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*Market Analysis*

The overdue Wile E. Coyote sell off is getting closer. It’s taken longer than expected to roll over because SPX / DOW etc daily, weekly AND monthly uptrends are simultaneously completing a protracted topping process. The resultant downtrend will have good momentum. Be careful folks: it will be nasty.

Transcript for Eric Janszen: We Are Witnessing the Death of the Dollar

Below is the transcript for the podcast with Eric Janszen: We Are Witnessing The Death of the Dollar.

Chris Martenson:  Hello. Welcome to another Chris Martenson.com podcast. I am, of course, your host, Chris Martenson, and today we are speaking to Eric Janszen, founder and president of iTulip. I have been a reader there for quite a while; it is a data driven economic analysis firm started as the website iTulip.com in 1998. Eric is a prolific economic and financial market analyst, and author of several notable books, including the most recent one, The Postcatastrophe Economy.

I have invited Eric to speak here today because he has made more right calls about the global economy than almost anyone I can think of or have been following in the past decade. Today we are going to discuss his "Ka-POOM" framework and what he sees next in his macroeconomic crystal ball. Welcome, Eric. I have been looking forward to speaking with you for some time now; it is great to finally have you as a guest.

Eric Janszen:  Well, it is great to be on, Chris. I guess we saw each other in Denver a couple years ago, so it is good to catch up.

Chris Martenson:  Yeah, we were at the ASPO Conference. And I know that Peak Oil is certainly a part of your framework, it is one of many pieces, and you have been sending warning signals about our macro economic predicament, if I could use that word, since you launched iTulip.com in 1998. So can you give our listeners here the background on the specific concerns that lead you to launch that site and your framework there?

Eric Janszen:  Well, Chris, at the time I was the managing director of a seed-stage venture capital firm called Osborne Capital. This is Jeff Osborn, an old friend of mine out of the technology industry, and he made a bunch of money when UUnet went public. He was the head VP of Sales and Marketing, and he started investing in startups, mostly people that he and I had known over the years in the industry. So he brought me in to sit on the boards of companies and help with the investments and so forth.

So we had what I would describe as a front-row seat into the technology bubble; we could see that something was clearly amiss. So I started to do my research that ultimately resulted in iTulip. And my real objective here was [that] we had all these investments, we invested in 20 companies and we had seven liquidity events, a couple IPOs, sales to Cisco, Microsoft, Nortel, and others. My job was to understand that we were actually participating in a bubble and to know when to get out. So my research led me to believe that it was time to get out in March of 2000, and I started writing about this on iTulip as a way to share some of the information we were getting with the public and to counter  what was coming out of the media at the time. That has really been the mission for iTulip ever since.

Chris Martenson:  Well, that new economy, of course, it is always some sort of false belief or some new adoption of a rationale that enables us to go a little further. Greenspan, of course, adopted many of those rationales, including the idea that risk could be off-loaded and potentially made to disappear. It was no longer a real structure of our financial system and mispriced money accordingly. So in that context, I guess you were just at a Fed meeting of some sort, and you have been clearly observing the Fed for a long time. Do you have any observations you can share from that meeting, and generally speaking, why you follow the Fed and what you think they are up to here?

Eric Janszen:  Well, this is a small conference, invitation-only, at the Boston Federal Reserve. It is on Atlantic Avenue in downtown, the financial district of Boston, and the title of it was "The Aftermath of the Greater Recession." The format was a bunch of academic papers presented mostly by academic economists, peer-reviewed, and then discussed with the group. So the audience is various kinds of economists from investment banks and multi-family practices and so forth to different kinds of funds, and the media of course, CNBC, and lThe Wall Street Journal, The New York Times, and all those guys were there to cover it.

Also, Bernanke gave a speech, and it was actually a very important speech. It was not particularly well covered and I will be happy to talk about that in a minute. But what was interesting about it from my perspective, having covered the cycle of asset bubbles and reflations and various kinds of distortions that we have seen in the economy for 13 years on the site, if you go to a meeting like this, it is kind of a game of make-believe; everyone is talking around the real issues. The best you can really get out of it is to show up and ask some questions and hope by asking the right questions, you start to get people focused on the right subjects.

Chris Martenson:  Are they focused entirely on just the economy, or are they looking at monetary interest rate, all these policy things? Do they have any sense yet of where oil and energy might be impinging on their world view any?

Eric Janszen:  It is not on their radar, at least not in the context of this particular conference. The conference was really about the lingering effects of the so-called Great Recession. For example, there was one paper on the long-term effects of consumer attitudes towards the housing market. It was a very academic analysis, extremely rigorous from a data standpoint, but somehow or other they managed to miss any correlation between the fact that we have massive negative equity in the housing market and the fact that people do not want to buy houses. Also of course, unemployment, which is one of the main drivers of housing prices and drives home sales.

So you have these extremely academic papers very rigorously done that are not really getting to the point of the problem. Simon Johnson was there -- he, of course, was his usual highly confrontational self -- and I asked him a couple questions and he was very forthright in his answers. I did meet Bernanke in passing, I shook his hand on the way out the door, but I did not get to ask him any questions because for some reason at this particular speech, he did not take questions, which I was told was quite unusual.

Chris Martenson:  So let us talk about the Ka-Poom Theory for a while, because this was really your larger framework, and you have held this framework for quite a while. Maybe you can date it for us when you first developed and got it out there, if that was right at the inception I would love to know that. But the Ka-Poom Theory is a way of understanding the macro cycles. If you could explain that for our listeners, I think that would be a real help, because I have a bunch of questions I would like to build off that framework as we try and peer into the future and address what might happen next.

Eric Janszen:  Well what the Ka-Poom Theory intends to do is understand how all the debt built up during the era of the credit bubble. It began in the early 1980’s and accelerated starting around 1995. How it eventually gets resolved in an environment where politically writing down debt is not likely to happen and that ultimately the way that debt is written down is to the exchange rate mechanisms where markets discount the dollar. We could have a sudden dislocation in capital flows commonly known as a "sudden stop" that would apply to the United States. This is an idea that I thought was one way of looking at how this could all turn out that I first developed that back in 1999. Since then I have changed it a couple times, I would describe it as phase shifting it forward, moderating it somewhat. And I think what I have learned from the last two times that we have begun a sudden-stop process and it has been reversed is that we have a system which is difficult to predict in terms of its resiliency. There are trade partners extremely committed to maintaining the system as it is. On the other hand, they have been actively hedging their investment in the system by buying gold, as well, since about 2001.

Chris Martenson:  Right, so in the Ka-Poom Theory, we have an enormous credit run-up eventually that has to give way at some point, It did in 2008 in a fairly spectacular fashion, and then you have the inevitable downward portion of that cycle where we see deflation, deflationary impacts. Certainly, we see that in housing right now, if we look at total credit market debt there is little blips there but it is really the financial credit that has taken a big hit. We have the Fed doing everything it can intervening, we have got trade partners helping. Still, in this Ka-Poom Theory, are we on the downward slope of that deflationary impulse that proceeds what you describe as the reflationary or massive or maybe even hyper inflationary wave that would follow?

Eric Janszen:  Well, Chris, the most important thing to understand to forecast what is going to occur in our political economy is that we have effectively two economies, not one. We have one economy that is called a Buyer Economy, which is oriented around the finance, insurance, and real estate industries, and then a second one that is oriented around productive industries.

And the reason that it is important to keep them separated in your mind is because from a monetary policy standpoint they are treated quite differently. From a monetary standpoint asset, asset price inflation is good, the wage and commodity inflation is bad. And so if you watch for example what the Fed is doing in response to deflationary forces, both in asset prices and in commodity prices, there are two different approaches, right? So Operation Twist is an effort directly to drive down mortgage prices, which is really, if you think about it, a form of price fixing. They are trying to create scarcity, and therefore drive up mortgage prices, and therefore yields down.

This is a direct attempt to try to affect a change in asset prices, in this case the collateral, which is homes of all the outstanding mortgage debt. So they are trying to prevent asset price deflation within the fire economy, and at the same time they are trying to raise inflation in the wage and commodities prices, and the way that is done is through exchange rates. It is not the explicit policy, but it is clearly the apparent policy, which has more recently been dubbed the "weak dollar policy." But the idea is if you can depreciate your currency through fiscal policy and through monetary policy. What tends to happen, particularly through energy prices, you can affect a change in the overall price level throughout the economy, and that’s what been done. So we effectively depreciated the dollar against oil starting in about Q2 2009, and that effectively halted a very brief period of deflation that we had.

Chris Martenson:  So what we are talking about here is a very interventionist Fed that feels like it has the right capability, or maybe the obligation, to then have one hand on the asset lever and one hand on the wage and commodity lever, and then they are going to affect the proper outcome. Is there in your mind any historical precedent to suggest that such a command-and-control approach is a useful approach or workable approach or has a good chance of long-term success? Where you do fall in that whole free-market versus these-things-need-to-be-managed spectrum?

Eric Janszen:  Well, a couple answers to that. Back in 2005 when I was doing my first forecast of how I thought the housing bubble would turn out, I had two forecasts, ten years and fifteen years to revert to the main. Ten years if there was a limited government intervention and the market was able to quickly correct and then come back, and much longer and more painful if it did get involved. I thought government interference in the correction was more likely, because from a political standpoint, the risks to the banking system under the current structure would have been too high, there is far too much concentration in our banking system to allow a “Natural” decline, the so called too-big-to-fail problem.

So you have to remember that Bernanke was the guy that inherited the mess from the Greenspan Fed, and it was really under Greenspan that we had these cycles of asset price inflation that were positioned and postured as free market phenomenon, when in fact they were simply, for the lack of a better term, rackets which were designed to shift risk fundamentally from Wall Street to the taxpayer. Now the way that Bernanke has had to respond to this, my view is that he was handpicked as the right guy to come in after Greenspan because Bernanke, you know, since he was relatively young and an undergrad at Princeton and was writing papers about the Great Depression and what went wrong and how to prevent deflation. So from my perspective he was picked specifically for his background and his interest in doing precisely what he did do, quite predictably, in response to the deflation that resulted from all the credit inflation that precede it.

Chris Martenson:  Yeah, you know, I have always known that we were going to go down this printing road, and I knew that as soon as I read Bernanke’s 2006 Jackson Hole paper, which, I think, was really his application essay for the job. He very clearly laid it out, and it, of course, has been quoted widely and famously, and this is where he gets the helicopter moniker and all that. I am just the kind of person that says look, if somebody says they are going to do something and then they actually do it, there is no real mystery as to what just happened there. I know people are still on the side of the view saying that deflation is still the more powerful force; it is going to overwhelm the ability for the Fed to respond. Bernanke can have his magic printing press all he wants, but the forces here are just too large, too structural, and too embedded. Perhaps something like we see going on in Europe; it is just too big for the system. So you call it a political economy, thinking of the Fed maybe as part of that, or if you want to parse that out further, feel free, but how do you fall on that spectrum? Do you believe deflation, the markets, etc., are larger than the Fed at all, or do they have a number of tricks up their sleeve yet? In fact, can they continue this game for a lot longer?

Eric Janszen:  Well, Chris, I have been hearing this argument from the deflationists since 1998 when I first started iTulip. I remember the first time was we had this big stock market bubble, and I was debating various economics analysts on the likely outcome event. And many of them thought that when the bubble finally collapsed we would have a deflationary depression like we had in the 1930s, the stock market bubble would crash like the stock market of 1929, and so forth.

I tried to explain to them that we, not being on the gold standard, that there was nothing limiting the ability of the Fed to expand its balance sheet to do two things. One to provide liquidity and also assume to take bad assets out of the market and put it on its own. Since most people did not understand that is how the Fed operates now and the situations are different, I understand why they would be confused. And then what I heard back in 2006 when I reopened iTulip was the same argument all over again, but this time, Eric, it is going to involve the whole banking system, the entire structure of credit. There are just too many trillions of dollars, and the Fed can’t possibly back it up.

I said, well, when you look at the Fed’s balance sheet a couple of years from now, you are going to see trillions of dollars of mortgaged back securities and all sorts of other stuff on it, because that is what they said they were going to do. So the answer is, it is a little bit like arguing with somebody over and over again about whether the world is round or flat and you go around the world a couple times and they still do not understand what that means. It means that the world is not flat.

Chris Martenson:  Right, you know, I do not know what the limit is to the Fed balance sheet. If you sat me down five years ago and said we are going to have the Fed balance sheet at 2.8 trillion, I would have said what, no way, but here we are. So could it go to five, or seven, or ten, sure; I cannot think of a technical reason why it cannot. Maybe a political reason, maybe a geo-political reason, so as I look at what the Fed is really up to here, though, maybe you could clear up one mystery for me. So Bloomberg does a big foia thing and pries out of the Fed the fact that they had either directly or through guarantees backstopped an ungodly amount of trillions and trillions of dollars in both domestic and foreign firms both official and private. My question to you is do you have any insight into why it is a lot of those guarantees never showed up in any of the statements I read? They did not show up in the Fed balance sheet in any way; are those extra off balance sheet things? Do they not count guarantees in sort of an accounting standard? Do you have any idea as to what we are looking at on the Fed balance sheet is truly a good measure of what they are on the hook for, or they any way guaranteed?

Eric Janszen:  Well, this is one of the other challenges in talking to economists about our modern economy, because we have a finance-based economy, and most universities have economics departments, and the finance is taught over in the business school. So most economists do not really understand enough about finances to understand how our economy really works.

So when they are confronted with this question of deflation and who is holding the bag, if you actually take a careful look at the Fed's balance sheet, the Fed -- unlike any other kind of bank -- can do magical things. For example, it can take what is a liability for a commercial bank and put it on its balance sheets simultaneously as an asset and a liability that cancels out to zero. So, for example, we will take a few hundred billion dollars in assets backed securities, put it in a Maiden Lane Fund (or whatever those funds are called) as an asset, and simultaneously on the ledger as actually a deposit is technically how it is listed. Before the crisis, the net holdings of the Federal Reserve were something like 35 billion, and after they took on a couple trillion dollars of bad assets, it is still 35 billion dollars. So it is much like some people, it is kind of magical, but in theory, as Greenspan said many years ago, the Fed can in theory expand its balance sheet infinitely. The unique characteristic of the way Central Bank operates is different from the commercial bank.

Chris Martenson:  Oh, that really clears up a mystery for me. So unless we had access to some sort of audit access or records access, we do not really know. I think the Bloomberg data, when I started poring through it, really opened up my eyes to exactly that dynamic that you just explained. So thank you for clearing that up.

So here we have the Fed, the ECB, Bank of Japan, also Bank of England, oh, let's not forget the Swiss National Bank, and probably some others I have forgotten to list, all basically printing at this point in various ways, or we can call it providing liquidity, but let's be fair. There is as much being created out of thin air, in many cases here, to manage all kinds of things, exchange rate risk, and dynamics, to buy up bad assets, to push liquidity back into the system, to recapitalize banks, whatever.

So all the way back from the time I first was aware of your work, you had been a pretty big proponent of gold, and I think you were there right at the second when the market was the beginning of the previous decade. Talk to us about the connection you see between monetary policy now in gold, if any for you, and as well you also talked about rising gold prices as probably going to have several distinct phases. Which phase are we in now?

Eric Janszen:  So, Chris, my thesis in waiting 20 years, I started watching gold back in the mid 1980’s and was very much a stock market bull for most of my career in the high technology industry from the late 1980’s until the early 2000’s. So it was not until 2001 that I finally made a decision to take a 15% position in gold; it was at the same time that we had sold our stock from our equity positions and technology companies and bought Treasury bonds in late 2000, and that wound up being the portfolio was gold and Treasury bonds and has been ever since. The theory behind it is that the system, a global monetary system, was very US-centric, was really designed back in a time when the United States was about 54 - 58% of the global economy. As of now, it is about 18%, so we have this US-centered monetary system attached to a much more broadly based economy.

So here we have this mismatch between the monetary system and actual structure of the economy, and here we also have the United States behaving with these asset bubbles in a way that is not consistent with the country that is the issuer of the world’s reserve currency. To qualify for that position, you have to really stand well above other countries in the world in terms of transparency and other factors that prove the legitimacy of that position, and I saw that beginning to erode back during the period of the stock market bubble and then accelerate during the housing bubble.

There was no Plan B in the global monetary system when it switched over to the US dollar reserve basis for global monetary reserves. The only fallback is gold, gold is the only reserve asset that central banks hold other than dollars, and to some extent euros, but it is mostly gold. So gold is the fallback. So what I thought was going to happen is that over time, gradually, that there would be an increase at some point in gold holdings by central banks as they hedged the marginal increase and the number of Treasury bonds that they needed to hold as a result of conducting trade with the US and also simply maintaining the US economy through low interest rates and providing sufficient investment to continue to offer the US government.

So what is very interesting to me is [that] starting in the second quarter of 2009, right after the financial crisis, is when global central banks became net buyers of gold, which to me indicated that they had as a group, determined that it was time to more seriously hedge their dollar assets, even as they continue to buy Treasury bonds to increase their hedging.

Before that, there were effectively two teams: There were the buyers, who were countries like India and Russia and China, and the sellers, which are most of your European countries. And that structure of the gold market occurred and was maintained until the second quarter of 2009, and it shifted to a much broader base increase in the number of governments participating in the gold market, including Saudi Arabia, Mexico, and other allies of the United States.

Chris Martenson:  Right, so we have the United States here operating the reserve currency, doing it poorly at some point. Because another piece I would like to toss in here is the current account deficit driven by the trade deficits, primarily, which really started to the downside in the early 1990’s right around 1990-1991 and then just never looked back. With that, I also combined the fiscal deficit, which together current account plus fiscal deficit is a pretty whopping funding bill that needs to be supported and is half supported at this point by foreign official buyers and foreign central banks.

As we look into that, we see this thing called the custody account of the Fed, which is one main repository for some of those reserve Treasury holdings and also agency debt, and it is just a whopper. I mean, Eric, when I look at that account, what I see is it is not driven by the response of the crisis in 2008. In fact, you can start in 2002, put a ruler under that current account and just draw a line about 45 degree line up to about a little over 15% annual compounded accumulation in that. What was driving that -- and again, it is not in my mind linked to the crisis we’re in, because you cannot see any wiggle in the trajectory in 2008 or 2009 or 2007; there is no bump in it, it is just a ruler shot from 2002.

Are you saying that that was primarily driven by this, lets call it international global vendor financing, is that the mean dynamic behind that, or is there something else here?

Eric Janszen: Well, Chris, I think there are a number of theories to explain. Well, two things, the growth rate and the consistency of it. If you look at net capital inflows to the US, they grow when the US economy is growing, and the composition of those changes over time between official and private investors. But what is really important is that the growth rate overall be generally maintained in order to ensure markets that there is sufficient inflows to fund US economic activity.

It is probably not particularily well known, but back in 2003 when we had our earlier crisis, there was a point where 70% of the US government operations was being funded by foreign purchases of US debt. So the way the country operates is there are certain times when counting largely on domestic purchases, other times on foreign purchases but fundamentally we are kind of all in it together and this is the way the system works. The Chinese are not all that happy about having all the US Treasury bonds they have, but they know perfectly well what would happen if they were not buyers. On the other hand, they are behaving as if, okay, well, we will buy them, because you know we have to, to maintain the system, but we are going to buy more gold to hedge the risk that investment in US Treasury bonds represents.

Chris Martenson:  All right, so I wanted to cover that territory just a little bit, because if there are two places that a foreign official buyer or central bank is going to stash their money, one is in Treasuries and obligations like that to maintain the system, preserve the status quo. The other being the gold holdings, and so you saw that secular shift away from being net disorders of gold to net accumulators of gold, it is a fairly recent shift, historically speaking, to become accumulators again. Does that change where you think we are in terms of the phase of gold prices at this point? Do you see a sharper trajectory now as the world monetary system experiences the slings and arrows of the fortune here, of certain difficulties, or do you think we are still in a phase of steady rising prices if even that?

Eric Janszen:  Well, that is an interesting question, indeed. It has gone through a number of phases. When I first got into it in 2001, gold was widely derided as a terrible investment and had been going down in price for over 20 years. If you open the Wall Street Journal, you would have to dig around to find any price, never mind a mention of it, and it did not really become a topic of news until quite a few years later. But the fact is it has been going up in price every single year, year after year, for ten years, and in fact, the rise has been so consistent that it has, with respect to almost anything else, particularly stocks, has been much less volatile and more consistent with its rise.

So this is to me indicative of this overall trend which is, I would describe it as, a dissolution of the US Treasury dollar-based monetary system. And that process of dissolution is going through various stages, the most recent one being global central banks becoming net buyers, and you probably saw a recent jump in prices the last couple of days. You can be pretty sure that what is going on in Europe right now is driving some additional sales. I think it is important to understand also that what you can read about who is buying and who has what by looking at the bank for international settlements reports is somewhat limited. I am aware of individuals that as families that are buying very large quantities of gold, in the order of tens of tons, that are not going reported there.

Chris Martenson:  Well. it does not take very many families accumulating tens of tons to distort a market that is actually fairly tight when you look at the total gold market. I know a lot of dollar value of it flips every day, but in terms of the physical market, I have seen some work by Eric Sprott that really details what the physical market actually does, and it is a lot tighter than many sort of suspect the paper markets that give us some churn in the appearance of liquidity. But it is not a very big market. Lets put it that way, compared to the dollar flows that are available to siphon and funnel into one market or the other.

Okay. so I want to ask, so let's talk about for a second, does Peak Oil, I know Peak Oil factors into you macro view a little bit, but if you could just tell us how Peak Oil, maybe peak other natural resources, how do these play in? We have got Jeremy Grantham recently I think really going off the reservation in terms of his investing style to really put his mark down and say look, there is a big looming story here, and he calls it a paradigm shift. I am certainly in that camp of thinking that anybody that has got a, say, an endowment or a pension timeframe to their thinking certainly has to be considering this story, and I argue everybody should because we are there, that is my view. What are you views on this and how do you weave this into your macro view?

Eric Janszen:  Well, I met Jeremy Grantham, and he is obviously very wise and experienced veteran of the industry and has made some very good calls, particularly around the time when I was talking about the technology bubble -- he was, as well, and quite clearly and rigorously. He has also started to build what I call Peak Cheap Oil into his models. It is a term that we adopted back in 2007 to try to distinguish between the overall physical fact of a reduction in the total amount of oil endowment and its impact on prices and on the macro economy.

So the fact is that there is a lot of oil out there still, and when I was writing my book The Post Catastrophe Economy, and I was interviewing people like Joe Petrowski who is the CEO of Gulf Oil and others to try to understand the industry perspective on this process. It became pretty clear that we have gotten in a relatively short period of time, really the last 40 or 50 years, from all that was relatively inexpensively extracted with relatively primitive technology to oil that is increasingly more expensive to extract and produce with extremely sophisticated technology. So I think to understand how wildly sophisticated technology is these days for oil production, you have to look at what is actually done, that the big shift that improved oil production over the last ten years has been in computers.

So we had a lot of data about where the oil was, but not a lot of computing power to crunch the data to determine exactly where the most likely sources are that can be economically extracted. And he used to take a bunch of Cray computers and now just takes a couple workstations. So the good news is we know where the oil is; the bad news is we know where the oil is. Meaning that it is very unlikely to be any large quantities that have not already been located and the economics of their extraction been determined.

Chris Martenson:  And not just the dollar economics, but the energy economics as well, and clearly we are pouring a lot more energy in to get slightly less back out and increasingly less. And of course we run our economy on the net of those activities, whatever the price may be. It certainly is a view that I think anybody who has been solely focused in just the economics sphere really needs to start paying attention to it. It is one of my chief complaints, such as they are, around how the Fed operates. I am not aware that they have anybody with such a view anywhere in their stable of advisors, let alone voting members.

Eric Janszen:  Chris, let me interject. I am not entirely sure that is true. I think that at the moment they have bigger fish to fry; in their view it is a longer-term issue. But I do happen to know that they are thinking about how central bank policy can operate in an environment of persistently rising energy prices because that implies a long-term trend to increased cost-push inflation. And how do you manage monetary policy when input prices to production are continuously rising, which is acting as a tax on consumers? And at the same time, producers are unable to pass on those costs. So generally speaking it is going to be slowing the economy, so I think it presents challenges that they are thinking about, but within the framework of the way our current global central banking system works there really is not an answer.

Chris Martenson:  Right, so it is a very narrow way that they are addressing it, looking at the cost-push components and trying to understand the monetary aspects of that and other pieces. But if you take this other view and we step in from the side and say it is actually about the net energy, it is energy return on energy invested, and we have this central banking superstructure that requires this expansion for whatever reason because of how it is set up, debt-based money, and hey, we need exponential expansion of money and debt. We have a conflict there, so I just am always intrigued when I see who is really paying attention to this, and I see militaries around the world paying attention to this, so they are doing it.

Eric Janszen:  Yes.

Chris Martenson:  So I work with corporations that absolutely have their eye on the ball and are aware of it, do not know what to do with it yet, but certainly are starting to chew on it. So let me differentiate. So I do to know that our government is unaware of it. I would say the institutional career branch, there are people in there that get it; it is the elected portion that I am not quite as clear about at this point in time, and that goes for the Fed as well, at this stage.

Eric Janszen:  I think the explanation of that is just the career timeframes from the standpoint of politicians; it is something that is going to happen later. It is not like the foreclosure crisis, which is an immediate election-impacting issue. And today it looks like oil prices are as much driven by in dollar value is by demand and supply, so there is room for some debate, and if there is room for debate there are ways to avoid it.

Chris Martenson:  Yeah, I agree there are all sorts of reasons to understand the lack of response, and the political angle is an important one here. You have been increasingly vocal. I have noticed that our leaders really wasted the wake up call in 2008. Are there any steps in your mind that we really could take at this point to get the ship back on the right course?

Eric Janszen:  Well, Chris, my warning in my book was that we are going to have a relatively short period of time to get back on the right track starting in the second or third quarter of 2009. We needed to take fairly precipitous actions to get an annual growth rate up to about 4% GBP a year in order to get out of the output gap that was created by the recession. We have managed just north of 2%, so at this rate we will simply never get out of that, and what that means is that the long-term unemployment problem that we have will just get longer and bigger over time. That has political repercussions, as we can see from the Occupy Wall Street movement. And the knock-on effects of that, over time, are very counterproductive and unconstructive policy decisions that simply will pile one bad decision on top another.

Chris Martenson:  So if you are a concerned individual or corporation and you are looking at this framework right now, what steps can individuals, corporations take at this point to insulate themselves from these trends that we just have been talking about?

Eric Janszen:  Well, it depends on the industry, I talked to everything from insurance companies to commercial real estate firms to a lot of technology companies, of course, because that is the industry that I have come out of. It really depends on the industry, for if you are in the energy industry, of course, it is a boon. And I was writing articles back in 2008 when people were asking me, what should I go into to avoid this crash I see coming, and say go and move to Idaho, move to Texas, Oklahoma, places where there are going to be a lot of jobs still. Because despite the recession energy prices are going to remain high.

But aside from the energy sector and also the agricultural sector, which are clearly areas that are going to continue to improve despite of the impact of Peak Cheap Oil and of debt deflation, there are some industries, which I think are going to continue to suffer for the foreseeable future, including residential real estate. I do not see any end in sight for a decline in that industry. I will give you a specific, there was one of the presentations at the Federal Reserve last week by a very thoughtful economist who had a really good plan, I thought, for reprivatizing Sallie and Freddie getting them from being nationalized banks to fully private banks over basically a four-step process, so it might take five or ten years, something like that.

It all seemed very reasonable, except for one small problem: It implies that the mortgages in the secondary market would eventually have to reflect actual default risk, which today would probably put a mortgage around 9% or 10% in the secondary market, and I have friends out on the west coast still lending hard-money mortgages at about 9%. So the question is, how politically is Congress going to be able to push through these plans, reprivatizing Fannie and Freddie as mortgage rates go from 3%, to 6%, to 8%, to 10% or whatever they do, and the housing market goes down and down. Are the real estate lobbyists going to sit around and just watch this happen?

And the answer I got was not; they probably will not. So this is a perfect framework for the problems that we have today, which is we have a bunch of special interests, which likely produced a lot of the problems we have, who are not getting out of the way to allow us to implement policies that are going to address these problems.

Chris Martenson:  And for the concerned individual who has a portfolio, are you still advising gold as a portion of that, does Treasuries still make sense? Do you have advice there, or is that the kind of thing you provide?

Eric Janszen:  Well, you know, we are one with gold since 2001 for the duration, meaning until the end of the current monetary regime. I do not see how this particular regime will last forever, but you never know how much longer it could be maintained. But throughout that process I see gold prices going up back to 2001. My best estimate was somewhere between $2500 and $5000, which sounded kind of crazy back when it was at $270, a little less crazy today.

But in terms of Treasury bonds, it is a lot more tricky, that is one of those situations where you would expect Treasury bonds should decline in price, yields should rise, but Treasury bonds do not behave in assured fashion when they are the reserve asset issued by the world and where everyone is dependent on the stability of that system. So we always strongly advise anybody against shorting them; that is extremely dangerous. And also we are continuing to hold our Treasury bond positions but are gradually diversifying into other things such as funds that take advantage of rising rents and energy prices.

Chris Martenson:  Excellent. Okay, great advice; we are going to have to wrap here. We have been talking with Eric Janszen, Founder and President of iTulip Inc., and of course operator of iTulip.com, a great website. You should check it out if you have not. Lots of excellent advice there, as well as his subscription service, well worth the money. And author as well of The Postcatastrophe Economy. I hope that does well. Eric, it has been a real pleasure talking with you today.

Eric Janszen:  Glad to be here. Thanks, Chris.

Chris Martenson:  All right, have a good day.

Eric Janszen:  Okay, take care. Goodbye.

Chris Martenson:  Bye.

Eric Janszen is founder and president of iTulip.com. Eric is a prolific economic and financial market analyst, and author of several notable books, including his most recent one, The Postcatastrophe Economy.


Our series of podcast interviews with notable minds includes:


Transcript for David Stockman: Blame The Fed!

Below is the transcript for the podcast with David Stockman: Blame the Fed!

Chris Martenson:  Welcome to another PeakProsperity.com podcast. I am your host, of course, Chris Martenson. And today, we are speaking with a particularly interesting guest, Mr. David Stockman -- economic policy maker, politician, financier. Mr. Stockman represented Southern Michigan in the US House of Representatives from 1976 to 1981, later served as the Director of the Office of Management and Budget, the OMB in the Reagan administration, and was the youngest cabinet member of the twentieth century. Since then, he’s held executive positions in many of the most influential banking, buyout, and private equity firms, including the Blackstone Group and Solomon Brothers. He has many other accomplishments too numerous to list here. Welcome, David. It’s an honor to have you as our guest today.

David Stockman:  Very happy to be with you.

Chris Martenson:  Well, great. Let’s start with where we currently are as a nation. Although the US is arguably in the same fiscal and economic pickle as much of Europe, Japan, other developed countries. So, perhaps, let’s just leave open in our minds the possibility that the US is a component of a larger structural problem. With that said, for the past several years, you’ve been publicly making the case there are no easy fixes here, no monetary adjustments or fiscal tweaks that can save the day. So what are the structural conditions you see that lead to these conclusions? How did we get here?

David Stockman:  Well, I think we had a thirty-year debt spree that is unparalleled in modern history or recorded history. In 1980, our total debt- (public and private) -to-GDP-ratio was about 1.6 times. That had been sustained, more or less, for the last hundred years. It was kind of the golden constant, if you want to use that term. Today, our debt to GDP ratio is 3.6 times. There’s two turns more of debt on the national economy.

We effectively had, over the last thirty years, a national LBO - a leverage buyout of the whole economy. And this is important if you look at the difference between our historic leverage ratio, which seemed to be compatible with a stable and usually growing economy, notwithstanding periods, obviously, of boom and bust. But at 1.6 times, we would have about twenty-two trillion of debt (public and private) on the US economy today. We actually have fifty-two [trillion] at 3.6 times. So the extra two turns have put on the economy -- households, business, government, we can go through the different sectors -- roughly thirty trillion in debt that’s being lugged around by the US economy as it struggles to stay even, to say nothing of recovery today. And until that massive over-leveraging is worked down and reduced and liquidated, which will take years and years in a painful process, we’re not going to get back on track as an economy.

Chris Martenson:  So if we could summarize, it was simply too much debt, here we are after -- I started tracking this from the fifties -- it really sort of started. But it took off, as I noted in the charts, around 1970. And so if we look at the decades from ’70 to ’80 to ’90 to 2000, 2010, we look across those decades, we can see that debt was growing far faster than GDP -- the total credit market debt you’re referring too -- far faster than GDP, and that, just, you can build a very simple spreadsheet that proves that model is not sustainable, yet we’re trying to sustain it, I think, in official actions and monetary actions, stimulus, all of this.

David Stockman:  I would like to comment on that, because I think that is dead on, and it’s exactly the point I’ve tried to make many times. If you go back to the 1970s before this leverage ratio took off, before the real national LBO got going, if you had dollar GDP expansion, it tends to be accompanied by about a dollar-fifty of debt, so the ratio stayed about the same. By the time we got to the late ‘90s, we were adding two and a half to three dollars of debt for every dollar of GDP. And we reached the peak of all this in 2007, during which we increased credit market debt by four trillion and GDP by about seven hundred million. So we were pushing six dollars of debt into the economy, nearly, for every dollar of GDP that was coming out the other end. That was the end point. That’s when the system buckled; that’s when the music stopped.

Obviously, we had the huge crisis the next year, and the meltdown, and so forth. Now, since then, we’ve been treading water. Basically, private debt has been liquidated to some degree; the shadow banking debt has been massively liquidated. But it’s been replaced by public debt. And so we have gained no ground whatsoever in terms of the total debt burden on the economy. We’ve just shifted it. And so now the crisis is moving from too much leverage on the household sector and in the shadow banking system in 2007, 2008 to the sovereign debt crisis that we have in 2011 and for many years to come. Because that’s really the end game. I would say one way to describe all this is that we’re nearing, if not at, the Keynesian end game.

Chris Martenson:  The Keynesian end game. So where we came through a period where we put on four trillion of debt [and] got seven hundred billion of economic activity for our troubles. Here we are, we’re pumping money in like crazy, we’re stimulating like crazy. I think a position I happen to share with you is that I’m not a fan of either monetary or fiscal stimulus, the tools we seem to be enamored with to try and get out of this mess. What’s wrong with a little stimulus in a time of need, and what is the Keynesian end game?

David Stockman:  Well, stimulus, it’s very well demonstrated right now that there’s no multiplier effect, there is no pump priming going on. Stimulus is simply borrowing from next year or next decade or next generation through the credit of the United States; some money to hand out, like this ridiculous holiday on the payroll tax. So people spend for twelve months and then you’re back to where you started. And this makes no sense whatsoever. And the idea that now is being pushed by the White House is just symptomatic of how far our thinking has gone off into the ditch here. They’re proposing, even though Social Security is bleeding and last year we had seventy billion more -- and by that I mean the fiscal year that just ended in September -- seventy billion more went out the door for Social Security checks than came in in the payroll tax.

Notwithstanding that, Obama wants to have a one-year holiday to reduce three out of the six points that the people pay in the payroll tax so that they what...? Can go out and buy some more Happy Meals that they don’t need or some Coach bags that they can’t afford. Because one year later, they’re going to be right back paying the higher rate. This makes no sense. It is really primitive Keynesian thinking that says all we have to do is drop money from a helicopter and that’ll pump up spending and then that’ll get the machinery of the economy going. The problem with that view is it ignores the fact there’s a balance sheet, as well as an income statement, in the economy. And if you get to the edge of your balance sheet, if you use up the credit, so to speak, or the credit card, then additional stimulus only buries you deeper and it does move the economy forward.

Chris Martenson:  Well, the federal government, of course, is expanding its balance sheet like mad. And I think the Federal Reserve is enabling that. It certainly did with QE2 and indirectly, with QE1 - buying all that MBS paper - where was all that money going to go?

David Stockman:  Right.

Chris Martenson:  It’s going into Treasuries, obviously, in part. And so here with Operation Twist, they’re just enabling the federal government to take advantage of some long borrowing at that, what I consider to be, abnormal, grotesquely distorted rates that do not really seem to take the risk into account in the pricing. So we’ve got the federal government really blowing its balance sheet out at this point in time. How does that story end, in your mind?

David Stockman:  Well, it ends badly. But I think we have to go right to the source. You’ve hit on it. It is the Federal Reserve and it’s the current leadership of the Federal Reserve. As far as I’m concerned, Bernanke is the monetary Darth Vader. He has destroyed the bond market. Because fundamentally, in a healthy capitalist system, the interest rate in the money market and in the longer-term capital market is the price of money and the price of capital. And if the pricing system isn’t working, if it’s been totally crushed, disabled, manipulated, rigged, medicated, everything that the Fed has done with QE1, QE2, zero interest rates, Operation Twist, all the rest of this insanity, then we’ve destroyed the ability of the capital market to function and we’re giving false signals in every direction. One, we’re saying you can count on the fact that overnight money is going to be free or close to zero through 2013. That is an open invitation to speculators to put on a carry trade, because the Fed isn’t going to surprise you with your ninety-eight cents on the dollar that you’re carrying the trade with, borrowing overnight, so that you can carry a two- or three- or four-percent return asset, or speculate in currencies or all of the other so called risk assets, and pocket the ARB. Now, this is really crazy.

It is totally undermining the healthy function of a capitalist economy. Now, beyond that -- and here’s where I get to the fiscal issue -- it’s hard enough for politicians to face the music, to dispense bad news, to make hard choices, allocate pain to constituencies whether it’s spending cut or tax increase. But when the Fed destroys the bond market, which is the benchmark for the whole capital market, and tells the Congress that you can borrow money for two years at eighteen basis points, which is -- as far as Washington’s concerned -- that’s a rounding error. It’s the same as free. Or you can borrow five-year money, which you can right now -- I’m looking at the screen -- at .78, at less than one point. When you’re giving that kind of signal, then there is no incentive, there’s no motivation for people to walk the plank and face down this monster of a fiscal deficit and imbalance that we have.

So the Fed has been the great enabler. The many, many costs to this policy that we’ve had -- and we could talk about those -- but one of them that is not remarked upon enough is that it has destroyed the government bond market and therefore, undermined the fiscal governance process in this country, because Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are.

Chris Martenson:  Absolutely. I see it that way, as well. There’s two things that I think Bernanke was really doing in his policies. One was, as you mentioned, enabling, I believe, a false sense of security on the spending side because after all, if money is free it’s really not a big problem here. Look, our interest costs are dropping. On the other side, I think what he was really doing was helping to recapitalize banks. You give them free money and let them park it back with you and give them a quarter point on it, and I know it’s not a lot, but that was part of it, buying their assets off of them at par or something close to par, not market rates, I’m going to suggest here. That’s helping to recapitalize the banks. So guess what? He helped recapitalize bank balance sheets for the bad decisions they’d made so we got the whole moral hazard story looming there.

On the other side, what he’s done is he’s taken everybody who was prudent, everybody who was a saver, everybody who is on a fixed income or is relying on some sort of an income stream, and forced them to live at negative real rates of return for a number of years, and it looks like he’s set to continue that program. I think there’s social costs here for his actions that go well beyond just the financial world. I think, from where I look, I see real damage happening to what I’m going to call the prudent portions of our society. How do you see it?

David Stockman:  I agree with that a hundred percent. You know, the banking system has been saved on the back of the savers of the United States. We have totally destroyed any incentive for thrift, for deferred gratification. The Fed has become more Keynesian than Keynes. And to think that a Republican White House appointed this Bernanke guy who had, you know, he was recorded everywhere at that point as talking about dropping money out of helicopters. There was no doubt he was an out-and-out Keynesian. They appoint him, and here is what we get. Now, the fact is, if you were going to bail out the banking system with this kind of transfer -- I calculate it at three or four hundred billion a year -- the suppression of interest rates on depositors, on the seven trillion or so of deposit base that we have, is at least three or four hundred billion a year. And that’s the same thing as taxing the public by three or four hundred billion and redistributing it to banks based on the distribution of their deposit base.

That wouldn’t get one vote. Okay, in other words, what I’m saying is, if it were done in a proper way as a fiscal transfer, put before the democracy to review and vote up or down, it would be voted down, overwhelmingly. It would be shouted down. It would not even see the light of day out of committee, to say nothing of the floor of the House or Senate. And yet, we have twelve people who can sit on the open market committee and affect a half-trillion-dollar transfer arbitrarily. They haven’t been elected, they haven’t been authorized to do this, they’re totally twisting and exaggerating their mandate, their so called "dual mandate." This ought to be grounds for a serious constitutional crisis, if nothing else. The Fed is operating as the central planning agency of the US economy. It is exercising plenary power from stem to stern in the US economy, and that is not the kind of system, 1) that’ll work, or 2) that’s compatible with all of our traditional notions of a private sector of a free market economy, of a distinction and separation between the realm of the State and the realm of private activity.

You cannot say enough about the danger of the deluded people who were running the Federal Reserve, and that’s why I’m so happy to see, finally, the Republicans waking up and the letter that came out a couple days ago warning them no more of this, you’ve done too much already. At least there’s a dawning recognition that we have a profound constitutional crisis emerging as a result of the Gang of Four. Yes, there’s twelve people on the open market committee. It’s the Gang of Four -- Dudley, Bernanke, Yellen, and Evans -- who have seized power in this country and really need to be called out.

Chris Martenson:  You know, I think that this most recent Fed announcement, which just came out on September 22nd, I guess, or 21st, and it was around Operation Twist. That was a real disappointment to Wall Street. I think we’re seeing that on some of our screens today and yesterday, obviously, and maybe across the world. So maybe they did get a little bit of the message that, you know, you talked about some of the political and social risks that exist in this. I’d like to talk a bit about the economic and financial or monetary risks that occur. And I don’t really ascribe to any particular school of economics, but there is one quote from Ludwig Von Mises of the Austrian school that does stick with me because it rings true. And that quote is that, “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” I can’t find a lot of fault in that. I’ve analyzed that statement a lot, and it feels like we’re fully down that path at this point in time. What are the financial and -- particularly the ones I’m most concerned with here -- the monetary risks that you see in our current trajectory?

David Stockman:  Well, there are big risks. But I think that quote is spot on. It was never more applicable than to our recent past. And it’s important to dwell on it, to focus on it, because the reason we have this crazy thrashing about by the Fed today, and by Washington with the front door stimulus, the back door stimulus, the absurdity of one-year tax holidays on payroll taxes that we desperately need, and so forth, is there is not a proper understanding of what caused the crisis in the fall of 2008, what caused the meltdown. And the answer is, it grew out of the preceding unsustainable reckless boom, exactly as Mises said. And as a result of failing to understand that, we have an implicit theory, which I think is remarkable in the mainstream of Keynesian policy makers or just politicians who would like to help, and that is that they don’t know where this crisis came from.

It was like a one-in-a-hundred-year flood; maybe it was a contagion that came in on a comet from deep space. But they have no explanation for it; it was bad luck. It hurt us so now let’s dig our way out and use the balance sheet of the Fed, the balance sheet of the federal government to compensate until we get back to normal. Well, that’s absolutely wrong, that we’re in a depressed economy right now because in 2003, -4, -5, and -6 and -7, we had an overheated bubble economy that wasn’t real, wasn’t sustainable, that created millions of jobs based on the margin credit extensions that couldn’t be sustained. And all of that was taken back by Mr. Market in 2007 and 2008 when the first debt liquidation started. And therefore, we’re totally on the wrong track, if we’re trying to restore demand that was never honest demand, or legitimate demand based on earned income and production in the first place.

And that fundamental issue is why policy has gone off the deep end and become so dangerous. Because now, they’re just pouring gasoline on the fire, as I think we all believe. Why would they think at the Fed that with the economy as sick as it is, the housing market as damaged as it is, that if you could get thirty basis points more on the long-term mortgage rate that somehow this is going to make everything better? And Operation Twist is, I would say, further evidence of ritual incantation. The Fed is so locked into this erroneous Keynesian world view that it’s indulging in a ritual incantation just doing the same thing over and over and over, when almost anyone who thinks about it can see why twenty or thirty basis points -- if they can get that from Operation Twist -- [would] solve anything that the last four or five hundred basis points of interest rate reduction haven’t solved, and what are the negative consequences of going in and manipulating and distorting the fundamental capital market of the world for thirty basis points? It’s not even a close question. It’s an evidence that they’re locked into almost insane policy making.

Chris Martenson:  Well, so we’ve got the Federal Reserve headed by Bernanke. They’ve maybe [been] prescribing some excellent cures. Unfortunately, they have the wrong diagnosis, with ritual incantations. So Bernanke, is he Darth Vader, or is he a witch doctor? We’ve got some good metaphors to work with here.

David Stockman:  Maybe we could apply both of them. But you know, I think, if you look at Operation Twist, there’s also an irony to it, which I think people who are trying to understand what’s happened, not just in the last year or two but the last decades or few, would be interested in. And that is the original Operation Twist, ironically, which I think was implemented in February or March 1961, was done as a valiant effort -- although misguided -- to protect the gold dollar, okay? It was still under the old exchange rate, and the threat at that point was there was a lot of hot money flowing out of the US because they worried about the expansionary fiscal policy and new economics of the new administration coming in -- and properly so -- Kennedy and all of those Keynesian advisors he had from Harvard. And so the Treasury, which was still run by orthodox people -- including Douglas Dillon, who became Secretary of the Treasury -- came up with an expedient whereby they could sharply raise short-term interest rates.

They pressured the Fed to do that in order to stem the outflow of hot money and support the dollar and support the waning days of the gold exchange standard. And, on the other hand, [they] wanted to push down the long-term interest rate to encourage investment and growth. But the point is, today, the aim is the opposite. Bernanke’s trying to destroy the dollar with Operation Twist and all the other monetary medicine that he’s dispensed. And yet, it didn’t work in 1961, for a good purpose. And today, to reincarnate Operation Twist as part of this capital market and currency market destruction that’s underway, I think is quite ironic.

Chris Martenson:  It’s interesting. You know, I think it was a little over a year ago in the New York Times, you had an op-ed piece titled “The Four Deformations of the Apocalypse.” And if I paraphrase, you essentially said that Democrats lean towards, maybe, 'tax and spend' and the Republicans lean towards 'borrow and spend,' but that there’s really no effective daylight between their spending habits. Certainly there is, if we look at marginal priorities for where the money goes, but not in terms of either the amounts of the long term -- even short term -- fiscal prudence. What’s the reality of the situation? And how, when, or even why will economic or fiscal reality finally gain purchase with our decision makers?

David Stockman:  Well, you know, that’s the heart of the crisis. It’s deep and stubborn. And it begins with the fact that after the early 1980s, we developed two free lunch parties in this country. The Democrats were always the free-lunch party of the welfare state and the Great Society programs and so forth. And the job of the Republican party, which was accomplished pretty reasonably under Eisenhower and, actually, initially under Nixon, who then finally threw in the towel and went totally Keynesian, but at least in 1969, he was attempting to maintain some fiscal discipline. So the job of the Republican party was to be the party that said no, the party that was the watchdog of the Treasury, the party that raised for the public the issue of fiscal discipline and the consequences of not maintaining it.

Well, after 1980, I was a supply sider, but not a free-lunch supply sider. And when the free-lunch version of supply sides set in and then became party doctrine, we ended up by 2010 with both parties wanting to give away the credit of the United States. The Democrats with more spending or defending the spending was their entitlements that were growing insupportably like Medicare or Social Security. And the Republicans cutting taxes randomly, continuously, and under every imaginable economic circumstance without offsetting spending cuts or a total framework of fiscal discipline. So we get to the point today where you now have Republicans saying no taxes, any way, any shape, any form, when the revenue is at fifteen percent of GDP, the lowest in history. And you have the Democrats defending what I call the twenty-four-percent line; that’s where spending is. And you have the President a few days ago threatening to veto a bill if it reforms entitlements and is put on his desk and it doesn’t tax the rich at the same time.

Now, that is a prescription for Banana Republic fiscal policy at best, and even more irresponsibility if you look at the real facts. Now, why did we get into a situation where our democracy became deformed and both parties became free-lunch parties and we no longer have a fiscally conservative party left? I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the 'T-bill standard' or the 'federal debt standard.' And the other central banks of the emerging mercantilist Asian economies -- Japan, Korea, and now, especially, the People’s Printing Press of China -- have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. But as long as the debt… In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But we got away for twenty or twenty-five years with, you know, to use the phrase, “deficits without tears.” And because all the bonds on the margin were being absorbed by the central banks.

Where we are today is that the central banks of the world own five trillion of Treasury paper, from bills to thirty-year bonds. That’s half of the ten trillion outstanding. So I refer to this system, the Fed and all its subsidiary central banks, as a chain of monetary roach motels. The bonds go in; they never come out. That has totally distorted the capital markets of the world in fiscal policy making. In the last few years, especially. More than half of the debt, even though on average, half of it is owned by central banks and other official institutions, well more than half has been absorbed by the central banks in the last few years.

And so, as a result of that, the reckless irresponsibility of the two free-lunch parties has had no check. And as a result, the positions have become politically institutionalized. I mean, the Republicans can’t help themselves on the tax issue because nothing bad has happened so far, and, as Chaney said inappropriately, they have the view that deficits don’t matter. And so far, they haven’t, because the central banks have absorbed it all. But I think we’re at the end of the road for this monetary roach motel chain, as well. China is red hot with inflation. The People’s Printing Press is going to have to let the currency rise. When they stop pegging, they will therefore be buying less Treasury paper and one bid is removed from the market. I hope the Fed is done with any additional balance-sheet expansion. And if they don’t expand the balance sheet, then on the margin they won't be able to absorb incremental debt issuance by the Treasury.

Other central banks are in the same position. So that’s why we’re coming now into a very dangerous phase, because we had a twenty-five year, let’s say, interregnum, here, where the consequence of massive debt issuance was not felt in the real economy in the short term, so that there would be a feedback that would cause at least some politicians to want to change course. Now, we have the central banks out of business and massive debt flow in both Europe and here that’s turning into the sovereign debt crisis, and that’s just another name for the fact that there isn’t enough private, legitimate private savings in the world to absorb debt at this issuance rate.

Chris Martenson:  You know, I’m right with you on all this, because for years -- and it’s gone on longer than I ever thought it could -- but I’ve been watching with alarm the custody account at the Fed, which is really just a measure of the reserve balances growing in central banks across the world…

David Stockman:  Sure, right. That’s three trillion right now.

Chris Martenson:  Yeah, and it’s not just a little bit. This is like twenty, twenty-three, twenty-five percent year-over-year growth for years.

David Stockman:  Right, right.

Chris Martenson:  It’s an astonishing compounding that’s happening there.

David Stockman:  Yeah, and add, if I could, just then add the 1.7 trillion of Treasury paper on the Fed’s balance sheet, and therefore, you have close to five trillion of the real outstandings. But actually, it’s worse than that, because if you take all the mortgages back, the GSE paper, that’s just a back-door form of Federal debt anyway, now that we’ve guaranteed the security holders with the bailout in September 2008. So if you look at the real sovereign and quasi-sovereign issuance of the United States, a massive share of it -- both Treasury paper, per se, and the MBS paper, is in the Fed in the other central banks of the world. And if it were that simple, well, let’s just get it over with and have the governments issue trillions of new debt, drop it out of the air from the helicopter, and put it in the central banks. Now, we know, historically, that you can’t print your way to prosperity. And that’s essentially what policy amounts to today. 

Chris Martenson:  Right. And so assuming we can’t do that - and I’m in agreement with you that that can’t persist forever and that we might be very close to the end of the road on that -- my question here is, essentially what we’re talking about then is a massive debt deflation if we’re going to write down -- let’s throw a number out there -- if the US has maybe twenty or thirty trillion of excessive total credit market debt, has to walk that off, what kind of economic impacts are we talking about? What happens to unemployment? How much does GDP actually contract, let alone not grow all that, right? So what do you think happens there if we really walk down that path of austerity?

David Stockman:  Well, I think that’s where the gloomy outlook materializes in living color. I think the unemployment rate is actually higher than nine percent right now. It’s only nine percent on a mathematically calculated basis because we’re driving people out of the labor force, because they lose hope that it’s worthwhile to look for a job, or we lure them into not looking with unemployment insurance; one of the two. So I think we’re over double digits right now. Even if you take the labor force participation rate of two years ago and divide that into the number of jobs that exist right now, you’ll find that you get a double digit result. I think we’re going to stay at double digits from now till as far as the eye can see. I think we’re going to have a crisis of incomes in our private economy, because sooner or later, the ninety-nine weeks of unemployment’s going to run out. The safety net is under tremendous pressure, and that’s one side of the equation.

The other side of the equation is, I don’t see why we have any growth at all. The only growth that we’ve had is statistical growth over the last two years as a result on the margin of the federal government borrowing money and then redistributing it back through transfer payments or through direct purchases in these stimulus programs we’ve had. The number that I look at, that I think demonstrates that in spades -- and this is kind of in round terms, but it demonstrates the point and it’s accurate within a few ten billion -- but we’ve had a one trillion growth since the fall of 2007, when, allegedly, the cycle peaked in DPI -- Disposable Personal Income. And that is the fundamental metric that measures the capacity for spending - PCE, Personal Consumption Expenditure - to grow. Or savings to grow. But the point I’m making is of the one trillion growth of DPI in the last four years, about eighty percent of it is due to either lower personal taxes or higher government transfer payments. And on the margin, the lower taxes -- which may sound nice to some conservatives - but every dollar was borrowed because we were already deeply in debt before they started cutting taxes to stimulate the economy. And obviously, every dollar of the huge increase in transfer payments during that period was borrowed, as well.

So almost all of the DPI growth has been borrowed money using, taxing, the last bit of balance sheet that we had left, both as a political matter and as a financial matter. Now, I think finally, the politics had reached the point where physical expansion -- I don’t know that we’re going to cure the problem, but hopefully it’s not going to get worse. The Republicans at least put a line in the sand on that. And as a result, I don’t see where we get much growth in the income statement of the economy. And without that, obviously, you’re not going to get GDP either.

David Stockman: That we need to have a giant alarm going off in the entire economy. And maybe that’s beginning what’s been happening for several weeks now, but in the last couple of days, finally, I think people are beginning to realize that this was an entirely artificial rebound in the financial markets, not in the real economy. And that the props that were under this monetary expansion and fiscal stimulus are no longer operative.

Chris Martenson:  Well, so here we are looking at a period of austerity that’s going to be imposed, I guess. I’m thinking Greece is our metaphor here; that eventually the markets catch up with you. The Federal Reserve has a lot of power, but it’s not omnipotent. So I think in the past you said there are actually two primordial forces -- the welfare state and the warfare state -- that are really driving the federal spending machine. First, neither of those states, I think, are going to be particularly happy with the type of austerity you’re describing. So, first, I want to know how you might expect them to react to that austerity. And second, where do we really go for spending cuts here at this juncture, given how much mandatory spending we seem to have that’s essentially untouchable?

David Stockman:  Yeah, well, those are really good questions because I think that’s why we’re seeing the utter paralysis in Washington that manifests itself daily. You hear all the talking heads on financial TV saying isn’t that disgusting? What’s wrong with these people? Can’t they realize they shouldn’t be fiddling while Rome burns and all that. But I think that is a superficial misperception. What is actually happening is that we’ve allowed the welfare state to grow so large, the warfare state to remain so unnecessarily huge, and the tax rolls to be cut so dramatically that we now have a gap that is so imposing that the politicians can’t cope with it. They’re paralyzed.

Anything they might want to do seems too insignificant relative to the size of the problem that they simply repair to inaction. So therefore, the military-industrial complex is hanging on for dear life and has actually driven through the House Armed Services Committee a budget for 2012 that’s up by three percent or so from 2011. Now why in the world, with the crisis as dramatic and as clear and as present as we see it now after having gone through the August debt ceiling crisis and the downgrade, would a Republican Armed Services Committee think you need to raise the defense budget in a world where we have no industrial enemies, where Al Qaeda is down to forty people, where the great holy warrior of Al Qaeda is dead, what are we thinking when they raise the defense budget? But I think it’s the military industrial complex that’s so dug in. And unfortunately, they see defense as a jobs program as opposed to what it really is -- and utter and complete economic waste -- that no progress is made. And of course, the same thing is true on this welfare state side.

I heard the White House press office the other day say that unemployment was a great jobs program. Unemployment insurance is a great jobs program. Now, how in the world could someone make that kind of preposterous statement? But it was only in the primitive Keynesian derivative sense that, well, if you send out the checks, people will use it to buy some food at the grocery store and someone will then work at the checkout counter. You know, that is the problem. Every feature of this is now being seen as a jobs program because the economy is stalled out. And the gaps are so great that it seems as there’s no political will or capacity to take on the warfare state when it should be dramatically shrunk and demobilized, and we can talk about that. Or the welfare state starting with Social Security.

How can someone not believe that at least the top five or ten million beneficiaries out of fifty ought to be means tested and if we can’t afford to give these people their full checks, since nobody earned it anyway, then the check needs to be cut back or eliminated. But there’s no capacity, really, to take on any of those issues. And so the system is falling into paralysis; not because the politicians are totally cowardly or stupid. It’s that the system has drifted into such massive gaps that the capacity for Democratic consensus and for positive action to slow down the doomsday machine is being lost. And that’s what the Keynesians never thought about, you know? They never thought you would reach the end of the balance sheet, that you would reach a crisis point like they’re having in Greece or Portugal or Europe, generally, or now in the United States. And they never thought about the weaknesses and the imperfections of democracy in terms of its ability to cope and make policy.

The whole Keynesian myth, I believe, is based on the erroneous idea that the private sector has its imperfections and its cycle instability, and government needs to step in with compensatory policy and make up for it without any examination of the State and the capacity of politicians to actually manage fiscal policy according to the Keynesian formula. The answer that we’re learning is they can’t, that the State has more imperfections built into the process of democratic action, and that this whole policy we’ve had for fifty years of managing the business cycle of macro-economic policy, the whole project of macro-economic policy, has been a giant error. It’s being discredited; it’s led us into this public sector sovereign debt trap that the political system can not work out of. That’s the real danger. That’s the real crisis at the moment.

Chris Martenson:  Yeah, I agree. Where I think we had an opportunity to fall off of a small stepladder back in the mid ‘80s, early ‘90s, we’ve now gotten ourselves forty feet up an extension ladder. And so I think politicians are rightly scared of how we manage the fall from here. At the same time, I see defending the status quo and business-as-usual not being terribly, let me say, leader-like positions to take at this juncture of history. So we’re talking about political blind spots. I’d like to just talk about one of the larger blind spots that I see, quickly get your take on it. And one of my key tenets is our monetary system; you know, through its essential design of loaning money into existence and our entire economic and institutional scaffolding, which we then built around that monetary condition. Well, it all kind of requires endless exponential growth. Not a lot. Two percent, three percent a year mind you. But endless growth nonetheless. And without such growth, the entire system becomes shaky, groans ominously, threatens to collapse, maybe systemically.

So when we look at this, a second key tenet of mine is that, look, nonrenewable natural resources, they are the headwaters of all economic activity. With resources, you build an economy. Without them, you can’t. So at the top of this list has to be petroleum, given its unique role in fostering economic activity. It’s the original spring, then, that feeds all the tributaries. Where does Peak Oil fit into your world view here, if at all? To us at my site, it’s that and competition for other critically depleting natural resources including maybe land or fish or whatever that seems to be one of the fundamental issues at hand. And the US current leadership seems either ignorant or intentionally avoidant of this entire topic. Is it on the political radar at all? And if not, why not?

David Stockman: Well, it’s on the political radar but in a very superficial way. And I happen to have the screen on right now and I’m seeing someone sitting before a Congressional committee taking the Fifth Amendment on the guaranteed loans that Solyndra got from the federal government. Now that is symptomatic of everything that’s wrong. We can not have a State run solution to a very complex, subtle market problem. I agree that there is something in the nature of Peak Oil happening, but I think that’s a metaphor for the fact that a delivered BTU, whether it comes out of a conventional oil well or whether it comes out of the tar sands or whether it comes out of some new or more efficient form of consumption or combustion, the price, the real price of the BTU delivered or consumed is rising. And as the real price rises, I believe the market could keep things balanced, but it would slow down the rate of total output growth as the BTU factor weighs on the mix that goes into economic activity.

I think that is being totally ignored. It is another one of the headwinds or constraints that we’re facing, along with the demographic time bomb of this huge generation retiring. And if you look at all of these, there’s no reason to expect much economic growth for the next ten or twenty years, even if you had a healthy monetary and fiscal situation. But given the situation that we’ve described and given the massive excess private leverage that was built up in the thirty-year debt spree, we have sort of added insult to injury. We have maybe an inevitable question of the rising real cost of the BTU, being added to the demographic question, being added to the totally distorted world labor market that the central banks have produced, which is another whole topic. But when you put all those together, the headwinds are truly frightening.

Chris Martenson:  I agree. So I see there’s a multiple convergence of forces here. And okay, so if I take the summary of this and I say, listen, you know, if a betting person now decides that the odds favor crisis over willing structural reform; that is, they come to the conclusion that maybe our future is more likely to be shaped by disaster than design, what would your advice be to the concerned American who wants these problems addressed responsibly, and what should they, as individuals, be doing to mitigate or protect themselves from what you see coming?

David Stockman:  Well, the first thing is to protect yourselves, you must get out of the risk asset markets. This whole thing, in my view, is a scam that has been promoted by the day and hour by the talking heads of Wall Street and the so-called economists that they trot out on the financial media constantly with all kinds of spurious explanations as to why there’s a light at the end of the tunnel, that we’ve solved the problem, that the crisis is over, and that the normal machinery of economic recovery is back in shape. All of that, I think, is a dangerous delusion. And therefore, all of the risk assets are dramatically overpriced, from copper futures to the SNP index and especially, the higher baited names in the stock market. So my point would be it’s a dangerous place. Both the bond market, we’re in the greatest bubble of all times, it’s been driven by the Feds’ bond buying, which is now coming to the end. So the bond market, the fixed income market, is an extremely dangerous place that should be avoided at all hazards.

The stock market and the various derivative markets that relate to it are exceedingly dangerous. And so the best thing to do at the present time is conserve capital. And ultimately, the monetary systems of the world are coming apart. They’re falling apart. They’re losing their credibility, and therefore, gold is becoming the de facto money. We’re going to be back to a gold standard one way or another, through the back door, in only a matter of time, simply because the central banks are dominated by the ritual incantation of dying Keynesian theory. And therefore, I would say that’s what someone needs to do to protect themselves. What do you need to do politically? I see not a lot of hope at the present time, because both parties, as I’ve indicated, are in denial. They have their heads in the sand. They’re more or less embracing free-lunch economics. And I think until we have a thundering crisis in the bond market that truly puts the fear of God into Washington, we’re not going to get any break from the path of drift towards disaster that we’re on right now.

Chris Martenson:  That’s an excellent summary. And I think we’re going to leave it there today. I really enjoyed this interview, and your views mirror a lot of my own. Maybe that’s why I enjoyed it so much.

David Stockman:  Well, your questions were great, and these matters go right to the heart of what’s behind the moment-to-moment headlines and impulses that seem to drive the markets but are really not the underlying reality that people need to focus on.

Chris Martenson:  Absolutely. And it’s reality which is the piece that I like to focus on. And there’s certain pieces of data and evidence that just can’t be spun and we talked about a bunch of them today. There’s more to be found on my website and I’m sure, as people follow you in the news out there, you’ll continue to make these points. And let’s just hope somehow we can shape that future by design rather than disaster, but plan as if maybe the opposite will happen.

David Stockman:  Very good.

Chris Martenson:  All right, thank you much.

David Stockman:  I agree with that.

Chris Martenson:  All right.

David Stockman:  Bye.

Mr. Stockman is the founding partner of Heartland Industrial Partners. He was formerly a senior managing director of The Blackstone Group. Prior to joining Blackstone, Mr. Stockman was a managing director at Salomon Brothers, Inc.

He served as the director of the Office of Management and Budget in the Reagan administration and was the youngest Cabinet member of the twentieth century. From 1976 to 1981, Mr. Stockman represented Michigan in the House of Representatives.

He is also the author of the book "Triumph of Politics: The Inside Story of the Reagan Revolution".


Our series of podcast interviews with notable minds includes:



The Martenson Report - Understanding What Happens Next

Understanding What Happens Next

Wednesday, September 28, 2011

Executive Summary

  • The sentiment on commodities is shifting in an important way.
  • What happens when a global credit bubble meets a secular rise in energy costs? (Answer: nothing good.)
  • The only chart you need to understand the future
  • Why the next steps of the Fed and other central banks is imminently predictable at this point
  • Given the high probabilities and their huge impact, you need to take steps now to position and protect yourself.
  • The three critical questions you need to be asking
KugsCheese's picture

QE3 and Why US Taxpayers are Now Supporting Europe

I have never thought I would see such market manipulation.  The economic news is getting worse yet the US stock market goes up.   This makes no sense unless the Central Bankers and Friends are at work proping up the stock markets until QE3 can be announced which looks assured now.

We must also thank our government for taking taxpayer money and giving it indirectly to the deadbeat Greeks.  Isn't this taxation without representation?

Thinkor's picture

A class action lawsuit against the Fed?

When the Fed creates new electronic money out of thin air,  isn't that doing economic harm to everyone in the country with a penny in hand or in a bank and doesn't that create an opportunity for a lawsuit?

How does a private institution get away with such an action, especially when it runs counter to their own charter?

SagerXX's picture

Anybody care to opine on what Bennie Bananas says at Jax Hole tomorrow?

I thought it might be interesting to collect opinions on what the Fed Chair gives the markets tomorrow. Does Christmas come early? Or does he give the markets a big raspberry?

I'll go first: no QE3 announcement. He'll affirm the 2-year pledge of super-low interest rates. There will be some typically cryptic verbiage about how the Fed will be ready to "intervene" to promote the "stability" of markets/the economy. But no giant bombshells.

Stocks go sideways or down (mostly the latter) in response. PMs resume gradual climb (albeit with pullbacks if there are further margin hikes).

Transcript for Charles Hugh Smith: Why Local Enterprise Is The Solution

Below is the transcript for Charles Hugh Smith: Why Local Enterprise Is The Solution

Chris Martenson:  Welcome to another PeakProsperity.com podcast. I am, of course, Chris Martenson. And today, a very special guest, we have Charles Hugh Smith, who has been an independent journalist for over twenty years. And his excellent web blog www.oftwominds.com, offers very thoughtful unique analysis of global finance, social themes, the political economy -- and he’s an accomplished author as well. Charles wrote the very impressive handbook, Survival +: Structuring Prosperity for Yourself and the Nation, which I highly recommend; I have read it. And he has just finished another book, An Unconventional Guide to Investing in Troubled Times. Charles, you know it's high time we had you as an interview guest; here you are. I am really looking forward to our discussion today. Welcome.

Charles Hugh Smith:  Thank you, Chris; I am delighted to be here.

Chris Martenson:  Well, there is so much I want to talk with you about, especially with all that is going on these days, but let’s start with your new book, if we could. Tell our listeners what it's about and why you decided to write it now.

Charles Hugh Smith:  Okay, I have been working on the book for eighteen months for the reasons that are familiar with PeakProsperity.com readers and members, which as we all know is the present is unsustainable. So where can we put our resources and our capital and our labor that will be productive as the status quo basically defaults or crumbles? So the book, having come out in July, just happened to be good timing, as the market is, in fact, crumbling as we speak.

Chris Martenson: Yes, yes it is.

Charles Hugh Smith: And I think the basic thrust of the book is that standard or conventional financial advice that we typically hear is: well, we’ll balance your portfolio between stocks and bonds and overseas investing and domestic. I don’t think these metrics have any value anymore. Or they’ve lost their meaning, as all of the status-quo investments are coming apart at the seams.

Chris Martenson:  So your general thesis is we’re on an unsustainable course, which, for those who are new listeners, may be shorthand for the idea that the past couple of decades, maybe even past four decades, have all been defined by the idea that we’re going to grow debt and accumulation of debt at a faster pace than the underlying economy. That means that we are living on borrowed money, we are living beyond our means -- however you want to look at that at the national level, whatnot. So are you looking just through that first economic lens and just looking at it and declaring it unsustainable? Then saying because of that, this is going to devolve or shift or change. Is that the general macro landscape you are looking at?

Charles Hugh Smith:  Yes, Chris. And of course, I learned from the Crash Course about the unsustainability of that exponential rise in debt. But also, as you’ve covered in-depth, we are running out of the idea that there are unlimited resources that we can exploit at ever-greater rates of consumption. So “Peak Everything,” as we call it - that’s also an issue. And also the unsustainability of a lot of our political and social structures that we’ve kind of grown fat and sassy and complacent based on this unlimited debt. It has allowed us to sustain things which are not sustainable. So there is definitely a social and political impact to the end of this kind of debt-plus-cheap-oil era.

Chris Martenson:  So in your mind, what happens when that debt cycle ends, when the party is over, and it comes to the additional accumulation, exponential accumulation of more debt – which by the way, they are trying very hard in Europe and Washington, D.C. to perpetuate and keep that debt moving? Let’s say they can’t – what happens?

Charles Hugh Smith:  There will have to be a renunciation of debt on a vast scale, and it could take the form of a forgiveness of debt, meaning that we deal with it as adults and write it off. Or it could be renounced in a very chaotic unplanned way, as people just default and that triggers a whole domino chain of the borrowers are defaulting and then of course, the lenders become insolvent and they default on their counterparty obligation. And so then it reaches the same point – that it’s written off.

Chris Martenson:  So this would be a process of default. The Fed’s been fighting that tooth and nail, and we just found out through a formal request of Bernie Sanders that the Fed had put $18 trillion in cash and guarantees across the global landscape to prevent exactly what you are talking about from happening. By all measures, they kind of did. And so what’s to prevent the world central banks – by the way, we’ve had three interventions of central bank actions in the last twenty-four hours, so we are recording this on Thursday afternoon, August 4th -- but we’ve seen the Swiss Bank come in and essentially print like crazy. We’ve seen the ECD come in and intervene in the Italian bond auction. We’ve seen the Bank of Japan come forward and attempt to bring their currency down. With all this intervention, what’s the trigger for this wave of debt defaults in your mind?

Charles Hugh Smith:  Chris, I think we all sort of know that there are two end states here: The end game is either we consciously renounce the debt, or we get the hidden default of the currencies being wiped out in terms of what they can buy. So if we do the hidden default method, then everyone will get their Social Security check for $1,200 dollars and that will buy them like a loaf of bread or something. And so the government will be fulfilling its obligations, but the purchasing power of the money that it's distributing will have been lost. And of course, we all know that’s a possibility. And that’s just another way of reaching the same point that the debt in the system will be purged either by high inflation, hyperinflation, or by conscious renunciation -- and that doesn’t seem possible at the moment, a conscious renunciation, but there could be political changes, say, over the next four or five years, that could bring that about if the people realize that’s a better solution to a hidden default.

Chris Martenson:  Right, well, yes, it's possible. I find that history says hidden default is the preferred option by far.

Charles Hugh Smith:  I agree. I agree, but I like to at least address the possibility that we could chose more wisely. I am not saying that lightly, but it's always possible.

Chris Martenson:  Absolutely. So you wrote this book and it's got "unconventional guide to investing" in its title. What do you mean by “unconventional” investing here?

Charles Hugh Smith:  I mean that it looks at investing as a form of expression, of personal expression, if you will, which is completely outside the normal conventions where we are – you simply seek the highest return from whatever mutual fund or the hot manager or hedge fund. But I think investing your capital, which includes your financial capital and also your human and your social capital, would not be a form of self-expression. And as a trader myself, I think the key to investing wisely is to align that with your own interests and your own personality. A lot of people have spent a tremendous amount of time and energy and money trying to find that perfect system which generates returns in all markets and that kind of stuff. And that kind of system doesn’t exist. And statistically, there is simply no system or manager who out-performs over a twenty-year period in both bull and bear markets. The number of people who do so is statistical noise.

Chris Martenson:  Well, you would expect somebody is out at the end of that bell curve, of course, so I don’t know that there are statistically significant numbers of those people – they do exist. And some of them will have some sort of a proprietary mojo that’s awesome, but you are right, those are very rare and few and far between. And this is a main theme of mine, which is that almost all of the methods for investing that we’ve grown up with that you learn from your father, your grandfather, your grandmother, your mother – wherever you got the stuff from, your broker…it doesn’t matter. They are all predicated on this idea of these models and techniques and styles, all of which themselves are predicated on growth, which means that as long as we have this three, four, five percent economic growth with the occasional recessionary pick-up here and there.

But long-term, you could put a ruler on this thing and say, “Wow, there’s an upper slope to this economic growth.” That growth gives a lot of the value to the overall aggregated stock and bond markets and other financial paper-based assets. It's that growth that is baked in, and it's so baked in that most people don’t even consider it. They are not aware of the extent to which the current prices and values of these things depend on that future growth happening. But the correct question I think people need to ask if they insist on staying in the stock market is What is the correct price earnings multiple for a company or a stock index which has zero-percent earnings growth baked into it? I’ll give you a minute for that one, but it's lower than it currently is. Where do you place it?

Charles Hugh Smith:  Well, if we just look at cycles and trends -- a lot of people are targeting an S&P around 450 or thereabout, meaning a drop of two-thirds per year -- that might work, but if you take what you just said and follow the implications, what if there are no earnings? In other words, what if oil goes to $200 dollars a barrel and a trade war erupts as everyone tries to protect their own national resources and so on? What I call deglobalization starts kicking in, and it may be extremely difficult to make profits in any way. And so it may be that a period of really low profits would then, of course, bring very low stock values.

Chris, the other thing I would say is the “unconventional” side of what I am describing in the book, is to look at how we value enterprises in general. To question the whole idea that it makes more sense to invest in a mine or a corporation six thousand miles away than to seek out a mine or a company in our own hometown, so to speak, or our home state or our home region that we can really understand. And that we would be drawing upon that productivity that we can understand, and we are not just trusting Wall Street to tell us about this company six thousand miles away. It's really a great thing.

Chris Martenson:  Yes. You know I come from a banking family. My great-great-grandfather founded one, and on the male side in that family, there has been somebody involved with it since. They have been cranking out just excellent earnings all the way through this whole hiccup, and I had opportunities to warn them this hiccup was coming. They looked at me and said, “Look we know every single person on our balance sheet. Every asset on here is somebody we know. We are intimately familiar with all the businesses – here are our credit standards.” You just run it like my grandfather used to run it, which is just incredibly safe and sound and with that intimate local knowledge, and guess what? They’ve come through this period just fine.

As we get into this next period, though, if I understand you correctly, and I think I do, there’s going to be an even higher premium on really knowing where your money is and what it's doing. Because the easy returns of just anonymously tossing your money over a wall and towards a group of people who are going to manage it for you -- let’s call that Wall Street, for now -- when things get tight, one of my basic theories in life is that when there are ample resources for both Wall Street to earn its outlandish bonuses and make themselves feel good about themselves that way and for you to earn something of a return too, then you both win.

When there aren’t sufficient resources for both, guess what happens? Wall Streets gets its bonuses anyway, and there is nothing left over for you. I think we are pretty close to that moment in time, here. And so it's a fancy way of saying real conflicts of interest are at play – the people who work in the financial industry are often deeply conflicted in terms of what they can say and what they can’t say. They have fiduciary responsibilities, and they sometimes limit themselves from telling you about the entire universe of opportunities. I know people who have been – even as recently as last week – cautioned by their broker not to go anywhere near gold. It's just a silly investment and it's not an investment, it doesn’t have any returns, etc.

So there’s – I think the first stage of awareness for me was understanding the extent of it. Wall Street’s interests and my own interests were not aligned, not even remotely aligned.

Charles Hugh Smith: ,That’s extremely well said, Chris, and I think that’s a key point which you just described about the conflict of interest. And also that there’s just no payoff in trusting Wall Street to look for our money. And I think another topic that makes it unconventional, at least in my view, is that there is the issue of sustainability and resilience, which is a topic that you’ve addressed in depth on PeakProsperity.com. So it will be familiar to most of your readers and listeners.

I think the solution here going forward is to have a number of income streams to increase that resilience of your household, by having several income streams, which means having an enterprise or enterprises in which you are an owner or a major investor.

Chris Martenson:  I am particularly enamored with the idea that energy is going to be going up in price, or, let’s say, ‘as a fraction of our disposal income,’ as we go forward.

Charles Hugh Smith:  Yes.

Chris Martenson:  Price is a relative thing. And so as that heads up over time, we are going to be discovering that the entire landscape changes. I find a very useful thought exercise is to ask myself the question What changes in my life happen when gas goes to $10 a gallon? Well, I can tell you I will be taking a lot fewer trips at a whim just to go do something. I will be thinking about consolidating those. I will be taking far fewer trips farther away, because those will become more expensive or I will think them through more carefully. At $20 a gallon, something even more profound happens.

And that’s when we discover, once we play that thought experiment, all the places that you probably aren’t going to go to personally anymore. Those are places that probably aren’t going to do all that well. That’s one way to look at it. They are going to be exurbs, distant strip malls, certain economic arrangements that just don’t make sense under a much higher energy cost than we currently have. And so those are the things that fall away. And then, as you are implying here, there are things though that will rise. Because now we are more local, and people are still going to have energy needs. We all still want to be warm when we want to be warm and cool when we want to be cool. And there are lots of opportunities to reconfigure our lives around that in reality.

Where I live in New England, wood seems to be our only local natural energy source besides the sun. A little bit of hydro, but not enough to even write home about. So I am looking at wood and saying, wow. It was a very important energy source as recently as a hundred years ago. It probably will be again, and here’s an opportunity for people who want to look at it that way -- unconventional, but something I can get my hands around. I understand it. It's local. I can look at it and touch and make sense of it.

Charles Hugh Smith: ,Yeah, Chris, I think that’s absolutely right that each region will have a lot of enterprise opportunity. I consider my book hopeful, because I think that enterprise is completely possible in an era of declining resource consumption. In other words, just because we have to use less doesn’t mean that there is no opportunity for investing in enterprise. I think enterprise and investing, in fact, are the solution. And if we withdraw our money from Wall Street and put it to use in our own communities, to the benefit of our own income streams, then I think that things happen.

Chris Martenson:  I completely agree. So let’s sort of focus in on where enterprises might look. I am interested, Charles, as you look at the current landscape and the financial markets, global credit system, geopolitics, maybe energy – whatever you are looking at -- what do you see as the macro trends that will define how these next ten to twenty years are going to play out?

Charles Hugh Smith: I would start with the four “D’s,” I call them, like deglobalization. I think we’re now seeing that we are past the apex of globalization due to cheap energy and the sort of smoothing of corporate profits as the key metric of economic “growth.” I think that we are going to see a lot of nations starting to cut off access and flow of capital and resources to protect their own resources from exploitation by outside corporations. And I think we might even see that in the United States, where people will say, gosh maybe we shouldn’t be selling our coal to China. Or we shouldn’t be selling our property to country XYZ. So deglobalization will, I think, radically change people’s understanding of value and risk assessment.

And then the delegitimization of the loss of credibility of key institutions. People will realize that they can no longer trust the savior state -- what I call the central state -- to meet all their needs and do what it had promised all these decades. And the institutions that people have relied on as trustworthy will be revealed that they are either corrupt or incompetent. So that I think will play out over the next couple of decades, as well.

Decentralization, I think the whole idea of centralized concentrations of wealth and expertise that we call corporations, with super-long fragile supply chains to one or two factories on the planet that are “efficient” -- I think that whole system is going to unravel and devolve. And so we’ll be seeking, in terms of investors, the safety. And lowering the risk element will be to choose local decentralized assets and income streams. So I think those are key dynamics over the next ten to twenty years.

Chris Martenson:  And was there a fourth “D”? So far, we had deglobalization...

Charles Hugh Smith:  Yes.

Chris Martenson:  …and delegitimization and decentralization.

Charles Hugh Smith:  It was probably shorthand for de-growth-ization.

Chris Martenson:  [Laughs]

Charles Hugh Smith:  In other words, that there is no way that we are going to keep exploiting resources at an ever-increasing rate.

Chris Martenson:  Great, how about Deceleration then?

Charles Hugh Smith:  [Laughs] Deceleration; I love it.

Chris Martenson:  All right, that sounds good. Because that’s how I see it. It's not possible to continue to increase the rate of extraction and consumption of many things, and so as that rate falls, this is the uncomfortable period we’re in. One of the big macro trends is, of course, we have all our high priests and priestesses of money over there waving their magic wands, pressing a magic keyboard, making trillions appear out of thin air – that is supposed to work, and guess what? In the world of abundant and essentially unlimited resources, the limiting factor is the number of people available to work to extract them. Once you pass that threshold, it turns out that waving the magic money wand doesn’t do what it used to do and it's very confusing, I am sure, to everybody who has been infiltrated in that system. They grew up in it, it's all they studied, and they understand all of their differential equations around how the economy is supposed to work. They get the Taylor’s rule and interest rate spreads and they did all that and they put all that in and they waved their wands and the potion doesn’t work and it must horribly confusing.

And over here on the side are people who see this other point of view and say, well that’s what we would kind of predict would happen if we took the amount of available net energy. That is the energy left over after we invest some energy to go find some. We take that net energy, and whether we sell it for dollars or just hand it out for free, it wouldn’t matter. Society will go out and do awesome things with that energy. As that stream of energy shrinks down, the complexity theory will tell you that any complex system owes its order and ultimate complexity to the amount of energy coming through it. And once you decrease that energy flow, it will be simpler. Well, what is "simpler" shorthand for? Well, fewer job types, fewer job specializations, fewer stock-keeping units, fewer whatever-you-want. But ultimately, they are units of economic activity.

And so, as you throw more money into the fewer units of economic activity, that’s where I think economic textbooks can tell you what will happen next with reasonable assurance. And that is that hidden default that you talked about and [is] otherwise known as inflation. That’s one of the macro trends that I have an eye firmly fixed on, is the idea that we are printing money at pretty rapid, if not the fastest rates ever seen, and shoving that into a world where I see less and less units of economic activity happening. And it's a chaotic system, so we can’t predict all the wrinkles. We don’t know where every grain of sand is going to fall in this story, but predicting that the sand tower is going to crumble is an easy one.

Charles Hugh Smith:  Yes, absolutely. And Chris, I remembered the fourth key which I had, which was definancialization, which is exactly what you are describing. This is the idea that we can financialize resources in some way that will make them larger. That’s over; just because we print more money doesn’t mean we are going to have more oil.

Chris Martenson:  Right, right.

Charles Hugh Smith:  So one of the concepts in my book that kind of follows is this: If we are doing a creative definancialization, what we want, of course, is real assets, and of course precious metals are the ultimate hedge. They serve an essential role in that. But I am not wealthy enough to, like, sell off part of my precious metals every month to buy food and stuff. So I am kind of focused on how I can get income streams. Like, what can I do in terms of social capital to set up a network of businesses and people that I know and that I can trust and value, where I can sell my labor for anything? I can just sell it for a quarter ounce of gold or an equivalent amount of wheat or whatever it is; my labor will have the same value as to what it can buy. If I have an orchard, if I know how to actually take care of my trees, then the harvest will have a value, irrespective of how we measure that. So I will have an income stream, whether it's measured in wheat, gold, rent, a new fiat currency from Mars – you know, whatever we have. So that is the focus of my book. To look at how we can invest in income streams.

Chris Martenson: A nd I think it's very wise and sad that we find ourselves here. Because the money of a nation, the money of a people – it's an agreement. Ultimately, it's an agreement between ourselves. So therefore, it is a social contract. That is what money really is. Forget that it's supposed to be a store of value and unit of account and all those other textbook things. Those are sort of features, right? But what it really is to me is the social agreement. So you and I agree that this piece of paper is worth ten dollars and this piece of paper is worth twenty dollars and that piece of paper is just a newspaper. So we have these agreements around what these things are worth, and what you are describing is that as we lose faith in that agreement, a lot of things in our social contract began to fray. And in that scenario, one of the things that we might consider doing is understanding what really intrinsic value actually is. An apple has an intrinsic value; regardless of how many pieces of paper we decide it's worth or agree upon, it's still an apple. And an apple still has a relative intrinsic value as compared to an hour of labor potentially or whatever. So you are actually talking about walking away from the money itself simply due to a loss of faith. Is that a fear characterization?

Charles Hugh Smith:  Chris, I think you very well described the loss of trust as a social contract. So one way of looking at this is capital: It's not just financial. It's what we call social capital. And that is, in fact, the valuation of trust. So if you have a lot of social capital, what that is another way of saying is that you know people you can trust. You have an enterprise that has a trustworthy output and trustworthy sources of input. So what we are really talking about is revaluing trust away from the paper money and institutions that rely on that.

Chris Martenson:  This is a really important point to me. I critique the Fed a lot in terms of their actual actions, but my largest critique of them is that they are ultimately operating a fiat money system of which confidence and trust are the two most important characteristics. We have to have trust that they are not going to overproduce this stuff, confidence that they are going to wisely manage it, and so when the Fed blocks every single effort for people to peer into that public balance sheet and ask the very legitimate question – What’s in there? Who did you buy it from? What did you pay for it? What are your plans for disposing of it? – and then we find out through a Foyer request years after the fact that the Fed basically supported every country, company bank in the world that needed access to dollars, without any regard to the trust or the confidence pieces.

They are, in my mind, playing with real fire here, because they are eroding the most important feature of any money, which is the trust people have in its stability and its utility and its store of value characteristics, and all of these pieces. And this is why I think this really describes, to me, much of the social angst, even of people who don’t quite understand all the mechanisms and the arcane and the jargon around what the Fed does or doesn’t do. They just know in their hearts somehow that printing up $600 billion dollars to buy Treasury bills out of thin air – there is just something wrong with that. And I think it's the trust that gets eroded that creates that anxiety. What are your thoughts?

Charles Hugh Smith:  I agree, Chris, and it's what I call the legitimization process. The legitimacy of these institutions is being eroded, as you say. And the Fed has already lost a tremendous amount of credibility. I think that politically it is already mortally wounded, in my mind, because people realize that that printing of $600 billion in the QE II was a complete, utter, total failure. It did not help the economy. It did not help the citizens. It failed, and so the Fed has failed, and I think that people’s faith in the Fed’s god-like status has been taken down considerably. I think the same can be said of Congress and the banking sector. I mean, just a huge number of institutions are failing, and people are recognizing that and they are losing credibility.

So I think the answer is not to get depressed about it, but to relocalize the institutions that we can trust, which tends to be like our city council and the organizations that form our communities.

Chris Martenson:  Right, so I agree with that, and I don’t really know how to counsel individuals to change the macro system. I look at it, and just looking through the energy lens alone, I see that every energy transition we’ve ever had in history took forty to sixty years. So we went from wood to coal to oil and so on. Each one of those took a long time, and there’s a really good reason for that, right? You have all this invested capital embedded in the old energy structure, and it takes time for that stuff to wear out and get replaced through normal mechanisms.

And I look at our current environment and I say, okay, we have an enormous energy challenge coming before us, and we haven’t taken any steps to really seriously address that. “Cash for Clunkers” was more of a joke than a serious sort of effort at that. Our fuel standards are still something of a joke, the pace at which we are going to put them on. We don’t really have mass transit. Anyway, there is no energy policy that I can look at and say, “Wow that squares up with reality.” And so that’s just one example, one slice where I am looking at current leadership and saying, I don’t see any leadership in terms of what to me would be a credible, adult-size response to just the energy slice of the story.

But there are other slices here, in terms of what we are doing with the deficit and how we are going to manage the entitlement programs and what we are really doing around education or infrastructure. Or the fact that we think nothing of spending a trillion on making sure banks are healthy, but we can’t seem to find the money to invest in what I consider to be legitimate alternative technologies. Or the next wave of farming that doesn’t involve big agribusiness, but involves permaculture and other practices that are legitimate and sustainable and understandably sustainable.

So that’s the delegitimization that I see, is that almost all of the actions that I see, I can only really understand and support, if what I am trying to do or what they are trying to do is perpetuate the status quo. They are doing a great job at that. I just don’t have any faith or trust that the status quo is either desirable or sustainable at this point.

So that is why I am personally very much out of step with the current machinery as it is architected and running. And that’s why I don’t spend any time trying to change it or tell people how to change it. I am glad people do, and they put a lot of energy there. My energy and focus is on helping individuals, companies, communities figure out what they can do under the idea that somebody is going to have to manage their future, and it's probably going to be them.

Charles Hugh Smith:  I think that’s a terrific encapsulation of where we are. We have to solve our own problems. The savior state and these institutions are not going to reform themselves, and they are not reformable in any way that is meaningful. And so, I think what we’re talking about is taking your capital, which is your human capital, your skills and your experience; your social capital, the people you know and trust that you’ve created in life; and your financial capital; and investing them in local solutions. Things that people need, like energy and food and shelter and a low-energy lifestyle. As you said, perhaps the most significant investment that someone can make is to move into a sustainable community where they can walk or bike or ski – everything they need within a few kilometers, a few miles.

Chris Martenson:  Absolutely. I have been counseling for a long time that anything that individuals can do -- and this would apply to companies as well -- anything you can do to make an investment today that will reduce your cash flow that you put towards energy (and in particular, food, secondarily), those will be incredible investments. You can often make a perfectly valid economic argument under today’s energy prices, and if you just wiggle the spreadsheet a little bit and ask the question what happens when energy prices are 50% or 100% higher or something worse, these investments just become absolute no-brainers. There is no other return on capital that you are going to find in today’s investing environment that you can match with some of these opportunities. And you can do that on pure economic terms, but then you have also increased your resilience, and if you have multiple avenues of meeting your heating needs for instance, then if any one of them fails you have good back-ups.

So this makes sense on so many dimensions, and the one that really helps me out is that I actually sleep better because I’ve made these investments. Not that I feel good about being green or anything like that; that’s not the big motivator for me. What is a big motivator is the idea that I have more control over my energy. And I have less cash flow going out for it and that I am less tied to and independent on these systems over which I have no control, to deliver to me what I feel like I need to live a good comfortable lifestyle. At the bottom of my list, yes, these things are green, and that helps, too, but that’s not my prime motivator.

Charles Hugh Smith:  Yeah, and that raises the next point, Chris, is that there is opportunity for technological innovation in greatly increasing the efficiency of our appliances and the rest of our lifestyle, as well as tremendous technological improvements in productions and so on. But there’s also what we might call social and behavioral innovations, which the United States is really poor in recognizing. The simplest way to cut your energy is to live close to the things that you need to get to. And if you have your own enterprise, then we might benefit on a household and a social scale of, like, just living close to your job. So being dependent on corporate America and a job a hundred miles away; that’s a really fragile, vulnerable lifestyle. So if you can relocalize your income streams and your enterprises, and live close to work and school, you’re already tremendously more resilient and have a much more sustainable household, regardless of what happens.

Chris Martenson:  Yeah, so we are really talking about an issue of lifestyle. I am very fond of saying that my standard of living has fallen by quite a lot over the past few years, but my quality of life has gone up. These are not connected topics to me, so I am interested – you weave a lot of social themes into your economic observations and analyses, and you are one of the most thoughtful bloggers I follow. I want to get your thoughts on this idea of needing to choose between growth and prosperity – they’ve been linked for a long time. We’ve always had both, and I think they have been conflated, and they are actually separate ideas in my mind. So it looks like growth is less and less likely, but what does that imply for ourselves in terms of prosperity? Do we necessarily have to settle for less, or if not, what is that definition of prosperity we should be striving for?

Charles Hugh Smith:  I think that’s an excellent question, Chris, which is rarely, if ever asked. I would start by saying that if we look at what the source of happiness is, both from studies – academic studies and from our own intuition – we find that happiness comes from, of course, having enough to eat and a warm place to sleep. But those are actually rather modest. They are not that difficult to supply. What happiness mostly flows from is having positive goals and the opportunity to express your personality in a productive way. We have linked this with an idea of a “job.” Like, you are going to go work for the government or corporate America, and you are going to find some satisfaction because you are making a lot of money.

But that actually is the wrong path to prosperity. Prosperity is actually a healthy life, if you will, which includes having productive work that you control and a modest amount of the comforts of life. And the freedom to express yourself. This is actual prosperity, and the amount of energy that that requires is considerably less than the sort of bogus corporate America savior-state mentality, where the more money you have and the more resources you are squandering, the happier you are supposed to be. Of course, we all know that is false. We know lots of people who are wealthy and miserable.

Chris Martenson:  Well, I think you could look at many cultural barometers and look at rates of incarceration, workplace violence, abuse – it doesn’t matter. It's like drug use in children under the age of ten. There are many things that you can point to if you are from Mars and say, [this is] maybe not the best indicator of health and maybe there is something worth looking into here.

One of my things that I really put into my definition of true prosperity – one of the things that I really want for myself and my kids and for everybody’s kids – is the idea of living in peace and security and safety. The idea here for me that is troubling is that if we as a nation consider our rates of consumption to be a nonnegotiable portion of our way of life, as Dick Cheney put it, then we are going to go to war for those resources if and when they become tight. So that is one model, right? You say, Wow, we want to have sufficient resources, because our way of life is nonnegotiable. Why, we don’t have sufficient resources, somebody else has them. Well, we have to go to war, because that’s the narrative that we have in play.

And then you are describing a different one which says, Wait a minute, what if we can actually live just as meaningful – wait, more meaningful - lives on less stuff and we don’t have to go to war? Why wouldn’t we choose that? And the people who are really running the narrative in our country right now haven’t really started to even really explore that avenue yet. And it's a concern for me. It's a concern for a lot of people. I will consider it a point of failure in my life if my kids get drafted into a resource war with China because we just failed to do something as simple as get the story right. What are your thoughts?

Charles Hugh Smith: Y eah, Chris, I completely concur, and I think that you make a profound point that our individual and household consumption has geopolitical consequences. And that you and I both know that the 19 million barrels of oil a day we burn and the 11 million barrels a day that we import could easily be cut in half, with no reduction the prosperity that we are talking about, with just really modest improvements in efficiency and our lifestyle. So the idea, and that’s what really is depressing to me, is that we would inflict a tremendous amount of harm, and perhaps, as you say, even war, to go get 8 million barrels a day of oil that we are just squandering. It could be cut with efficiencies that are not that difficult.

Chris Martenson:  I agree; that is the troubling side of this piece. I know that you are working as hard and as diligently as you can to shift that story. I am, too; a lot of people are. So the I hope I have is that there does seem to be a dawning awareness that it's time to really sit back and maybe take stock of where we are. I see that happening at what I am going to call the individual level, and that includes company level, but it is not yet happening on the political landscape. But that is okay, because you know what? Those people never lead; they always follow.

Charles Hugh Smith:  Yeah.

Chris Martenson:  So our job is to create critical mass awareness out here on the outside, and eventually Washington will wake up and go, We knew it all along, but that was to lead you to where you already are, and they’ll be right there waving flags. It will be an awesome thing to see.

Do you have any final parting thoughts here for our listeners today?

Charles Hugh Smith:  Chris, I would say that it's my belief that enterprise is fun and opportunity is there for the taking and remaking of America and our lifestyle – it’s all open to us. And investing shouldn’t be some kind of, like, worrisome anxiety-producing drag; it should be part of who we are as people. In other words, investing in ourselves and in our communities and doing stuff that is exciting and fun.

Chris Martenson:, I absolutely agree, that’s very well said. So we are heading off into this uncertain future and I would highly recommend people get An Unconventional Guide to Investing in Troubled Times. Charles, how would they find that?

Charles Hugh Smith:  Right now it's a Kindle eBook on Amazon.com, and I will have a print edition later next month. But you can read a Kindle on any electronic device; the application to do so is free on Amazon.

Chris Martenson:  Excellent; I have it loaded and it works great. So we have been talking to Charles Hugh Smith, his primary blog is oftwominds.com. He’s got a couple of books out there, and we have been talking about some of the topics in his most recent one. Charles, it's been a real pleasure.

Charles Hugh Smith:  Thank you, Chris. Bye.

Chris Martenson:  Bye.

Note: For the next few days, Charles' new e-book, An Unconventional Guide to Investing in Troubled Times, which goes much deeper into the topics discussed in this interview, is available at a 15% discount (expires midnight Friday, 8/19). 



Charles Hugh Smith  has been an independent journalist for 22 years. His weblog, www.oftwominds.com, is a daily compendium of observations and analysis on the global economy and financial markets, as well as notable political, social, and cultural trends. Charles has authored a number of books across several genres, including Survival+: Structuring Prosperity for Yourself and the Nation and his recent e-book An Unconventional Guide to Investing in Troubled Times.



Our series of podcast interviews with notable minds includes:


Transcript for Gold Surging: Buy Mining Stocks? Not So Fast, Says Frank Barbera

Below is the full transcript for Gold Surging: Buy Mining Stocks? Not So Fast, Says Frank Barbera

Chris Martenson:  Welcome to another PeakProsperity.com podcast. I am, of course, Chris Martenson, and today we are talking with Frank Barbera, one of the top experts on precious metal mining companies and editor of the very well-respected Gold Stock Technician newsletter. In his analysis for investors, Frank overlays a macro outlook on top of a highly rigorous technical analysis and employs a market-timing approach to reduce the inherent volatility within this very high beta sector. So for many years now, Frank has also managed private equity capital, most notably for the Caruso Fund, with particular focus on precious metals, energy, currencies, all things of, I know, intense interest to our listeners here.

Frank, we’re delighted to have you here. With all the recent action in gold, we have a lot to talk about.

Frank Barbera:  You bet, Chris. Thank you for having me.

Chris Martenson:  Oh, my pleasure. Now, you know, gold’s up 180 dollars an ounce since early July. What do you see as some of the key drivers behind this? You know, how much momentum does this run up have, in your estimation?

Frank Barbera:  Well, strangely enough, you know, I know there are a lot of people out there who are saying that gold could be a bubble and that maybe it’s going to come down sharply. Right now, I would strongly disagree with that. I think when you take a survey of what’s going on in the world and you look at Europe, Europe is in the midst of a major banking crisis, a banking crisis that could have widespread contagion from not only Europe but back to the United States through the credit default markets. And the U.S. also has, as we’ve seen now, major debt problems and a very difficult situation in terms of an economy that seems to be relapsing back into recession. And that, once again, is putting massive pressure on the Federal Reserve to try and do something to ameliorate what looks like is shaping up to be another hard landing. You look at all of these factors, and what it adds up to is gigantic uncertainty. And it is that uncertainty which is under-painting the move higher in precious metals. Another important point which your listeners should really take into consideration is the fact that this is a climate where, because global growth is slowing, short-term interest rates, especially here in the United States, are really locked at zero.

Now, depending on what metric of consumer prices you want to look at – let’s say we take this fairly horrible CPI that’s constructed at 2% inflation. Right now you have negative real rates in the United States. And if you go back over a historic period of time and you look at negative real rates and the price returns on gold, gold does very, very well -- as long as short term rates are in negative territory. Now, when short term rates are normalized and they move above the rate of inflation, that at that point can become a problem for gold.

I don’t see any way that that’s going to happen for the longest period of time, especially when you start to look at some of the recent economic data that’s coming out of the States. We see very weak employment. We see GDP backward revisions as far as 2003; they went back just recently to downwardly revise the GDP data, the recent quarter coming in at about 0.38 with final demand at around 0.08. So you have a comatose growth situation here in the United States. No growth, chronically high structural employment -- that is a situation where it’s impossible to see how short-term interest rates are going to start to move up. So I think negative real rates are here to stay, and gold will continue to surge.

Right now, Chris, the other thing that’s really amazing about all this is like you said, we’ve had this strong move up in precious metals prices, in gold prices. But remarkably, from a technical point of view, we really have not seen any kind of bullish enthusiasm. It’s slowly starting to creep into the market over the last day or two, but I look at dollar-weighted call-to-put options data each day, and that tells me a lot about how much money is flowing into calls and how much money is flowing into puts.

And right now, even though we’ve gone to $1660 on the gold price, we have not seen those call-to-put ratios move up to readings near two and a half or three to one, which would typically tell us we’re getting into a frothy market. They’ve been hovering around 160, 170, and that tells me that there’s still plenty of room to go.

Also, on a momentum basis, if you look at moving average convergence/divergence, which is called MACD or RSI, we’re seeing strong momentum confirmation by the move up in the precious metals -- outstanding relative strength. To me, this tells me that gold could easily surge in coming weeks towards the $1800 level, and I have really very little doubt in my mind that we’ll see $2000 over the next two to three months. So I think the price is going sharply higher from here.

Chris Martenson:  So against that, though, we see that the USD is up about a full tick today, up almost 1.4% at 75. It looks like a decent pop for the day, but it seems almost maybe stuck in a range. How are you looking at the dollar now, which is the anti-gold?

Frank Barbera:  Well, that’s a good point, and I’m glad you brought that up. The one caveat I would have with gold in the short term is that you could see a very short-lived pullback. So this is not something that I think investors should really be terribly worried about, but I could see something, for example, like the GLD pulling back towards, maybe, the 155 to 160. We’re at 160 right now, but about the 155 to 156 area.

So you could have a couple more days of strength in the dollar, and you might get a few more days of short-term weakness in the gold price, but I think within a couple of days were going to make another low in the gold market, and then from there the price will turn higher and begin another large trending move to the upside. So in the very short term, I do think we’re going to see a little bit more dollar strength. The dollar index is at about 75.02 as we speak here on a Thursday morning, up about a buck. I think you could see a push up towards about 77.5, maybe 78, over the next four to five days.

And, now there’s one other little caveat. The dollar is showing a very, very weak pattern. When we talk about poor-quality rallies, this is really the textbook definition of a poor-quality rally. So I’m not really that sure that we’ll even make a move to 77, but I’m allowing for the possibility that it could do that over maybe the next week or so. That could correlate to some kind of a short-term period of weakness in the gold price, and at that point, then, I think we’ll probably start to see signs of a reversal back to the downsize in the dollar and a reversal back to the upside in gold.

So, you know, one of the things I would really recommend to listeners is to not worry too much about short-term moves. This is one of those times you really have to think big-picture. If you’re very concerned about getting the best price, break up the capital that you have into smaller increments and dollar-cost your way into the market in stage tranches, because trying to put too fine a point on any of these markets right now is not the greatest idea. But, for what it’s worth, I do think we’ll see a little more bounce in the dollar and short-term pullback in gold, and then I think gold will reverse higher.

Chris Martenson:  You know, this fits largely with what I’ve been telling people as well. I’m also noticing for the dollar that something very unusual has happened. The past 24 hours, I think we’ve had three central bank interventions on behalf of the Swiss, the ECB, also Japan. I see the Japanese…

Frank Barbera:  Japan, sure.

Chris Martenson:  ...yeah, the yen’s down 2.3% on the day against the dollar. That’s big. That’s a giant move. So some of this dollar bounce is really engineered, you know; it’s manufactured in a central bank near you, so…

Frank Barbera:  That’s exactly right.

Chris Martenson:  ...so does that account for some of the poor quality of this rally that you’re seeing. It’s really – you know, central bank interventions have a really bad habit of sticking. They don’t stick well.

Frank Barbera:  They don’t stick well, and that’s exactly the way this pattern looks like it’s going to play out. What I notice is that more or less between January of this year and early May of this year, the dollar was in a strong downtrend. It kind of pushed down to new multi-month lows and got very oversold. In any market, when a market gets very oversold, if it can build a solid base and then come out of that base with a vengeance and move up very quickly, that’s where you get your best rallies. When a market sort of languishes near the lows, what tends to happen is that oversold condition dissipates, and then over time, the more it languishes and the more it lingers near those lows, when you finally do get a rally, the market tends to get very overbought very quickly. And that’s exactly what we’re seeing in the dollar. The lows, the oversold, maximum was on May 2nd and May 3rd. It’s been compressed and lingering down near the lows through June, through July, now we’re in August and we’re getting a little bit of a bounce, and what I see happening on my technical indicators is that we’re moving up and getting overbought very quickly. That tends to make it very self-limiting.

And, frankly, 76.5 is very strong resistance. That’s the high that we saw on May 24th and also on July 11th. Maybe we go up and take out those highs by just a few ticks for just a few days and then turn down, but this looks like it’s going to be very labored and really a short-run affair. And my suspicion is that if it does turn down later in the month of August in the dollar, it may turn down into some kind of massive break to the downside, because this is a chart that’s hovering just above 30- to 40-year lows.

So a renewed move to the downside here in the dollar during the second half of 2011 could end up bringing about a stunning decline. So this is something I think that your listeners should be very attentive to. Keep a strong watch on the dollar, and start to think about if it starts to turn down, and there’s nothing wrong with waiting for some confirmation. I usually – even though I’m kind of geared towards looking for turns in the market -- I usually like to put money when I actually start to see a trend develop.

So there’s nothing wrong with waiting for confirmation, but most Americans really need to stop thinking in the same kind of dollar-centric terms that they have over the last, you know, the bulk of their lifetime. It’s time to start thinking about deploying assets and deploying savings into different kinds of currencies. You look at, let’s say for example, the Canadian dollar, the Aussie dollar, maybe the Singapore dollar, and the Swiss franc; those are all fairly steady currencies. Some people might be interested. I don’t work for them, but I personally have an account at Everbank, and when I get my paycheck in every two weeks, I usually allocate some of it into different currencies. That’s one of the few banks in the United States where people can go to open up multi-currency bank accounts. You can save in currencies other than dollars. And I think that’s an idea whose time has come. So that’s one way of hedging dollar weakness.

Chris Martenson:  Yeah, you know, I’ve been with Everbank for a number of years myself, principally in Canadian dollars at this point.

Frank Barbera:  That’s exactly right.

Chris Martenson:  Yeah, that’s worked out really well for me.

Frank Barbera:  A sidebar – and again, it’s another one of those personal choices people can think about but, you know, Canadian banks – this always becomes an issue with reporting, because when you open a foreign bank account, whether it’s a Canadian bank or a Swiss bank, you know, you have to do a lot of extra reporting to both the Treasury and the IRS, and a lot of people don’t feel that that scrutiny is really worth it. So that’s where Everbank makes a lot of sense.

But I happen to be a big fan, just to go on the record with a plug: I love the Canadian banking systems. They have four or five large money-center banks there: Royal Bank of Canada, Toronto Dominion, Bank of Montreal. There’s a lot of good places up there where you can look at those banks and say, gee, these banks have great balance sheets. The country has low debt, and they have very conservative lending policies. They never really did anything reckless with regard to real estate lending over the last few years. And, so, you know, that’s a very – that’s a real sea of tranquility in terms of just wanting to park money some place. It comes at a big price in terms of reporting requirements, which is always a personal decision, but that’s another idea by the way.

Chris Martenson:  That’s right. So, to summarize here, you think for the new few weeks or a period of time the dollar is the best horse in the glue factory. The chart is a little bit weak. And, if I was going to pick an event that would support the idea of the chart being weak and why people are leery of the dollar, it’s because, you know, the Fed is now the last central bank that’s not really tossing another QE bundle into the party. So I think everybody’s sort of anticipating that. I certainly am. I’m looking at the stock screen right now. We’ve got all the major indexes down over 2%. It’s pretty much a red blood bath here on August 4th. We’re seeing the commodity index get hit hard. Its’ beginning to look, smell, and feel a little bit like 2008 all over again. Do you see any similarities there, or is this different?

Frank Barbera:  Well, I’ve been writing – and I’ll take a little credit – I’ve been writing in my newsletter over the last few weeks, the Gold Stock Technician, Chris, and I’ve been warning my readers that the market was building a head-and-shoulder top. In the last letter that I sent out I told – which went out over this Sunday - I told them I thought that the market could have a very violent move down this week, a mini crash, and that seems to be exactly what we’re getting. My target was about 1155 on the downside for the S&P on this move. And, I think we could see 1120 intraday,but a close around 1155. This market, the equity markets, have left a major top, a cyclical top, a reversal pattern in place.

This looks like equities globally are moving into a major bear market, and that does have me thinking that the Fed may move to the next round of quantitative easing, even though it’s going to be interesting to see how they justify it, because it seems like such total madness, I mean, in terms of what the actual effect will be. How can this possibly be good? In other words, it’s just going to drive up commodity prices, and when you look at an economy that’s already growth-challenged and slipping into recession, how does driving up cost for consumers re-kick-start any kind of growth on Main Street? I don’t get it, but that’s probably where they’re going to go, and that will definitely help gold.

The other thing that seems to be – that listeners should be aware of – is when you look at Europe. Yesterday, before I left, I had the top ten banks of Italy, the top ten banks of Spain, and the top ten banks of France on my screen, and you could just look. You know, one after the other. The charts are from the upper left corner to the lower right. It’s just a straight 45 degree down angle on all these banks.

Chris Martenson:  Ugly.

Frank Barbera:  Ugly. So Europe is in a major banking crisis, and guess what? American banks, even though the numbers are not huge, in terms of the credit default swap liability, American banks have about 56% of that liability. I think the big issue is so some of this could be referred into our banking system over time, and that may be another catalyst that pushes the Fed towards more easing.

But I’m beginning to think that when you look at the size of the problems that are besetting Italy and Spain in terms of rising yields, the fact that it’s going to be very, very difficult to bail out economies that are that large, you know, I think you have to start raising the odds in terms of Germany maybe pulling out of the euro or forcing the ejection of some of the smaller countries within the euro. It seems to me that something tectonic is on the way in terms of the currency markets. And I think if something like that does happen, maybe some kind of a realignment in the euro block, that could indirectly be a trigger for a massive dollar sell-off, because I think if they reconfigure the euro into something that is a very liquid, more conservative, less debt-laden currency, then I think that could be the trigger to switch selling onto the dollar. So something to watch for, you know, in the weeks ahead. 

Chris Martenson:  So here we have more pressures building. It turns out that QE II didn’t really do what maybe we hoped. Certainly, maybe it stopped something worse from happening, but it certainly didn’t make any magic happen, and that was $600 billion not including the other $200 billion that the Fed was recycling through principal and interest payments throughout the MBS part of the portfolio. So here we have eight hundred billion, didn’t do it, and there’s more weakness ahead. So I think people are rightly beginning to question, Well, what’s another round going to do? And it’s a fair question.

So we sit here and we see recently gold has moved up strongly. I’ve noticed that silver had surprised [us] by looking as if it was going to behave as a monetary metal there for a few days now. Now it looks like it's behaving like a commodity again today. We’ve got a lot of red all over the screen. So, you know, a lot of our listeners have a question, which is, you know, they love gold and they’ve been in mining stocks. You’re a specialist on those. Now historically, I used to trade mining stocks a lot. They were nicely leveraged to the price of gold all during the 2000 to 2007 timeframe, which is when I was principally in them, and they make bigger swings in whichever direction the metals move – nice high beta behavior.

But they’ve been lagging the returns of the metals themselves. So with gold now making all these new highs, many analysts I see are – they’re just increasingly bullish and anticipate some big move upwards in the gold stocks eventually. You’re sounding a much more cautionary note. Why is that?

Frank Barbera:  No, I’ve been very negative on the mining stocks, which, believe me, is not easy when you write a newsletter called the Gold Stock Technician.

Chris Martenson:  I imagine not.

Frank Barbera:  It’s not good for newsletter sales, you know? So -- but anyway, no. You know what I found, Chris, is really, I’ve been watching the mining stocks since 1983, so a fair amount of time that I spent watching the group. I have a wide variety of unique technical indicators on the sector, and as I started to see the stock market topping out over the last two to three weeks, I wrote my readers a note to say the mining stocks are also very overbought. Mid-July we saw one of the second most overbought readings on the XAU, on the arms index, in five years.

And that kind of reading is a big warning, and so I’m not surprised to see them going down. The last letter I put out I told subscribers that I thought the mining stocks could get cut in half in here, and I’m going to stick with that. I think we’re looking at a 30 to 50 percent decline over the next six months. The XAU, which recently peaked out at around 220, I think you could see that close to 110 before this decline is complete.

So, now, why is that? Really, the truth seems to be that a lot of these assets have been very, very highly correlated and that mining stocks are a risk on asset. Now there are a lot of very competent analysts out there that have been strongly recommending them, pointing to the idea that the stocks are, quote, cheap. When you look at Barrick Gold or Newmont Mining you see 13, 12 times earnings, multiples relative to cash flow that are near multi-decade lows. I don’t disagree with any of that. I think that the mining stocks are a great value on the fundamentals.

On the other hand, the equity market looks like it could be heading for a very substantial decline, and I think that mining stocks – they have not shown the ability, at least not yet, to decouple from the equity market. Now, clearly, nothing is cast in stone, and I sort of evaluate this day to day, but, you know, if you look at the past data, it really suggests that they’re going to get hit if the market goes down.

And at some point, I think what you’ll see is, I’m looking for a bear market in equities over a period of a couple of months. I think during that period of time you will see gold go through the roof, the physical metal. I also think you’ll see some nice upward progress in silver. I’m in the camp where I think silver is going to act like a monetary metal. Sure, they may pull back here in the short term, but I think there’s a real opportunity there for silver to turn the corner, especially if we get another Jackson Hole special come the end of August with Dr. Bernanke and more QE. I think silver will light up like a firecracker. But the mining stocks they need to simply fall to a bigger discount to the underlying metal. And at some point, then, if we end up getting into a really strong dollar movement of the downside, I think that’s when you might -- down the line a bit -- you see the mining stocks turn.

Now, I also want to make another point that’s very important. I think that ultimately this shakeout in the mining stocks, we don’t have to put numbers on it, but let’s call it a substantial decline. Once that decline is over, I think they will reach a low, probably into the first quarter of next year in 2012, and from that point I think you’ll see a multi-year bold market in the mining stocks, where they play catch up to where they should be and then to where metal prices will be. So I think that it’s going to be very volatile, and right now they’re decoupling, and that decoupling may stretch out dramatically, but then they’ll eventually catch up. So I still see an enormous opportunity there, but I think that mining stock investors may have to wait awhile to capitalize on that opportunity.

Chris Martenson:  Yeah, I like this because it confirms my own reasoning and thoughts. Of course, I love what you’re saying. On March 8th I put out a piece called The Coming Rout, and it was a macro analysis of what was just going to happen, I thought, to the markets as the Fed's QE liquidity went away and all of those Treasury invoices that were being stuffed in the upper right corner of Geithner’s desk as they tried to maneuver under the debt ceiling, those were going to come roaring out and have to go out and suck up liquidity starting right around now.

All of this put together, I think we’re in for a really weak period coming into fall. I mean we’ve just got some – the liquidity pieces we would need to see just aren’t there. The economy is not on its own legs. It's not spinning out cash. We look at excess reserves of banks. They’re all just parked there. They’re not being lent out. So the Fed was the source of cash. They were cycling it through the federal government. Both of those doors are either mostly closed, in the case of the Fed, or all the way closed, in the case of the federal government. So here we are, and without that liquidity, I just couldn’t identify where we were going to see that depart from. Bang – it’s playing out as we see it, and I don’t know that the Fed has any other opportunity or options before them, except to just open those flood gates again and what do they do.

Frank Barbera: In fact, Chris, when you look at some of the past examples where we were in other countries that were in situations like this, this feels to me like Argentina 2001, 2002, where the economy, where the deflationary pressures who’ve come to the end of the stimulus cycle, the deflationary pressures, the pressure on the global system to unwind is huge, and we may see a bout of contraction. In Argentina what happened was over two to three years that period of contraction became more and more and more intense and the government had to write more and more and more checks to maintain the status quo. They had a currency board at the time. People were saying that the Argentina peso, that they had dollarized the economy, that the peso was strong, because it was a part of a currency board, and yet the government kept writing checks, and then eventually it blew apart, and the currency dropped 70 percent in six months. Inflation went from something relatively small to north of two hundred thousand percent over 18 months, and money just evaporated. And, that’s when all of the banking system problems really came out and you had situations where they did the colorito in terms of limiting withdraw from the banking system. And, you know, we’re at that phase now where it’s those deflationary pressures that are asserting themselves again. The fed is out of bullets and monetization is going to be the answer that comes down the line. I don’t know when it’ll kick in but in my heart of hearts I really think that’s where it’s going to go.

Chris Martenson: Yeah, I don’t know that there’s many other options at this point and we’ve long – I think the time to actually affix this was 1995. That’s when Greenspan implemented the sweeps to effectively eliminate reserve requirements in banks and allow them to really go and have a party and so we’ve never really suffered through the hangover yet. This one will be a doozy I think. So, you know, I want you now to put yourself in those shoes then of the average investor who’s looking to protect capital, their wealth in these really uncertain times, maybe even looking for a little upside embedding on a secular bull in precious metals. What’s your advice?

Frank Barbera: Well, you know a couple things – first of all, I would say the traditional advice for precious metals in terms of an asset allocation is five to ten percent. I would say for most individuals that’s probably too low. I think you should start to think in terms of 15 to 20 percent. Personally, I’m way higher than that and you also should think about diversifying your precious metals. Think in the country. Think about out of the country. Think about different kinds – I’m not a big fan of most ETFs. I will go on the record and say that I am comfortable with Stefan Spicer and the Central Fund of Canada and his other product which is the Central Gold Trust, GTU. Those are PFICs and they have reporting requirements but I think those are reasonably good assets because they’re allocated gold. The key thing about gold is that it must be allocated. If it’s not in your possession and you’re going to have some kind of a conduit between you and the gold quite honestly Central Fund and Central Gold Trust and Central Fund of Canada, GTU and CEF. Right now, those are the only ones I’ve been able to get enough personal comfort with to feel okay, I’m comfortable owning these securities even in a crisis. That’s not to say anything negative about the various spot products. I just haven’t had enough time to understand them but then I would not – it’s my opinion and it’s just one man’s opinion but the GLD and the SLV feel like from what a lot of experts have said more paper gold or at least unallocated gold. Some of the sub custodial arrangements there have been questioned. And so I think you have to be very careful and judicious how you think about your metal holding.

Another asset class that doesn’t get a lot of attention and a lot of thought but I think deserves a place is the currencies. There’s a lot of different venues to that. You can go to Ever Bank or you can look at some of the global bond funds. I’m going to give out three global bond funds and on this I do want to – I do have to mention that I am a fun manager. I’m the co-manager of the Sierra Core Retirement Fund. The symbol is SIRIX for the mutual fund that I am attached to. We’re a fund of funds and from time to time we may have investments in these funds. Right now we don’t as a matter of fact. That’s because the dollar is rallying but I wanted to mention three very good quality global bond funds which investors should at least have on their radar. The symbols are – and I’m going to give them from the most conservative to the more risky. The Paid In Global Bond Fund is PYGFX. This is a very, very conservative fund. It pays about four percent yield and it has a substantial portion of the portfolio outside of dollars in foreign bonds’ so you earn interest on the foreign bonds and then you earn interest on the rising currencies against the dollar.

The next is the Templeton Global Bond Fund – TEGBX, which is the retail share class. That is one of the best performing mutual funds, period, and its compounded money around 11 to 12 percent per year over a very long period of time with very, very low volatility. And, what they end up – traditionally, they’ve had around 20 to 30 percent of the portfolio in high grade, triple A corporate Korean bonds, things like _____ [00:32:58] bonds and Samsung bonds that pay around six percent. And, so you get the rising Asian currencies and you get the yield on some of the Asian corporate bonds. That is one of the actually my favorite funds out there in the fund world. It does have a one percent back end load and I will tell you though of 11 to 12 thousand mutual funds that I look at that is one of the few where the pay on the backend load is a good idea. You’re getting management that knows what they’re doing and most other vehicles cannot deliver that.

Then also Deutsche Bank has a global enhanced bond fund – SSTGX, which has knocked out around nine to ten percent annual total return. Again, a nice dividend and has a nice yield of around three and a half percent and it very conservatively managed. There are others Pimco, Oppenheimer have good global bond funds – PFUIX and OIBCX is the Oppenheimer fund but, yeah, they’re a little bit more volatile and they’re for more risky investors. So the ones I just mentioned are a little bit more conservative. In my fund that’s what we tend to deal with. We look for conservative vehicles and our whole fund is oriented for conservative investors.

Chris Martenson: You know it’s – this is an area that I think also people should be wary of and look a carefully because, you know, there was – I think it was -- what was it Reserve America was the money market fund, very conservatively run, it turned out they had a boatload of Lehman bonds right up to and through to the crisis. And, of course, they broke the buck and it took two and a half years to settle that before people saw their money again. I’m not saying that anything you’ve mentioned here is in that class but some of these bond funds out there are holding some junk. The ones you’re mentioning I say are all holding really high quality stuff. Is that true? 

Frank Barbera: They’re highest – they’re generally high end. If you look at the portfolio single A, double A, triple A paper, money market funds in general – I deal a lot with TD Ameritrade and this is, again, this kind of goes back to the whole Canadian banking theme. TD Ameritrade phased out it’s money market funds a year and a half ago. And, what they did is when investors when you have an overnight sweep as a TD Ameritrade client and your money goes basically into a FTIC insured bank account as Toronto Dominion Bank. And, so they realized in their – in where I give them a lost tread at being ahead of the curve – that they could have been reached for yield anymore to keep those money market funds at once. So they just phased them out. Very few mutual fund families and very few brokers have really done that. Instead a lot of them have reached for yield and in the process they’ve ended up buying a lot of European banking debt, which is now embedded in these money market funds. So you definitely need to look at what’s in your money market fund if you still have one because in some cases they’re holding some really junky paper. And, if you look at the charts of these European banks it’s definitely not something that one would take a great deal of comfort. I cannot speak for any other firm but I am – you know our firm, we only custody with TD Ameritrade. I’ve been a TD Ameritrade customer for years and years and I don’t want to sound like a commercial for really anybody but, again, they have a very conservative approach to things as do most Canadian firms and those are ideas that people might want to think about.

Chris Martenson: Oh, fantastic, excellent advice there too. So here we are. We’re near the end of our time. Do you have any final words for the listeners today?

Frank Barbera: Well, no, I think we’ve covered it all. You know, I’m ultimately worried that when the dollar does begin to fall should it break down that we will see a bare market in yields here in the United States. So I think bond investors – you know, right now bonds are in an uptrend in terms of price and a downtrend in terms of yield and it doesn’t show any sign at the moment of really reversing but I do notice that the ten year bond yield at about 2.47 this morning is all the way back down to multiyear generational lows. It’s just an interesting point to think about when you look at long term trend changes in markets. I used to work with John Bollinger or many years and John always used to tell me, especially when I was much younger he said Frank think in terms of M tops and W bottoms. Often long term trends will exhaust with a double top on the upside, think gold in 1980 it made a big M top at the 1980 highs. In 1999, at the bottom it made a big W bottom. If you look at treasury bond yield they made in a major lull in October of 2010 at around 220, they moved up to around 360, and now they’re within hailing distance of that 220, 230 lull at 246.

This could be the right side of a big W bottom on interest rates. It may take a few weeks to turn out and begin to reverse up but I look at the long term chart and I noticed it as rates are coming back down to test the former rows most long term momentum measurements are not confirming the match of the lows. So there’s a positive divergence shaping up on some of the weekly and the monthly charts on bond yields and that tells me that we may be very close to the end of the bull market in bonds. There may be a month or two away but it’s an area to be very careful with in terms of domestic dollar bonds. And, global bonds, you know, Asian bonds, different animal, different type of thing. We’ve already seen European bond markets have been wrecked but that’s an idea that I think people have to keep a very close watch on is where are rates going and if rates do make a turn that would be very inflationary in the U.S.

Chris Martenson: All right. Well, that’s I think very wise and I think great observations. So listen it’s been a pleasure and I really hope we can do this again. You know, so much is happening so quickly that we’re going to need all the eyes and advice that we can get at this point. It certainly seems like things are speeding up and we might be heading into a hard landing as you put it. So best of luck.

Frank Barbera: It was my pleasure Chris.

Chris Martenson: And hope to talk to you soon.

Frank Barbera: Thanks so much.


Note: Listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on The Screaming Fundamentals For Owning Gold And Silver, which takes a deep dive into the data behind the supply and demand imbalances in the bullion markets.