bit to deal in dollars or out of their choice, would not want to go anywhere near a dollar. Will have the facility to buy gold in Yuan. And that I think is something that is likely to lead to a significant rise in the price of gold. The other thing about the price of gold is that there are an awful lot of dollars outside America. We’ve got some people running around saying well you know the American economy is rubbish and the rest of it is just going to collapse and then the end of the purchasing power of the dollar will go up. But the latest figures we have which are over a year old now is that the total portfolios in dollar cash outside America is in excess of 17 trillion dollars. That was midway through the last year 2016. It was barely changed from the level Midway 2015. My guess is that with the dollar having eased over the course of this year we will already be recording a decline in the total value of foreign portfolios, the dollar elements in foreign portfolios. Those figures will be released in next April or May. So we won’t know until then. But just imagine if you go 17 trillion dollars outside America and you have got an economy you’ve got about 19 trillion dollars GDP something like that. This is too much money outside. I think for the situation to be sustained, so I would say the dollar is weak and that is what’s going to drive gold up. And I think it is something which is independent of the Cryptocurrency story, but what does fascinate me is the potential for the Cryptocurrency is to destabilize paper currencies if you like as well. And as I said I’ve got to get my head around that before I write it.
FRA: And your thoughts Bosko.
Bosko Kacarevic: Alasdair and I seem to be in the same camp. I’ve heard actually a number of my clients who have actually sold their precious metals to purchase Bitcoins because it seems like an alternative currency. But you know it’s not officially a currency, but it seems to be operating like one. And you know judging from what’s happening, the attraction to Bitcoin is similar to the attraction to gold. It’s it’s an alternative currency outside the banking system or in government and so on. But the problem with that is is when you’re when you’re comparing it to gold. Gold is still a physical commodity. You can take possession of it. I have a problem with Bitcoin because it exists on the Internet. It doesn’t exist in the real world. You can’t take physical possession like gold or even paper currencies. So there’s a huge cyber threat to the Bitcoin. I mean I find it strange that the person who invented Bitcoin, Satoshi Nakamoto, is still anonymous, nobody knows who he is or where he came from or whatever. That kind of raises a lot of flags for me. Then when you have issues with Bitcoin or let’s say that there’s a hacker that hacks into Bitcoin who are you going to call. There’s no nobody you can sue. When you invest in a company or you buy gold and silver or invest in the stock there are people behind that. When you invest in currencies, there’s a currency broker. The government issuing the currency, there’s essentially nobody behind bitcoin. It’s operating and it exists on the Internet and apparently from what I understand it’s a series of encrypted keys. But you know I think one of the fundamental changes that Bitcoin is introducing, is the blockchain technology that it’s produced on, which I think that there’s a lot of people in the financial institutions are adopting this new form of a distributed ledger and even that’s questionable as to the advantages of that. I think the credit card companies and the banking system the the technology that’s behind their ledger entries and their software accounting systems are doing fairly well. Introducing a distributed ledger, I’m not sure what the advantages of that are, but it seems that a lot of people are attracted to it. And you know mind you people are always attracted to new things like Alasdair alluded to earlier, but you have to remember that when the Internet was introduced and people were adopting there was a lot of, along with the advantages, it brought in a lot of problems. We have high-frequency trading now. So it’s not always a great thing to not have a central authority. In some cases, you want to have a central authority to be the mediator between two parties. So I’m still sceptical about Bitcoin. Obviously, it’s doing very well on a price level but on a value level. You know I still have a lot of reservations about investing in it, but currently, the CMA group thinks that the futures contract would be in demand and people will have the opportunity to hedge their risk in Bitcoin. So for me, it’s too early to get in. I’d like to see how it develops.
FRA: And I saw today an article by Jim Rickard’s on a new research report out by Goldman Sachs discussing this very issue of gold versus Cryptocurrency. Goldman Sachs appears to be leaning on the side of gold. Well as a preservation of purchasing power. They mentioned that Cryptocurrencies are vulnerable to a hacking, government regulation, and infrastructure failure during a crisis. Those are issues of concern and because of the volatility in Cryptocurrencies, they still see gold as preserving purchasing power better than Cryptocurrency, so that those are the results of the research report by Goldman Sachs and any thoughts on that and. Your final thoughts there.
Alasdair Macleod: Well I’d go along with what Goldman Sachs have concluded. I haven’t read their report, I must say, but as you’ve described it it’s hard to disagree with it. But I don’t know. I know that for people who are trading in it, this is all sort of a big issue. But from an economic point of view there is no doubt about it. Gold is money, always has been money whereas Cryptocurrencies are not then merely a medium for speculation. But you know we don’t actually care about that. Perhaps we always say is Bitcoin going up and we’ve got to get in there or in theory or whatever. We’ve got to go and buy it you know because you can’t stand aside and not buy these things. And this is why I think it’s terribly important to understand that actually it is just a whole load of hot air and nothing else, but this balloon I think, if I’m reading market correctly it is in the early stages rather than the final stages of its inflation. And as I said, I mean so far the people who got into it all the people in the know if you like the people who have been following this story from the outset, the early adopters, the institutions yet to get in. And I think that I mean this is this is the thing about the CMA contract it doesn’t settle in Bitcoin at all. All it does is it uses that bitcoin as a reference price. So that’s actually not going to be anything like gold futures contract where the gold is actually deliverable. This is a very very different thing. So I can’t see really that there is going to be the arbitrage between the futures contract and Bitcoin. I can see how that’s going to happen because there’s nothing deliverable. So that is not going to take demand out of the Bitcoin story so much I don’t think as inflating the number of gold contracts in outstanding on Comix definitely takes demand out of the gold market. So to my way of thinking, you know the the the institutions have yet to get into this. They will get into it because these new instruments look like you know go into contracts themselves so forth are beginning to take place. I think the other thing that’s going to happen is that the regulators are going to come in and insist that anyone maintaining accounts for people with Bitcoins or other Cryptocurrencies are going to have to do their due diligence. And I think the industry as a whole itself is likely to turn round and think we’ve got to clean up our act to make ourselves mainstream. I think all that is still ahead of us. And then you know when you think about the public investing in this, investing is the wrong word, speculating is probably better word, they think they’re investing. This is not just a bubble let’s say in the Shanghai stock market or you know if we go back to the tulips in Amsterdam that’s what 1640s or whatever it was all the Mississippi bubble which was France or the South Sea bubble which was which was England and most particularly, not just you know I mean just sort of England within coaching distance of London. That was the source of this. We’re talking about something that is catching the imagination globally and I mean already we’ve got so many imitators I think there are over a thousand Cryptocurrency I read somewhere. Where is proper paper currencies or something like a 170 only so already we’re you know there’s a lot of funny deals being done around in these icy roads and all the rest of it. This is an act which if it gets cleaned up and they will try and clean it up I’m sure that they will though try and clean it up. They the authorities will want to see cleaned up because they want to tax it apart from anything else. And the other thing is I think that the industry itself will want to see it cleaned up and that will open the gates for everybody to get involved. This is this is a theoretical bubble for any student of psychology in the future. They’re going to look back on this as an absolute wonderful example of a pure speculative bubble which is totally out of thin air.
FRA: And your final thoughts Bosko.
Bosko Kacarevic: You know when you compare the standard deviation of gold versus Bitcoin, I read a report recently that over the past 12 months’ gold has had a 12 percent deviation, where a big coin is over 60 percent. So you know I agree that it is a speculative instrument. It’s going to be quite volatile and the attraction of many people to Bitcoin to elude the financial markets. I think that’s going to be taken care of with the regulators are going to get involved obviously to see him now as is adopting it. So this idea of people being able to have a peer-to-peer and to trade outside of regulation or the government size. I think that’s just an illusion because of you ultimately you have to settle these Bitcoins for currency that’s going to be used in the real world. And you know you have to receive it in a bank. It has to be wired from whatever Bitcoin exchange or so there’s going to be financial institutions involved, regulating it. So I mean is it going to go up further. It’s very possible. I mean I think it is in the early stages and you know it’s it’s going to go through the process like anything else that’s brand new. It’s going to weed out the all the weak currencies and will Bitcoin be the winner in the end. I don’t know. Maybe a theory or the other thousand that are available. Who knows how it’s going to turn out, but there is definitely an attraction to it. And it seems to be distracting some gold investors are distracted and selling their gold and silver for Bitcoin and I disagree with it. But you know people like to follow trends and in some cases, they’re going to have to experience the negative part of following a trend and being wrong. So I don’t really know what’s going to happen but it’s interesting it’s a new technology and we’ll have to see.
FRA: OK great. Great insight gentlemen. How can our listeners learn more about your work, Alasdair?
Alasdair Macleod: Well the easiest way is to have open an account Goldmoney, no, but on Goldmoney site I write weekly is published on Thursdays I usually say if you look if you go onto the site, Goldmoney.com, research and then insight, you’ll find that. I also write a weekly market report and that again can be found under the research column.
FRA: And Bosko?
Bosko Kacarevic: People can reach me at our Website at Kindigo.com and you know on there this information about our company, my background, and they can email us through there. We don’t do a call in, but we do keep in touch with our clients and keep them up to date on what’s happening in the gold market.
FRA: Great thank you very much gentlemen for your insight. Thanks for being on the program show.
Submitted by Boheira Manochehrzadh <bmanoche@ryerson.ca>
10/27/2017 - New Zealand Bans Foreigners From Owning Property – Is Canada Next?
10/27/2017 - The Roundtable Insight: Charles Hugh Smith On Will The Private Sector Be Able To Grow Fast Enough To Meet The Demands Of The Public Sector?
FRA: Hi welcome to FRA’s Roundtable Insight .. Today we have Charles Hugh Smith. He’s author leading global finance blogger and philosopher, America’s philosopher we call him. He’s the author of nine books on our economy and society including “A Radically Beneficial World Automation Technology and Creating Jobs for All”, “Resistance Revolution Liberation a Model for Positive Change”, and “The Nearly Free University in the Emerging Economy”. His blog of twominds.com has logged over 55 million page views. It is number seven on CNBC top alternative finance site. Welcome Charles.
Charles Hugh Smith (CHS): Thank you Richard. Always a pleasure to join your roundtable.
FRA: Great. And with that today with the focus on the sort of tension between the private sector and the public sector with many types of revolutions, technological revolutions happening in the in the private sector you know in terms of block chain and biotech, energy environment, lots of revolutions happening much like what happened with the with the Internet.com revolution. And the question is will that growth in the private sector be able to to meet the challenges of the public sector in terms of seemingly unsustainable growth and that growth in Entitlement programs. Dr. Albert Friedberg of the Friedberg Mercantile Group recently observed that in the U.S. it’s basically 10 percent of GDP and rising for entitlement programs. So you know that’s the big question. Your initial thoughts.
CHS: Well Richard I think that’s an excellent context for you know the points we’re going to make. And one of the first points I would start with is ultimately the public sector in this state what we call the state all all layers of government and government related entities. They all live off the private sector right. That the private sector has to generate surplus. It has to generate wages for employees and those are taxed by the public sector and that’s the source of the public sectors revenues. And so what we’re really kind of discussing is can the public sector generate enough profit and employment to support this fast ballooning public sector. And you mentioned the entitlements growing by 10 percent. And I have this chart of consumer goods and services.
The price changes what what we might call inflation. But it’s actually not. Not entirely inflation it’s it’s the cost of services being provided and how far above or below they’re rising then like people’s wages which household incomes as we all know if and stagnating for somewhere between 40 years and 10 years and depending on which sector of the economy you’re looking at. But we look at what is soaring in price and we look at like 200 percent increases and we find out it’s college tuition and we look at what’s climbing at a 100 percent or or more and it’s like health care and child care. And of course these are the sectors that are heavily controlled or are funded by by the public sector. And what we find is declining in price is cell phone service, software, TVs the kind of things that the private sector provides. So it’s pretty clear when you have competition and when you have exposure to innovation then you get it lower prices or at least you get more for your money. Or there’s there’s hope that innovation will impact the consumers, either the quality of the goods and they’re receiving or the price of the goods and services they’re receiving. So to sort of summarize everything that the public sector controls is skyrocketing in price and the quality is also now suspect right.
Like I’ve written a lot about higher education and I have another chart here showing that literally all of the the the higher education student loans that are being issued are actually funded by the federal government. So it’s it’s actually the federal government is funding these private sector lenders and guaranteeing them profits to fund these students getting diplomas which are declining and real world value. You know in terms of statistically what the earnings are of college graduates and so on that that’s been stagnating just along with the rest the wages. So I would propose that higher education is actually declining in its utility and value despite the cost soaring and many other people would make the same claim about health care at least in the U.S. Is that the cost keeps soaring but the actual you know measures of health of the American population are continue to decline. So this is a really striking difference. I think that’s really what we’re talking about is an enormous difference between the sectors controlled by the public sector and those controlled by the private sector.
FRA: Yeah you’ve written a lot about that in terms of several industries being sort of cartelized, you know with special interest group, lobbyists and just the interest by the government in them. Can you elaborate a bit on that?
CHS: Yeah I think that’s a great topic. If the public sector controls something like health care which in the US is dominated by the public sector programs: Medicare, Medicaid, and the Veterans Administration. Then the way to maximize your profit is to lobby the public sector, lobby the government agency, to lock in your cartel pricing. And so that’s what we see is that we see these pharmaceutical companies routinely raising prices 30 40 percent or even 400 percent just on a random basis that they make no claims that they’ve invented something new. They simply raise the price on an existing medication and the public sector also imposes a lot of regulations that some of which are of course important and necessary, but many of which are simply you know churn you know they just create more work, but they’re not really creating that not really impacting the patient in any in a positive way.
So I have a chart here of the growth of physicians and administrators in the health care system. And we see that the number of physicians has been flatlines for like 40 years where the growth of administrators from about the early 90s on has has ballooned up like 3000 percent. And so this is there’s no way that a private sector company could could bloat its management by 3000 percent and get away with it unless its revenues and profits were rising even faster.
And we see the same thing and I have a chart here of the faculty and management of the of the University of California system and it shows that while the faculty has risen slightly over the last 30 years from about 7000 to about 8500 the number of administrators has risen from about 3000 to like 7500. So we have these enormous ballooning of bureaucracies and all of which are really highly paid positions. And and yet where is the output. I mean where’s the gain in quality or any output. And of course there isn’t any. None that we can measure.
FRA: And associated with this involvement by government is an increase in government debt. And if you look at just debt in general in recent years in the developed world it’s taken more and more new debt to create $1 in GDP. I mean the figures are something like $4, of between $4 to $18. I’ve seen some estimates of new debt to create $1 in GDP. Your thoughts on that.
CHS: Right. Right. And I just read a report from a blog that showed that China has the same similar, very strong diminishing returns on its vast expansion of debt. That it’s expanding debt at rates that are multiples of its GDP growth. And so it’s also the case that even in the developing world the same diminishing returns that you describe is that is the dominant reality. And of course we have to ask why is there such a low efficiency or low productivity rate to this new debt. And and it’s because there’s no there’s no pressure of innovation and competition on how the governments are spending this money. And so there’s really no adaptive pressure in terms of natural selection for them to find more efficient ways to do whatever it is they’re doing. Right. The pressure simply to raise more revenues. And if they can’t do that then to borrow more money and this is where financial repression comes in because the only way the public sector can keep adding debt and it’s at this fantastic clip is to lower interest rates to zero or near zero. And create all these perverse incentives for speculation that we’re seeing now as a result of that manipulation if you will or intervention to keep interest rates low enough so the public sector can keep borrowing and borrowing and borrowing, you know to infinity.
FRA: Any ideas on what the endgame could be here if we consider the level of debt and the level of interest rates for the two lever’s, you know with rising debt at some point even small increases in interest rates could be disastrous. I mean where does this all end.
CHS: Right. Right. I just saw a statistic which I can’t verify of course but it sounds fairly close to me. Somebody said that the point six percent rise in the U.S. Treasury yields. That’s a kind of recent rise in one part of the Treasury bond yield spectrum generated 1.7 trillion dollars in losses right then and there you know just a relatively modest increase in only one part of the total global bond market created almost 2 trillion in losses. And so yeah if we extrapolate the possibility of of interest rates going up two or three percent then you’re talking about losses that could be in you know 10 trillion and up in the bond market and then of course as yields rise historically people sell stocks with low dividend yields and high risk. And then if they take the benefit of a higher yield in bonds and so stock markets tend to go down when interest rates go up as well. So we are the end game there is can they can they keep creating debt at a fast enough rate as the returns on that debt continue diminishing. And by some measures as you know that some people feel the return is already negative, like there is by the time you include debt service and other factors than actually we’re losing ground here. So eventually that will erode the the real economy. And I think that’s that’s really what we’re talking about here is can the public and the private sector outgrow the debt that’s being piled up by the public sector.
And I have a chart here. It’s kind of interesting that shows the adoption rates of technologies and it goes back into the 19th century and shows how long it took for electricity and telephony and radio and so on to be adopted by the general populace. And of course as we all know from our our own experience the adoption rates are speeding up for things like cell cell phones and the Internet itself and social media. And so we’re seeing like a faster rate of adoption and development and in the private sector and we’re seeing a glacial change in the public sector or actual resistance to any kind of innovation or change. And so I think the one of the endgames is that people the taxpayers might just simply be run out of patience with with having to pay higher taxes for lower quality public services. Right. And this could this could be a problem because as we all know public pensions are many of them are not really solvent and they’re based on unrealistic expectations of earning seven and a half percent, you know forever. And the number of people pulling the pensions drawing on the pension funds is rising fast as the boomers retire and so on and so there’s it’s not just entitlements but the entire pension system public and private is under pressure as the boomers retire and the wages of the millennials and the younger workers remain stagnant. So there’s there’s a whole other dynamic here that the public sector is going to be forced to borrow trillions more to make up these shortfalls in pension funds if it’s going to meet all those all those promises. On top of the public entitlements of you know social welfare, social security, health care, and so on. So yeah there’s there’s a number of pressures building and what’s the endgame? It’s anybody’s guess but if you destroy or or fatally wound the real economy then there’s no way that borrowing more is going to fix what’s broken.
FRA: So you think none of these revolutions in terms of like block chain in biotech and in others is strong enough for it deep enough to overcome with the general trend is in the public sector.
CHS: Well that’s an excellent question Richard because I mean my book that I wrote about higher education and that the nearly free university. The tools to dramatically reduce the cost of a college education are already enhanced. And of course this is not just remote learning but it’s also in my mind the key is not just remote learning and taking the best of what’s available and making it available to students digitally, but there’s a lot of possibilities for public private sector apprenticeships which are much lower cost than than supporting this gigantic campus with a huge bureaucracy and 42 deans of student affairs and his whole it tremendously expensive infrastructure. The way what actually is the most effective way to learn is to get out there in the real world and augment your book learning or your lecture learning or your lab work with actual experience in the field then of course this is how it works with the construction industry and many other trades. But it also works just as well in the scientific community. And I know for many of our young friends who graduated with degrees in biology or computer sciences they discover that they really don’t know what the employers really need them to know. And so that’s just one example of the kind of revolution that could occur in public funded sectors if the sector allows innovation. And so it’s like how do we break down the resistance of the status quo and the insiders who are benefiting. And I don’t know that we can but at some point when a system becomes completely unaffordable then people will flock to some new alternative and you know health care as another example people might just start going around the existing public sector and buying their own health care services at you know 10 percent of the cost of the official public sector fund. So if there’s definitely a battle royal you know over these sectors that are bloated and efficient super high cost and increasingly unaffordable. And so I’m hoping that it’s like a logjam. You know that is blocking the river of innovation and lower costs that something will break that logjam and exactly what that could be would would have to be some public sector agency or state agency that that broke away from the status quo and accepted a much lower cost model. And that’s what I hope for.
FRA: Could there also be maybe a geographic solution to this in terms of certain countries promoting innovation like Chile has has a program to encourage innovation with new immigrants you know could there be that type of solution. Maybe new countries that take on, you know more innovation that are regulatory friendly to business so that perhaps this is you know a brain drain and wealth drain from from the more stressed countries that we’re talking about.
CHS: That’s a great dynamic that you’re describing and it also works within within regions, like the EU or the United States or North America. And so I think that that’s probably the most likely vector or trajectory for real change is somebody somewhere allows or encourages the kind of innovations we’re talking about and they start reaping these tremendous rewards and and capital and talent and then are attracted to to those places. And as they drain away from the high cost places like Illinois and California and some of the developed nations as a whole then those those those places have their tax base has reduced their the profits generated by their private sector go down as talented capital flees. And so then there is a kind of Darwinian competition that the really high cost sclerotic bureaucratic unfriendly to business and innovation places become insolvent and then they’re forced to change or they or they just with her wither away. So that’s an excellent point. And I think the block chain is another example of that dynamic that whatever country fully legalizes block chain technologies and crypto currencies, like Japan appears to be doing. And it’s sort of baby steps. Even the U.S. appears to be integrating the crypto currencies into its investment sort of scheme. Those countries were prosper compared to countries that are trying to ban crypto currencies and block chain or limit them or co-opt them, you know like make a public sector version and force everybody to use it. Those kind of attempts to to stave off innovation will definitely fail and there’ll be a Darwinian selection process, whether it’s really not controllable because you know you can’t really force people to work hard and you can’t force them to put their money in places that that money is treated badly.
FRA: Could the reaction by governments be similar to what has recently happened in what is happening in Spain for example like with Catalonia. Could that be a blueprint for what is to come in terms of preventing brain drain wealth drain? You know the sort of the within the regions you see that potential.
CHS: Yeah definitely that what we’re talking about to some degree here of course is financial repression that the public sector manipulates interest rates and yields and and then and tries to subvert ban or limit innovative technologies like block chain. And then of course that what you’re describing that financial repression if that isn’t enough then they move to direct political repression. And you know one of my favorite quotes and I’m paraphrasing here was from Napoleon Bonaparte. And who is reputed to have said something along the lines of “what amazes me most is how little power can actually achieve”, In other words if you’re going to use force it’s remarkable how little force can actually accomplish. Because you’re you’re having to monitor and enforce something that’s unpopular that’s going to that’s a tremendously high cost of insurance. And so that’s a good way to go broke is trying to force people to do something they don’t really want to do. And that that doesn’t benefit them. And so I think if we had to summarize what we’re talking about it’s the public sector is default setting is to try to force everybody through financial and political repression or propaganda to do what benefits the public sector and it’s cartels and fiefdoms. But you really don’t. You can’t change anything unless you create a benefit for people that they want to adopt a new change or adopt innovation. They want it because it benefits them in some broad fashion. So and that’s really the battle we’re talking about between the public sector which tends to want to force everybody to do what benefits itself and its insiders and the public sector which realizes the only way you’re going to sell anything, whether it’s an idea or a concept or a product or service, is if it benefits the consumer and the citizen. So and of course you know anybody from the outside we would look at the public sector and go why don’t they accept a more public-private sector mentality. Why don’t they understand they have to generate additional benefits for people not by borrowing more money to pay for like a bloated inefficient corrupt system. But to foster and encourage innovation that that lowers the price of goods and services because it’s more productive. So that’s that’s really kind of the battle that’s being played out I think throughout the world.
FRA: Yeah. Well that’s great insight Charles as always. How can our listeners learn more about your work?
CHS: Please visit me. Oftwominds.com. There’s free free chapters of my book and thousands of various rants and essays.
FRA: OK great. Thank you very much. We’ll do it again next month.
CHS: OK. Thank you Richard.
Summary written by Boheira Manochehrzadeh <bmanoche@ryerson.ca>
10/26/2017 - McAlvany: Central Bankers Are The High Priests Of Perpetual Growth
A discussion on interest rates at a 5,000 year low. Central bankers are now the high priests of the perpetual growth religion, how long can it continue. We’ll dive into bitcoin investors who now are purchasing out of fear of missing out. Will governments soon move to regulate cryptocurrency.
10/24/2017 - The Roundtable Insight: Doug Casey On Cryptocurrencies And On His New Book Drug Lord
FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have Doug Casey. He’s an American writer, philosopher, investor, and the founder and chairman of Casey Research. He literally wrote the book on profiting from periods of economic turmoil, his book Crisis Investing spent multiple weeks as number one on the New York Times bestseller list and became the best selling financial book of 1980 with over 400,000 copies sold. He’s lived in 10 countries and has visited over 175, today you’re most likely to find him in La Estancia de Cafayate (Casey’s Gulch), an oasis tucked away in the high red mountains outside Salta, Argentina. And recently he’s been writing a series of fiction books as part of a series High Ground Novel Series. The one that is most recent I guess is Drug Lord and just wondering if you’d like to start on that to give us some idea what that book is about, what the meaning and message you’re intending to convey? Welcome, Doug.
Doug Casey: Thanks, Richard I appreciate it. I’m talking to you today from Aspen, Colorado which is where I usually spend the northern summer, and the rest of the year I’m usually down in Argentina and Uruguay. But talking about Drug Lord, it’s the second to the series of 7 novels and when I decided to do novels as opposed to nonfiction is that it’s a different audience, different people buy fiction then buy nonfiction number one. And number two, you can say a lot of things in fiction that you really best not say in nonfiction, and that’s why I decided to do this series. Last year we completed- because I’m working with my coauthor John Hunt who’s a medical doctor who doesn’t really want to be a doctor anymore for all kinds of obvious reasons, Speculator. Which what we’re trying to do is take unjustly besmirched and highly politically incorrect occupations and we form their reputations. So last year was Speculator, which is about a bush war in Africa and a gold mining fraud and so forth and talks about the theories of speculation. This year Charles, after seven years running, or Charles Knight, our hero decides to get into the drug business. Both the legal drug business regulated by the FDA and the illegal drug business that’s kind of regulated by the DEA. And I think its quite interesting because its instructive as to how the drug business works and all these books are morality tales of course. So, we show that you can be a good guy in the illegal drug business dealing in things that are highly illegal. So that’s Drug Lord and I think you’ll find it a very very good read.
FRA: And what type of message did you have in mind in this particular book? Like is there something that you wanted to convey in general?
Doug Casey: Yeah, of course. I’m a philosophical anarchist and I don’t believe that the state as an institution serves a useful purpose or for that matter even have a right to exist. So, I’m naturally for the full legalization of any kind of drugs. The argument that I make is basically that your primary position, the thing that you own most personally, is your own body. And of these government officials to try to dictate what chemical substances you can or can’t use is insane, it’s immoral, and it creates huge distortions in the marketplace. It’s just like what they did in the 1920s with alcohol when they tried to dictate that no one could drink in the U.S. and all it did was double or triple the size of the liquor industry and give the mafia a way to become the creature it is even today. So, everything the government does along these lines is counterproductive. Of course, as far as drugs are concerned, I’m a believer in Aristotle’s golden mean, it’s that some things are- everything is good in moderation and all things. And I don’t advocate that people take potentially destructive drugs such as heroin and cocaine, although our hero Charles Knight comes up with a marvelous new drug which could actually change the face of civilization but that’s another story. But these things shouldn’t be illegal and people forget that before Harrison Act was passed in 1914 that all these things were completely legal. A grade school kid could go down to the corner drugstore and buy heroin or cocaine and it was not a problem, nor was drug addiction a problem in the country. So almost everything the government does whether it be drugs or anything else turns out to be counterproductive.
FRA: What do you make of the trend in the cannabis industry now?
Doug Casey: Ah this is a very interesting thing, it’s going to be huge. I’m not personally a big fan, personally, I don’t do drugs and I generally choose a company of people (inaudible) why? Because most of these popular recreational drugs including alcohol if you would, cloud the mind and keep people from thinking clearly as well. And the problem with pot has always been that it clouds the mind. So, I’m not a huge fan of it personally. But huge medical uses which have been suppressed so far which are coming to the floor and so people that you know some people it just takes the edge off of them psychologically and they don’t have to get goofy by taking too much of it. So, the answer to your question is there have been scores and scores of marijuana stocks that have come public in Canada primarily where cannabis is going to be legal nationwide shortly and its legal now for practical purposes, just as it is in many states in the U.S. right now. But it’s going to be big. I think that the amount of pot grown in North America and the rest of the world after its legalized is going to multiply by a factor of 10, so this is a great place to be at the moment if you can find a quality company run by ethical guys. Yeah, pots going to be big and people are going to make fortunes on these stocks. And of course, many of people have already made fortunes on them and as a result, there are a lot of frauds out there in the cannabis space, but that’s true when anything becomes too popular, the frauds just always step in.
FRA: Interesting. And another big event happening these days is what’s happening in Spain, Catalonia, what do you make of what’s happening there?
Doug Casey: I think its absolutely wonderful. My ideal scenario would be to have 7 billion nation-states on the face of this planet. As I said, I’m a philosophical anarchist, I don’t believe the space has a right to exist. But what is happening in fact, this is what I like to see, but what’s happening, in fact, is that nation-states all over the world now are starting to break up. It’s not just Catalonia and Spain, the Basque region just north of Catalonia I think might be next on the runway for becoming an independent movement. And throughout Europe, there are a couple score of independent movements. For instance, in the Venezia region around Venice, in Lombardy around Milan, Sardinia, even the Pharaoh Islands belonged to Denmark. And of course, Scotland, I think that’s going to come back as an issue for independence. I think it’s great, if you’re going to have a nation-state, then the nation-state should at least have people that share ethnicity, culture, language, perhaps religion so that they’re similar, they share values. If it’s a multicultural enterprise where they don’t share any of these things, then the state just becomes a vehicle for theft of the group that gets in charge of the government. So, I think this a step in the right direction with Catalonia, that’s the good news. The bad news is that most of these independent movements are run by doctrinaire socialists, of course, all European politicians are doctrinaire socialists, but these people they tend to be even more doctrinaire. But I think it will work out very well in the long run.
FRA: And from the perspective of Spain, could this be a blueprint or a precedent on how indebted governments may act in the future against some of their regions or just the private sector in general as for example the pension crisis unfolds entitlement programs crisis unfolds?
Doug Casey: Oh yeah, you’re absolutely right, Richard. Because I think the main reason that the government in Madrid doesn’t want to see Catalonia break off is because Catalonia sends money, twice as much money, to Madrid as Madrid sends back to them in the form of national services. So, Catalonia is like a milk cow for the Spanish government and of course they don’t want it to go away. They want to keep it there, keep it producing so they can allocate the goods. And of course, this is all the more reason why the Catalonians want to break off, but the fact that the Spanish government in Madrid has clamped down so hard and so violently against the Catalans, I think its actually going to, I think reinforce the Catalans so that even the ones that don’t want to see a doctrinaire socialist Catalonian government are probably still going to vote for it simply because they’re so angry at being exploited by Madrid. And eventually I think that even after Catalonia splits off and like I said the Basque region will probably be next anyway, they’ll probably go to more free market style policies and become realistic. Because you can only have a socialist country where there are others to exploit. If we had 7 billion little nation-states in the world, there would be no socialism. Because how can you exploit yourself?
FRA: Yeah, exactly. And from considering your views on the economy and financial markets and the geopolitical landscape, what is on your mind today? Do you see any trends taking shape?
Doug Casey: Well I’ll tell you what’s really surprised me, and this has been true for several years now. It’s that after the world economy entered the eye of the gigantic financial hurricane in 2007, or entered leading edge of the financial hurricane we’re in, in 2007. And then we went through the leading edge in 2008 and 2009 and now we’ve been in the eye of the storm which has been papered over by not just trillions, but hundreds of trillions of new currencies units created not just by the U.S and Europe, but China, Japan, and all the little countries too. And that’s poured oil on the water and what I fear is that even now as we speak we’re entering the trailing edge of the hurricane and it’s going to be much longer lasting and much worse, and much different then what you might recall from 2008 and 2009. So, I think this is a good time to batten the hatches down, I mean the fact that the DOW is trading at new all-time highs and interest rates are still at or near zero, or I think they’re still below zero in some places, actually, as metaphysically impossible as that seems. I think that this isn’t a cause for rejoicing, this is really like the tidal wave going out before it comes in and washes away everything. So, it’s a good time to batten down the hatches and I don’t like the idea of being involved in the stock market or the bond market. Which isn’t just a bubble, it’s a hyper bubble, it’s a super bubble right now the bond market. So that’s my feeling on the economy in general.
FRA: In what ways will this sort of second part or a second phase of the financial crisis be different from the first phase?
Doug Casey: Well, things really went over the edge back in 2007 and 2008 and 2009 as a deflationary collapse. If the governments hadn’t created these trillions of new currency units, you would have seen the collapse of not only Lehman but Goldman Sachs and AIG and Chase, Morgan, all of them, they all would have collapsed. And that would have been deflationary in nature, we would have seen something that would have resembled 1929, it would have been a deflationary collapse. But they forestalled that and this time, since they’ve already shot most of the arrows in their quiver with ultra-low interest rates, increasing and printing up trillions and trillions of new currency units they called quantitative easing, it’s kind of cute that they make up a phrase like this and everybody just parents it rather than just say inflating the currency. I think that what we’re going to see this time around though is going to be much higher levels of inflation. Because all that money went into the financial end of the market as opposed to the consumer end of the market. So, its created a number of bubbles, stock market bubbles, bond market bubbles, real estate bubbles they’re a number of many many cities around the world. So, when those bubbles break, I don’t know the currency, we’re going to see, I think we’re going to see very high levels of inflation. So, it’s going to be very ugly for the average guy I think.
FRA: And speaking of bubbles, a lot of people see a bubble in the cryptocurrencies, what are your thoughts on cryptocurrencies?
Doug Casey: Yes, that’s very interesting. I was introduced to them about, oh how long ago was that? 2013 when somebody actually gave me a physical Bitcoin when I was in Argentina. It was worth $13 at that time and now the bitcoin is worth 5,600 something in that area today. Good news-bad news, look initially I snookered myself. I liked the idea of it as a private currency, a fiat currency created out of nothing, true, but with a limited number of units, unlike these national fiats currencies. And I missed at the time, the value of these cryptocurrencies. I missed the fact that they are excellent transfer devices. In other words, they obviate the SWIFT system which is expensive, which is slow, which is unreliable, where all your money has to go through New York, its horrible. By using cryptocurrencies to send money across borders, its private, instantaneous, cheap. So, this is a really really big thing, this is what gives Bitcoin and others its value. Like gold has value because its one of the 92 naturally occurring elements, so it has many many uses and more everyday in a high-tech world. But the cryptocurrencies are A primarily a transfer device, and then there’s a second thing that I failed to catch back then and that was that 2/3s of the people, 3 quarters of the people in the world live in 3rd world countries. Where if they want to save, if they want to produce more then they consume and save the difference, you’ve got to save ridiculous things like Zambian Quatches and Argentine Pesos and ridiculous fiats currencies like that. And when they save them, they’re all inflated badly and they’re worthless outside of their home country. But if they save in Bitcoin, its got the same value everywhere in the world, so this is a very big deal. So, I’ve become a convert, cautiously because it is bubbly. Anything that’s gone up 300 times in a few years kind of looks bubbly, but I can see why the bubble going to get a lot bigger. So, the answer to your question, I mean I was a recent investor in something called Hive blockchain which is about the only publicly traded company that mines these cryptocurrencies, this thing’s gone from $.30 to $30 in the last six weeks, I expect it’s going higher. So, it’s a bubble, but it’s going to get to be a bigger bubble, Richard.
FRA: And so, the value you see is being based on the payment transfer utility, but also you sort of referencing as a store of value as well?
Doug Casey: Yes, especially for people in the third world, two-thirds of the human race which don’t really have the opportunity to bank, not that the banks in those third world countries, Africa, Central Asia, places like that, are worth saving in. They’re all insolvent and the local currencies are horrible so this is a boon for the average guy in the third world, this is a very big deal. So, this is the two things, transfer device and a savings device for third world people. Now I don’t know how it’s going to end because eventually there’ll be a Bitcoin version 2.0 and what happens to version 1.0? Does anybody want it? Is everybody going to dump it all of a sudden? So, there’s risks, there’s dangers here. But right now, the trend is still up, the bubble is going to get bigger. In principle, it’s an excellent idea. And its also, I’ve got to point out, it’s going to draw peoples attention to the nature of money. Which people don’t think about, they only thing they’ve got their local currency or the dollar. But then they see oh, Bitcoin, why is Bitcoin worth something? And eventually, it’s going to grow their attention to gold because eventually there’s going to be one of these cryptocurrencies that will become very popular that launches instantaneously going to gold to silver and so forth. So, it’s going to expose a lot of flaws in the current monetary system, it’s good from every point of view.
FRA: Do you see governments getting into cryptocurrencies perhaps as a way of doing away with cash or implanting negative interest rate policies for example?
Doug Casey: Oh yeah, unquestionably that’s going to happen. It’s happening now, all these governments want to get rid of cash. Cash is only paper but at least paper cash allows you privacy, secrecy, it lets you transfer things and own things that are unbeknownst to the authorities. So, they’re trying to get rid of cash, they’re trying to get rid of the U.S. $100 bill, they’re getting rid of the €500 note, they want to get rid of even the U.S. $50, the U.S. $20. So, they’re going to come out, and some governments have come out already with their own digital currencies. And it’s a disaster when governments do that because they will manipulate them and inflate them but worse than that, they’ll know where everything you have is, everything you buy and sell, they’ll know absolutely everything about you financially. And they will control you totally, they can just shut off your iPhone and you’ve got nothing. So as wonderful as cryptocurrencies are when the government gets a hold of them they’ll corrupt and destroy them like everything else, so it’s a huge danger also.
FRA: Wow, great insight as always. Doug, how can our listeners learn more about your work?
Doug Casey: Well, they can go to www.internationalman.com, that’s one website. And the other website is www.internationalman.com they’re both totally different with different products, we have lots of excellent free articles posted on them and so forth, they’re good websites. So, people should check in there and send me a note if you’ve got any reactions or whatever at either of those websites.
FRA: Great, thank you very much, Doug, for being on the show.
Doug Casey: Well, thank you, Richard. And I hope that a few listeners decide to go out and pick up a copy of Drug Lord
Transcript written by Jake Dougherty <jdougherty@ryerson.ca>
10/21/2017 - The Roundtable Insight – John Browne And Yra Harris On The Geo-Political Trends Affecting The Financial Markets And Economy
FRA: Hi ― Welcome to FRA’s Roundtable Insight ….. Today we have Yra Harris and John Browne. Yra is an independent trader, a successful hedge fund manager, a global macroeconomic consultant trading foreign currencies, bonds commodities and equities for over 40 years. He was the CME Group Director from 1997-2003. John is the Senior Market Strategist for Euro Pacific Capital, a distinguished former member of Britain’s parliament who served on the Treasury Select Committee as Chairman of the Conservative Small Business Committee, and also as a principal adviser to the British government on issues relating to geopolitical matters. He has worked at Morgan Stanley as an investment banker also working for other firms such as Barclays Bank and Citigroup. Welcome gentlemen.
JOHN BROWNE: Thank you very much Richard. Hello and to Yra too.
YRA HARRIS: Yeah John, hello to you and thanks Richard for having us and putting us together.
FRA: I thought we’d begin with a discussion on the Chinese oil contract. And just a general theme for today’s discussion are undercurrents geopolitically that are happening which could have implications in factors on the financial markets and the economy. Yra you have recently written on this new crude oil futures contract that is priced in Yuan and is convertible to gold. You wrote, “China’s ability to monetize gold is a direct assault on the US ability to manipulate the global financial system to it’s advantage ― A remnant of the Bretton Woods post-World War II global system.” Any thoughts on that?
YRA HARRIS: Well, as we’ve had the breakdown of the system this is all part of what’s taking place. People who don’t want to admit to themselves that there are major changes afoot. We see what China is doing and I’m not making a qualitative judgment one way or another, that’s just history. I just finished reading a book by Giovanni Arrighi, who people might find that he’s on the left, but in the 20th century there are changes going on, and there’s always changes going on in the international system. The United States is seeing itself diminished as the global hegemon. These things are taking place and the Chinese are very astute global watchers. We’ve talked about this before last time that when NAFTA started on January 1st, 1994, China devalued the Yuan from 5.8 to 8.7, where they held it for a long time after that, but that was a 50% devaluation. The Chinese are very astute watchers of the world situation and this is just more of that.
FRA: And John you have also written about the same subject about huge ramifications and a move with little notice outside of the financial world.
JOHN BROWNE: Yes, and interesting enough China is now the largest consumer of oil in the world and it’s two largest suppliers are Saudi Arabia and Russia. Just that fact alone is quite interesting when you think of the Saudi visit to Russia. But what recently happened, and it’s amazing it missed most of the financial media, China created a domestic oil contract that would be traded internationally in Yuan, and that Yuan would be convertible for gold. In other words, people that receive Yuan for their oil like Saudi Arabia or Russia or any other country that sells them oil, maybe even Britain, will be paid in Yuan, not dollars. This is the crucial thing because what Yra referred to after Bretton Woods was that the dollar became the reserve currency and most commodities in the world had to priced in dollars. If you were a German you would have to buy dollars in order to buy pork bellies in the Chicago exchange. What was most interesting is that in the early 1970’s when the oil crisis happened, Dr. Kissinger flew into Saudi Arabia and managed to persuade the Saudis to persuade the rest of OPEC to only sell oil for dollars. In other words, no longer would sterling be any good or any other currencies to buy oil ― Their oil was only to be sold in dollars. That underpinned the U.S. dollar and enabled the enormous expansion of dollar liquidity once Nixon had broken the gold window in August of 1971 and underpinned it. Now this is a very interesting thing here because now Saudi Arabia has stopped using dollars and other countries have stopped using dollars, particularly China. Say Saudi Arabia sells oil for Yuan to be paid rather than for dollars, and it can convert those Yuan into gold. That’s very attractive for all oil exporters to be exporting to China for it’s currency because unlike dollars, it’s convertible into gold. This strikes exactly to what Yra was saying, the hegemony of the United States and the power that it was in 1944 with Bretton Woods, it was by far the most powerful economy in the world and the richest country, and then by 1945 it was the most powerful military nation on Earth, and it has traded on that ever since. If you look at the depreciation of the dollar since 1914 when the federal reserve opened it’s doors, the dollar has depreciated by 90% or more. In other words, 2 cents of that dollar would buy you a present day dollar. And sterling has been even worse because there were 8 dollars to the sterling pound in those days, now it’s 1.2. So you can see that sterling has virtually been depreciated over 99%, and yet nobody has noticed it because all of the other currencies depreciated too, or most of them, because they have all been valued in dollars and not in gold. That particularity happened after 1971 and that’s when the real scam took place. Today we’re left with a world of seeming wealth, but really it’s just huge liquidity. There are dollars swimming everywhere hence these stock markets are rising ― People got to put them to work. You’ve got negative real interest rates, the interest rate in the U.S. is about 1.5% and the inflation rate is just over 2%. So there’s a negative interest rate in the United States as well. And we’ve reached ridiculous things where people are finding somewhere to put their money, even into junk bonds. In 2009, a European junk bond traded at 25% yield, today it yields less than a 10-year U.S. treasury bill ― It’s 2.2% as opposed to 2.3%. That can’t go on, I mean it just doesn’t make sense, and it’s a vast, vast bubble. I think Trump has done a wonderful job on trying to drain this swamp, but when he was in Puerto Rico he said he may wipe out Puerto Rican debt. If he wipes out Puerto Rican debt, and we have great sympathy for these poor people who have been cheated by their local government, if that happens then people will say, “What about Illinois? What about California? What about New York?” is the government going to wipe their debts? Eventually if you extend that argument further, what about America? Maybe a president comes in here and says we’ll wipe out the debt. So you start to get a real beginning of a fear as to whether I should start buying dollars and U.S. debt. That is the beginning of the pricking of this vast balloon, in my opinion.
FRA: Yra, any thoughts on that?
YRA HARRIS: I agree with everything that John has said. When you look at the European high yield index that yields less than 10-year U.S. treasuries, considered to be the safest debt in the world. If you don’t think you have a problem then you must be a central banker. This is an enormous problem and of course the world march is on, but so be it, that’s the way markets work. I think we can all agree that central banks have broken the signaling mechanism of what bond markets are supposed to do, so where they would be offering us warning signals, they can’t, because you cannot overcome the power of their printing press. They can print and print and we know that money in a world in which capital flows freely, all money is fungible, there is nothing to stop it. When you buy 60 billion a month in Europe, that money goes somewhere, it goes to buy other assets and so they’re buying all types of bonds. So we don’t have a market price and we know that the biggest fear for the central banks is for the market to take over the pricing mechanism because then it would reflect some sense of reality. As long as the central banks control we won’t have that sense of reality. That’s just the world that we live in and I think John is a 100% right, especially in what the Chinese want to do here. This is not a mistake and I want to see what their next move is. It’s interesting that Russia came out the other day and they are creating their own Ruble cryptocurrency. Ultimately, if there are these electronic medium of exchange, what we call currency, it will be controlled by the governments. They will not let this out of their control. One of the main things in the U.S. constitution is the government’s ability for currency and coinage, so they will lose control of it. But when we really look at it, and I think this is where John goes, because if we go back to 1960’s when Jacques Rueff was writing The Monetary Sin of the West and he was calling it, “the question”, because what we had was not a gold standard, we had a gold exchange standard. The United States was willing to exchange gold for currencies until the Vietnam War and the war on poverty began, and then there was just too much currency to exchange, so Nixon said that they were going to kill us here and we got to get off this standard. It’s the same thing if you look at Bitcoin. Bitcoin is nothing but a dollar exchange standard because it’s not like someone created Bitcoin out of nothing. If you are buying Bitcoins you are exchanging some underlined value. You might be exchanging gold, but most of the time you are exchanging dollars for those Bitcoins because they are always valued in dollars. The Chinese are really going to try hard to take us away from that. I think John wrote an important article about what China is doing and that we have to be very attentive to it.
JOHN BROWNE: What Yra said I think is so interesting because what we’ve got is an illusion of wealth and unreality. Governments and central banks have just created this incredible unreality and I mentioned those differences in yields, are just beyond belief. But the thing is when we go back to the gold standard we had before, there was real money because of the gold standard, before the first World War. What I find fascinating is that it had a rule of law within money, but it translated into national rule of law. There were very few wars when international currency came in based on gold and it was only when we broke from gold that we suddenly unleashed huge amounts of unrest and irregularity and the breaking of the law. The law is broken by the government all the time. Just look at the illegal immigration and the new secret funding of Obamacare ― illicit and unconstitutional, but it’s still accepted by all these rhino politicians who are corrupt. Populations are getting violent and very depressed and angry with each other ― It’s a great shame. I think it’s because we live in a world of unreality. Yra mentioned cryptocurrencies, of course this is a fantastic thing. A Bitcoin plus it’s blockchain methodology is an offer to clear the financial swamp. President Trump is trying to clear a political swamp in America, but a financial swamp is almost more severe. It offers the individual freedom from government, instant transactions at no cost and a tremendous degree of anonymity. I think it’s a fantastic revolution that’s taking place and that’s Bitcoin which of course is becoming the reserve cryptocurrency of the roughly 1200 cryptocurrencies. They all translate or measure against Bitcoin and Bitcoin is measured in dollars at the moment and the blockchain technology behind it is going to challenge governments and major corporations on how they do business. It is going to, in my view, almost redefine capitalism because it’s going to be a completely new way of doing it. The devoid of regulations where there is so much more freedom for the individual and I think we’re heading to a time of phenomenal change in the financial world because of blockchain. All the big financiers including: Jamie Dimon, who I like and is a tremendous guy, are all decrying Bitcoin because it is such a threat to the financial system that we’ve got now which is so expensive. They used to do everything for free, but they they are charging for everything, even wiring they are charging $15 to wire money. Is it just staggering when it’s all digital stuff I doubt it costs even 15 cents. So all of these things are going to change, in my view, if you just imagine 1850 compared to 1950, who could’ve imagined electricity and machine guns and all this sort of stuff ― It was fantastic. I think we are going to experience that in the next few years that one of the leading things is going to be the technology behind Bitcoin, the block chain, that it’s going to transform the world. It’s going to really face these big corporations, not just governments, on their whole business models. You think the internet was bad enough for brick-and-mortar companies, blockchain is phase 2 of the internet and it’s going to be an even bigger challenge for commerce and the whole of capitalism. So I think that we’re going to see a reversal and a technological draining of the financial swamp. It has huge implications for Wall Street, the city of London and every other financial centre because if I come along and I dial up Germany.com and I deposit $10,000 into an account that I’ve opened and they do due diligence, takes a few days to open the account where the check you out, know your customer, they do all that by regulation to avoid money laundering, I put the $10,000 in and convert it to Bitcoin and that money has come out of the banking system. No longer is it in deposit and leveraged up to make loans ― It’s gone. To the banking system it is dead money. At the beginning it was difficult to get into Bitcoin, but it’s getting very simple now, and if you don’t leave the money on the Bitcoin exchange and put it in your wallet then it is entirely secure. You have remember your password or it vanishes. The thing is it is going to change and the thing it’s going to do is create dead money in the banking system, in other words, taking deposits out of the banks and they’re going to be really strapped. I think Bitcoin is a majoy economic threat to bursting the balloon and then Bitcoin would rise phenomenally if money collapses. The only way you can get into cryptocurrency is through Bitcoin. None of the other currencies accept fiat money. You can put fiat money into Bitcoin and then Bitcoin into the other cryptocurrencies. This is going to siphon money out of the banking system, it’s going to siphon money that people think is real money. The combination of Bitcoin and gold, where the Bitcoin being much more mobile and easily moved around the world at no cost is a thing that I see of the future resulting from the swindle that people have been had by their governments and the banking system ― And that could prick the balloon.
FRA: Speaking of the move away from dollars, we talked about the Chinese, do you think the Russians may move away from accepting dollars for oil?
JOHN BROWNE: They already have done deals with China. That was a ridiculous thing about forcing the Russians which Obama did over the Crimea. Instead of seeing that the Crimea was to Russia as Cuba was to the United States under Kennedy, when Khrushchev put his missiles underneath the soft belly of America next to Florida Kennedy had to get them out even if it meant going to nuclear war. He simply couldn’t accept missiles sitting that close with such a short time fuse to get into the United States, he couldn’t accept it. He had to get it back and luckily Khrushchev realized that and climbed down as America removed their missiles from Turkey. Obama and Kerry hadn’t read their history because they didn’t see that Crimea and the Ukraine was a similar thing for Russia. And instead of accepting it and finding some weasel words typical of politicians to get over this problem, they forced Russia out and into the hands of the Chinese where we’ve spent ages trying to lead them away from the Chinese. Now Russia makes no bones about being awkward with us and one of the things they’ve done is tied up huge deals with China in their mutual currencies avoiding the U.S. dollar ― So they’re out. One of the things to break America is very interesting, we’ve piled up huge amounts of money in military systems, but maybe the Achilles heel of the western world is its money and not it’s forces because if China and Russia could break the dollar, it would smash America without firing a shot. The great generals are the ones who win without actually fighting. Just like in chess you threaten the king with a checkmate, you don’t’ even have to take him because he can’t move. That’s the game is to win with the minimum amount of fighting and the Chinese could be doing that by etching out our fiat currencies. When we’re talking trillions, I mean even a billion is enough to get your head around. I’ve seen a football crowd at Wembley stadium of 100,000 and that’s a huge number, a billion is way out of my comprehension. I went to a funeral in South Korea and there was said to be a million people at the funeral and even then you couldn’t see the size of the crowd, you can’t see a million. A trillion seconds ago was 31,500 years ago. The American government owes 20 trillion in direct debt and another trillion in unfunded liabilities and guarantees. These are staggering figures and people have no comprehension. It’s the big game of bluff that is run by the governments and the central bank ― Ordinary people have no idea. And if that bubble was to burst, the abject poverty that is to be reaped upon everyone as search, as to what Yra said right at the beginning, as the search for real value is way below these prices in almost everything. And we said what we’re trying to do next after oil, what about copper? Probably the most widely used natural resource in the world, other than water, for raw materials is probably copper. If they’ve done it for oil with this instrument then why not do the same thing for copper if the oil one is successful and then gradually spread it around. Who would be buying dollars to buy any commodities? You’d kill the dollar and with the dollar you’d kill the United States.
FRA: And Yra, what are your thoughts on the Russians moving away from accepting dollars for oil, the potential for that. You recently pointed out the Saudi King’s first ever visit to Russia.
YRA HARRIS: John talked about that, he eluded to it. These are major events. These are far more important than any of these Trump tweets. The Saudi King going to Russia for the first time ever ― That’s an enormous event, that a signaling event. When John talks about the Obama thing, they had no idea what was going on. Go read probably the best book on political science, Graham Allison’s The Essence of Decision, and you’d understand first of all everything that is going down in Washington because it’s the greatest study of bureaucratic politics and it’s acknowledged as that. This is all that is going on and Obama and Kerry dropped the ball because the Russians are never going to give up the Crimea. Why is Guantanamo Bay in Cuba? Why does the United States still have a naval base in Cuba? Because Cuba protects New Orleans and New Orleans is the grain-shipping capital of the world. Cuba protects the entire Gulf of Mexico which is huge for oil and food just like Crimea. Why did the Russians always want a base in Crimea? Because it allows it to either threaten or protect. Forget Turkey, if the Russians want to shut that down they can shut that down and that’s why you’re not going to move them out of Crimea. When people look at a map, so much of this becomes logic. The Russians learned a lot from Obama. They red-lined and they saw all the weaknesses and all of the apologies, so they just kept moving in and moving in. When the ambassador of Ukraine was trying to insight Putin with the whole revolution, Putin played that exactly right. Then John McCain, the idiot, sorry John I used to respect you, but when you want to give the Ukrainians advanced weaponry you are setting them up for massacre because Putin was waiting for that to happen. So things have quieted in the Ukraine because the Russians have the eastern part and they have their people in and it will work itself through, but the world is fascinating with all these things with the oil. The Russians are going to squeeze this too which is why they are working with the Saudis and the Saudis are in need of the Russians now that Russia is in control of Syria. What the Saudis fear most is the Shia crescent that extends out of Iran across Iraq into Lebanon. They know now that the Russians are the key players here, not the United States. As soon as the Russians took back that naval base in Syria it was a major game changer. John Kerry was ridiculous ― They had no plan and they got totally blindsided by the events that unfolded. We’ll see what John says about this, but the greatest wild card in the game for the Russians is Gerhard Schroeder. He has an enormous position now. Before it was just the pipelines, but now they’ve actually brought him in to Rosneft as a major director, are you kidding me? This guy was a chancellor. This would be like George W. Bush serving on the the board of Gazprom. There are things afoot here that are so big that nobody is paying attention to them and they will unfold. What’s going to be the market dynamic? I don’t know, but I know these things are in motion and we have to be very attune to them.
JOHN BROWNE: Yes, that Gerhard Schroeder thing is fascinating because obviously Russia and Germany have always had a huge trade and when the sanctions came on organized by Obama, the United States did less than a fifth of the amount of dollar volume trade with Russia than Germany did and so it hurt Germany far more. That threatened to break NATO because the Germans didn’t want to go ahead with these sanctions. That was a threat to NATO and a slit to NATO would’ve been very, very bad, but it risked it and eventually Merkel obeyed what Obama and Kerry had wanted, but it was a dangerous time and the Gerhard Schroeder thing illustrates this great weakness. I am appalled when I think the government here is focused on trying to fix a Russian assassination on the president and meddling around in these silly, unbelievable investigations of people while the big crooks go and these huge events are happening in the world and nothing seems to be done. But I think people are getting really fed up and they’re sick of being financially swindled by their governments and seeing their living standards fall. When I first came to Wall Street in 1969, most people had one family breadwinner, now both parents have to work to have a living wage and yet this huge illusion of wealth is there. Really the ordinary people are being squeezed to death. I think that they are getting fed up with that and also with their governments doing things that people now, thanks especially to the internet, are seeing things happening in the world which are totally against their interests and the government are doing it. It started with a big rebellion in Britain with Brexit, then with the election of President Trump, the people spoke and the financial elite were absolutely staggered that he won as they were staggered by the victory of Brexit. Now you see Catalonia wanting to leave in Spain, you saw the same sort of problem in Greece, in Italy, then in the German elections with the huge movement of right from 0 to 88 seats. They were saying that they were never going to get 1 seat, but they got 88 seats and now you see in Austria the similar sort of thing. The people are speaking and they are very, very fed up with their governments and I believe as I went back to that gold story when you dilute and you create turmoil with the money system it eventually spread to the political system where we had gold that is law and order within money and when that vanished, the law and order in the streets broke down. It has now reached a fever pitch and people have to live on the streets, I mean our leaders live in limousines and chauffeur-driven cars with police escorts and everything else, ordinary people have to live with their children going to school down streets that are dangerous. They are beginning to speak and I think all of these things are beginning to reach a crescendo which is extremely worrying.
FRA: Yra, you have written about the Sunday election in Austria as well, just wondering about your thoughts on that. You also mentioned financial repression will be the next theme for the European ripe.
YRA HARRIS: There’s no question and I know John will agree. The media and the established elites, whatever that means, it exists and I call it the DAVOS crowd who meet amongst themselves and claim their own self-importance, they want to make it into anti-immigration, but it’s so much more than that if you pay attention. I mean, today the German court basically sided with what the ECB has been doing up to a point, but this isn’t going to stay that way forever because they were all economists and yes, they got sidetracked because Merkel made that terrible decision about open immigration, but there are things that are going to re-rise because they are not going to back off of this. If the FDP is brought in and Linda gets the financial ministership, this is going to be a continuing issue because German citizens are paying, by design, the entire bailout of Europe. Right now because the world has enough growth, they are able to smooth it over, but that’s not going to last long either. Japan was able to go through a terrible period of non-growth or very low growth, but a lot of that is because the rest of the world is expanding. That alleviated a lot of the problems. Japan had more problems, of course, when the world went into a major repression in 2008/2009. Ben Hunt writes about it continuously: it’s a narrative. Do I accept the narrative of the mainstream? And it’s not that I’m a fanatic, I’m not, but I read everything that I can because I need to in order to prosper in what I do. I don’t accept that narrative because there are underlining things that are far more powerful going on and it’s outside of the narrative that they want to concoct as the way the world is ― It’s just not so. There is so much disruption going on and now we have the Chinese with the 5 year meeting and of course you have the Japanese elections. The Austrian elections were very important because, as John was talking about with the rise of the right there, this is the second time. The first time was back when the Euro was coming to existence and the Austrian people were not enamored with it. It’s harder to shun people now because you got the Catalans, you’ve got Brexit, you’ve got Poland whose not very happy with the way things are, you have other eastern members of the EU who are not very happy. There is a lot of underlined unhappiness and Merkel is right now in a very wounded position. The only thing that would salvage her would be if she created another coalition with the SPD. But the SPD, who just won an election that they weren’t suppose to do very well in, has no desire and they’ve said that. They do better as an out party than they do as a part of a coalition so Merkel is in a very precarious situation here. This will be interesting to watch.
FRA: John, your final thoughts?
JOHN BROWNE: Just listening to Yra I agree with everything he has said. What I see happening now is what I’ve said before. I think my summary feeling is that we have this illusion of wealth and we’ve built this massive bubble thanks to the Fed and the other central banks that have followed suit ― Absolutely gigantic, trillions of dollars of hot air. If that was to go, the higher the balloon goes, the more devastating the fall and we are really high up at the moment with the 23,000 stock market and everything. I think it’s shocking the way people have been treated and what’s really worrying is that people are beginning to act. And if the balloon is pricked because their actions on the street, and they get politicians who really will prick the balloon, it’s going to be a very nasty financial situation.
FRA: Great insight gentlemen. How can our listeners learn more about your work? Yra?
YRA HARRIS: Notes From Underground is available if you go to YraHarris.com. You can subscribe to it and it costs nothing. You can find me there and there’s a lot of dialogue that goes on.
FRA: And John?
JOHN BROWNE: I write for Euro Pacific Capital on the internet which is EuroPac.net. My articles are on there together along with Peter Schiff on the front page. That’s probably the best way other than lectures that I give every now and again and of course your wonderful podcast.
FRA: Great! Thank you very much gentlemen for being on the show.
Transcript written by: Daniel Valentin <daniel.valentin@ryerson.ca>
10/18/2017 - Yra Harris On The Financial Repression By The World’s Major Central Banks
“EQUITIES have certainly been a long-term momentum play as the central banks have prevailed in pushing equities and real estate prices ever higher, while the fungible nature of fiat currency has kept global bond yields historically low. Meanwhile, forward guidance maintained the powerful regime of negative interest rates in Japan, Switzerland, Germany, France, Spain, Italy, Sweden, etc. The use of negative interest rates and zero interest rate policy has been the ultimate determinant of ‘Who Gets Eaten and Who Get’s To Eat.’
As Carmen Reinhart has argued for the last nine years, the ultimate outcome of the Fed’s efforts at financial repression is that savers get crushed while borrowers and hard asset owners get rewarded. If the Fed is truly on a path of “normalizing” interest rates owners of interest-yielding products will get some relief. Are the short volatility crowd and risk parity positions ready for the end to a beautiful deleveraging?”
“The QE programs propagated by the FED, ECB, BOJ, BOE and SNB has flooded the world with ultra-cheap debt. This is similar to the mid-1970s when the OPEC nations had massive amounts of dollar deposits after the rapid increase in OIL prices. It is only the weakest borrowers who are in need of borrowing the greatest amounts. We have gone from the recycling of petro-dollars to the world’s financial system being overwhelmed with the FED‘s largesse. In times of great amounts of liquidity, money is like water: It congregates at its weakest point.”
Notes From Underground: Who Gets Eaten and Who Get’s to Eat (Sweeney Todd)
10/10/2017 - Bill Gross: “We Have Fake Markets Because Of The Fed”
Bill Gross: Financial markets are artificially compressed, in the process distorting capitalism because of the U.S. Federal Reserve’s loose monetary policy.
10/10/2017 - Spain Is The Blueprint For How Indebted Governments Will Act
“What is going on in Spain is the blueprint what what other governments will do .. The structure of the EU in attempting to federalize Europe required a single federal debt. That is what they failed to do so you ended up with a half-baked cake. This is why we have the problems in Europe as we do. But make no mistake about it, this is a political problem and what happens in Europe will be a contagion as it was in 1931. This will eventually cause major problems politically in the States as well .. I strongly urge that you read just Common Sense written by Thomas Paine .. Spain is merely the blueprint. Watch carefully, for all governments will act the same.”
Spain is only the Blueprint for How All Governments Will Act
10/10/2017 - Schäuble: Another Financial Crisis Is Coming Due To Spiraling Global Debt
Says there is a danger of “new bubbles” forming due to the trillions of dollars that central banks have pumped into markets ..
10/04/2017 - Yra Harris: Does A Printing Press “Guarantee” The Balance Sheet Of A Central Bank?
“Over the past 15 months, I have made light of Fed Governor Jerome (Jay) Powell because of his answer to a question I had asked him at a symposium presented by the Chicago Global Initiative. I asked Governor Powell, ‘Who guarantees the balance sheet of the ECB?’ Without hesitating, Powell said, ‘THEY HAVE A PRINTING PRESS.’ If this is his answer to issues of debt overhang I will be closely watching the precious metals if Powell actually became Fed Chairman. Janet Yellen has proven far more competent than Jerome Powell would be under any top of stressful central bank situation .. In my mind Powell would prove to be a new G. William Miller: A weak Fed Chair that was inept in a crisis situation. The current global financial situation is too fraught with danger for Powell’s PRINTING PRESS ..
There was a major article in the Nikkei Asian Review titled, China Sees New World Order With Oil Benchmark Backed By Gold. The article begins: ‘China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.’
This has the POTENTIAL to be a great disruptor because China is the world’s largest oil importer. This can have major consequences for the entire global macro world for many reasons. First, the DOLLAR will have an alternative for its status as the benchmark for global commodities. Second, the ability for countries laboring under the threat of U.S. sanctions that are imposed through the SWIFT transfer system can not be avoided by receiving payment in YUAN while being guaranteed by gold. Third, China recently initiated a GOLD CONTRACT settled in YUAN so large OIL EXPORTERS will have the ability to hedge their revenues in a liquid contract further undermining the power of U.S. exterritoriality and quickening the demise of Pax Americana. Fourth, China’s ability to MONETIZE GOLD is a direct assault on the United States’ ability to manipulate the global financial system to its advantage, a remnant of the Bretton Woods Post-World War II global system. The monetization of GOLD really has piqued my interest. It certainly sheds light on the theory that China has been accumulating GOLD. Now, let’s see if they are bi-metalists that can bring SILVER into the equation. XI, what say you?”
Notes From Underground: Be Very Afraid Of Jerome Powell and His Printing Press
10/02/2017 - Gordon T Long: The Next Financial Crisis Will Be Global And The Federal Reserve Will Not Be Able To Control It
“That is correct, and it won’t be something that is gradual, it will be very abrupt .. The system will break… and the financial markets will freeze up. When they come out of the other end of that freeze, and it may be a number of weeks because the next crisis will be global and much more complex than 2008. We could control that with the Federal Reserve . . . and this one you cannot do because you cannot get agreement with all those countries. Never mind understanding the complexity .. So, when we come out on the other side . . . there will be a massive revaluation in the U.S. dollar .. They will have to put some stability in the monetary system, and the only way they can do it is having something they cannot print. This is what has gotten us into this problem. We have to get back to sound money.”
10/01/2017 - The Roundtable Insight – Charles Hugh Smith On Why Wages Are Stagnant In The Developed World
FRA: Hi – Welcome to FRA’s Roundtable Insight. Today we have Charles Hugh Smith. He is America’s philosopher as we have called him in the past. He is the author of 9 books on our economy and society including: A Radically Beneficial World: Automation, Technology and Creating Jobs For All, Resistance, Revolution, Liberation: A Model for Positive Change and The Nearly Free University and the Emerging Economy. His blog, OfTwoMinds.com has logged over 55 million page views and is number 7 on CNBC’s top alternative finance sites. Welcome Charles!
C. H. SMITH: Thank you Richard. I always wonder if I can live up to that glowing introduction.
FRA: You always do. You have great insight as always. I thought maybe today we take a look at a topic you have written a lot about and that is on stagnant wages, particularly in the developed world such as the U.S. and Canada, and what the challenges are behind that…Why it’s happening and if there are any solutions to get out of that trend.
C. H. SMITH: Right – Well it’s an excellent topic. It confuses the conventional economic commentators because as of right now we all know in the developed world, at least in North America, the unemployment is quite low – It’s less than 5 percent which is considered full employment. Normally when we have full employment then employers have to start bidding higher wages and benefits to attract the most productive workers. A rising tide raises all ships and in other words wages tend to rise across the board. When you have full employment and a rising gross domestic product, but we have rising GDP and very low unemployment, according to the statistics, and our wages remain stagnant so something has changed. So I think that is the question that we are going to try to explore.
FRA: And as your writings have indicated that there are a lot of explanations that include automation, globalization, offshoring, the high cost of housing, the climb in corporate competition, the failure of the educational complex to keep pace, a global labour arbitrage as a big factor. What do you make of those explanations?
C. H. SMITH: Yeah – I think all elements and part of what we’re proposing here is that there is not just one explanation. If we could just nail it down to one cause then we might be able to change that which policy, but what you’re talking about is these very large structural forces such as globalization and the fact that the economy is changing faster than our higher education systems can change so they are falling behind what employers actually need employees to know. And so these are structural and very difficult to modify or change with just a few policy tweaks here and there. That’s not even mentioning the impact of financialization and financial repression which we all know has kicked into gear in the 21stcentury. That has also changed the distribution of the gains we’ve made from productivity. I have a chart here that the New York Times published in August indicating that virtually all of the income increases over the last few years are now going to the top half of 1%. That’s completely different than it was in the 80’s and 90’s where the distribution of increasing incomes was skewed to the lower end income and middle income sectors. That to me shows the impact of financialization because we know the top 0.5% are generally not people inventing something wonderful, they are not Steve Jobs, they are people that are simply getting nearly free money from central banks then using that cheap money to leverage it into ownership of income streams. They are not creating any income streams they are simply acquiring them with all the evil fruit of financial repression, cheap money, limited liquidity and high leverage.
FRA: For our listeners, Charles has made a collection of charts that provide good insight and we’ll have those charts in the write up of this podcast as well for everybody to look at. If you could go into what is the need for rising wages – the whole system is based on rising wages, could you go a little bit into that and why stagnant wages is a problem?
C. H. SMITH: Yeah – That is a critical point because our whole economy, the advanced post-industrial developed economies, they are all consumer economies – They depend on consumers buying goods and services on a permanent basis. So you have to have higher wages in order to support more consumer spending and more consumer borrowing because if we are going to borrow more than we need to make more net income so we can service that higher debt. So stagnant wages throw a monkey wrench into the whole permanent growth and expansion of consumption that our economies are based on. Now we can question that model and say what we really need is a growth model where we are actually getting more happiness and satisfaction with using less resources are earning less income, but that’s a discussion for another day. The economy we have is one that starts falling apart if wages stagnate or decline. I have a chart here of wages and salary as a percent of GDP and it’s quite interesting because it goes back to 1960. It’s basically a measure of how much of the economic activity or output of the economy is going to wages and salaries. What we find is is that it’s dropped quite a bit. In the 70’s, about 50% of all the GDP went to wages and salaries such as working and self-employed people, now it is hovering around 42% or 43%. That is a significant chunk because the GDP currently is about 18 trillion, so if you’re talking about 7% of that then you’re talking about a trillion dollars that used to be directed to wages and salaries and now is going to corporate profit or financier profits and basically financialization. So that’s a big change, but it’s secular, in order words it started in the 1970’s with the stagflation of the 70’s then it continued to climb in the financial boom in the 80’s and the only counter trend was in the Dot-com era, then the percentage of the GDP growth that went to wages and salaries actually increased, but when that boom ended it went back to a decline.
So we have to look for answers that don’t just start 5-10 years ago, we have to look back and say something has been happening for a decade or two. One possibility is productivity, that if we look at productivity growth – I have a chart here that goes back to 1980. Obviously it’s a volatile metric, it goes up and down depending on if the economy is entering a recession or not, but recently even though we’ve had strong growth in the GDP, the productivity has been very anemic and not just for a year or two but since 2010. That’s another change that’s undermining wages and salaries because all real growth comes from increases in productivity.
FRA: Now in some parts the local governments, which have growing budgets tied to increased collection of property taxes due to rises in housing prices, that could also become problematic in a similar way in the public sector if the housing prices stagnate or decline. How are property taxes going to be maintained or increase based on budgets that are factored in for growth?
C. H. SMITH: That’s right and an excellent point – And especially for municipalities and states where the majority of the local government income is largely based on property taxes rather than sales or income taxes. And of course if wages stagnate then people have less money to spend so sales taxes stagnate, they have less income so income taxes stagnate and then they can’t afford to move up to more expensive housing if they can’t afford the property tax. I think we can see the local governments around the U.S. are feeling a dwindling, a stagnation of their revenues. Another thing is I have a chart here of the annual change in the number of new firms or in other words how many new companies are emerging and succeeding enough to hire employees and pay taxes and all the good stuff that we expect of new business growth – That has been stagnant or declining since the 2009 global financial crisis as well, compared to the previous decades of very strong growth of new small businesses. That’s another element, it’s becoming more difficult to start a new business and to succeed. That also means that there is less opportunity for wage earners because the fast growing small businesses tend to be the engines of employment because they are growing fast and need talent and are willing to outbid existing corporations for the best talent and so they are a big part of higher wages. That is also causing stagnation in wages and salaries.
FRA: So, if we consider the big reason of financialization as the reason that wages have stagnated and that the economy is optimized for financialization, can we focus on that to explain what is financialization, how does it work, what does it mean to the average consumer and so what’s exactly happening behind financialization?
C. H. SMITH: That’s a great question. It’s a word that has various definitions. My personal definition is that it’s the commodification of everything in the economy into something that can be marketed globally. So for instance, home mortgages in North America, back in the ancient days or 20 year ago banks would originate a mortgage and hold it. It was a very slow, steady, low-risk business with a guaranteed return. Once that financial industry got financialized then the mortgages were packaged into financial instruments that can then be marketed globally as investments and then they could be sold as AAA-rated instruments to credulous investors and huge profits could be spun off of this. So that’s an example of how financialization works, is that it’s basically taking what was once a low risk industry and hyperfinancialzing it so it could be sold off and traded for immense profits. The high risk that is generated from that is then passed onto other people. The role of central banks in financialization is that the cheaper you make money, the more speculation that you enable. For example in the housing bubble of 2007-2008, that speculation was fueled on both ends of the spectrum. You had small-time players getting liar loans, which were of course enabled by central bank liquidity. And then you’ve got financiers that were selling F-rated financial instruments as AAA-rated. Nowadays, because of the credit-tightening and the regulations that were finally imposed on the banking sector, the small fry doesn’t really have the same access to liar loans and easy money, and so now it’s congregated up in the very top of the wealth power pyramid that if you’re a financier or a corporation, then you have almost unlimited access to cheap money. You can sell bonds at low rates or borrow money from a money centre bank at rates that no normal employee can possibly match. So the corporations can do thing that would not have been possible without financial repression because if they had to pay 7% or 8% to borrow the money, then it would no longer make sense to buyback so many millions of shares of their company in order to boost their wealth and capital gains. So it’s the cost of money and the availability of money to the apex of the wealth power pyramid and that’s why the chart from the New York Times shows that the vast majority of income gains over the 21thcentury are congregated over that very small part of the population that has access to unlimited liquidity at very low interest rates and then they can buy the income streams and outbid everybody else. I think that is one of the devastating impacts of financial repression, that the benefits are not evenly distributed. If you and I could go borrow a billion dollars at 1%, we could do some amazing things because all I would need to do is buy bonds that pay 3% and I would be skimming 2% for nothing. I would be earning 40 million dollars a year simply because I have access to cheap money. That is one of my favourite examples of how financialization works.
FRA: And you’ve got a great quote from one of your blog writings earlier this month saying, “Financialization funnels the economy’s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage.” Those aspects cover what a lot of what financial repression is about such as cheap central bank credit – The whole money printing and quantitative easing aspects of central bank activities.
C. H. SMITH: Right – And the fact that for the 99.95% of us, we can borrow money to do something specific, modest and limited such as buying a house or getting a small business loan if we jump through a lot of hoops, but we can’t go borrow money with the size and leverage that the big players can – That’s why they’re scooping all the income gains. If we look at the chart here of declining wages for all layers of the educational accomplishment, in other words even the workers with advanced degrees, their wages are stagnating too while those with less education may actually be declining once you adjust for inflation. This is quite amazing that even the highest educated workers are no longer making gains. That shows how pervasive the damage is with financial repression.
FRA: That is an interesting chart. And if we can now ask what is the way out of this – Are there any solutions? Could a repeat of the dot-com bubble, where there was a break in the trend, be repeated through the revolutions we have going on like in blockchain, bio-tech, energy & environment, robotics. There are a whole bunch of revolutions that are happening in different industries. Could any one of those or perhaps collectively altogether duplicate a dot-com effect?
C. H. SMITH: That’s a great question and I think the more we learn about each of these scientific and technological revolutions, the more potential we see. Just as a beginning comment: there is a lot of media coverage of the replacement of human-beings such as the self-driving driving vehicles which are going to get rid of millions of drivers, that is definitely a real possibility, but we have to also make mention of something that is less sexy which is that a lot of technology tends to augment human labour. For instance, an industrial robot on a factory floor, it doesn’t just do it’s thing with no human interaction for months on end, years on end. More and more you need to change your product line very quickly and modify your production and so you actually need skilled humans to reprogram the robot. There is a lot of this kind of technology where the tool increases human productivity, but humans are definitely still the key part of the whole chain of production. So I think there is a definite possibility for higher wages which would basically mean the higher productivity that’s flowing from technological advances would go to those doing the work as opposed to those who own the income streams. But I have to say we are going to have to find some way to limit the predation of financialization in order to press those gains down the wealth power pyramid to those who are actually doing the work and creating the advances. That’s going to require certainly a political change that puts limits on financialization so there is more of the nation’s income left to be shared with the workers.
FRA: Could all of these trends have deflationary effect on the economy in terms of the need to sell assets for generating enough income to service debt and to pay ordinary everyday expenses? Do you see that potential in terms of deflationary effects on the economy in general?
C. H. SMITH: That’s a great question because it calls to my mind Japan, which as we know has been sort of in a deflationary cycle for roughly 25 years. When we look at Japan there are many aspects we can comment on and it’s stagnating too in terms of it’s wage structure and it’s growth. But one thing we might posit is that Japan’s export industry, it’s most productive sectors like automotive and various technology sectors, their productivity is increasing enough that Japan’s national economy has been able to stumble forward in a very low growth and stagnate way, but the very high productivity of the industrious sectors of Japan how allowed that to be modified. In other words, without those high productivity industries, then Japan would be in a real perhaps deathbell of deflationary dynamics. My point here is that if you have these very productive revolutionary technologies, they may be a small sector of the overall economy in terms of a percentage of economic activity, but in terms of the gross and productivity that they create, they have an outsized impact. So we might see something like that and we may be already be seeing something like that in the U.S. where the sectors that are growing fast and creating a lot of value are keeping the U.S. economy from entering a deflationary cycle. And because we know one cause of deflation is technology lowers costs and so things get faster, better, cheaper, or at least that’s the idea. That’s not a very complete answer to your question, which I think is a good one, but my point being is that technological revolutions can lower the cost of goods and services which is deflationary, but their productivity gains can increase the GDP which tends to counter that deflationary impact – In other words the whole economy can be growing even as prices decline.
FRA: That’s interesting and great insight – How can our listeners learn more about your work, Charles?
C. H. SMITH: Please visit me at OfTwoMinds.com
FRA: Great – We’ll have you on again. Looking forward to the next discussion.
C. H. SMITH: Thank you so much Richard – It’s been my pleasure.
Transcript by: Daniel Valentin <daniel.valentin@ryerson.ca>
LINK HERE to the podcast in MP3 Format
