David Collum: We're Headed for a Showdown

Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson.

This week we welcome Dave Collum to the podcast. For those of you unfamiliar with Dave, he is a professor of chemistry and chemical biology at Cornell University, the place I got my MBA from. In addition to his academic interests, Dave authors an annual macroeconomic assessment titled “Year in Review.” It is hands-down the best synopsis of everything that mattered during the previous 12 months. If you want to read it, it is at [PeakProsperity.com]. You can find it. It is around there. It is a great synopsis.

We are going to discuss that today. Dave's latest Year in Review really touched on some things that I am very anxious to talk about. I am excited to have him here with us now live. Dave, thank you so much for joining us again this year.

Dave Collum: Hey, I am thrilled to be here. We had a podcast about two years ago that was my favorite of all recorded events that I have ever done. I jumped at this opportunity.

Chris Martenson: Then we should make it an annual occurrence at least. You know where I want to start? One of the things I am most struck by in reading your 2012 review, all of this compressed into a single document, is just how far off the track we seem to be. Markets are structurally broken by allowing computer-driven trading strategies on one end of the spectrum, while the truly powerful institutions and in some cases individuals are allowed to get away with blatant thefts, felonies, and other assorted misdemeanors and malfeasances. Here is the question: Is this just how things have always been, but are now being exposed by macroeconomic weakness, Buffett's famous tide going out? Are these things actually getting worse? You have been tracking this year after year. What do you think?

Dave Collum: I think it is a little of everything you mentioned. There is no question that we have access to this information now, which we did not use to have. The Internet is a phenomenally democratic device. I hear people say it was the greatest thing since Gutenberg. I was dismissive of that as hyperbole. [But] the more I think about it, the more I tend to agree with that. I can reach out to people that were unimaginably distant from me in the past. Government, as it gets bigger and bigger – even a fixed level of corruption will get bigger. I think that is a problem.

I draw an analogy in the review about global warming and monetary policy. The global warming debate is one where if we are heating the planet, what we not only get is a higher temperature, which would be analogous to inflation, but we also get an increase in volatility. We get more turbulent weather, as in Sandy-like events. I think that happens in the markets themselves. I think it also happens in the corruption that you get. As trillions move around the planet, the crime syndicates are going to go straight for that money. There is no money to be made in the little stuff when you can make so much money based on Federal Reserve and central banking largesse. I think it is has gotten massively problematic.

Chris Martenson: This is interesting to me. To pick a couple of cases and one that you did highlight, the case of MF Global – and in particular, to name an individual, Jon Corzine – he appears to have been allowed to get away with what occurs to be blatant theft. The thing that just absolutely drives me nuts in this story is this story line that they immediately came out with that the money vaporized. Somehow money can just go away. Oops, we cannot track it. You and I both know that everything is tracked. If money could just randomly appear and disappear, the Russian mafia would have figured that out long ago and just done the opposite of vaporizing, depositing money out of nowhere into accounts. It does not happen. How are they getting away with pushing that story line, that it just disappeared?

Dave Collum: That particular story, I think, was in the Wall Street Journal. That got denounced by a lot of people. That drew scorn very quickly. It was certainly a planted story. That was an attempt to front-run it and try to come up with some story line that people would accept as if the money were no longer traceable. That is just nuts.

My best suggestion is that they should get a computer, too. That would allow them to track it. Then afterward, as they started sort of entangling the mess that this MF Global created, you get these trustees, a guy named Giddens and then Louis Freeh in there started negotiating with the depositors, the ones who got hosed in this deal. You discover that the money really does exist. What these guys are negotiating is that if the depositors agree to take their money, which means therefore it was not vaporized, they also have to agree to not press charges. This means that theft is not theft if you give the money back. It would be a nice system for the bank robbers. If they get caught, they can turn it back in and all is forgiven. That is what MF Global did.

Corzine is a particularly problematic case, because Corzine, while being investigated, was bundling funds for Obama, and Obama's Justice Department was in a terrible conflict. They should have shut down the bundling at the very least for the optics. They did not. In the end they dropped the charges against Corzine. They never gave immunity to his second in command. If you get immunity, you not only cannot be charged but you are forced to testify. You cannot plead the fifth. If they had taken the second in command and said you have immunity, now spill your guts, Corzine would be in jail now, I think. That is my guess. We certainly would know what happened. They do not want Corzine. He is too connected.

Chris Martenson: This is an interesting sort of theme, that if you are connected enough some sort of a story is made up. What just came out recently was this whole story around HSBC. They got caught laundering billions and billions of dollars for drug cartels. You and I know that as a private citizen, if you are just driving down the road and you get pulled over and you have cash in your car, no matter how much you can prove it is yours the police can still seize it and hold it. They can force you to prove that it is not illegal. Even in some cases that is not sufficient, with some test cases we have out there. HSBC gets absolutely nailed. The Justice Department swoops and declines to press any criminal charges because I believe the quote is “They worried that it might prove to be systemically bad for the bank to have any sort of charges laid against them.” What is going on here?

Dave Collum: It is funny. I had to wrap my Year in Review at some point. As you know, I had to get it in a little earlier this year than we anticipated. On that particular point, I stated, that at the point I uploaded it to you, that it is said that HSBC could be charged as much as 1.5 billion. That is peanuts for the kind of crime they committed. There could also be criminal charges. In the review I said yes, there could be, but there will not be. About two days later they said that there would be no criminal charges.

I think HSBC actually inherited the BCCI (Bank of Credit and Commerce International) clientele. I said that somewhat facetiously, but not totally. The BCCI collapsed in the 1990s. That released an awful lot of dark clients, CIA and various intelligence agencies, the drug cartels, you name it. Anyone who wanted to do nefarious things with the banking system was there. It was a huge bank. They went belly up. They went somewhere. I think they went to HSBC. Now they got caught.

Chris Martenson: That could be. The thing that is mysterious to me is that every so often they will trot out pictures of cash and say they found $25 million. As you and I know, the actual global drug trade is over one trillion dollars. Ninety-nine percent of that gets laundered back through the banking systems somehow. The idea that this is vaporized, difficult to track, or unknown is ridiculous to me. When finally something does happen where somebody gets caught – HSBC in this case – the idea that no criminal charges are coming is another sort of statement. It is the same statement.

The reason I am connecting this right here is that while Jon Corzine is doing things for very politically powerful people – in this case you mentioned the bundling of funds for Obama – HSBC also must have had some very powerful clientele within that roster of things. The next thing you know, there are no charges that get filed. I understand this is kind of how the world works a little bit. It is so pervasive, so in-your-face, and so outrageous that I feel this growing gap between what you and I as citizens are expected to comply with on a yearly basis under penalties that are fairly swift and certain if we fail to, and what the institutions seem to be able to get away with. My perception, and maybe I am getting cranky in my older age, is that this seems wider than it has ever been to me.

Dave Collum: It has gotten so blatant that they do not seem to feel the need to hide it. I think if the BCCI scandal broke now that nothing would happen. There is a great example. They got caught doing all of these things that HSBC got caught doing. That bank imploded because the curtain got pulled back too far. They could not put the scandal away. I think a lot of the things in the past that caused trouble would no longer cause trouble now. There is no penalty. They are temporary regulators or something. They are just waiting for their job on Wall Street. They have gotten no one. They have convicted no one of anything that I can tell. I know of no instance.

Chris Martenson: I think the one story they have managed to get away with, and they used it again with HSBC, is the too big to fail. That is their story. If we somehow collapsed HSBC, this would be systemically awful. We are in such perilous times right now that we cannot afford to even test that theory out. Therefore we cannot press criminal charges because somehow holding a few people responsible at a giant institution like HSBC would cause it to collapse or something. I am not quite clear on what the story line is. It does not really hold water to me. It looks more like excuse-making than a solid rationale by any decent measure.

Dave Collum: They almost do not even say that now. I am not even hearing that. I am just hearing that it goes away. They have even stopped making fake excuses. It just goes away. They said we cannot get Corzine and we cannot get HSBC. We cannot get these guys. They do not give an explanation. This is some form of Stockholm syndrome, where you start enabling your captors. I think at some point this all comes to a head. I think these guys should be careful. They have decided that the rule of law is not important. If that is the case, then they might suffer the consequences of no rule of law. I think we are heading for a problem. We are going to have a showdown at some point, or we are heading for a much more closed society and more corrupt society.

Chris Martenson: It is interesting. When I look at Greece's problems, for instance, corruption is part of the Greek culture currently in their political system. Guess what? People do not feel really obligated or like they have to pay taxes. Their tax collections are really awful. There are a number of things that happen when you corrode not just the reality but also the appearance of rule of law, where it is even and fair. I think that is one of three or four things that actually made – or makes, depending on your point of view – the United States a really fantastic place to be. There are contracts, contract law, rules, and criminal penalties that are evenly applied. That is falling apart. I do not want to complain about this; I want to paint this. I think this gives us an insight into what comes next.

Dave Collum: I agree totally.

Chris Martenson: Let's talk about what comes next. Here we are in a system. Let's hold that thought aside about where our broken markets are sitting and the rule of law. I want to talk to you about resources for a minute. This is the other big dot I want to connect here: water, oil, natural gas, coal, copper, tin, fish, land and all of the rest. They all seem to fall under one of two views – resources, that is. The dominant view is that supplies of them are never going to be either limited or limiting. The other view holds that the best non-renewable resources have already been stripped bare and we are down to lesser grades, while every renewable resource we can think of – land, water, fish – are obviously under human pressure. There are a couple of scientists here. I want to talk to about resources. I think the dominant view is not just wrong, but dangerously wrong.

Let's start with the most critical, oil. There has been a magnificent campaign lately to convince us that there is so much still to be had and there is really nothing to worry about. What are your thoughts there?

Dave Collum: The fracking has produced a perception of a game change and some really smart guys buy the model. I am agnostic in the medium term. That is to say that I think it bought us some time. I saw a report that came out that said we will be producing something like 20.1 million barrels of oil a day in the year 2028, some ridiculous thing. It was a three-decimal-point estimate of our production. I was thinking that whoever did that was an idiot. You cannot estimate something like that in three decimal points. It goes nuts. Everyone trumpets the numbers. That is the kind of propaganda you have got. I saw an estimate out there that said in 2028 that Saudi Arabia would become an importer of oil. I am reading this and I am thinking who are they going to import from? The journalist did not ask that question. Where are they going to import from, Mars? This is a silly concept.

They do not take it to the next step. The journalists are not very discriminating, in my opinion. They do not scratch their heads and go into uncomfortable places that you have to sometimes go and ask uncomfortable questions. I think resource depletion is a killer. Jeremy Grantham is out there saying this. There are a lot of people who are. We will eventually be told, when it starts to become a problem, that no one saw it coming. Of course they did. I totally agree to varying degrees, depending on the resource. The one thing I did point out in my review was that I got to talk to the CEO of Chemetall. He said the rare earths are not rare. He said that particular fear of running out soon, the idea that China has them all, is not correct. He said China dominates the market because they undercut everybody. There is some bright news. We are going to run out of helium here. The helium shortage is a big one. People do not know why that is important. It is profoundly important.

Chris Martenson: It is extraordinarily important. Helium, and in particular one isotope, helium-3, is extremely important in medical imaging technology, neutron detection, and other things like that.

Dave Collum: It is also a coolant though. You use vast quantities of helium for a number of these MRI imaging devices. We could find out that we used up all of the helium that would have allowed us to get scans of our knees in party balloons. That will be a silly realization when we get there.

Chris Martenson: Right. Let me turn back to oil for a second. There has been something that has been driving me a little bit nuts for a while. It started in February of 2012. That is where my first instant was that I started tracking it. That is where this idea of energy independence came along. That was the first confusion in this story. They started talking about the United States in terms of energy independence. Of course, forms of energy are not interchangeable. If you are in a lab, your Bunsen burner gives you a very different thing that you can do with it than the electricity that is in the wall switch or anything else.

Energy independence is one thing. Really it is the liquid fuel story that is the most important one. I saw that first clouding. The second thing was that they started lumping all kinds of things in terms of barrel-of-oil equivalents (as if they were truly equivalent), natural plant gas liquids (which nobody can put in their gas tank yet), and other things like that which are just not actually oil.

When we peel all of that fluff away and we actually ask the question about where we are in the oil story, for whatever reason – as I am talking to you today, Brent is $109 a barrel and WTIC is $90 a barrel. When we look at this, those numbers are not consistent with a world awash in oil, given where we are in the macroeconomic story. There is something here, where I am finding a larger and larger disconnect between what we are being told about the energy story and what the actual data is telling me. It is a fairly profound gap right now, both in price information and volume information. Those two things are out of alignment with the official narrative. Why is that happening?

Dave Collum: That crisscrosses a number of troublesome factors. I have trouble getting my brain around this. The commodity market pricing is being set by the futures market. Somehow it appears, and the commodity guys all understand this while I do not, but somehow the guys trading paper get to set the prices for the guys actually trading the hard commodity or soft commodity. If at some point the paper traders take the markets to someplace where the actual supply of the commodity cannot go, we are going to have this gigantic disconnect. That is the first thing.

The other thing is that if you look at the price of oil, people say there is no inflation in this world that we have lived in for the last couple of decades. They rant about the inflation being tame for so long. You know about ShadowStats.com and how John Williams counts inflation in a different way. I like to use college tuition as an inflation measure. Since the late 1990s, oil has gone up tenfold. Here these guys are saying inflation is tamed, but the energy that is fueling the planet has gone up tenfold. That causes a serious brain crack for me. I think the oil is telling us something about the inflation numbers too. You know much more about this whole commodity sector than me. You should keep talking.

Chris Martenson: When we look at the total basket of commodities, it is up close to tenfold as well over the last ten or 12 years. It is up extraordinarily. For the rest of the world that is pricing things in dollars because of the nature of the world commodity exchange, and where the local populace has to spend upwards of 50% of their total income on food and fuel, they are not experiencing anything close. The United States is busy telling the world that there is no inflation. I will guarantee you approximately three-quarters of the world's population is not experiencing it that way. They are experiencing it quite differently.

Dave Collum: That is true. I think the inflation/deflation debate reaches levels of absurdity when you realize that something so complex as inflation and deflation – which I find have an asymmetry already because I can understand inflation better than I can understand deflation and I am not sure why – that the whole debate to talk about something so complex using a binary language is just nuts. This is like asking if it is sunny or raining. There are a lot of other choices out there. I think we are going to have things that matter to us getting expensive and Beanie Babies getting cheaper. They will declare that Beanie Babies are the best inflation measure and declare inflation tame.

Chris Martenson: Absolutely. My final point on resources is that the non-renewable resource sector, which I track carefully looking at things like grain prices, land availability, water aquifers and things like that, is that it is just so clear to me that we are under tremendous pressure already at seven billion. As we head to nine, nine and a half, or maybe ten billion people by the end of the century, clearly those pressures are just going to increase. Has this factored into your investment strategies at all, personally?

Dave Collum: Yes, big time. As you know, my portfolio has not been a standard balanced 60/40 stock/bond portfolio since about 1999. I went totally into hard assets, first exiting every mutual fund, and second, by the middle of 1999, I had started buying lots of gold and silver. In 2001 I started investing in energy. It started out as an inflation hedge. Then I started running into these odd articles about Peak Oil. I had to dig into those. I started hearing about how Ghawar is the Saudi's biggest field and it is gasping. I ran into the whole Matt Simmons story, and Colin Campbell. I realized that oil and energy were more than an inflation hedge.

At the same time, the reason I like those investments is because if for some reason you and I are nuts and are a couple of monkeys with our brains in a Bell jar and they are tweaking us while the world is actually rather normal for everyone else, energy ought to do well then, too. It is my way of attempting to be normal and hedge against inflation and risk. The one thing I do not like being is long the dollar, which is what cash is. I have attempted to invest in things that hurt when you drop them on your foot.

Chris Martenson: I like that. That is solid resources and tangible things. I like all of that.

Before we get to that dollar story, which I do want to get to, you mentioned before that you like to follow ShadowStats for inflation. I have to tie this back to something that I think you pointed to in your Year in Review, which is that right around the election, it turned out that these fuzzy numbers that are being presented to us – the unemployment numbers, housing, inflation, and GDP – I found those to be absolutely bizarre the closer we got to the election. What was your perception there?

Dave Collum: You know the numbers coming out of the Federal agencies are suspect at all times. I think they are politically motivated. I talk about the birth/death model. Here is a model in which there are jobs that you cannot detect. I can buy that model. Then they say we have to figure out how many there are. You say you cannot detect some of them, so how do you figure that out? Then they start fabricating, as best I can tell. The birth/death adjustment now is so substantial and so politically motivated that in some months the birth/death correction is substantially bigger than the job counts themselves. Here they are fabricating fictitious numbers. They never, during the depths of the recession, the birth/death model never said there were jobs disappearing that we cannot detect. There is a highly cooked number.

I think the one you are referring to is right before the election. Unemployment dropped by 0.4%. In units of employment, that is a cliff in itself. That is a free fall. That is, I think, sponsored by Red Bull, that plummet. The visceral response by everyone immediately was that these numbers were just wrong. Then it turned into this political football. You had Jack Welch getting into this big brawl over his Tweet in which he said that the Chicago boys cooked the numbers. It is clear that you cannot believe the numbers in the most general sense because they cook them for political reasons, but during an election year when everything is at stake you cannot believe that they are squared. They are corrupted to the point. In my opinion, the election clouded 2012 so much that it was difficult to tease out the truth, even relative to other years.

Chris Martenson: There is still this crazy thing that happens where the market buys the number, whatever it happens to be upon its release, but then with the inevitable downward revision in prior periods it does not respond to that. Is this just a Pavlovian market response? What is going on?

Dave Collum: That is an Escher diagram. The guy keeps running around. ZeroHedge has been all over this where they say look; it is a three-step process. You announce great numbers. In the quiet of some later moments, you say, “By the way, those numbers are adjusted down.” Then you report the next numbers and you say, “These numbers are fantastic compared to the revised downward numbers.” It is this constant game.

The markets respond in a way that I think Bill Fleckenstein used to say best. He said the guessers are guessing what the other guessers are guessing. It just becomes absurd. It makes no sense. It is a bunch of computer algos chasing news reports. The noise is huge now.

Chris Martenson: We have the price of everything and maybe the value of nothing. I spent some really valuable time talking with Eric Hunsader of Nanex. That is an exchange information outfit. What they do is they have access to all of this exchange information down to millisecond resolution. When I wanted to understand certain things that happened, like why oil suddenly plunged four dollars in two minutes or why gold had 3,000 contracts dumped at 8:40 in the morning or things like that, I have to run over to Eric. He shows me the data. What is happening now is that you have to see this at the millisecond execution time frame now. An entity will come in, and we cannot tell which ones from the data because that is obscured, but you can tell it is an entity who just dumps massive contracts. Clearly this is only to move price. This is why you do something like that. It is not because you are a sophisticated investor.

Two things came out to me around that. One is that these are obvious price manipulations. Those are being left not investigated. That has important long-term implications because price discovery is now broken.

Dave Collum: Totally.

Chris Martenson: The thing that really sort of gets me around these is that it looks like the tiniest amount of money can move giant markets now, because what you will do because all of these computers are out battling with each other like Battle Bots, there is an arena and they are all in there, and all somebody has to do is toss something warm and fuzzy in there and they are all over it. I asked him how much it took for this line in the S&P E-mini to be defended. It was coming at a critical support juncture. All of a sudden it reversed the other direction because somebody bought 30,000 contracts. It has a notional value of quite a bit of money, but the actual amount was a few tens of millions of dollars. That is it.

Dave Collum: Seconds later, if not fractions of seconds later, they can get rid of them. The exposure to tens of millions is on this unbelievably short time scale. This is a metastable system, right? You know this, as a scientist. You get these complex systems with these feedback loops. Anyone who thinks that we are not going to have a catastrophic market seizure at some point going forward, not just in the past, is nuts. This is a system that has the most spectacular feedback loops I have ever seen. These guys at Nanex are treasures. One time I saw something odd. I sent it to Saluzzi. He sent it to Eric. I got the answer back. It is so fantastic that these guys can watch this.

Berkshire Hathaway at $120,000 a share flash-crashed to $1. It does not even make it to CNBC because they are too busy sniffing around Warren Buffett for nuggets of wisdom from this guy who is the biggest stock jobber I have ever seen. Buffett drives me completely nuts. He is a total insider. He trades on inside information. At the same time he has got this little-old-man thing. He is like the Mafia Don walking around in his bathrobe looking innocuous. He drives me crazy.

Chris Martenson: That is all right. I am really interested in this phenomenon. Here is my perception: The markets have all of this fuel being dumped into them, 85 billion a month courtesy of the Fed. That fuels finds its way into the market.

Dave Collum: Not to mention other central banks. That is just us. There are more central banks out there doing this. It is amazing.

Chris Martenson: There is lots of fuel. That is on one side of the equation. On the other side, like the real slow-burn rocket fuel for any market, there needs to be widespread participation. This means you have a productive class of people out there who are busy producing real things. In the consequence of doing that, they earn income and they have some left over for savings that flows into the markets. That is a fairly virtuous route, where you have productivity, value creation, and really productive enterprise. I love that cycle. You can see how that one will work. Retail participation has been negative for how long now? They do not even talk about it. I have to hunt for the information now. It has been 30 or 40 months. I do not even know anymore.

Dave Collum: It is deeper than retail participation. Now it comes down to demographics. Back in the 1990s, they kept saying these markets were going to soar because the Boomers are just going to put more and more in. No one really thought about the fact that Boomers would start going conservative before they retired. You cannot go into retirement carrying Dell and Worldcom, then get out of it later. You have got to start downsizing. The Boomers are downsizing everything. At some point they are going to sell their McMansions. They are going to sell their equity. They are already selling their equity. They are not going back because they cannot afford to. There is this idea that retail has somehow got to come back. The average person has no savings. Their income has been pounded. There is no return trip for these people. The average Boomer has something like $70,000 in savings. This is crazy.

Chris Martenson: Even if they were to sell their McMansions or their portfolio, to whom would they sell it?

Dave Collum: To our kids, and they are making nothing. They have student loans. In the olden days if you go into some burg like Ithaca where I am at, you go downtown and you see these big Victorian mansions. They are not single-owner occupied. What they are is funeral homes and multi-resident dwellings. They are all of these things. They converted them to something useful. I presume those things were built during a heyday when there was a pile of people who had money and they said let's build a big house. They discovered they could not afford a big house.

Now we did the same thing again. [But] there is a difference. Our McMansions are spread all over the countryside. They are not downtown where they can be converted to Victorian stores or McMansion things. They are out in the hills. There is no one who is going to be able to buy them unless you and I are dead wrong and there is some big boom coming and our kids are going to be stinking rich and want to buy a house with 5,000 square feet that costs a fortune to re-roof and heat –by the way – that is also going to depreciate at a rate that is unimaginable, because they are made like garbage.

Chris Martenson: The greatest story never told is that houses are not assets that appreciate. They are depreciation machines.

Dave Collum: They are liabilities.

Chris Martenson: They are liabilities. You feed them money, capital, and effort, and all of that. There is another big story that comes in here that is still not even remotely talked about enough. This is the idea that Ben Bernanke, following in Alan Greenspan’s footsteps, decided that the infinite wisdom is that we are just going to fix things by running interest rates down to 0% for as long as necessary. I think we are committed through 2015 now, or forever? Is that right? We have to wait for unemployment to hit a certain rate it may never hit. This is potentially forever.

Against that backdrop, we have all of these people who are retiring. They should have had money parked in something safe, navigating away from the Dells, Microsofts, and all of that, into some other form of safe bonds, money market funds, or something where they are earning some rate of interest that at least approximates inflation. You and I know that inflation is not zero. It is higher than that. [Bernanke] saddled us with negative real returns. Are we four years into that experiment? If you are a pension fund, an endowment, or somebody with actuarial liabilities, if you are in any way responsible for an entitlement program with investments on the back end of it, this is negative compounding for four years going on five. That is a hole that cannot be climbed out of at this point, because of what Bernanke has done. He has ruined saving. He has ruined actuarial investments. What are your thoughts on that?

Dave Collum: Look at what happened to peoples' nest eggs during the 2007-2009 calamity, which I do not think is the last one as I am sure you agree. their equities were getting pounded and their houses were getting pounded, the people who were 60/40, which is most people even if they did not know it because most people had their money in some sort of pension fund or something, and let's call it 50/50 to keep the math easy, while the equities were getting clobbered the bonds were rocketing. The bonds were soaring because they drove interest rates down. It provided this buffer. As equities got beaten up and bonds soared, it produced a bit of a wash. Some people were hurt but their bond funds were spectacular. Here we are at. It is 2013. Now you have got this ugly case scenario. In the best possible scenario interest rates stay low forever. That is not going to happen, but let's pretend like it is. If that is true, then it means half of their portfolio will return zero. They are getting nothing, a couple of percentage points for a ten-year bond.

As a consequence, it means that they are going to have to get all of their returns on equities. It is not going to happen. There is this folklore out there that says equities go up when rates are low. That is wrong. Equities go up when rates are dropping. Warren Buffett said that in 1999, and it is clear: Dropping interest rates means rising equities. It is a P/E interest rate relationship. Once they are low, the profit is squeezed out. It is gone.

Now, the more logical scenario is that rates rise against Bernanke's will. What would cause that? That would be inflation showing up and you can no longer keep them low. You end up in some high inflation or runaway inflation scenario. Now you are going to lose principal. Now your bond fund is going to get annihilated. The equities are going to get annihilated because who is going to pay for a dividend of 2% when inflation is running high? The equities get pounded when interest rates are rising. As a consequence, you are going to have dropping equity prices. You are going to have dropping bond fund principal. You are going to have no slack. We squeezed the slack out. I do not know if Bernanke gets this or not. He is a smart guy, but he is also a fool. You can be both.

Chris Martenson: I think that is a great point you make. It is not low interest rates that support a rising equity market; it is falling rates that support a rising equity market. Of course the reverse is true: Rates rise and equities fall. That is the world. That potential energy has now been stored in the system. There it is.

I want to talk about gold and silver against that backdrop, that context there. I mentioned that you do not like the dollar. This is all going come together into one conversation here. Gold and silver have a tough end to kind of a lackluster year, the first out of 11 or so where that has been true. Let's talk about the precious-metal markets first, and then what the fundamentals are for the metals. For markets, what do you see when you look at the gold and silver markets?

Dave Collum: They have been flopping around in a way that is pretty standard for a secular bull market. If you look at the previous bull market, there were periods where the metal investors got beaten up pretty well en route to some spectacular returns. None of this troubles me. It is clear to me at this point that the case for intentional intervention in the precious-metals market is not a bad case. I do not know if I sign off on it, but I think that there are those who say powerful forces are getting in there and messing around with the metal price.

It is undeniable now, thanks to Rob Kirby who came up with a document from the Comptroller of the Currency showing that JP Morgan has a short position in silver. We know they have a short position in silver. We know that Blythe Masters claims that they were hedging. If so, it turns out their short position in silver is equivalent to 50% of the entire global bullion supply. I think Masters is fibbing a little bit there. They have got some serious speculation going on. At some point, does the price get out of the corral they have put it in? That would be my bet. As long as central bankers are printing, how can you not like the metals? It is hard for me to imagine this.

The other thing is that they said it was a bubble. It is not acting like a post-bubble period either. When you really hit a bubble, take a look at Qualcomm or some stock like that. After that bubble popped, it was a free fall. It went straight down.

Chris Martenson: This bubble talk always gets under my skin a little. Let's name one other bubble where you had broad participation that you had to measure in the 1% range.

Dave Collum: That is a great point. It is estimated that the percentage of the investing world of the metals is in the ballpark of 1%. I have seen below 1%. If you take all of the portfolios around the world and you ask what percentage metals is, it is around 1%. Historically it is supposed to be around 5%. That is a five-fold gain in front of you to get back to historical norms. Then you have central banks, who are now net buyers. This is the smartest money on the planet. These are not day traders. These central banks are not buying and intending to flip it like flipping condos or anything.

China, which everyone knows is a financial juggernaut, is buying gold and silver. Their gold position is something like 2% of their reserves. They could ramp that to 50% and it would do unbelievable things to the price discovery mechanism of gold. It is hard to be pessimistic. I admit it is painful watching the metals get bashed back and forth and the metal equities getting bashed back and forth. You and I bought the metals back when they were in the $200s. It is painful, but it is not that painful.

Chris Martenson: I do not think it is very painful. I am just patient like you. I know the day will come. I have really stopped paying hour-to-hour and day-to-day attention to the prices because it is not really relevant unless I am thinking of adding more. Then I will trot out some charts, look at them, and think about when I want to put some more into my portfolio. For the markets themselves, I did track – using Eric over at Nanex – some of these raids that happened recently in both gold and silver. You would see thousands and thousands of contracts dumped in a single 80 millisecond period. That has nothing to do with normal price discovery. That is a price manipulation moment. Nobody is doing that to suddenly balance their portfolio or liquidate something, as they commonly like to trot out, like that rumor that maybe Paulson, one of the most sophisticated hedge fund operators in the world, just one day pushes a cell phone button and unloads his gold position like a complete novice. That is not true.

I look at that, but I have seen that same behavior in many other markets, in equities markets. I have seen it in the oil markets. Somebody out there is able to push price around to their benefit. If you wanted the price to go down, these to me are not two very hard dots to connect. If I happen to own the largest short position in silver, I might be the first institution I would go looking at if I was an investigator, to say who pushed that massive sell button right at that moment in time? Without the investigation, we will not know.

I do not have to get into theories about why they are doing it, or if they are doing it because the central banks want them to, or any of that stuff. I can just say that by looking at the market structure, with shorts that are that outsized and are by definition manipulative when you hold that concentrated a position in a future position in market. On the other hand, we see these things come through which are clearly price manipulation events. How can these two dots not be connected? It leaves fertile territory for average inquiring and somewhat intelligent people to say there is some smoke there. Can we please investigate and assure me there is no fire? Of course the CFDC refuses to really do that in anything like a meaningful way.

Dave Collum: So at one point there were 75,000 sell orders for silver in one second. That is not an investor. That is something altogether different. That is a cheater trader doing that one. This is why the Nanex guys are so important. They show us this. They look in these short-time scales. They can see the monkey-hammering going on in these markets. There are still two levels though. One possible level is that the markets have just been discovered, that the precious metal markets have been discovered by the HFTs. What looks like manipulation is really just algos banging away at the problem and pounding away. They are finding air pockets and drilling down the prices and making money going down and going up. The other is that there is a more intended purpose behind it. The former is certainly happening. The algos have got a hold of the precious metal markets now in a serious way. With the latter, certainly the Gata guys would say that the intention is price suppression.

I make a case for price suppression in my review, where I point out that, for example, the central banks lease gold to traders. Why would you ever lease gold? You say well, they can rent it. This is a profit. The lease rates are something like two-tenths of a percent. There is no profit motive there. That is free capital in the very least. You also lease out the gold and they sell it. Then it is going to drop the price. It also means that the central banks do not have the gold. It is out there and has been sold. It is suspicious that our central banks report gold as a single line item, both the leased gold and the gold supposedly in possession. They actually do not dissect those two. They pretend leased gold is as good as gold, as one might say. It is not. It is gone.

Chris Martenson: That is a great point, too. I have this conversation from time to time, about the things I know my central bank openly admits to manipulating. The one that is most important and drives me the craziest is that they manipulate the price of money.

Dave Collum: Right.

Chris Martenson: When you do that, every other price by definition becomes distorted or manipulated, depending on which verbiage you are more comfortable with.

Dave Collum: It renders our money worthless. That is the key. Our capital, in the olden days, used to have value. We would work. We would save. Someone would come along and say you know, if you lend me the money that you have saved, I will pay you for it. I will find a productive use for it. Therefore you would get a return. Now the central banks have decided that they will render our hard-earned capital worthless. It is worthless at this point. It returns nothing.

Chris Martenson: They have distorted the time-value of money, which is one of the biggest distortions out there. Of course, 85 billion a month is my number-one fundamental statistic. We are building up this pressure across the world where we are just throwing more and more money. The central banks have some crazy idea. They are running a social experiment, the largest one ever, with an N of 1. It has got a binary outcome. It works or it fails.

This feels a little risky to me because this same experiment has been run on a microscale hundreds of times throughout history. It has never worked. They have never come forward and said this time, when we run this grand printing experiment of printing our way to prosperity, here is why we think it is going to work this time. They have never had that actual explicit conversation come out. Ron Paul used to bang at Bernanke with questions like that. Bernanke would just dodge and nobody would follow up. That was the end of it.

Here we are. I think this is the thing. I look at your Year in Review and I think about where we are. If five years ago or ten years ago you had just picked me up and dropped me into this moment and showed me what the central banks were up to, I would have gotten up out of my chair with my hair on fire and run outside. I want to back up. All of our baselines have been shifted. It has been creeping up. We get assaulted with this news constantly. The Federal Reserve is doing more and more, as well as the other central banks. Stop. Time out. Back up. This is insane.

Dave Collum: Do you remember when they bailed out the system by basically dropping $30 billion into Bear Stearns? You could taste vomit in your mouth when you read that article. Oh my God, they just dumped $30 billion into Bear Stearns. You are kidding me. That is such a quaint number now. They desensitized us to the point where they go on TV and not only talk about numbers in the trillions, but they actually get people in the system cheering for it. This is going to be historically bizarre. There are going to be people looking back and saying explain this to me again. Why did you guys think the system was okay? It looks insane retrospectively. Prospectively it would look insane, too. If you took some person from 1950 and beamed them forward, they would say you guys are nuts. This does not work.

Chris Martenson: Absolutely.

This is my final question here. You have managed a very impressive 11% average compounded annual rate of growth for ten years or more.

Dave Collum: Thirteen. I just use January 1, 2000, because that really represents it. That is the one I cite because that is the one where everyone else started suffer. If you go back, it worked fine, too, but everyone was fine. As of January 1, 2000, I have averaged 11% compounded. Admittedly it was two years in a row that are break-even.

Chris Martenson: Here is the question around that. That is very impressive. We just had a long conversation here. You have it in the Year in Review around how broken and dysfunctional our markets really are, that money is mispriced and that this is insane. What is the poor confused investor to do, if you were to pass on some sage advice? How do we navigate these next few years here?

Dave Collum: Someone who has money has a nasty problem. This really is. You and I, we like metals. We like energy. We think if you have to go somewhere, those are it. They can be hurt, too. It is not like we are sitting around saying there is no way these things are not going to get whacked. We know they can be whacked. We just think it is the best bet we have got. I have no optimum bets. I wish I could think of something that was safe. There is nothing safe now. We are in the middle of a mess.

My advice, first and foremost, is do not underestimate what it costs to retire. You will be told by the authorities what it takes to retire. Those estimates are way off. Fidelity is saying you need eight times your annual salary to retire. If you do the math that will only get you about ten years worth of retirement. Then you are done. You need more like 20 or 25. I guarantee your listeners [who are Boomers] are very unlikely to be on track to get 20 or 25 multiples of their annual salary in the bank before they retire.

These are scary numbers. I just say hang on as long as you can. Do not retire. Do not retire if you do not have to. Do not retire thinking you are going to get a part-time job. It is going to be at a drive-through window if you do.

Chris Martenson: How about the importance of living frugally? Does that factor in?

Dave Collum: Yes, it certainly does. For one thing, the more frugally you live the less you need to retire and the more you save. It is a two-for. If you could live off of half your salary, you would not only need a lot less but you would have a lot more. Unfortunately, for a lot of people we are past the fail-safe point. I hate to bring that news, but for someone who is 60 years old who is way behind the eight ball – and this is a very large percentage of the population – I do not see a mathematical solution beyond austere old age. It is a consequence. It is not a cause. Europe is a consequence. They say they decided to do austerity in Greece. No, Greece is a pathetically dysfunctional country – no efficiency, no prosperity, no nothing. That is not a choice. That is a consequence. We are going to suffer the same, in my opinion.

Chris Martenson: The alternative is that we are going to be allowed to live beyond our means forever.

Dave Collum: Yes, that will happen.

Chris Martenson: History is not really supportive of that as an awesome strategy.

Dave Collum: Hope is not a strategy, as they say.

Chris Martenson: Absolutely not. Yet there is still a lot of hope in this story for me. We can shape our lives. We can take control of our finances. I recommend very strongly that everybody listening, the best investments you can make are in yourself. My best investments this past year were a solar hot water system and insulation, both of which are going to have triple-digit returns in the first case and high double digit returns in the second case. I am investing in myself in ways that minimize my future cash flow.

Put it in a spreadsheet and it makes perfect sense. We have been captured in a lot of cases by the idea that investing means taking your money, closing your eyes, sending it to Wall Street, crossing your fingers, and hoping. There are many better ways now to get involved with investing that begin right at home. It is all around the idea of minimizing future cash flow out the door, rather than trying to maximize future cash flow in the door. It is a little flip, but it is actually a story that I can make perfect sense of, get my arms around, and there is no risk in it unless oil goes to zero dollars a barrel.

Dave Collum: I did have this one idea. That is one that people talk about, especially people like you. That is to invest locally. I have this image of investing in local businesses. You pool resources and then you invest in things you can kick the tire on. I pieced this whole model together and I say we will call it a Savings and Loan.

Chris Martenson: That is a great idea.

Dave Collum: Do not give the money to HSBC unless you want to support drug cartels. Then you should.

Chris Martenson: With that, Dave, it has been my pleasure, as always. We are going to have to do this much more frequently than biannually. Thank you so much for your time and for the Year in Review.

Dave Collum: I appreciate you letting me do it.