Robert Wiedemer: Awaiting the Aftershock
Bob Wiedemer, author of the best-seller The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy, regards the 2007 puncturing of housing market prices and the 2008 financial market swoon as the precedents to two much larger and much more dangerous bubbles.
These more pernicious threats are the dollar bubble ("printing money") and the government debt bubble ("borrowing money"). While both are expanding at a sickening pace, in the near term they deceptively make things seem much better than they are.
But, like all bubbles, they are unsustainable. And when these collapse, they are going to take the entire financial system, and very possibly the currency, with them (a.k.a. the "aftershock")
Bob predicts that the rupture of both these bubbles will most likely happen in the next 2-4 years and accelerate astonishingly rapidly once it begins. Part of the reason for this is that the Fed, now boxed in by its committed course of action, will print like mad to slow the process down -- which ultimately will serve instead as fuel for the fire. This will be the point at which the Fed loses control of interest rates.
Wiedemer is fairly confident that the Fed is well aware of this dire probability, but finds itself increasingly stuck to avoid it. At this point, the major financial markets (stocks, bonds, housing) are so dependent on Fed liquidity that any efforts to withdraw the punchbowl will send prices lurching downwards, threatening the weak global economy. It's now a binary choice between damned-if-it-does and dammned-if-it-doesn't.
As Chris summarizes, the Fed's main strategic consists completely of "hope." It's backup strategy? "Panic."
Not surprisingly, Bob and Chris discuss the wisdom of focusing on preservation of purchasing power, and positioning one's financial assets safely before the aftershock arrives. For many, that will include working with a financial adviser who understands the nature of the risks in play and can help you allocate your assets accordingly (a reminder that we know a few, if you're looking).
The main thesis in Aftershock is that these bubbles – this dollar bubble and this government debt bubble – will burst. It is not as if it will not burst for 15 or 20 years. We say it is somewhere in two to four years. You need to be prepared for it.
The debt will always be funded as long as the Federal Reserve stands willing to buy all the bonds that the government sells. At some point, that creates inflation: that pushes up interest rates. The Fed will fight those interest rates going up. At first, they can do it. They just print more money. That keeps interest rates down, but ultimately that inflation will force them up. We cannot just pull the money out and raise interest rates now; it's going to pop the real estate and stock bubbles.
What is going to happen is the Fed is going to lose control of those interest rates. When you print too much money, it gets you control short-term, but it is a recipe for losing control long-term. With those interest rates going up, what is going to pop? The stock market and real estate bubbles. All of that is what kicks off the big problem going forward. Normally you would say the bond market is going to be the problem, but I would tell you that it is actually going to be more stocks and eventually even real estate combined. Then ultimately, the bond market starts to go down, and down quickly once it starts.
When the dam finally breaks, it will break quickly. Literally, it is in a matter of months or certainly no more than a year once it really starts to go.
You get very, very high inflation. We could have stock market holidays and things like that.
The big difference between now and the depression is that the government is also in trouble at this point. We are really not going to have a huge failure until the government kind of comes to its wits' end. It will, but it comes as a last massive orgy of money printing to try to save everything - unlike anything you have seen yet. QE1, QE2, QE3 is nothing like what the Fed has to do when this thing starts to fall. They have to print, buy, and buy, and buy, and try to keep up the falling house. They will not be able to do it, but that will be the reaction.
Then at some point, it is not going to work and the whole thing goes.
Click the play button below to listen to Chris' interview with Bob Wiedemer (40m:50s):
Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson. Today I am really pleased to welcome Bob Wiedemer to the program.
Bob is the author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, which quickly became a New York Times and Wall Street Journal best seller. That of course came out before all of the big troubles hit. Just a month ago, his newest book, The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy, another Wall Street best seller, came out as well. Bob is the managing director of Absolute Investment Management, an investment firm that allocates capital based on his market insights.
I have met Bob before. We have talked extensively. We share many similar views. I have asked and invited Bob here to discuss his latest macro outlook for the global economy. Are developments progressing as he predicted in his book? What does he see coming next? I am really looking forward to this conversation. We will hear his advice for the individual investor, where one can find safe harbor, or even the potential for real gains. Where would you do that in today’s market? Bob, there are a number of foundational similarities within your book and mine. I know our views align somewhat. I am really looking forward to learning more.
Welcome, Bob. Thanks so much for joining us.
Bob Wiedemer: Thanks, Chris. It is good to be on the show.
Chris Martenson: Listen, I want to start – I did mention your book, Aftershock. I think let us rewind that tape just a little bit further. You had an earlier book, which talked about the bubble economy. You were in your own Paul Revere mode, I guess, trying to warn people that there was something going on. What were you looking at then? When did that book come out?
Bob Wiedemer: America’s Bubble Economy was published in 2006. I actually wrote that back in 2004 and early 2005. We wanted to delay publication because not enough of the bubble economy had popped that we thought anybody would believe us and we would get any sales. We delayed it to 2006, which kind of worked out. What we said in that book is that there were four bubbles that were working interactively to push up the bubble economy. Those were the housing bubble, the stock market bubble, the consumer spending bubble, and the private credit bubble. There is a quick example of how these all work in a virtuous manner to boost the economy. It is like a home equity loan. As your house price goes up in value, you take out that home equity loan. You go out and you buy a car or you buy other things. That helps boost the economy. It boosts the stock market. It all works great until what we said would happen is that the housing bubble would pop or any one of the bubbles could pop. The housing was the one that popped. That brought the rest of the bubbles down in a vicious downward cycle.
We said that it would be offset though by two more bubbles that would essentially work as airbags. That is the dollar bubble or printing money, and the government debt bubble and borrowing money. It is the government borrowing money. This we talked about more in the Aftershock. In fact, the Aftershock is when those two bubbles pop. Right now that has not happened, but we are still pumping up those two bubbles just as we predicted earlier. In fact, we have added since 2008 almost two trillion. We almost tripled our money supply. We are now hauling over a trillion dollars more per year. This is about total net of about 600% increase in borrowing per year by the government of what we had prior. We have done that. We have done exactly what we said. We pumped up the money supply. We borrowed a tremendous amount of money. It has had the effect of helping to keep those bubbles up just as we said. It does not reinvigorate the economy so much as really help keep the bubbles up. I guess it depends how much borrowing and printing you do. The problem is of course you now have two new bubbles. We think those will pop. When those pop, you will get the aftershock. When that happens, of course all the other bubbles come down as well.
Chris Martenson: That is, I guess, a train of thought, which says that you cannot really ever escape the effects of a bubble. Greenspan was famous for saying you could not spot one in advance. You could only deal with it after the fact. This seems a little bit self-serving, or ignorant, or both. I am not clear on which it was. How do you see that?
Bob Wiedemer: I do not think Greenspan wanted to see the bubbles. That is why they are so hard to spot. It is because people do not want to see them. They want to think they are real. They want to think they are making tons of money. I mean come on, Chris. In reality, how many people wanted to see their house values collapse? How many people wanted to see stocks break down? We all thought it was real money. I mean Bob Shiller of the Case-Shiller Index did a survey of Californian homeowners, I think this was back in ’01 or ’02. The majority of them thought that the average increase in their home values for the next ten years would be 20% per year.
We all want to think it is real. That includes Greenspan. He wants to think that we are not really in a bubble. That is why they are so hard to spot. I say the same is true today. We do not want to see the bubble we are creating with all that printed money and with all that borrowed money by the government.
Chris Martenson: I see it every day in the paper by people. Journalists will write in the Wall Street Journal, other places, New York Times, it does not matter. They will say if U.S. government borrowing were excessive, we would not see interest rates at 1.6% on the ten-year or whatever number they are quoting at that point in time. It is as if the price itself were an appropriate signal. They are failing to note something that you have already raised. That is that we have two new bubbles which is fresh money printing supporting fresh government debt purchases with the Federal Reserve stepping in and influencing – or whatever word we want to call forcing or manipulating – the price of money through the interest rate market. We are not really getting real signals out of those markets, are we?
Bob Wiedemer: No, that is exactly right. Plus, the other thing is that – let’s face it – if you had told that same person that we would be borrowing over a trillion bucks a year in 2005, he would tell you that you are nuts and crazy. That would never happen. What is happening is people tend to want to assume that what is currently happening is normal and reasonable. That is part of that bubble mentality. They do not want to see the bubble.
You are absolutely right; the borrowing bubble is being made possible by the fact that we are buying bonds. That absolutely will keep rates low. In fact, it means that you really could never have a government debt meltdown in the traditional sense of let us say you have a failed Treasury auction. If the Fed – or whoever is head of the Fed – is going to always buy the bonds that the government issues, well, there is always a market. As long as that never creates inflation, I guess you could say that that is fine. In fact, you could ultimately just get rid of all taxes and just borrow all of your money. Right, Chris? Then have the Fed buy all the bonds. As long as it does not create inflation, that is fine. It is just that, of course, I think it will. What has enabled all this borrowing is the fact that the Fed has been willing to go in starting in 2009 and save the government’s borrowing ability.
Chris Martenson: You spotted the bubbles coming in advance. You were one of the few who did that. You did that right. Then it all comes down quite kind of as you expected. Then you write this book, Aftershock. Also, it has done extraordinarily well. What is the main thesis in Aftershock?
Bob Wiedemer: The main thesis in Aftershock is that these bubbles – this dollar bubble and this government debt bubble – will burst. You need to be prepared for it. It may not happen tomorrow. It may not happen in the next year, but it will burst. Probably it is not going to be your grandchildren’s problem. I think that is the thing we emphasize. It is not as if it will not burst for 15 or 20 years. We say it is somewhere in two to four years. It could be a bit longer, but you are going to see problems even before then. The good thing is that this is all being held up by unsustainable economics. You cannot keep borrowing and printing and expect that nothing will go wrong. Otherwise, why did we not just do this ten years ago? In fact, we could have boosted our economy an extra trillion bucks with the borrowing. We are only doing it because we are forced to now. Do not think that makes it right. Do not think that means it is going to work.
It is just that the government has already felt forced to do this, as a way to sort of bail out the bubble and keep it from popping. You have to kind of see the economy for the reality it is. It is not that it is going to collapse tomorrow, but it is being based on those big four bubbles that are being held up now by the two new bubbles. It is not that. We have been borrowing for a while, but now we are borrowing a whole lot more per year. That will burst. That is just the reality. You are not going to be able to keep it up forever, and I do not think you are going to be able to keep it up for more than two to four years.
Chris Martenson: I have this theory, Bob. It is that if you could print your way to prosperity we would all be speaking Latin. The Romans would have figured it out. They were very clever. They did all kinds of incredible things. They built roads you could still drive on, which seems to elude us, at least in my part of the world. I am thinking that if you cannot print your way to prosperity, I believe with your central thesis that these bubbles have to burst. It feels to me that the Federal Reserve is now stuck. They have painted themselves into a corner. By which I mean it is not possible for the Federal Reserve to suddenly and aggressively start raising interest rates. That will completely destroy the government funding apparatus at this stage. That would be one way we could look at that.
Let us talk about these bubbles bursting then and what you think that is going to look like. Whether that is in two minutes from now, two weeks, or two years, it is somewhere, coming along. Is this one big burst that you want to talk about? Do you want to separate the dollar bubble from the government debt bubble?
Bob Wiedemer: Unfortunately, you cannot really do it, because that dollar printing is an enabler of the government debt. Again, it is not only in theory, but also in practice. The debt will always be funded as long as the Federal Reserve stands willing to buy all the bonds that the government sells. What really happens then is the real defining bubble is that money-printing bubble. At some point, that creates inflation. That pushes up interest rates.
When that happens – and again, the Fed will fight those interest rates going up. At first, they can do it. They just print more money. That keeps interest rates down, but ultimately that inflation will force them up. It is just as we had in the late 1970s and early 80s even before Volcker starting cutting back on money supply. Our interest rates were going up with inflation. You are absolutely right; we cannot just pull the money out and raise interest rates now. They certainly would never want to do that because that is going to pop the real-estate and stock bubbles. That would be terrible.
What is going to happen is, the Fed is going to lose control of those interest rates. It is going to lose control, essentially, of being able to control interest rates by printing money. When you print too much money, it is basically a recipe for not getting control. It gets you control short-term, but it is a recipe for losing control long-term. Those interest rates going up; what is going to pop? The stock market and real estate bubbles; all of that is what kicks off the big problem going forward. Normally you would say the bond market is going to be the problem, but I would tell you that it is actually going to be more stocks and eventually even real estate combined. Then, ultimately, the bond market starts to go down. It goes down quickly once it starts going down.
What is happening is, just as everybody does not want to see a bubble today, it is amazing how quickly they will see the bubble once it really does start to burst. It is just like housing. I mean, nobody wanted to see that bubble. Once it started to pop, people did start to change rapidly. The housing values went down rapidly. In this case, I think it will be even faster. Yes, the government will try to intervene for a while. Most of that intervention will work to kind of keep the bubbles up. When the dam finally breaks, it will break quickly. Literally, it is in a matter of months, or certainly no more than a year once it really starts to go.
Chris Martenson: I think that is a fascinating idea. We saw that some of the big players like Goldman Sachs were edging away from the housing market as early as 2006 by taking the other side of the CDS trades that they had created. Some of the big players were positioning themselves. They saw it as well. The housing market, though, is this other dynamic; it takes time for prices to fall because it is actually real people holding very illiquid assets. This is relative to big players holding onto extraordinarily liquid assets, meaning bonds. Those things can be traded in a microsecond if necessary. I could agree that when it starts to unfold it will probably go fairly rapidly.
How will the Fed fight this? We have a bond market route. The Fed has been fighting it as long as they possibly can. They are trying not to let interest rates go up. Suddenly the Fed, as usual, has to follow and not lead the market. It is following the market up, but at some point that creates extraordinary difficulties for federal financing, state financing, housing market prices, stocks, and everything. How do you see that playing out?
Bob Wiedemer: Exactly; you have it. What happens is, it becomes a much more difficult battle over time. What you are having is that the people are losing a lot of money in the bonds they bought earlier. They are falling in value. Many numbers of people want to sell. There is really no market for them. The Fed has to print money to buy them. You are also finding that some foreign investors are getting increasingly worried about all of this. They are selling U.S. bonds. The Fed has to buy them, which it will. The Fed is starting to print an enormous amount of money. Like you have not seen anything yet. QE1, QE2, QE3 is nothing like what the Fed has to do when this thing starts to fall. They have to print, buy, and buy, and buy, and try to keep up the falling house. They will not be able to do it, but that will be the reaction.
It does mean that you have to keep it up for a while. Ultimately, it is like trying to keep up a house falling on you. You can sort of maybe hold it up, but eventually you are crushed. The Fed will do all sorts of things like printing money to try to keep that foreign money in, to try to keep the bond market stable, and to try to finance the government, which is having increasing problems. Ultimately it does not work. You get very, very high inflation. Pretty quickly, they cannot keep the stock market up. They cannot keep the real estate market up. As you say, that takes longer to react, but ultimately the interest rates go up. The massive amounts you have to print, it is pretty obvious to everybody that the gig is up. Then it basically pops. During this, we could have stock market holidays and things like that. People may say everybody is rebounding; we will just solve the problem with short-sellers, or high-frequency traders. You have got a more fundamental problem and it is not going to get solved.
Ultimately, the original asset bubbles all pop, but now with a whole lot of inflation added on top of it and a government that has basically gone bankrupt. Their debt – well, how do they pay it at that point? Is it with printed money? It just does not work. The big difference between now and the [Great] Depression is that the government is also in trouble at this point. We are really not going to have a huge failure until the government kind of comes to its wits end. It will, but it comes as a last massive orgy of money-printing to try to save everything. Then at some point, it is not going to work and the whole thing goes. You can keep it going for a while, and then one last blast of money printing and it is over.
Chris Martenson: Let me test that. I am thinking back to the late seventies. You have Paul Volcker. He had to make some pretty hard decisions. He was the only Fed chairman ever to have been burned in effigy on the mall in Washington. He took some pressure, obviously, but here is the thing. The Fed is not like General Electric (GE) – a big diversified company with an awesome product portfolio. They have got one product. It is the dollar. At some point, doesn’t the Fed have to choose between destroying its only product – the only thing it is charge of? It is the dollar – it has to choose between defending that and enabling what the politicians want on the other side.
One of my critiques of the Fed is they have gotten very politically cozy and operate more like a political function than a monetary function. Where do you see them? If push comes to shove, does the Fed really print? Or do they go all Paul Volcker, reel everything in, and let things come crashing down in attempt to preserve the dollar?
Bob Wiedemer: I think in the end they are going to really relate for it. We found that has been true in past history. I think it will certainly be true today. At any given time, Chris, if you pull the plug out even today and you decide that we are not going to buy anymore; we are going to sell all of our bonds back. Interest rates start to soar and the stock, bond, and real estate markets all come tumbling down. Two years from now, it is even worse. We are even more vulnerable. It is harder to pull that money out. When you put two trillion out and we are already basically almost guaranteed to put out another trillion over the next year with QE3 and probably more after that, it is just too tough. You have brought yourself, as you said, between a rock and a hard place. You really have no good alternative. If you pull the plug, the impact is increasingly so big that it is sort of unthinkable. So you continue going down the path until it basically melts down around you. It takes the dollar with it.
Again, I have always wanted to say the dollar will not become worthless, but it will become worth a lot less. It does not take much before it basically kills the stock, bond, and real estate markets. If you took one dollar that you have in your pocket today and turned it into ten, that would pretty much be it for all three of those markets. Even though I think we will have high inflation, it does not take that much inflation to really knock the heck out of our markets today. They are not anticipating much, if any, inflation.
Chris Martenson: Let us take where we are in current reality. One of the great surprises in my life has been seeing just how long this charade has been able to go on. If you had taken Chris from five years ago and said, hey, here is where the Fed balance sheet is going to be, I would have thought you were nuts. I would have expected some fairly significant impacts. Here we are. Inflation is apparently pretty tame right now. The stock market has been magically levitated. The S&P is sort of hugging the 1400 mark right now, which is not too bad. So some might say, look, it is working. What do you say to that?
Bob Wiedemer: It is just what I said in my introductory piece. It is working. In other words, when you pump up those two bubbles, it will work. That is the whole point. It does work. Frankly, Chris, if I wanted to get housing sales back up to $2 million, print me enough money right now and I could do it. Do you want me to? Could we borrow another half trillion instead of $1 trillion? Let us borrow $2 trillion. Yeah, we could do that too. It will work at first. It is just that what happens at a certain point is enough people all get together and say, hey, I think this is fundamentally going to blow up. Right now, what everybody is saying is let us just get through a down cycle. We will all come out of this and then it will be fine. We will be able to reduce our deficits, reduce our money printing and we will all be fine.
We are assuming that this is just sort of a big down cycle. What I am saying is, fundamentally it is a bubble pop. You are just pumping up bubbles. It is not going to upcycle. By the way, you guys never said we are in an up cycle now. We will just be in a down cycle in five years. They kind of know it is not really a cycle. They are just hoping beyond hope that it is a cycle. We will just have to cycle out. I am saying you are not; you are just pumping up bubbles. It is going to pop, but yes, it does work for a while.
Again, we can print more money and you are not going to see inflation. I think inflation is higher than it is being reported. I am not the only person who is saying that. There are a lot of ways that you can keep it down. Ultimately, even if you have bad reporting and all of that, if what I am talking about is true, you will get inflation that everybody can see will become obvious. It will ultimately panic the markets, essentially. That is kind of the destiny you are going down. Yes, it will work now, and it will work for a while; as I said, it will work. This is as we said in America’s Bubble Economy and Aftershock. This stuff works initially. Initially does not just mean six months. It could be years and years. If anything, if I am wrong, it will be (as you said) that it lasts a bit longer than I expect. Maybe it will last more than four years. I think we will find that there are a lot of problems before then, just as we found there have been some problems in the economy now. Even though it is working, it is not working perfectly. Even in the last few years, we still have a troubled economy.
Chris Martenson: Obviously, there are some cylinders that are not quite firing in this story. We have this macro backdrop now, which includes the idea that we have been a serial bubble nation. All bubbles tend to burst without exception, so far, historically speaking. You have painted a picture that all we have really done is traded the past bubbles for the next ones. By the way, these bubbles just get larger and larger and larger. You take a NASDAQ bubble, replace that with a housing bubble, and replace that with a government bond bubble, and you can just see the trajectory of this story. We have all that in the backdrop. Here we are. You are saying on one hand we might be waiting for inflation, so we are watching out for those signs. Here we are. It is almost 2013. What are you looking out for here? Are you just trying to ride the wave until you see clearer signs? Is there something you are really keeping an eye out for as you look into this next year?
Bob Wiedemer: I think in the next year that it really will be just riding it through. I am not worried about a big panic in the coming year, to be honest. I think we are going to ride through it. I think that if $40 billion a month – which they pledge to do in QE3 of money printing and of bond buying – I think if that does not work, they will raise it to $70 or $100 billion a month. This will have some positive effects. Does that mean it is going to push the stock market to 16,000? No, probably not. Will that keep it from going below 10,000? Yeah, quite possibly. That is the whole idea. I think the Fed will react if the stock market has big problems or anything like that. It will react by printing more money.
Actually, I am not that worried about it this year. That is kind of the weird part of this whole process, Chris. It is that basically you keep doing this until you cannot. Once you cannot, everything changes very rapidly. When people lose faith that this is going to work, it can go very, very quickly. It does not take 100 percent of people to change before the market really starts to have problems. If 20 or 30 percent change, as we all know, everybody else cannot get up at the same time.
I think we are going to find people are still hoping that this year things turn around. I do not anticipate a huge problem. But then again, that does not mean I am a big fan of the stock market right now. I am also not short on bonds right now either. It could change in six months. I might start shorting bonds, but I am not now.
Chris Martenson: That is excellent. Where does gold fit into your strategy? Maybe there is silver, too, and other resources as you look into this.
Bob Wiedemer: It is very, very important. I think gold has done well. That is one of the great things about gold as opposed to, say, shorting a stock market or a bond market. You could have lost a lot of money doing that – shorting either one in the past few years. With gold, heck, it has done great. We have been up 10% in the last year. We will probably be up 10% this year. We are up over 400% since 2001. That was, by the way, up every year, as I am sure you know very well. It has been up every year since then. It has been a great player in the past. I think it will continue to be. I mean that if gold can do this well in a period of low inflation, the stock market has been okay. It has not gone anywhere, but it has not collapsed. The bond market is actually even pretty good. What would happen if those changed? If we have high inflation, a not-so-good stock market, and a bad bond market, I think gold could do very well. I am still very bullish on gold. I like it. It is certainly a big part of our portfolio. I am pleased with that.
I am also pleased with silver. Silver has a lot of volatility. I still think long-term it will do well. However, on a shorter-term basis, we are still down from I guess what was our peak back in the spring of 2011. I think silver will do well long-term, but gold has just been a lot less volatile, so I generally tend to much prefer that. Other commodities, like agricultural commodities, are great. I think they have done well in the past. I think they will do well in the future. If our dollar falls, I think Ag commodities will do well. I think those kinds of commodities will do well.
The one issue I have with, say, oil – although I think that could be good with oil or other metals – they are in fact in a recession, particularly as it kind of slows down. Yes, we have a lot of demand for metals and oil in the past, and certainly in the past few years, I should say. If that demand slows down a lot, that could hurt some of the metals and oil. Again, a falling dollar – this could be a really weird situation – could help domestically produce oil and natural gas. Commodities overall are an interesting play, but a lot of the demand last year has been driven by China. I think that is going to slow down a lot over the next few years.
Chris Martenson: I get that. I do like silver as well, because it is my Rip Van Winkle metal. It is an extraordinarily beautiful industrial metal. We use it. We consume it. We pull it out of the ground. It gets lost at the molecular level into the oceans or wherever it goes, and that is that. So as long as we can keep pulling it out of the ground, that is awesome. It has got a story of scarcity built in. if you wander over into the mining sector and look at ore grades, look at known deposits, look at rates of extraction and you say, oh my gosh, there are not that many years left before all known deposits are gone. Maybe we will find others, but the story that is inescapable at this point is falling yields off ore grades. There is just a story of depletion and eventually scarcity showing up there for me. This, of course, translates into price at some stage. That is one of the reasons I like it. More broadly, are you looking at the idea of resource scarcity as you go out through the years and decades?
Bob Wiedemer: I am, but maybe in a somewhat different way. I think there is definitely resource scarcity. I am about to publish an article. We all kind of know it, but this does prove it. The days of three-dollar-a-barrel oil are long gone. The days of ten cents per thousand cubic feet of natural gas are long gone. I think it is all going to get more expensive. What did you just say? Ore grades are going down. What does that mean? That essentially means it is getting scarcer or more expensive to extract. I mean yes; I forgot the exact number. However, in a cubic mile of ocean water, there is a lot of gold, but it is very difficult to get it out of there. It means it is very expensive. I think we will see the cost of getting those resources going up. Yeah, we will be able to find and work with lower yield ores. We will be able to work with lower-yield oil and gas deposits. However, it is all going to come at a cost, Chris. Those costs are going to go up on probably all of our resources. This is from helium, to iron ore, to oil, and everything in between.
Chris Martenson: It is an interesting part of the inflation thesis. A lot of times, the Fed and the government only track inflation through its terminal impact on prices. There are a number of things, obviously, that can push prices, and scarcity is one of them. Let us just wander over into the energy sector, which you mentioned for a minute. All of the people I talked to in the oil and gas business say, listen. The Bakken plays have been there. We have been drilling them since the fifties. They have been very marginal. We have had fracking for 20 years. We have had multi-stage fracking. We have had horizontal drilling for 30 years. What we did not have was $75 to $80-a-barrel oil so that we could deploy these technologies there. That is just a story that says listen. By the time you are doing these horizontal drills at 10,000 feet down and another 15,000 feet across, potentially, and a 20-stage frack, you would need pretty expensive oil to get there.
That oil price then feeds over into prices. That is a different impact in inflation. Inflation might be adding to that dynamic. There is just a story here which just says certain resources are now becoming more and more expensive. They are more dilute. They are more diffuse. They are more distant. They are deeper or whatever those things happen to be. That starts to play into this.
One of the things I would like to get your point of view on is, we have built an entire credit market system, and how the world is supposed to work. We have blown serial bubbles all with the idea that we could safely ignore resources. They will be there, you know? If prices go up, then that will create a certain amount of demand. Supply will follow. The idea here that I want to sort of tease out is, in your mind, when you look at the efforts to reignite the credit bubble – I see potential resource scarcity as just more sand in the gearbox. Does that fit into your view? What I am trying to get at here is, what is the chance that we are going to be able to get the animal spirits back? We are going to be able to re-inflate not one, not two, but maybe all four of those virtuous bubbles that you had articulated all the way back at the beginning of this. What is the chance that we are going to get that firing up again?
Bob Wiedemer: I have a number of issues here. Let us deal with that last one first. Can we re-inflate the bubbles? You can by pumping up those other bubbles. Ultimately, the more you pump those up – and we both know it. If we really did try to basically borrow our entire federal budget every year, we would scare people. We would scare people investing in the U.S. We would scare people overseas. We know that you just cannot go too far. Just if we printed $500 billion a month, we would scare people. You would also find we would get inflation pretty fast. We can kind of pump them up. We can sort of stabilize them, as – what I said before – I think you will find it is hard to really pump them up without scaring people that you are inflating those other two bubbles too much too fast. I think that theoretically we can do it. I think in practicality it is just not going to work. Again, the only way you are inflating them is you are kind of pumping them up from something else.
How does resource scarcity play into it? Absolutely, no matter what happens, resources are getting scarcer. You are absolutely right. We do have a lot of oil in oil shale. We do have a lot of gas in gas shale, but it is expensive to get out. My dad was in oil and gas drilling back in the fifties. Yeah, actually, hydraulic fracking is what they used even back then. It is 60 years old. It is nothing new. What is new is exactly right. It is we have higher prices now for natural gas and oil. I mean that when he was working there, it was ten cents per thousand cubic feet. Now even the cheap price is three or four dollars. All of that helps make a difference. My guess is most of that gas shale is not a problem until six dollars per thousand cubic feet.
The point is, what you are saying is quite true. Those resources are getting thinner. Our cost is basically due to supply and demand. Supply is getting tighter. Demand is still relatively high compared to your supply. You are going to have higher prices and inflation will be on top of that. That is a real price increase. All of that is salt in the gearbox as you said – or sand in the gearbox. It is salt or sand in the gearbox. It makes the situation even more difficult.
Fundamentally, what is really going on is you are trying to pump up bubbles that ultimately cannot last. You are doing it by creating other bubbles that will pop. It just makes the whole situation much worse. It is like somebody who is trying to save his or her business by borrowing and borrowing more money without fundamentally solving the problem of why this business is losing money. He is just making the situation a whole lot worse in the end.
Chris Martenson: This is probably an unanswerable question, but does the Fed have a game plan here? I mean the story you have just articulated says there is no exit to this thing. The question is, how bumpy is the road between here and there? Potentially we are making the road even bumpier by just adding more fuel to the fire, as it were. There are more imbalances and dislocations that have to ultimately be reconciled at some point. If you are painting a picture that says we fundamentally overdid it and now we are going to have to re-equilibrate and find a new equilibrium, which is at a lower point, we will potentially live below our means to account for the years we lived beyond our means. Do you think the Fed is aware of this? If so, what is their plan?
Bob Wiedemer: I think the Fed is aware of it, honestly. I think they do know what this is. What they are doing is not something they would like to do. I think they felt forced to do it, especially in 2009. I think they felt they had to do it to save the financial markets. What I think they are hoping is that, again, we are just in a down cycle. It will cycle out just like the good banker.
Let us say some of you lent money and got stressed out, down turned, with a problem in the economy. Rather than pull his credit, you are going to give him more. You are trying to give him more to get him through the down turn. Then when the down turn is over, this guy is making money again and he pays you back. I think that is kind of what the Fed is sort of thinking. They are giving a little stimulus – a little boost to get through the down turn. Then they will be able to pull that money back when it gets better.
The reality is an exit plan. We actually used to talk about an exit plan after QE1. How are we going to pull this money back out? We do not even talk about it anymore. The Fed does not mention it. I do not see it much in the financial press. There is certainly no exit plan talked about. There used to be. It was an issue. Now it is not. I think we are kind of seeing the reality of it.
The Fed also is increasingly stuck. Any time you try to pull that money back out, you are going to instantly start to throw the bond markets, stock markets, and real estate markets into trouble. They do not want to do it. Just like a good banker who maybe is starting to throw good money after bad, they are hoping that by giving this client more money he will get through the down turn. Then when he gets back out, he will get his money back.
I think just like a regular banker, the essential bankers in the U.S. are going to eventually start getting more and more worried. I think they already are. The fact that they are not talking about exit plans should tell you that their view and their reality of this money trend is changing. It is harder to get it back out once you put it in. We might have both thought that was obvious a few years ago. For the Fed, I think they felt pressure to do this because their client – like a bad business – was going under. They felt pressure to save them. Now they are hoping that business will turn around. I do not think it will. It is bubble business and not a real business.
Chris Martenson: The Fed’s main strategy is hope. That is okay. They have a backup plan, which is panic.
Bob Wiedemer: I might quote you on that one in an upcoming book. That is awfully good.
Chris Martenson: All right, I think we have summarized that all in a sentence. Here is the most important question – I have to know now. Let us pretend I am somebody who is listening to this. I am a private investor and I am thinking about shelter at this point. How am I going to protect what I have got? Maybe it is preservation of purchasing power, or maybe even how I grow my wealth. I am in a position where I actually need to find ways to grow my wealth. That should be a legitimate goal of investing at all points in time. It is not just protecting it. What do you say to a person who is listening with those concerns?
Bob Wiedemer: Okay. The first preservation of capital is not always compatible with growing your wealth. I agree it is reasonable. To me, I am going to 1928 when Charlie Merrill of Merrill Lynch came out and said guys, get out of the market. You know I think this market is in trouble. He was wrong. 1928 actually worked out pretty good. Most of ’29 worked out pretty good. I mean, the last part of ’29 did not work out so well. Charlie was right. He did not say let us get out of this market and let us move into this market. There is a bull market born every day, somewhere in the world. He did not say that. He said it is time to pull out and preserve. In that case, it turned out to be pull out and preserve for years, and years, and years. The stock market really did not come back until the late fifties and early sixties. In terms of making money, even then, it was not a barnburner.
You know that sometimes there is a great way to make a lot of money in difficult times. In this case, I think we are in a better situation than they were in, say, 1928. I think there are some ways to make money, but they are never easy. I do think gold is one good buy. I do think shorting the bond market at some point will work. Do not do it too early. Shorting the stock market will work. I think there will be some commodities placed that will be good – some agricultural commodities. Commodities are still going to be tricky, so there is no easy way to do it. What people really like is what they have had before. It is a stock market where they just throw darts at the wall. In 1980 and by 1999, you are basically up 1000 percent in blue chip stock. Heck, if you are in high-tech stock you would be up 2500 percent. I think it is what they are really looking for, and I am saying I do not think you are going to get it. I think you can make money, but it is going to be by being in things that are naturally difficult or socially difficult.
I mean, the number of financial advisors who will tell you to put even 20% in gold is pretty few. It would have been a great investment in the last ten years. They will all agree with that. It is proven. They will say for the next five years to forget it; I would not put any money in gold. It is uncomfortable from a lot of standpoints. I think that at this point you make money. The days of making comfortable money are gone. In some cases for many people, it may be better just to go into capital preservation mode, as Charlie Merrill recommended in 1928. Do not worry about making five or ten percent a year. That might just be better for some. It is not great, but it might be the better alternative than having your money stuck in a stock and bond market that ultimately you lose a big chunk of your money.
Chris Martenson: Well, if we are being honest about it, stocks have gone nowhere for I guess about 12 years in nominal terms. In inflation-adjusted terms, it would be a different number. Maybe inflation and dividends sort of cancel each other out roughly.
Bob Wiedemer: That is for your mainstream stocks. However, NASDAQ, Chris, they are down 40% if you are all NASDAQ stock.
Chris Martenson: That is right. If stocks are not the path, one thing I am really unhappy with is just how overvalued all the bond markets are. The various central banks have gone out and basically crammed safe yield so low that all the other yields have followed. Obviously if you are a pension, you are an endowment, you are somebody with an actuarial responsibility that has real impacts to it and you have got 0% or something close to it in what we might term a safe yield, that just makes everything else just that much more unattractive. That becomes really just an extraordinarily difficult problem. I had always expected that maybe the Fed – if you want to cram interest rates down to 0% for a little while, like three months or six months, here we are. What are we – four years into this experiment? Anything under 1% is 0% as far as I am concerned. It is the same. If there is really no safe place to put your money in the financial sphere, what else is available, especially for the big institutional investors? What do you do?
Bob Wiedemer: As I said, gold has actually proved to be relatively safe. I think it will do well in the future. In terms of bonds and stocks, it is not so good. Now, for big institutional people, they can short these things more easily. I think some shorts will come up and be a nice opportunity in the next few years. Again, it is not easy. It is not easy to time that right.
I think there are ways to make money. As you mentioned, John Paulsen and the shorting on the mortgage trade is the most profitable lucrative trade ever. I think it netted John personally over $10 billion or $15 billion. You can make a lot of money on these things, but it is not comfortable money. It is not the money how we made it in the old days. I think there are ways to make the financial markets. Outside, in terms of hard goods, you do not really want to hold a bushel of grain. I am not sure how well it is going to do. You can hold the silver and gold. Those, I think will do very well long-term.
Yes, ultimately stock and bond markets will come back. It all depends how much we decide to damage them now. Every day that we keep this money printing, we are damaging them further long-term. Yes, eventually they will come back. I think we have got a ways to go before that, because I think we are going to decide to damage them an awful lot, unfortunately. That is not good. Every day we do this, it is not good to help our long-term recovery.
I started rambling a bit here, Chris. Yeah, I mean in terms of things other than financial instruments, as you said, there is not an easy way to make a lot of money. I do think gold is probably the easiest and simplest of any of those – or silver.
Chris Martenson: That is excellent. I certainly concur with that, and I have for a while. I am just waiting patiently for the time when investing can come back. Obviously, we are not really investing quite as much, in my view. We are speculating. How much is the Fed going to dump? Is it $100 billion or $40 billion? That is a guess. Your most recent book, Aftershock Investor – I assume you are covering a lot of these principals in there. People can find that, I assume, just about anywhere.
Bob Wiedemer: Yeah, in fact, I think in Barnes and Noble it is in the “Best of Business” section through Christmas. It is certainly on Amazon. It is pretty easy to find. It is at most major bookstores, online, at barnesandnoble.com, and all of that. Yes, it is all out. It is pretty easy to get a hold of, fortunately.
Chris Martenson: That is excellent. If people wanted to follow you in other ways, do you have other venues that you write or communicate in?
Bob Wiedemer: We do. You can go to our website, AftershockPublishing.com. It is pretty easy to remember. It is AftershockPublishing.com. We have got newsletters you can sign up for and audio conferences. There are a lot of ways they can follow it.
Chris Martenson: That is excellent. Bob, it is really just a pleasure to have you on and to hear your views, many of which I do concur with. I just love the framing which is that bubbles burst. That is all you really need to know.
Bob Wiedemer: That is all you need to know.
Chris Martenson: History has never dodged them before. The odds are low this time, so maybe you should have something in your own personal strategy besides hope. Just understanding is an important part of that. Thank you for helping us to understand these issues.
Bob Wiedemer: Thank you, Chris. It has been fun.