FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have Yra Harris and John Browne. Yra is an independent Floor Trader, successful hedge fund manager, a global macro consultant trading foreign currencies, bonds, commodities, and equities for over 40 years. He was the CME Director from 1997-2003. And John is the Senior Market Strategist for Euro Pacific Capital, he’s 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 Advisor to the British government on issues relating to geopolitical matters. He’s worked for Morgan Stanley as an investment banker and he’s also worked for other firms, Barclays Bank and Citigroup. Welcome, gentlemen.
Yra Harris: Thank you, Richard.
John Browne: Thank you, thanks for having me.
FRA: So today I thought we’d discuss the implications of the recent elections in Germany on the EMU, the Euro, ECB policies, financial markets, and the European economy. Your thoughts? I guess we can start with Yra, what you think happened and what are the implications?
Yra Harris: Well you know Richard, we’ve talked about this and you know I’ve written quite a bit about it over longer than I care to think about, but the results were to me a phenomenal loss for Merkel because she not only slipped from the vote totals but it was a very big slap in her face. And like in the Brexit vote, they want to sell it as anti-immigration and I think it’s so much bigger than that. I think this part of the vote .. and if we go back to when the AfD first began, I think in 2013 when it was founded by various economists, the issue is far more financial than anything else. Yeah, the AfD attracted some fringed wackos as we might call them, but most importantly, the Free-Democrats resurrected themselves. I think this is a pretty big statement as to how Germany will face what Macron has been trying to push down, I would say Macron and Draghi have been trying to push down the throats of German taxpayers but of course, it never had the okay from German voters. So, I think that this has a long way to play out, it was a very important vote .. the biggest winner from here may be Theresa May. But we’ll leave that for further discussion.
FRA: And John, your thoughts?
John Browne: Well, I’m very interested by what Yra said because I think you’re absolutely right. Theresa May may be the biggest winner of this because Merkel is very pro-German industry and that points towards a mutually favourable Brexit from Germany at least. And Germany really runs the European Union, although it’s meant to be everybody, but basically Germany runs the whole show. And that’s a very important thing that Yra mentioned. I agree with Yra that Merkel had a big loss, she was elected as forecasted but there was nobody else, she’s weakened significantly. I mean the interesting thing was that combination, again getting back to what Yra said, it wasn’t all immigration. It was partly to do with the financial environment. The Alternative für Deutschland, the Alternative for Germany, went from 0 seats to 88 and the Freedom Democratic Party went from 0 to 69 seats. 132 seats against Merkel’s 217, so it’s a big block in there. And it’s going to sober a lot of the left wing in Germany, the Greens lost and the Left both lost seats. And so, I think that’s very interesting in my view and I agree with what Yra said. I think its going to boost the thing for Brexit because Merkel is going to be favourable to a good deal with German business. As far as the ECB is concerned, I think there’s going to be continued press for EMU, the European Monetary Union. The Euro has faired fatally basically because it doesn’t have a unified economy and so, each threat to the Euro is going to be used by the European elite to force closer and closer fiscal unity on the way to becoming a superstate. And talk about undemocratic, I mean I’d call it the Euro Soviet. So, a good reason is they say they offer a parliament, which is duly elected and I think quite fair with proportional representation, but of course they give that parliament no power, just as happened in the Soviet Union. And the other thing is they’re already talking now immediately of giving huge amounts of money for electoral reasons rather then taking money away from the politicians to be elected, making it less of a money game, they’re going to give much more. But only to parties that fully support the European ideal, the parties that go against it will have no funding. So, it’s becoming less and less democratic and right down the road of what I think justly called the Euro Soviet. And I think regarding the Euro, it’ll be used as a weapon to increase togetherness and of course a superstate. As regards commodities and things, what we’re living with masses of money, masses of credit and liquidity that’s falling value, bonds are going up because of zero interest rate policy and quantitative easing. And equities have risen on this thing, hugely, record highs in both bonds and equities all over the world. But of course, that is all organized by the swamp. If the swamp starts to get eroded, then the reverse is going to happen. Bonds are going to be probably the biggest bear trap in history, equities are going to be a problem and of course commodities and precious metals will rise, certainly in dollar price and also in value. And so, I think the whole thing depends on how effective it is to get rid of the swamp. Realizing both parties in Britain and America that have ruined the countries in the last hundred years. If you take an actual number of it, in 2014 in January when the Fed opened its doors, that dollar today, it would be only worth, it other words two cents of that dollar would buy a present dollar. The Fed has devalued the dollar by over 98% and in those days, there were 8 Dollars to the Pound, and now there’s 121 .. And this has been done by the swamp which is both parties and the question is, how long will it take for reality to dawn? Whether they can put it off with another type of QE, giving people money, not even QE but just giving us all a cheque like the Republicans did under Bush. But a massive cheque, like $10,000 a piece or that sort of thing, to fend off that awful day that reality may dawn.
FRA: Your thoughts, Yra on this and the possibility of fiscal integration in the EMU?
Yra Harris: Well, it’s like John and I have been talking our whole lives. But he uses this term the European Soviet, and you know Richard I’ve talked about it quite a bit so John, I don’t know if you know Bernard Connolly but he’s a very dear friend of mine. So, when I hear you throw that out it reminds me of his great book, The Rotten Heart of Europe. But I’m going to answer your question Richard, this is all about the fiscal harmonization, this has been the program pushed by the likes of George Soros and what I call the Davos crowd and I don’t mean that as a conspiratorial, that’s just what they’ve been pushing. And now Mario Draghi has a very serious problem. And the speech yesterday was horrendous and stupid, he should have cancelled that press conference that he had scheduled before the German election because its just not going to happen that fast. And it puts Draghi now as I would say the only game in town. Which is why these people or those people including Peter Boockvar and I, have gone back and forth on this. There will be no quantitative tightening yet from the ECB because Draghi is now going to be in a bigger hurry to keep piling on sovereign debt onto the balance sheet of the ECB because only through that effort can he synthetically create the Eurobond that they’re craving for. So keep loading it on, keep loading it on, and then they’re going to the Germans and go “well you can’t possibly not be the guarantor of this bond, you have to. We have all this debt piled on the ECB, you’re going to have to be the one who has to guarantee this.” Otherwise we go into a massive debt default and the world goes into a major Depression. That’s what’s happening and this is all being done by Mario Draghi and if Mario Draghi hears this broadcast and he wants to go head to head with me and argue this, I relish the day.
John Browne: Well I totally agree with Yra. And it’s interesting, I was an investment banker in London and we were asked to be managers of a Eurobond issue. Not a Euro like the currency, but European Bond Issue .. everyone wanted to do it in Europe except for Germany .. Germany said, “we’ve got terrific concerns about inflation from the Weimar we will never forget it, and we certainly are not putting the German signature to a European bond.” And I personally despite all the talk and the movements that are taking place, believe that is at heart in the average German. I mean what Germany has done since the Weimar is to say “Okay, you German women and men work hard, save your money, and we as the government will ensure that saved money is still worth the same as when you put it in. Unlike the Anglo – American governments that have stolen from every saver.” And so, I think Germany, now that Merkel is weakened severely by most interestingly right-wing parties effectively. Both financial and immigration wise, I think she’s going to be under bigger and bigger pressure not to put the German signature to that Eurobond. And I think that’s been pushed back and this is of course is a big problem for Draghi whose been depending on it and it’s going to become a tremendous issue. Germany, as Yra said, is going to be faced with collapse on the one hand if they don’t sign, but a collapse of support politically if they do sign. And I personally think Germany would stand in the long run to win by not signing a bond to hell, because that’s going to go for the birds. I mean its going to just follow the Sterling and the Euro down the drain. And we’ve got bigger challenges then just the rest of the world. We got China that’s now issuing a forward contract in oil, measured in Yuan, which the Yuan will be convertible into gold. So, if you buy your contract for Yuan and then sell it for Yuan at a profit, you can convert all those Yuan back into gold. Now that’s going to really challenge the prime reserves status of the dollar and that’s a huge question mark. And if they do it for oil, what not other important international commodities like copper for example. I think we’re facing severe challenges and China is just waiting her time to strike. Whereas we’re spending fortunes on military equipment, China is spending it on making sure that she’s going to win economically and financially. And as the greatest generals have said, the greatest way to victory and power is to put your enemy in a position where they have to capitulate without firing a single shot. And I think that’s what China will do.
FRA: And John, do you think that there’s a possibility for the ECB to begin to buying Germany equities if German bunds become scarce in the overall ECB asset purchase program?
John Browne: Yes, absolutely. They’ll do anything above the law, around the law, they have no laws. They would do anything to save that Euro against the disaster that I see coming unless the Germans back it. And the price for Germany backing it is German rule of the European Union. Which Germany tried three times an empire, Franco-Prussian war, first World War, second World War. Each time and I think they’ve now realized that the Deutschmark i.e. money, is the key and the key to this is either the Deutschmark or the Euro to win their empire which will be Europe. And Britain is hopefully going to be leaving it.
Yra Harris: I think that John is exactly right and the Chinese are interesting to watch. More interesting is the amount of dollar borrowing that Chinese corporations and individuals are doing, Chinese real estate markets, they’re doing these huge dollar bonds. And I’m paying attention to that because first, it puts the Fed in a terrible situation and this is I think where John goes with not having to fire a shot, because the Fed, you know Bernanke beats his chest to talk about how great he’s been and how great it was. I think Janet Yellen has done a much better job by the way, but he just kept adding on and adding on and adding on, and this money had to go somewhere. And it went into the borrowings of, of course emerging markets. So, we’re so borrowed up in dollars now that if the dollar, if the Fed were to move here aggressively, which they’re not going to do, but we’ll create they’re favourite counterfactuals and let’s say they do that. The rally to the dollar would be fairly severe, especially because Europe is going nowhere now, so the dollar would rally more and because there are all these borrowings in dollars which means people are short dollars essentially, it would put a huge rally to the dollar which would wreak havoc across the Emerging markets, and it’s the Emerging markets that are now driving the global economy. Don’t believe the nonsense of European growth, I still see European unemployment hovering at 10% and I’m being kind because I’m using their numbers, the United States has tepid growth at best. So, it’s the Emerging markets and if they were to get into a situation where the dollar became expensive and the amount of dollars that they’d have to go raise to start paying just the interest on the debt. It would cause a very severe contraction. And that’s with the Chinese, I can’t agree with John more, it’s interesting to see who is hoarding gold here. And again, people say oh you’re a gold bug, I’m not a gold bug and I listen to John, he’s not a gold bug. But I’m not a Fiat currency bug either because I see the games that they play. So, I don’t love any of any investment that much, there’s nothing that I see but I just try to protect myself and to see where the world is going to have to go to. So, I’m in total agreement with what John is putting out there. And the ECB, Mario Draghi is the most dangerous person right now in the world, right now. Because he’s in a hurry and he’s now lost his key supporter who was Angela Merkel. Merkel is really going to have problems and if you follow the news today Schäuble is already out as Finance Minister which means that its going to be Lindner who’s the head of the FDP who gets the Finance Ministry and he’s already drawn a line in the sand that he won’t go to for fiscal harmonization in Europe. So, this now gets very interesting and nobody is even talking about the fact that Schäuble is going to take the Presidency in of the Bundestag which I haven’t written about but I’m going to write about it this afternoon or later .. You’re going to have Schäuble, whose a fiscal conservative at heart, you’re going to have Lindner .. I think this now gets very interesting.
John Browne: That’s what I think, that’s fascinating what you say, I totally agree with you about Bernanke, Yellen, and those things. China of course has been borrowing hugely in dollars, of course has got a lot of dollars in terms of securities and Treasury bonds as its second largest holder after Japan, well of course the Fed is the largest holder with about 4 trillion, Japan is about 1.05 and China’s about 1.02 trillion and it ties with Japan for being the second holder. And of course, they will be paying back any debts they borrow. It’s like balancing, by borrowing dollars they’re balancing the dollars they own, which I think is entirely sensible. And even if they borrow more then they have, if they borrow more then 1.02 trillion, they’re going to be paying back in peanuts! And so, I see that as a great strategy for Japan. Regarding gold, its rumored, I mean we’re told America has 8300 tons of gold in Fort Knox, and it may still be there .. but nobody knows who owns it anymore. Its rumored and I say rumored, that already over the last five years China’s been accumulating gold by all means possible, through shipments and out of London through Switzerland and so on, that its now the largest holder and now has more gold then America, but that’s a matter for rumor. But I think they’re very gold conscious, and in the end, I think they see a totally depreciated dollar which they will be paying back the excess debt, they can write off the debts they have against the dollars they own and then they can pay the overspill of the debt in depreciated dollars relying on gold. And I think that’s a serious risk for the dollar and the dollar still is one of the most important things in the whole world economy. And so, if the dollar really collapsed it would create mayhem in the world. That’s why people are buying Bitcoin and all this stuff. I mean the average Joe who elected that Doctor yesterday in Alabama over the established swamp Republican, if people are getting sick of it, and that’s why people are saying if big banks like J.P. Morgan won’t even allow us to hold cash in our own safe deposit box, what we’re paying for. They’re now dictating we can’t hold, we can’t hold cash and all that sort of thing. They’re moving to get rid of cash? Well lets get into Bitcoin or gold or precious metals or something where we actually own the thing. And although I think some of these cryptocurrencies are highly speculative and have had fantastic gains recently, but I think highly speculative, that the people are going for it in desperation to get out of clutches of big government, swamp government that’s just robbing them blind.
FRA: And John, what are your thoughts on the current status of Brexit and the potential for other exits in the EU, EMU?
John Browne: Well first of all I thought May, I saw her first speech and met her very briefly. I thought she was terrific when she got in and even when the Brexit vote happened last summer, 2016 I mean. And she was strong and everything. But then she was advised by these two incompetent people to go for an election trusting the polls which were all wrong on both the Trump election and the Brexit vote and to trust those polls. And she went in and got heavily defeated in the polls, she’s still in the government but she’s severely weakened .. I thought her speech in Florence last week was very weak, I mean offering to pay, Britain is the European Union’s second largest contributor, why on earth should Britain pay anything? Let alone billions of dollars and she sort of gave way a bit on that, I thought that was disgraceful. And also lengthening the time of the transition. We want to stick strictly to the two-year transition so that if people want to have a divorce where the divorce is put off until after the financial arraignments, which is the reverse of any other human thing, you have the divorce first and then talk about the finances. They want the reverse. I think that’s obscene for Britain which was the second biggest contributor is outrageous and she’s giving way and that worries me .. this is just as Yra said right at the beginning, I think Merkel’s election has actually strengthened her hand a little. So, she’s almost back to where she started a week ago. But still it’s a touchy business, and you ask what of the other things? I think the European Union if Britain wants to stop Britain getting out, its largest contributor and everything else and I think there are only four countries where Britain enjoys a trade surplus, all the rest have trade deficits, have trade surpluses with Britain. So, it would be a severe blow both tradewise and economically if Britain leaves and they want to make sure Britain doesn’t leave .. they’re going to tie Britain down and punish Britain as an example to anyone else like Spain, Italy, Greece, who wants to leave, or Poland. You can’t leave, you’re going to be crucified, look what we did to Britain, and Britain was rich. And we still smashed her. And so, it’s a huge thing ahead of us now and until this Sunday I felt very depressed that May had given away so much, but then with Merkel’s erosion of her vote I’m feeling slightly more bullish.
FRA: And Yra, your thoughts on the potential for other exits in the EU, EMU?
Yra Harris: 100% I agree with him 100% their going to be punished, to be made an example and the Brits don’t really realize how good they are getting out because when you go to fiscal harmonization if they go to that, and I think it was a weak possibility before I think it’s been much weakened, it’s going to cost them a fortune. Anybody who has any money and the Brits have money. And why do I know that? All you do is have to open your eyes and look to see what’s going on with who is funding through the individual national central banks in Europe. The Germans are accepting the liability for the entire project and nobody ever asked them. Otmar Issing himself wrote that article two years ago they put it in the FT, he talked about no taxation without representation and this is going to become the battle cry in Germany because you cannot escape from it.
John Browne: Exactly, completely agree.
Yra Harris: First of all I wouldn’t pay them a dime, I’d say to them you know what, come and get it. Come and get it. They couldn’t bomb Libya so I don’t even know what Europeans are talking about. They had to get the ordinates and weapons from the United States to bomb Gaddafi. So, this is not 1914 .. you’re not coming to get it, you’re not getting paid because you’ve gotten all you got from us and we’ve got nothing in return, you’re trying to steal the financial centre of Europe out of London the French have had their eyes on this forever and now they think that they have a free pass at it. I’d give them nothing and tell them you know what, you’re lucky I don’t send you a bill for all the aggravation and all the court costs that I’ve had to endure and all the other things that we’ve had to endure. And John’s point about Germany and Britain industrially being tied into it is absolutely right and the Brits should start playing that up more and more. And if I was May I would turn around and give them a bill and say this is what you owe us for our good offices all the time that we’ve had to put. It’s ridiculous.
John Browne: I quite agree, I totally agree I just like that one point, was when that wrenched man Brown was Prime Minister, no relation to me, he was asked to give the British a contribution of gold into the European Central Bank which was the second largest of course. And he was so ashamed of the thing that he didn’t want the television or news picking up truckloads of gold being shipped to Frankford from London. So, he sold half of Britain’s gold reserves at just over $300 an ounce and lost Britain billions and billions of dollars on that transaction alone just to save his face. So, he could wire the money rather then send it in gold. It moved Britain from being the fifth largest owner of gold down to about the tenth. It was staggering, really. All these countries that save money like Germany and France have large gold holdings .. they all have large gold holdings. Switzerland is trying to get rid of its gold because its Swiss Franc is so strong and they’re trying to do everything to weaken and be like members of the deprecation gang to get their Swiss Franc’s cheaper because it’s hurting their trade. But that’s a false indication, Swiss basically are like the Germans and savers and are sound money people and savers as a result. The American world has turned savers into spenders, and for spenders, depreciated money is the name of the game. Financial dishonesty really.
Yra Harris: Yeah, you know the name of this show is “Financial Repression Authority” .. financial repression – the Fed was number one but now number one of course is the ECB. But to close I just want to pick up with what John talked about with the Chinese hoarding gold. John, I think you will appreciate this, if you go back to I think it was November 2nd 2009, when the IMF had its last gold sale, it sold 200 tons of gold to the Indian RBI at $1,048. Now that’s been a very important level for me. In fact, the last move down in gold stopped at $1,045 and that’s been a very significant level because the Chinese were furious that the IMF sold that gold to the RBI because the Chinese wanted to buy that gold. So that becomes a very critical level of look at all this into what the Chinese truly want to do. And you know what, I think the 3rd or 4th largest gold owner in the world is the IMF even though they cry if they don’t have enough funding, you know I always say oh all those good Keynesians at the IMF and I have no problem with Keynesians, but they have a problem from the gold perspective. Why don’t they monetize that gold and turn it into gold-backed bonds? IMF issued gold backed bonds. And you watch how the Chinese would scoop those up in a minute which is why they won’t do it, because they know who’s waiting there to take and accept that hoard of gold.
John Browne: The net position of gold verses currency is that gold is real money .. It means reality will dawn .. If the central banks of the world are united underneath by making sure reality does not dawn. But history has a habit of eventually something happens and reality does dawn. And of course, one of the countries that’s really interested and very powerful in having reality dawn in the west is China. And that’s why I think China will win this battle without firing a single shot. And it’s a sad thing, I don’t think any shot is going to be used if our currency collapses which is what the real threat is.
Yra Harris: And if we know the Chinese, they’ll be bimetallists and because they got a little evening to settle with the Brits over the silver situation in the 1800s so they’ll probably be bimetallists by that time.
John Browne: Oh yes, the precious metals, but the big boys use gold. That’s why silver is a greater investment at the moment because at the moment if you were to imagine a bell curve we’re on extreme left-hand end very very few people compared to the worlds population own precious metals. And of course, an ounce of gold at $1,300 is a lot of money for the average Joe .. But at $20 for a coin in silver is not so bad. And therefore, the mass market will go for silver and that’s a huge on the bell curve and would drive silver up much faster then gold. But gold is the real money in the end and this will defeat players play.
Yra Harris: Right, and I’ll tell you from a trading standpoint, John and you probably know this, is that there’s not a real precious metal rally that takes place without silver leading the way. That’s a fact. When gold ran up to $1,900 it was silver that lead the first leg of it by a lot. So, I keep waiting for that to happen, somebody has their foot on it but we’ll see.
John Browne: It comes from the average Joe .. If those people are worried about their money they buy silver. And that’s why I still believe in silver so I agree with you entirely.
FRA: Well that’s great insight, gentlemen. I know you have a time constraint John but how can our listeners learn more about your work, John?
John Browne: Well I write for europacificcapital.net (http://www.europac.com/) it’s a website and I write for that and there are a lot of articles and things like that. That’s mainly what I do and I sometimes get asked to go on Fox, CNBC, and CNBC Asia to speak about these things, but I never know when that’s going to happen.
FRA: Great, and Yra?
Yra Harris: You can reach me at Notes From Underground or yragharris.com and you click on notes from underground which is where I blog at, but I’m on the Santelli Exchange all the time, and I gotta tell Rick Santelli to get John Browne on! He needs a British voice.
John Browne: Thank you very much, Thank you very much Yra.
Transcript written by Jake Dougherty<email@example.com>