Podcast

Bob Fitzwilson: Charting a Safe Course Through A Market Gone Insane

Stick to the fundamentals and ignore everything else
Saturday, March 16, 2013, 11:14 AM

The Dow Jones has had 10 consecutive days closing in the green, a streak not seen since the mid-1990s. Both the Dow and the S&P are at or near all-time record highs.

That's what happens when you flood the markets with liquidity, which the Federal Reserve has done with trillions of newly-printed money over the past several years. It's currently juicing the money supply to the tune of $85 billion per month. All those dollars have to go somewhere. And their now finding their way into financial securities.

So, has the Fed won? Has the crisis been averted?

Should we just accept the maxim: "Don't fight the Fed", jump in the markets fully and let the rising flood of money carry our stock portfolios to the moon from here?

Hardly.

In this week's podcast, Chris puts the tough question to Bob Fitzwilson (one of Peak Prosperity's endorsed financial advisors): Can one prudently invest in today's logic-defying markets?

Bob's short answer is: yes. Perhaps more than ever, old-school fundamantal analysis matters - stock picking in the true, nose-in-the-numbers manner. For as the Fed's money injections reach their point of diminishing returns (which there's growing evidence they have), the tide lifting all stocks will reverse, and only those companies with real merit will maintain (or lose less of) their valuations.

Like Chris, Bob sees the potential for a large market correction as the Fed liquidity binge effect wanes. So, in his eyes, now is not a bad time to sit on the sidelines in cash and equivalents. If indeed a correction occurs, there will be an attractive opportunity to deploy dry powder selectively into those companies with verified fundamental value.

But it's hard to have the fortitufe to do this when the world is cheering the return to easy stock gains. Of course, those are the times when the greatest number of 'greater fools' are in the game. It's wise not to be one of them.

If after listening to this podcast, you find yourself interested in connecting with Bob and his team to learn more about their advisory services, please use the form here to do so.

Transparency note:  As a result of our public endorsement of Bob's firm, Peak Prosperity has a commercial relationship with them. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.

cheers,
Adam

It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and Bob are obviously unaware of) and should be obtained directly from a financial advisor you trust. Before acting on any of the statements made in this podcast, we advise you do just that.

Click the play button below to listen to Chris' interview with Bob Fitzwilson (38m:37s):

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and today we are pleased to welcome back Bob Fitzwilson, founder and managing partner of the Portola Group, one of the financial advisory groups we endorse here at Peak Prosperity.

Today we’re going to discuss the markets. U.S. equities are powering to all time highs or a close, yet the cross-currents are numerous. How does one safely navigate these waters? As mentioned on my prior podcast with Bob, there is a business relationship between his firm and Peak Prosperity, the details of which are clearly spelled out in the write-up accompanying this podcast.

Hey, Bob, I’m very excited to have you back!

Bob Fitzwilson: Well, thank you, Chris. I’m excited to be here, too.

Chris Martenson: Let’s start here. Dow win streak hits nine. Nine up days in a row, its longest winning streak in 16 years. We have to dial back our time machines to 1997 in order to experience something like what we’re experiencing. Bob, what are we experiencing?

Bob Fitzwilson: Well, I think what’s really driving it is the afterglow of all the trillions and trillions of money that was spent from QE1 to the present. And then starting last year, it was just outright purchases of the marquis names in the stock market. A lot of it is real. There have been companies that have done very well with the wind at their backs starting with March of 2009. But the action, certainly the last couple of quarters, does have the look of an invisible hand behind it.

At the same time, the economic series are starting to roll over. If you look at the leading economic indicators retail sales, unfilled orders and things like that they’re starting to roll over. So the bottom line is, we’re coming to this crunch point where we’ve spent an amazing amount of money to buy the best recovery that we could get, which wasn’t much. And now the question is, is there enough firepower behind the invisible hand to keep it going?

Chris Martenson: That’s interesting. So let’s talk about what’s good out there, but let me start with what’s mysterious to me. I noticed things like Boeing, the Dreamliner; they’ve invested a lot; it’s clearly got some problems; they haven’t figured out the battery issue. Yet if you had bought Boeing just before they announced this mini-crisis, this setback with the batteries, you would have outperformed the S&P by about 1100 basis points, about 11%. It’s fantastic. When I look at Netflix with a PE of over 600; Amazon, I don’t even know what its PE is, it’s got to be in the thousands at this point, 3,000 it’s something. How do we make sense of it? Would those be frothy issues in your mind, or is there something fundamental there that I should be looking at?

Bob Fitzwilson: I think they’re different issues. The Netflix one, I agree with you. I just scratch my head. The PE is just astronomical. Amazon you have to look at Amazon as a work in process. They’ve made it real clear that they’re building out their infrastructure, and it’s not something that I would choose to invest in, but we’ve all missed a heck of a run-in. So those two are a little bit different.

Boeing, the most frustrating experience in the investment business is when everybody hates something. When everybody knows what all the problems are, it’s the time to buy. And so Boeing looks to me like a classic example of that. We’re also big believers in cash flow, and through all their troubles, the last number I saw was about $7.50 in cash flow. And that’s with deferred sales and all the problems. So the Boeing one to me is just the classic frustrating investment experience: When all the bad stuff [is happening], that’s the time to be buying something.

Chris Martenson: All right, and then let’s talk about where you see there’s some real fundamental basis for the valuations that we’re seeing right now. What is it that’s caught your eye and that you’re invested in?

Bob Fitzwilson: A large part of this is just common sense. And so we tend to get away from rules of thumb and adjectives and small cap and mid cap and all that stuff, and we try to look for businesses and themes that make sense. And we’ve talked about food being a theme; we’ve talked about energy being a theme; water is another good theme. One of the things I was thinking about today is that if you’re looking at alternative energy, silver is a great alternative energy play; it’s also a great monetary play. But you can’t get all that the megawatts they’re talking about building out in the solar area without silver.

Another theme is that it used to be that if California goes, so does the rest of the nation, unfortunately. We’ve been heading, as a state, in the wrong direction. But the beneficiaries of that have been the states that are doing well, and so you could say that North Dakota is a theme, the state of Texas is a theme. If all these people are moving to Texas, they’ve got to have places to live. There’s got to be infrastructure. The back-end trend is a major theme for us. The Eagle Ford trend. One of the ones that’s not intuitive is the airline business. There’s a couple of airlines that are just generating huge amounts of cash flow and doing very well.

Chris Martenson: Real honest cash flow? Because the airline industry is something that for, it seems like decades now, just is perpetually in a cycle of win some, lose some, but overall the return on equity from the airline business has just been horrendous for quite a while now.

Bob Fitzwilson: No, it’s a failed model, because it starts out when you don’t have any planes and so you buy a bunch of equipment and you build out your roots and all that. And just from the depreciation alone, you’re generating huge amounts of cash flow, but you’re not replacing your aircraft or maintaining them as you probably should. So there definitely is a life cycle to that business model. So the ones that I have in my mind are ones that, as you can guess, are probably newer and aren’t quite as far along in that cycle as the other ones are. Because you have to have good labor when I say it’s not intuitively obvious that when you think about rising oil, you’d think they’d be having troubles. But these other two airlines, they have very good labor relations, and that’s a significant factor in their cost structure, too.

Chris Martenson: Interesting. As I look out, I’m obviously reading the first hints of the Fed exit strategy. And we all have to watch it very carefully, because these markets are, of course, obtaining at least some of their valuations due to the largeness of the QE efforts, which you’ve started out with. And so we have to keep our eyes on where we are in that story. How closely do you follow the Fed exit at this point in your position? Is it something that you keep a half an eye on, or is it front and center to how you strategize and think about what you do?

Bob Fitzwilson: I would say front and center, to a large extent. Once we realized what was going on, our thinking was that there would have to be a limit to the QE, and we thought there would be a limit to the budget deficits and things like that. And the truth is, there’s only one path ahead for the Fed the Fed, in our view, is the mother ship for the rest of the central banks. They have to get nominal GDP back on an upward path, because if you are increasing debt, you’ve got all these unfunded obligations. You’re going to have to get the GDP up, you’re going to have to make people pay more taxes, feel better.

And to some extent, the San Francisco Bay Area at least the west side from San Jose to San Francisco is a good example of that. The Fed, if you will, has the money flowing in chasing start-ups and buyouts and IPOs and stuff like that. And there has been a huge amount of money generated between those two cities. And San Francisco is absolutely booming.

So you can see in that microcosm that the wealth effect actually does work. Now if you get outside of that peninsula, it’s a completely different story, in the grand sense. But evidently Texas is doing quite well and North Dakota is doing quite well, so I guess you have to look for areas that have a positive inflow and it’s generating this wealth effect.

But as far as an exit strategy, I don’t see how you do that. Shadowstats figured it was around $7 trillion a year in actual income, minus expenses, plus unfunded liability. So the only exit strategy for me is some sort of a currency reboot. There’s just no turning back, in our view. So given that their goal is to keep assets or get assets higher in nominal terms investors have to play along.

And the problem is the vast majority of most people’s assets are currently invested in things that generate a zero to negative real rate of return. And they don’t want to go into the stock market. And so for investors, you have to just be incredibly disciplined, and you have to keep your powder dry and then only buy things when it absolutely makes sense to you, that can create long-term potential.

And turn off the TV; don’t listen to any of these financial programs. Most of it is extremely short-term oriented, and most people have zero chance of playing along in that game.

But I do think it’s probably the best environment in 40 years for people who are going to use their head and common sense and do a little gumshoe work to find out companies that do have great long-term potential.

Chris Martenson: I want to back up one second. You mentioned a $7 trillion number from Shadowstats. I believe that you’re referring to the actual accrual based deficit for the federal government.

Bob Fitzwilson: Yes.

Chris Martenson: When you’re running deficits like that, there’s only two options do or die. The Fed has to get nominal GDP. It has to target that. Nominal GDP, according to ECRI (the Equity Institute of Business Cycle Analysis), who noted that in the past 40 years every single time we’ve had nominal GDP below 3.7%, we’ve had a recession. And that’s where we happen to be at this particular moment in time.

And they had some other indicators in there, too. One, they noted that there had been two negative quarters of operating earnings growth, and so that’s a slightly different definition than the usual earnings growth that we see. And that also had always been associated in the context of a recessionary environment. When you’re looking at macro statistics like that, is that giving you any caution here?

Bob Fitzwilson: Oh, yeah. Again, you can see the afterglow of all the money they started putting into the system in early 2009 and so the real economy is starting to flag, no question. And when we’ve got stocks at all-time highs, those stocks end. It’s just crazy. So we’ve got this terrible choice. Do you play along with the Fed targeting nominal GDP frankly, the other G20, too; it’s not just the Feds

Chris Martenson: Right, right

Bob Fitzwilson: Or do you do what’s prudent historically and stay in short-term fixed income or even laddered fixed income? The problem with that is, the more money they throw at this problem, the greater the reduction in the purchasing power of your assets. So it’s not a great set of choices, although it’s a mistake to think in too-grand terms. You need to pop the hood on the economy because somebody is always making money.

I was surprised there are plenty of companies not just airlines but a lot of industries making a lot of cash flow, again, which is what we like. And I also ran a screen on dividend payers. The quick screen was between 4-8% yield payout ratio, less than 70%, and it came up with like 130 names and it was fairly broadly diversified. A lot of different industries. So people should not be frozen. They need to be proactive and use their heads and history and common sense, and then just wait and pick things up one at a time.

Chris Martenson: lot of this rests with the idea that the Fed can control interest rates forever, or for a lot longer. If interest rates really begin to rise, obviously that’s going to take one of the legs out of this stool. First is that Bernanke has been horse-whipping everybody into the markets, whether they want to go there or not. I thought he had a completely inappropriate response at the Congressional hearing recently where he observed that the plight of the elderly retiree living on fixed income should maybe take a gander at the stock market and note the great returns there. Obviously very inappropriate advice; people who are of an age where they’re not in a position to be in the stock market are certainly in difficult times right now.

But if interest rates begin to rise, then this would clearly knock at least one of the pillars out from under the equity stool, as it were, and the second pillar might be what you mentioned, which is that the relative value of the dividends as they currently exist compared to interest-bearing instruments would also begin to suffer. If interest rates begin to rise at any point in time, that would clearly be a shift in this overall trend that you’re talking about now, wouldn’t it?

Bob Fitzwilson: Oh, yeah. I started my career in the early 1970s, and people were just devastated because interest rates marched up and because it’s an inverse relationship, bond prices just went down, down, down. And then the inflation hit, and whatever was left over was destroyed.

So probably a good resolution for this for most people, because most people are more inclined to pop the hood, is to spread it out between short-term cash instruments. And I would tend to favor Treasury bills; it’s a terrible investment but at least it’s sort of the mother ship, and think of it as a short-term holding period.

And then this is where the energy and the gold and silver come in, because if inflation is going to devastate the money that’s in cash and fixed income, at least you can hope to have an offset with those real assets. And then just try to find either a fund or an advisor or if you do it yourself things that are quality income.

If I had to pick one mistake that I’ve seen in my 40 years is people stretching for yield. I hear it from everybody I need income and yes, you do, but virtually all the scams start out with somebody promising a yield that’s higher than is common sense.

Chris Martenson: In the [PBS] series Downtown Abbey, which my wife fell for, there was one period in there where the patriarch of the house is considering this wonderful new investment opportunity he’d heard about involving Charles Ponzi over in New York City, and he was very excited by it.

Bob Fitzwilson: It’s just an emotional connection. Somebody says, I can get you 12%, and people start writing checks. And oftentimes it has to do with second deeds of trust and things like that. And so if the ten year is at two and somebody offers you 12, just run.

Chris Martenson: How about all of the things that I’ve recently written about including the idea that there are a number of headwinds now? It seems that the organic growth in the economy through the consumer is not strong. Now we have these additional headwinds, potentially, from the payroll tax-cut expiration. We have the Affordable Health Care Act, otherwise known as Obamacare, starting to trundle into the situation. We’ve got sequester and other political realities that are going to constrain federal government growth and spending at this point in time. So considering how large the government is in terms of the overall economy, now would that at least stalled and potentially going in reverse; how does that factor into your thinking right now?

Bob Fitzwilson: Oh, in a major way. Like I said, the new orders for all manufacturing, that’s just plunging. It had a huge rise once they started the 2009 QEs and all that stuff, but now it’s plunging. And everybody is talking about how good retail sales were today, but a lot of that’s gas, and that’s been heading south; unfilled orders is plunging off of a cliff. So what I wouldn’t want to communicate is that I’m not seeing the same things as you are. All I’m saying is that if you’re inclined and have the ability to do some homework, there are some things that are going to do well regardless of what we’re talking about.

But if somebody just looks at stocks in general, then they probably should pull back to the sideline. The margin debt is at a new high all these classic signs for us the bottom line is that Bernanke said that he’s going to keep doing this, and frankly it’s his only option. So you’re either forced to tag along with him or do what’s been smart throughout market history, and for most people the smart thing to do is miss a little upside but save falling into a 30 to 40% decline.

Chris Martenson: Absolutely. There’s a lot of signs of toppings, so I’m watching them carefully; I’m sure everybody is. And yet we have the Dow hitting all-new win streaks. I guess today was powered there was a little bit of a rise today; nothing too great to talk about. But there was a 1.1% increase in sales; you mention a lot of that was actually due to gasoline, and there was a little bit of rebuilding there from the auto side. And then also there was an inventory build today. There’s a couple ways, I saw that spun very positively. Businesses are bullish on their prospects, so they’re building inventory. Of course there’s a different way to spin that, which is that inventories are building because it’s not being sold. Which do you think it is?

Bob Fitzwilson: I think there’s spin everywhere. It’s hard to know we do know what’s real and what isn’t real; it’s just that for most of our lives we’ve been spun on everything. It’s just in the last few years this façade has been pulled back, and now it’s just outright spinning. And so again, for the long term people need to generate positive after-tax inflation returns, but that doesn’t mean you should be invested all the time. And unless you’re very, very focused like a laser on opportunities that you think are going to transcend this, this is a time where you need to head for the hills.

Chris Martenson: I agree. I do like the themes, though, that you’ve identified. Consider North Dakota and consider Texas to be little mini Saudi Arabias, as it were. They’re actually pulling out huge amounts of wealth out of the ground and that’s flowing principally. First, there’s some pieces of afterflow into the local economy. Just to put a number on it, the Bakken is probably this year going to hit something close to a million barrels per day if it gets on track maybe by year-end, maybe 2014 at $100 a barrel, a million barrels a day is $100,000,000.00 coming out of the ground. Now a lot of that gets shipped off out of there, but North Dakota is taking a piece of that, it’s not a very populace state. So that’s going to have an extraordinary boom effect for that economy.

Similar story for Texas. There’s actually quite a lot of wealth that comes out of the ground, and that does, of course, create true wealth effects. That is real wealth. How do you place something like that?

Bob Fitzwilson: This is a great way to look at it. Just pretend that they’re countries with an eco-system. And so in the Bakken area, my understanding is that the infrastructure still isn’t completely built up. They were having to truck the oil out; somebody is supplying all that pipe and trucking and valves and pumps and all that stuff. And so what I would look to do in essence is that money is like QE for North Dakota and for Texas, and just figure out who the beneficiaries would be.

In the case of Texas, it’s not just that they have the Eagle Ford trend, but they have all kinds of other things going for it. I think I read that they just are projecting $9 billion surplus. They’ve got all these people moving in that require services and cement and building products. And people have to get there. So how do they get there? Is it by car, by train, by moving company? So –again, for the people who are inclined to do this, there’s plenty of fertile ground to be chumming for companies that will stick out in events like this.

Chris Martenson: Let’s play a little “what-if” game. Let’s pretend for the moment that a recession hits. It doesn’t have to be particularly deep, but one does strike or is more properly actually recognized coming into these next few quarters. First question is, what happens to stocks in general under those circumstances? and secondarily, how do you think the Fed might respond?

Bob Fitzwilson: I think we’re seeing it. If we’re not in a recession, we’re heading there rapidly. Today’s gain on the Dow was five. It’s not exactly a resounding bull market move. The S&P looked like it was up 0.14%. So what they’re trying and hoping to do is to have people see these headlines about Dow hits record for X number of days, etc. But the truth is, this is almost de minimus. It’s not a bull market. As you know, volume has fallen off.

Now, taking the flip side of this, if somehow all these things that we just discussed look like they’re going to get fixed, then a humongous amount of money not in these markets. But people need to wait. There’ll be plenty of time in the future to spot a true breakout. But being up five and having anemic volume does not qualify for anything.

Chris Martenson: Oh, absolutely. So you’re seeing then that there’s signs of topping and that it might be prudent to sit and wait if somebody is more of a casual investor at this point?

Bob Fitzwilson: Yeah because – you can’t buy Netflix, you can’t buy Amazon, and I’m not trying to pick on those companies at all, but we’re witnessing an aging economic bull market and the Fed is running alongside spraying it with water to try to keep it going. So what will we see if it really starts to roll over? The Fed and the other central banks still have capability, and it would be now or never. Because if economic activity rolls over, which it is, then it’s going to be a problem not only for us, but I read that a thousand businesses a day are closing in Italy. There was a comical one, in some sense, that today the IMS came out and said that Greece was their top performing economic pick for 2016 at 3%.

So my understanding is that Europe is China’s biggest trading partner and China is mixing it up with Japan and so it’s a mess almost everywhere. And so it comes down to how big a wallet the central banks have. And when you said it’s do or die, it’s more like make do and then die for me.

Chris Martenson: Yeah.

Bob Fitzwilson: There’s no way out of this.

Chris Martenson: I follow, and that’s a different story. Of course we have to make investment decisions today, and one of the things I’d like to discuss with you, then, if we widen our view out just a little bit. I don’t follow the Dow all that closely because it’s not apples to apples. If you even said the last time Dow was in this territory was 2007, I believe there’s five completely different components in there subtract a manufacturer and install an IT company. So it’s hard to put that on equal footing. I tend to trust the S&P 500 a little more because it’s a larger weighting. Looking at the S&P 500, the last number I heard was that a little north of 40% of the total revenues of that composition come from outside of the U.S. borders.

So that could be Canada, Mexico, Europe, Japan; somewhere not inside the U.S. And so now I’m looking at the dollar here at a multi-month high at 82.92 today; it’s powering up. In the past, the stock market has been fairly sensitive to that, and for good reason. As the dollar climbs up, two things happen. Exports get to be a little bit tougher, because your products are more expensive as a U.S. company. And second, the 4X conversion as you sell in some other currency and repatriate that money after swapping it through; –that, of course, is unfavorable as your currency is rising going forward.

So when you’re looking at the global picture which you just started to allude to is not strong Japan is already in recession; Europe is in recession. Those are fairly large markets for components of the S&P. Stocks ultimately are about earnings. How do we square the circle between a rising dollar and falling global activity and what we’re seeing with future earnings projections as they’re configured for the S&P?

Bob Fitzwilson: For me, I pop the hood on the Dollar Index, and my conclusion is that the bulk of it is in western European currencies and the yen. And so my conclusion is, the Dollar Index is the sock puppet the dollar goes up, the euro goes down. But it’s just basically attention-diverting in the short term. And so if the dollar goes down, all those currencies have to go down together and we may get to that point.

But the opposing force to that is the Yuan and gold. I see it as a battle between the Western central banks and Japan against the Yuan and gold. And so we’ll just get this back-and-forth thing if and when we get some discontinuity there. But you’re right as far as at the margin goes our exports get more expensive, but you do get the sense that because of things like the Bakken and the Eagle Ford and this is just my gut and anecdotal sense but people are going to be buying less of the inconsequential things and putting their money into important things. It could be a bit of a renaissance for U.S. manufacturing. And when we’ve got huge increase in lower-cost energy, a lot of the products being demanded or starting more and more being made in the U.S., maybe the export side of it isn’t in general as important as it used to be.

Boeing used to be the largest exporter. They have a pretty strong lead in aircraft, so that will probably continue almost no matter what. This is the most extremely frustrating environment for anybody trying to figure this out. There’s so many moving parts. That’s why I say people need to step back and just say, Okay, what makes sense for me and my family? Just common sense wise, I should have some cash, I should have some gold and silver, I should have food, I should have some dividend-paying things, I should put in a garden, I should develop another skill. Those are the real things that people can do. And if you worry about all this stuff, which you and I do, it’ll drive you crazy.

Chris Martenson: So somebody should do your crazing for you, is what you’re saying, and that’s a good thing.

Bob Fitzwilson: It’s both. First of all, do the things that you can do yourself because not everybody has a portfolio. They’ve got some savings, but then if you have a portfolio the most important things is turn off your TV, and then find somebody who has a philosophy that makes sense to you. And pay no attention to track records and things like that, because what’s important is what the person is going to do with your money tomorrow, and does that make sense to you.

Chris Martenson: Absolutely. So as you look across the landscape right now, is there any possible way to control for the macro risks that might be out there? For instance, Japan is doing everything it can to toast its currency. If they succeed beyond their wildest dreams, is there any possible way to plan for that, or do we just have react if and/or when that happens?

Bob Fitzwilson: I would almost ignore it, to be honest with you. The road is littered with people who tried to make debts on currencies. And so I would focus in on, again, common-sense things. Try to find advisors with common sense, because otherwise particularly with global news and global financial programs and the Internet everybody can get wrapped up in it, and they get huge amounts of data but almost no information. And you get data overload, and then you want to just bury it in the backyard, and you can’t do that.

So if we’re worried about the market in general, going to cash, there’s nothing wrong with that. But then you have to protect yourself by having something that will do in case there’s a discontinuity or just a general erosion of purchasing power. And that’s the energy and the gold and silver.

Chris Martenson: Fantastic; I like the simplicity of that in this day where everything seems to be so confusing; fairly opaque and not open to being well-analyzed. There is a sense here that there is a little wait-and-see. We know that the Fed has pretty much dealt its hand. It’s been very transparent about what it’s going to do. It started with Bernanke’s speech in Jackson Hole way back when in 2006. And he’s pretty well played that out as as promised. And so your expectation going forward is more of the same, I would suppose, from our policy makers.

Bob Fitzwilson: It really is a fight between very powerful entities, the way I look at it on a global scale. And there are many of these entities. It’s like we’re in this calm before the storm where everybody is pushed and pulled and nobody is getting what they want. And so it’s set up for some chaotic event, and the Western central bank still has plenty of firepower. And I expect they will continue to exercise that, but when they do, from a strict inflation standpoint, every time they keep printing money. then its creating inflation. Maybe it hasn’t shown up in the statistics, but it’s happening for real people buying stuff.

So at some point there will be a resolution between the jockeying and juxtaposing of the big players on the grand stage. But for the rest of it, you don’t have to try and handicap that whole thing; you just use what history tells us, and that’s get into real assets and if gold and silver isn’t your thing, then find something that historically preserves value. But now is the time to get out, not trying to handicap it and then think you’re going to be able to react because it’s going to happen rapidly whenever this thing breaks.

Chris Martenson: When you say it’s going to happen rapidly, what are you talking about?

Bob Fitzwilson: It’s the system; throughout history, when empires and civilizations hit the skids, it’s not a linear decline, particularly when it comes to currency. So if there is a break, the people in control learned from the 1970s that rising interest rates, rising inflation, rising gold, rising unemployment, these are all things that upset the population. And so they’ve done a magnificent job of corralling all these things, but it’s a coiled spring. How long can you corral this before something pops on you?

And if one thing pops, they’re all going to pop, and so that’s how I see it resolved is that we’ll all play along. But if something really pops, then we’ll get a new currency. There’ll be a press release some Sunday night – actually, in the Venezuelan case, it was Friday night where it’s just announced, we have a new currency. And that’s why going to cash is problematic and it’s different than anything else in our life, because if you go to cash and they do this Friday or Sunday night special, you could get wiped out.

Chris Martenson: Absolutely. The two words that occur to me at this particular juncture of history are capitulation and complacency. Just about everybody I know is capitulated to the idea that the Fed has all of this in hand and that nothing is going to break, and it leads to the sense of complacency. That the Fed is really all-powerful. It’s why I enjoy talking with people such as yourself who went through the 1970s. The Fed was very powerful then, too; it clearly didn’t have everything under control, and that’s the nature of history. There were whole quiet periods where a sense of control is in existence and that feels like it’s going to perpetuate forever, but they never do. Something comes along, upsets that, and as you mentioned that coiled spring idea, we haven’t really undone any of the structural things that were there that caused this first crisis to happen.

By the way, I start this in the 1990s; it wasn’t a 2008 sub-prime crisis. The pieces were put in place a long time ago. And we’ve just traded little short, relatively survivable recessions for these entirely too-big-to-fail moments. And so when I say it’s do or die, the thing I’m holding under that is the sense that what the Fed is trying to do is prevent any downturns at all, to micromanage or macromanage all of the things that arise as a consequence of that.

It’s a little bit like a can of beans that’s been tossed in a campfire. We’re going to hope that it doesn’t blow up, but eventually it probably will, because the pressures are building is the theme I’m working with here. And I can’t quantitate all of that, unfortunately, but it certainly doesn’t feel right to me just one example at the Federal level is, they’re going in conniptions over this 2% sequester piece. And in all of that, nobody is talking about the fact that last year on an accrual basis the Federal government racked up between six and seven trillion dollars of true deficit. And that’s the real deal, so 2% in that context is meaningless. But yet the government will make it through sequester. Everybody will breathe a sigh of relief and say, see, we dodged that, so these things aren’t an issue. And of course, the bigger issue hasn’t been addressed; it’s still sitting there and it’s just cooking along. And that same set of pressures are similar to what I see cooking along in the monetary side,;$85 billion a month is pressuring the can, and who knows what will happen or when it will happen, but my sense is something will happen.

Bob Fitzwilson: The sad part for me is that most of this is imaginary the last I heard it was $220 trillion were the accrued promises that we’ve all made to each other. And it’s a form of mass insanity; everything around us is real but these promises we’ve made they sounded great over the last 40 or 50 years, but they can’t be paid. And so the can of beans is going to explode because the arithmetic tells us it has to be that way. So the question is, do you deal with it? and you would and I would probably be in the camp that you deal with it now and fix it or do you try and keep the can from exploding as long as you can and hope it happens on somebody else’s watch? I think that’s what politicians tend to do.

Chris Martenson: Absolutely. And still people have to make decisions where they’re going to put their money; no decision is a decision. So we all have to make those decisions.

We’ve been talking with Bob Fitzwilson of the Portola Group, one of the financial advisor groups that we at Peak Prosperity really admire and respect. And Bob, I personally admire and respect you and what you bring to this. So thank you very much for your time today.

Bob Fitzwilson: Thank you, Chris. I really appreciate it.

About the guest

Bob Fitzwilson

Mr. Robert Fitzwilson is the President and Director at The Portola Group, Inc. He founded the firm in 1979. Mr. Filtzwilson has invested in more than 25 companies and founded several software firms. He is a Director of SOMA Networks. Mr. Fitzwilson obtained a B.S. degree in Industrial Engineering from the Purdue University and an M.B.A. from the Stanford University.

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13 Comments

Hotrod's picture
Hotrod
Status: Bronze Member (Offline)
Joined: Apr 20 2009
Posts: 69
The Stock Market

After carefully analyzing the stock market, its origins, its history, etc.  I have decided to vote with my feet and refuse to participate in a giant confidence game.  By participating, the public simply fuels the whole corrupt machine and rewards the predator class who have access to inside information. At one time, when most companies paid dividends on real earnings it might have been justifiable to call it investing, but not anymore.  You can't even say that the market aids in price discovery, as it is a "juiced" market.

I compare being in the market to having a pet cobra.  It's kind of neat to brag about, but sooner or later you're going to get bit.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2502
Consider the lillies of the field.

Ants are in danger when elephants fight.

Make yourself a warm dry home.

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 466
great points, but few are paying attention

Thanks Chris and Bob, for another good discussion.

I can think of so many people who I would like to show this transcript to. In fact over the last year, I have forwarded many articles from this site to people I care about. I know they have read the articles, but as Chris said, there is just a tremendous amount of complacency, with few people I know actually doing anything with this new information. I often feel like I am on a small island called Reality, rubbing shoulders with a sparse population of realists - our virtual community - while cruise ship after cruise ship of complacent sheeple sail on by, waving from the railing, while wondering what the heck those folks on the little island are doing, and why they won't join the party...

I really liked the idea of a "coiled spring" describing the current situation, and that a "pop" is inevitable. Math and physics are not my strong suit, so this gives me a visual I can wrap my head around - that there are limits to the amount of pressure that can be applied. Mind you, all of this is a grand monetary experiment that has never been done before, and therefore we do not know the eventual outcome. But the idea of infinite pressure without springback of some sort just does not make sense to me. With plenty of pressure being applied from a variety of sources and places, there are only two unknowns as far as I am concerened: when the springback will occur, and how strong it will be. While I can't guess on the former, the latter will be exacerbated by the groundswell of anger that will erupt when the passengers realize the ship is not as stable as they thought it was, and the next port is not a safe harbour.

Jan

VeganD's picture
VeganD
Status: Platinum Member (Offline)
Joined: Jul 18 2008
Posts: 627
Nothing is completely safe

get a load of this. insured savings accounts in Cyprus are being "taxed"

http://www.bbc.co.uk/news/world-europe-21814325

Bailout levy

  • Depositors with under 100,000 euros deposited must pay 6.75%
  • Those with more than 100,000 in their accounts must pay 9.9%
  • Depositors will be compensated with the equivalent amount in shares in their banks
  • The levy is a one-off measure

Despite the risks of banks I am out of the market, preferring alternatives. That being said I have met Mr. Fitzwilson and found him to be a very standup guy.

However, as Scott Adams of Dilbert fame (also) says: "do not meddle in the affairs of dragons, for you are crunchy and taste good with ketchup".

Mainland Company's picture
Mainland Company
Status: Member (Offline)
Joined: Mar 30 2011
Posts: 2
Your sentiment is colorful - Arthur

Poetic grace in what you say.

Quiet conduct in righteous ways.

GrandSupercycle's picture
GrandSupercycle
Status: Member (Offline)
Joined: May 14 2011
Posts: 14
Wile E Coyote ...

SP500 monthly chart megaphone wedge [aka broadening top] warns of inevitable Wile E Coyote crash.

Weekly & monthly charts reveal an unstable uptrend that is destined for collapse.

The Wile E Coyote drop is delayed but remains a 100% certainty.

This substantial delay with much needed corrections prevented due to central bank intervention, ensures the inevitable crash will be worse.

DXY [ie USD] monthly chart continues to give bullish warnings and a substantial US dollar rally awaits.

trader618

Oliveoilguy's picture
Oliveoilguy
Status: Gold Member (Offline)
Joined: Jun 29 2012
Posts: 401
Market insanity in Cyprus

As of today the EU is getting ready to steal 9% of deposits from citizens of Cyprus. Bank runs will start immediatly. This should boost the dollar and Gold.

http://news.goldseek.com/PeterCooper/1363536256.php

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 3507
Cyprus Theivery

Oliveoilguy wrote:

As of today the EU is getting ready to steal 9% of deposits from citizens of Cyprus. Bank runs will start immediatly. This should boost the dollar and Gold.

http://news.goldseek.com/PeterCooper/1363536256.php

This is really big news.  If the Cyprus parliament does not vote yes to the IMF/Banker/Political proposal soon, this will be quite market destabilizing.  

Unfortunately, what should happen and what will happen in these heavily influenced markets can be very different things.

We're going to have to monitor the situation in the southern Eurozone very carefully over the next couple of days.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 1399
Cyprus Theivery

I agree completely, this is vastly important news, and the market reaction over time is critical to watch.  I believe policies like this will increasingly drive capital underground, at a time when the eurozone desperately needs every bit of growth it can get.

To put in place a deposit guarantee system for small depositors, and then when the bank fails, to levy a "tax" on the savings so that the ECB and the senior bondholders don't lose money is appallingly cynical.  CHS suggested this was a test run; if the citizens don't revolt, this same mechanism will be applied elsewhere.

When a bank fails, someone always pays.  The only question is whom?

R.US's picture
R.US
Status: Member (Offline)
Joined: Aug 31 2009
Posts: 9
Cyprus Theivery

May be thins not what it looks like. May be it does not even matter as Cyprus Parliament will vote. May be it just a multi-stage game.


Why here: Eurozone's tiniest economy on isolated island


Why now: Perfect timing for setting up a global run on the banks in Italy, Spain, all over Europe.


Hidden Goal: Let the Cash Wars begin..


The situation should escalate. This will be the reason to to introduce a protection from unjustified run on the banks.  Сash must be punished to protect the Euro. Few stages to be expected:

  • impose the special taxes for cash withdrawal
  • an additional taxes on any cash operation
  • complete outlaw all cash operation except deposits
Hladini's picture
Hladini
Status: Bronze Member (Offline)
Joined: Dec 28 2011
Posts: 59
Love that quote!

A very graphic image came to mind.  Yes, I am one of the ants.

Hladini's picture
Hladini
Status: Bronze Member (Offline)
Joined: Dec 28 2011
Posts: 59
Another great quote!

I got really worried when Fitzwilson talked about a rapid collapse of the currency: Monday morning wake up and we've got ourselves a new currency.  A lot of us would be crunchy toast in that event.

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1582
ants, Arthur?

Ants are also in danger when grasshoppers swarm.

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