Annual chronicler Dave Collum sits down with Chris again this year to discuss the major themes of his epic 2013 Year In Review recap.
2013 was a frustrating year for those who believe in cause-and-effect. Markets have been levitated far above what fundamentals would justify. Sovereign debt has increased tremendously, but seemingly without repercussion. Central planners have become more brazen in their belief that intervention is the best way to control both an economy and its citizens – to surprising little outcry from the populace:
To me, this year was about civil liberties. It just dominated my field of view.
You can touch upon Snowden, but there were all sorts of breaches of civil liberties this year, all sorts of warning shots that say it's problematic. You can track concerns about the NSA's potential to go to totalitarian to 1975, Senator Frank Church. There have been whistle blowers all along saying these guys are dangerous. And then all of a sudden, somehow Snowden clicked. But he was not the first.
So civil liberty is a huge issue. They've got facial recognition software to make your shopping experience better. Right… I do not want my shopping experience being approved by face recognition software. We're at great risk of going Orwellian here. And this really came through clear this year.
The debt just keeps getting worse; we just keep going bananas on the debt. And these guys, they go on TV. They say we've got to get the consumer consuming. The consumer has no money: it's that simple. The consumer is out of money. Student debt is soaring because the parents are broke. We've got an entire generation that is being damaged daily by opportunities that do not exist that they were promised. And this is scarring.
And then the markets look broken to me. They are so state controlled – and anyone that says that is conspiracy theory, then excuse me: What is QE? If the market are rigged, then what is QE? What are zero percent interest rates? What is that?
And so I think broken markets, civil liberties, state capitalism – that is the plot.
Meanwhile, because the Dow is up, everyone is partying. But since the numbers are so bogus, we know we are going to get a regression of the mean. History of bear markets show three big legs down. We have only had two. The next one will rip the souls out of investors if it shows up. And the markets, the economy is immuno-compromised. We are fragile. If we get hit with another Lehman-type event, we are going to really crumble this time. We are really going to have a mess on our hands. And I think it could come.
Click the play button below to listen to Chris's interview with David Collum (62m:34s):
Chris Martenson: Welcome to this Peak Prosperity Podcast. I am your host, Chris Martenson. If you want to know where you headed, you have to know where you are and where you have been. Well, continuing with our annual tradition, we have got the best year-end review in the business thanks to today’s guest, Dave Collum. And for those of you unfamiliar with Dave, he is a professor of chemistry and chemical biology at Cornell University – obviously, the perfect guy to talk to us about macroeconomics. And in addition to his academic interests, Dave authors an annual macroeconomic assessment titled The Year in Review and is hands-down the best synopsis of anything that mattered during the previous 12 months. And Dave’s latest Year in Review can once again be found on peakprosperity.com. And I am excited to have him with us now, in order to expand on his excellent insights. Hey, Dave, thanks so much for joining us again this year.
David Collum: It is great to be here. I enjoy your podcast more than anything else I do.
Chris Martenson: Thank you so much for that. Before we jump into the macro, let me go micro for a second. The Fed just came out with a taper announcement. And they are going from $85 to $75 billion a month extensively. Although, as you and I have noted in the past, if you actually look at the Fed’s expansion of its balance sheet, it has been running a little over $90 billion a month for the past year. So who knows where the $85 billion a month number comes from? And what did we see in response? Well, stocks are vaulting higher. Bonds are vaulting higher. Gold is subdued. Can you help us make sense at all of what the market is thinking? And I have to put quotes around that work here “thinking” at this juncture.
David Collum: And the answer is no. I cannot help you with that question. You could actually take a try – chance and say that is a “buy the rumor, sell the news,” or “sell the rumor, buy the news” moment, right. So to the extent they are afraid of the taper. Now they are not afraid of the taper. So they buy, right? It is something that is silly. But we are still $75 billion away from zero. And if we got rid of the entire taper, we are still at unprecedentedly low Fed funds rate. So it appears as though we have taken out 5% of some tumor embedded in the monetary system. So it is hard for me to get excited about. But otherwise, what you are seeing is market behavior that has a turbulence to it that is what you would expect and call rational only in the context of massive monetary printing causing money to slosh around wildly.
Chris Martenson: Well, I feel like this is going to be a challenging podcast because we are going – we have been handed a rubber yardstick. And we are in a hall of mirrors. And people are asking us to give them something firm that they can look at and make sense of. And this is really, this Year in Review, if I was going to scan through your list of things that I have read, it is not really a case of here are the really truly exceptional things that really happened. We did not have a Lehman collapse. We did not have certain things besides Snowden’s big revelations on the NSA. What we really have are just continued distortions. And they are so distorted now at this point that many of the things that you have cataloged, to me, just come across as literally like a fun house of mirrors. They are so distorted at this point. Most people cannot even recognize them as distorted any longer. And we have been living under some fairly grotesque conditions for quite a while now financially.
So where do we start with all of this? Let us start right in with where you think the stock market is, and whether you have seen a market that smells, tastes, and feels like this one before. And what is propping it up here?
David Collum: A lot of measurements out there are truly unbelievable. You will read about the housing recovery is in full force. And then you actually look at it and say, Wait a minute. I cannot even detect it on a plot. And earnings fall into that particular category. So there is a massive distortion of earnings. I was just listening to some this morning where they kept talking about how earnings jumped. And then they say but that is due to share buy-backs. So now you have major corporations that, instead of putting their capital – which in my opinion is largely borrowed – into capital expenses, which would grow the business, this year’s capex is approximately zero. So we are eating our seed corn this year. We are not doing a lot of R&D, according to the numbers. We are putting it into share buybacks. Even a company like Merck did that. Their pipeline looks like it dried up in their responses to buy back shares. And that makes no sense.
But then you get into the guts of the earnings. And you have got two problems there. One is, stockmen estimated that the X items – where these keep doing these one-off items, which turn out to occur in every earning’s report every quarter – he estimated that that might be causing as much as a 30% distortion to the earnings to the upside. And then the second trick that they do is they use forward earnings.
And I got into a spat with some prominent bull. He used forward earnings. And I said, Why would you use those? They are the only ones that do not exist, right. They are fixed. They are being fabricated. And it is also well documented that as the earnings come in, the forward estimates start dropping down as reality strikes. And then they get to the point they are so low that they start using the next year’s forward earnings. And I think the forward earnings estimates are another double-digit percent contribution to distorting the so-called earnings – the so-called PE ratio.
So some guy will go on TV and say the PE ratio is 15. I think it could be 25. You have got the Case-Shiller PE that is sitting at 24, which is nosebleed. And they use trailing earnings. You use trailing earnings. The Russell 2000 is something like 60 or 70. It is a disaster. So I think we are getting a bad read on earnings. And I think that elevates the market. I think the day traders, the algos, they are bidding up the market with easy money. They just wanted it badly. But I do not know when. Time scale, who knows! We are back to the land of the insane.
Chris Martenson: There are a couple of things that have legitimately boosted corporate earnings. One is, they are not paying workers. Famously, you have got McDonald’s and Wal-Mart, whose business model in corporate profits also entirely depends on the taxpayer providing their workers with food, medicine, and things like that, and basic living things. And the second thing that is really boosting corporate earnings right now is that they are feasting on the lowest-ever cost of capital. And what is interesting to me is what you mentioned, capex, the capital expenditures. That is the reinvestment in your productive property plant and equipment. That is investing in your R&D pipeline. That is building your company back up and investing for the future. It is at all-time lows while money is at an all-time cheap position.
And so what are corporations doing with all that cheap money that they are getting? Well, they are buying back shares, which tends to boost earnings per share. So when you look at the debt side of the equation on corporations, they have actually been levering up pretty handily. And so that makes sense, I guess. At the same time, anybody who is projecting that all-time historical high corporate earnings – and we look at corporate profits as a percentage of GDP; they are at the highest they have been in 70 years, and I do not think they have been higher – and the idea that they would then stay there that permanently high plateau of prosperity. Where have I heard that before?
David Collum: Irving Fisher. Let us stick on that idea for a minute because it could be confused. So you say well, we are at record-high corporate earnings. And you say well, of course, because we have a growing economy. But we are at record-high profit margin. And that is a plot I know you know and I think you were referring to. And profit margins are one of the most regressable measures out there. And that is, when your profit margins are at record high, they are going to regress back to the mean. And what I can tell you is, if your profit margin is cut in half – which is easy to do; it is hard to cut your total earnings in half – next thing you know, you have got no earnings. And they tend to arbitrage away. So being at record-high profit margins is decidedly bearish. There is no way of looking at it any other way, because you are going to regress to normal profit margins.
And, as you said, they are getting it off of free money. They are getting it off of capex-like investing. They are not putting money into plan, hardware, and R&D. And so they are basically just taking all profit right now, right here in the present. And they are not taking – we got workers going on temporary status so they do not have to pay health benefits. And oh my God, that will take us into Obamacare in a heartbeat there. And so it is optimum from profit margins. And that will regress not only to the mean, it will regress through the mean. Because otherwise you do not have a mean.
Chris Martenson: Yep, well, the idea that we are going to permanently live at these corporate profit margins is a really bizarre idea, and one that does not have a lot of data to back it up. But that is what you get when you are in a bubble. I am a big fan of thinking we are in the largest liquidity-driven bubble ever. And by the way, if we widen the lens a little bit, we discover this is not a U.S. story. I am not talking about U.S. stocks only here. The German DAX is in the same sort of territory. Even the Greek stock market has recovered against every possible underlying economic statistic, right. So with that, we have to just adjust to the idea that we are living an in incredible liquidity fueled abundance at this point in time. And the part that is just starting to sneak through, this is the interesting development for me this year.
The part that is starting to sneak through is awareness that that regime of flooding the world with liquidity has not floated all boats. In fact, not even the majority of boats. In fact, not even ten percent of the boats. In fact, you can even argue that the 1 percent versus the 99 percent, yeah, it really lifted the 1 percent’s boats. But within the one percent, the fraction of that, the .1 percent, they really got their boats lifted. This was an absolutely regressive, repressive, and deeply unfair – if I can use a qualitative term like that – a deeply unfair way to go about trying to boost things, as it were.
David Collum: Yeah, I am going to give the Fed a little bit of credit, in the sense that I do not think they saw that coming. If they did, we should just line them up and hang them, because you are right. It is unfair. I think they actually believed that they could pump money into the system and it would pump it somehow into the economy. I do not get this. You and I talk about this every year about how you cannot print your way to prosperity. In fact, if you say okay, let us go back and look at the historical record. Who has printed their way? Who has inflated their way to prosperity? And that list has not yet been uploaded to the internet. That is a list of zero right now. And so they are doing highly experimental things.
I view the unfairness of it as almost antiseptically, in the sense that it is not about redistributing wealth. So as soon as you start talking about unfair, people start saying, Oh, boy, now you are going to try to take it away. You are going to start putting in high taxes and all this stuff. No, I think a healthy economy naturally distributes wealth in a rational way.
And I cannot say it is a simple way. And I cannot say I even know what it is. But my sense is that when an economy is really chugging along efficiently, wealth will spread out various ways. And the rich will get richer; there is no question. That is true. But everyone else will get their share of the pie. It is not happening right now. And history shows that when you have the masses getting pounded, forget about whether it is fair on the way you redistribute it or not. Bad things happen, right? And if you tell those masses, let them eat cake. The next move is not a pleasant one. So that is my view. I think we should worry about the unfairness from a purely pragmatic perspective. And that is that civil unrest is what follows.
Chris Martenson: We have already seen that, of course, in certain municipalities that have collapsed where somehow there just was not enough juice to keep the whole thing going. Camden, New Jersey pops to mind, Detroit, certain suburbs of other major cities and other areas. So we see that already that there is sort of a decaying going on. And this is the thing that gets me is just the shortsightedness both on the fiscal side out of D.C. and the monetary side on the Fed. You spotted the Fed credit and said, Well, maybe they did not know how this was really going to turn out. And they thought that if they could just boost the markets and boost asset prices – they famously still confuse rising asset prices with wealth – and so go ahead; they do that. They did not really see this coming. But we are going on our seventh year of this at this point in time. And we can arguably look out and say there is no organic growth really coming up that is going to lift us out of this.
The idea that people are familiar with is the headline numbers that unemployment seems to be falling. But a lot of that is statistical fudgery. And honestly, it is so dishonest. I do not even know where to begin on that. And our economy is ostensibly growing a little bit. But it is not growing at all if you factor out deficit spending by the Federal government, which is completely enabled by debt monetization by the Fed. Once we factor those things out, we say look, there is not real growth in the economy yet – still. So that brings us to having our own Japan moment.
And you have a bunch of great lines in your Year in Review. This is one that actually made me chuckle out loud. I love this one. You said Japan’s 24-year-old lost decade is often attributed to inadequate intervention by central bankers and policymakers, insufficiently armed with untested theories of academic economists mired in state capitalism.
David Collum: It is a mouthful.
Chris Martenson: Untested theories of academic economists mired in state capitalism. Well, here we are, entering our seventh year of state capitalism. What kind of a grade can we give the Fed for perspicacity, forecasting, and responsiveness?
David Collum: I give them an F. But I them a high echion F is what I give them. What they suffer from is the “fatal conceit” that I titled one of those books. And I talked to an economist at Cornell with whom I have no axe to grind. But I asked her, When in your economics education do you learn about the history of economics? When do you get the historical backdrop? And I bet you there are economists in major economic departments who have not read the Wealth of Nations, for example. They are out there. And she said to me, she said, Well, I took a course in economic history. And I am thinking, You took a course?
My definition of economics is really ultra-simple. The question, you say, is, We have been here before. What happened next? That is it. That, to me, is economics. And the problem is, you got all these computer-mathematically-driven economists. And I think they are losing the perspective of what really got us here. And they have got their models. And they have got their math. But they are forgetting about the fact that Bitcoin – I am going to really irritate the Bitcoin crowd out there. I am sympathetic to why they like Bitcoin, but it is up 90-fold. That is a tool of mania, right? There were things that people referred to metaphorically as tool of mania. But Bitcoin is tool of mania. In all its magnitude, a tool of mania.
So in any event, the Fed somehow thinks that they can set the price of capital. Now, I know of no market in the world more important. And I know of no mechanism more important than price discovery. Yet the Fed takes this system that is attempting to equilibrate, that is attempting to get the borrowers and the lenders together and say, Okay, what price is capital? And the Fed is saying, No, you are wrong. We know better. Here is what it should be to optimize the system. And that is a fatal conceit. That is a kind of arrogance that I cannot get my brain around. If they were biologists, they would be redesigning the damn elephant. They would be saying it is too fat. They would take away its trunk. They would make its legs longer. Ignoring the fact that billions of years of evolution created this miracle. And so that is where I blame the Fed, that they do not even understand that they should not be using price controls.
And by the way, everyone acts shocked that capitals were zeroed, my hard-earned savings! I have saved aggressively through the years. And it is now worth zero because the Fed has decided to feed the system all the capital at once. So some guy wants to borrow from me, he simply borrows from the system now. And that is not fair. That is what intervention in the capital market does. It renders my capital worthless. And that makes me kind of irritated.
Chris Martenson: Well for you, it is an irritation. But for people who are living on fixed incomes, it is absolutely –
David Collum: It is life-threatening.
Chris Martenson: It is deadly. And that is really where we are at. And of course, the other fatal flaw the Fed – and I completely agree. I read hubris all over these people. They have looked into their little models. I was at this conference awhile back. And I think Jim Rickers had it right. He said, They run their models perfectly. The only problem is their models are all wrong. And so you can get perfect outputs. But if your model is wrong, you are still going to get bad results. And so they are running their models. They are dutifully cranking them.
And for me, even if they had the right economic models, even if they had something more in the Austrian version that understood you cannot get a free lunch and you cannot print prosperity, even if they were operating that model well, they still do not seem to have any inputs coming in from the natural world in terms of actual limits, in terms of how much energy it is, how much it is going to cost now, the fact that net energy is declining, the fact that the seeds are basically stripped clean of protein at this point time, whatever those other things are we might want to look at. The Fed is completely unaware of those. So let us just drop with them into their world. They are running their system. They are turning their cranks. Do you not think that at some level they have a gut fear over the fact that real robust growth has not happened?
David Collum: One of the sections I write about is, you can make the case that from statements made by guys at the BIS, the World Bank, the IMF, and the Troika that they actually realize the system is heading for a big reset. The statements that they have made about the way they bailed out Cyprus in a completely hamfisted way that they realize the system is going to go through an up-scheming, cataclysmic shaking of the Etch-a-Sketch. And that they are trying to figure out how to survive that. And it is a high-probability view of what they are thinking; I do not know. But there is some arithmetic nonsense out there.
I did a little bit of math, for example, on the unfunded liabilities. And I bounced this off Kotlikoff. And he seemed to like it. You never know; he might be humoring me. But I took the $200 trillion of unfunded liabilities – these are the promises we made. Subtracting away projected revenues, that is a key distinction. And it is the promises that we simply do not have a clue how we are going to pay for. And you project them out to infinity. So you say, Okay, based on all the promises we made now, it tapers off. That therefore confuses me. So I say, let us demonetize this. So I take the $200 trillion, which he confirmed as little as two weeks ago. And I say, okay, there are about 100 million taxpayers. And on average, they earn about $50 thousand. So I start diving through. And then I say, what happens if the average taxpayer commits half of their salary, $25 thousand dollars of their salary, to pay off these unfunded liabilities. How many years do they have to do this? And the answer is a staggering 80 years. And therefore, it is nonsense.
The payback rate, the payoff rate, the amortization rate is nonsense. But even without an aggressive one, it is 80 years – a lifetime. And so therefore, they are not going to be paid off. There is no mechanism for payoff. Let us say Kotlikoff is off; I have seem estimates as low as $70 trillion. That gets you down to a 25-year payoff time. That is still in the land of unicorns and Skittles rainbows. That is nuts.
So the bottom line is these promises are going to be welshed on. And we are either going to inflate them away, and it is going to be one these things where sure, you take all the money you want because it is worthless. Or we are just going to default on them. And by the way, the Cyprus bail-in looks like a deflationary default mechanism they are testing. That is what my read on Cyprus is. That is a deflation.
Chris Martenson: Well, now, let us check that out, because the thesis you’ve got running here is that they know that the numbers do not line up and that there is some sort of a reset event. Whether that is inflationary or deflationary, it is still an open question. We know that “they” (again, air quotes around that, the word “they”) would really prefer an inflationary outcome, particularly one that is in a medium-hot level. That sort of, somehow, in their models, cures most of the ills. And most people cannot detect it. So you get away with it, and that is fine.
But really, what we have here is a case of who is going to take the losses. That is the question du jour. And they started to answer that question, I think, in Cyprus. Which, for the people listening who somehow are not familiar with Cyprus, it was a case where the banking system was bust. And they decided to tag the depositors in the banking system as the people who should eat the losses in this particular case. And they tried to pin it on Russian oligarchs skirting financial rules or something like that. But in truth, the Orthodox Church of Cyprus lost quite a bit of money in this little fiasco.
So there was this island nation. You could put a ring fence around it. They thought they could run the whole thing and run a little test – a Petri dish – and say what happens when we do a bail-in? And the first thing is, you cannot even shut down the banking system in a tiny island nation, with the holes and crevices appearing all over the place, because it turned out –
David Collum: London; oh, God.
Chris Martenson: So that is an intriguing thing. But then I saw that the rule sets for banking and how banks would survive another Cyprus-like crisis included bail-ins. And bail-in language has been included in FDIC documents, in Canadian banking documents, in New Zealand banking documents that I have seen. So do think that is the model?
David Collum: So I think that Cyprus is the story below the story. I am always talking about the Michael Lewis narrative. And beneath the surface, Cyprus is a huge story-fill, because I think it is a beta test. And when I talk about prominent people, I am talking about major, major, central-banker-type/size players, who were talking about how this bail-in model – they say, We do not want to charge the taxpayers. So we are going to take depositor money. Who do you think is paying taxes? The guys with the deposits, right? So it is this fictional distinction. And it does not even matter if you had your money in a valid solvent bank. You still got gutted like a fish. Do you know what the final percentage was, by the way?
Chris Martenson: No.
David Collum: I have seen numbers all over the place. I have heard up to 90%. But that sounds high.
Chris Martenson: Yeah, it was more than 40%. My guess would be, it averaged in around 60%. But I would really have to check that number to be sure because I never got a final print on that.
David Collum: But I have sighted a bunch of instances of players saying, We like this model. Now, if you start confiscating bank accounts. I think that is a deflationary model. I think if you follow the bouncing ball, then you go, That is deflationary. Why would they play with that? One of the possibilities is that Bernanke and these guys recognized that the inflationary model is failing because they are creating socially unacceptable bubbles. And they cannot seem to just get the inflation to go where they want, which anyone who knows about inflation knows that is exactly the problem. You release inflation. You do not get to direct it. And they are getting these effects that are going to lead to civil unrest. They know that.
So there was this very scary article that was in ZeroHedge just the other day, where the IMF declared to ZeroHedge that they were wrong about a one-time hit to global bank accounts. And ZeroHedge went right back at them and said, Here are your words, dude. And there is no question that the IMF basically came out and said, If we hit them hard, fast, and once, people will just dust themselves off and move on. And I do not want to be in a banking system that does that.
Chris Martenson: This is the big mystery to me, because Cyprus was clearly and obviously both a test case and a PR campaign. I watched carefully how it was packaged and sold for consumption. There was a little wild wooliness around the edges; I do not think they had the story completely contained very well. But it was clearly a trial run. And that is all you have to tell me. The idea that people would leave their money in the system after that is just startling to me.
David Collum: So here is the problem, though. I have got a huge amount of sheltered accounts. A lot of my wealth is in 401K, IRA, SEP-IRA, employer-based accounts. And so the question is, what do I do? That money is a sitting duck. They have locked the doors to the casino, and now they are lighting it on fire. This is high-risk stuff. And so I did not do it this year, but I am thinking about stopping contributions to all sheltered accounts because I have heard discussions of capping them. Okay, if they want to tell me I got too much, I cannot add anymore, I am fine by that. But if they say, You have got too much; we are taking it. That gets real problematic.
There was another reference to an IRA retirement account as an annuity, which means do what you want, but when you die, it is gone. The word annuity should scare the hell of out your heirs –
and you, if you care about having heirs. So there has been a lot of this chatter that tells me that confiscation of retirement money is on their radar.
And I have a lot in there. And I am not quite sure how to handle this. But if I take it all out at once, I take it out at the marginal rate, I get crushed. It is a very expensive put option I am buying if I do it.
Chris Martenson: One of my operating principles – and I have several – one of our operating principles at Peak Prosperity is that when circumstances call for it, they will just change the rules. So here is how you line up the ducks. The system is structurally insolvent, just from a pension and entitlement standpoint. But looking at the fact that we have been increasing debts at a rate roughly twice the rate of underlying even nominal GEP growth and we want to keep doing that, that is the system that the Fed is attempting to preserve, with all of the entitlements and flows of money that go to certain preferred individuals, institutions, and things like that. That is a fundamentally non-sustainable system anyway.
And then we wander over and look at the various ways in which we have gone about, at the official level, thinking how we are going to deal with crises. I have to give an F on this one because it always felt wrong to me. So the bondholders do not take the hit. The people who took the risk do not take the hit. It always gets foisted off on the taxpayer and then depositors. But these are fundamentally innocent parties, as far as I am concerned, given what actually caused the transgressions in the first place. And through all of that, I am 100% convinced that when the time comes, just like Willie Sutton robbed banks because that is where the money was, the government will go after the pools of places where there is enough identifiable wealth to figure out where the losses are going to be eaten. So there, you just look at your pyramid of financial assets. Money Market funds are an obvious target. Certain pension holdings are obvious targets, particularly if you can strip them for assets and put IOUs back in their place.
There are all kinds of things that can be done. And that is a few things we did see this year. We did see – what was it? Ireland did a one time (I am putting air quotes up again) attachment of 0.9% on all pension assets to help balance out the national budget over there, I believe. So this is the theme. And this confiscatory regime that has been put in, we will take it if we need it. So look at me with the timing in this. Cyprus comes through. And it was just shortly after that that the biggest rate on gold and silver happened. And it just struck me as just too cute by half that the “response” of the market to seeing the Cyprus story would be to sell out of the assets that give you your best – and as far as I know, only – monetary protection from confiscation of assets that are tucked within a banking system.
David Collum: Yeah. This year you mentioned gold. That is about a four-hour podcast right there.
Chris Martenson: Yep.
David Collum: Gold’s price and the behavior of physical gold in the global marketplace were absolutely unconnected this year. And I may sound like a disgruntled gold bug, but absolutely every shred of information out there says that there was a massive spike in physical demand for gold this year. You can track it using official sources. You can track it. It all got pulled out of all the depositories. It got pulled out of GLD. The Indians, the things the Indian authorities were doing to keep Indians from buying gold, they were going to go after the religious organizations’ gold. And they took Cyprus’s gold. So all of the evidence points to the fact that there was a huge grab for physical gold.
Meanwhile, the price of gold dropped the whole way. And I cannot even reconcile those two, unless you want to say that the futures market and the physical market have just become completely disconnected. And the way that would happen would be if – as sort of the phrase you use – if the seller in the futures market was a price-insensitive seller. Clearly, a bear raid, though. I mean, this was a bear raid in gold; it was not just skittish sellers. It was a raid. It was set up, teed up, and someone really took a swipe at gold. And it happened all year long, best I can tell.
Chris Martenson: Certainly, and we saw that on the tape. It is completely obvious if the CFTC ever wanted to do a little investigation, all they would really have to do is look at any one of probably 20 or 30 separate raids that I saw this year, where somebody would come into the overnight markets very thinly traded and dump several thousand contracts, typically in a single blast. And we saw that even just in the last few weeks where the gold market had to be halted. Interestingly, once to the upside, too, out of many, many, many examples to the downside.
But regardless of who is doing this and their motivations for doing it, we can clearly look at an event where market participants, one or more, come in and just crushed the bid structure. That is just blatant price manipulation. That all of those events happened to be to the downside, that strikes me as just a little too cute by half, given what we just saw with Cyprus and looming issues around confiscation.
David Collum: The other one that jumped out at me, which left me slack jaw, was when Goldman came out in a public forum and said “short gold.” Now, I have no recollection of any major brokerage coming out and recommending a short position in any asset class. When they do not like something, they say we thin up, we lighten up, and we would underweight this. I have never heard of a brokerage come out and say short it. They said short it! There were two days of relative calm. And then two days after they did this, there was this $40, $50, $60 monkey-hammering of gold.
Where, by the way, tens of billions of dollars of selling occurred in minutes. Billions within the sub-second range, so this is not skittish investors. Someone was in there banging the gold price that day. And then they shut down the physical market. So you had to hedge by going into the futures market selling more. And it was on a Friday so that they could then line up their margin calls on the following Monday. And so it was just crazy in the gold markets.
Meanwhile, breathlessly, the news commentators would say GLD liquidated another 20 tonnes of gold this week. And I had this funny exchange with Tony Deaton, who tends to keep to himself, but he gets out there a little. And he mentioned to me that he had tried to pry $60 million worth of gold out of GLD, and they would not give it to him. And he said I have got a team of lawyers. And they would not give it to him.
And it hit me that the only people – and if you look at GLD, what is it? It is an EFT. And if you have a warehouse full of gold and the shares reflect the price of the gold, I cannot figure out why gold should be bought and sold from that. I just think it ought to just sit there. And so the question then is, well, then who is liquidating the gold? And the answer the 20 big ass banks. They are the ones who can take gold from GLD. So here is this bear rate on gold.
Meanwhile, the 20 biggest banks are turning in paper promises to gold for the actual physical metal. And somehow we are told that is bearish. And that makes no sense. And every depository this year got leveled of their gold. And that somehow is supposed to be bearish. That gold went to Asia. And that somehow is supposed to be bearish. And I cannot get my brain around that.
I called and I told Grant Williams this. He wrote about it. Then it went viral. I asked Tony to confirm it. He said, well, it was actually public record in 2007. It was in a blog in 2007 that this happened as a funny hint able that goes out on the Internet.
So in any event, the physical demand for gold was huge. It was undeniably huge this year. And it was all slopping to the West. I think – it is my thought position that we are seeing the beginnings of a change in the currency regime. We are seeing the beginning of the dollar hegemony going away. And I think that probably the Chinese said, Look – something like this is my plot line. This is my made-for-TV movie plot line that the Chinese said – we will keep buying your Treasurys. But you have to give us some gold. And we want it cheap. And so you sell us the gold. And so we basically shook the tree to make the gold fall out of it and go to Asia. That is my thesis, that the move of the gold to Asia and the drop in the price were a geopolitical quid pro quo.
Chris Martenson: It is interesting, if you follow these things, because these hints are there. So we are going to look back on this, I am convinced, and we are going to say, How did people miss the most bull-market case for gold ever? Look at all the public information that was available about its flows! When we look at everything on a fundamental basis, whether that fundamental piece is around the worries around confiscation that they are rightly rooted post Cyprus or we look at the actual flows of gold from West to East, it is just a stunning story. The only thing that is out of lockstep of course is price. And I get in routine discussions, if not debates, with people who say, Well, that is just sour-gold-bug kind of thinking.
And then I wander over into – it was in 2007 or 2006, I remember reading a report from the Electronic Frontier Foundation that had a deposition by an AT&T engineer who said, I do not know what is going on, but I can tell you that all of our routers are compromised, that the government is siphoning all of our data. And that was just fringe kind of stuff. People said, That is crazy talk. And then, of course, you need a Snowden to come along and prove that not only is that not crazy talk, but with every new release that comes out of the documents – and by the way, he has only released 1% of the documents that he took – it just gets worse and worse. I mean, we are spying on Brazil’s oil companies, Angela Merkel’s phone, and other allied affiliated leaders of the world who are presumably on our side. They are not just taking metadata. They are actually sweeping entire phone calls, on and on, and on and on. That was all crazy talk just a few years ago. Now people just numbly look at it and say, yeah, I guess.
So I am looking at the footprints I see in the markets today. And it just basically looks like complete utter state craft, if you will. There is so much manipulation going on. And my theory around that, along the lines with your gold theory, is that they know there are some really big problems in the system. That is why we still have $75 billion a month minimum in QE going on.
What the Fed talks about in terms of unemployment and inflation is just republican consumption. Deep down, there are worried about something else. They see that it does not line up. And the markets and prices, they have learned, are really potent signaling mechanisms. And so if you had said to me, Chris, last year, I want you to script out the perfect script for the power centers. I would say, Oh, well, here is what I would do with equities. I would keep commodities well contained except for oil. We need that over $90 a barrel, because tracking does not work otherwise. If we want that miracle story to keep going, we are going to need to keep oil over $90. But everything else, keep the commodities down, because people across the world get unhappy when their food goes up in price. And we will keep Treasurys mysteriously well bid through all of this. And of course, gold will have to go down.
That is exactly what we are seeing. And it is just again, it could just be a coincidence. But I am really starting to get very leery of coincidences these days.
David Collum: So there are a bunch of leaked memos out there that over the year’s surface. The one that came out this year – and I think it was new this year, although it could be one I missed –was a 1974 Volker, in which he wrote about five or six pages describing the U.S.’s best interest in demonetizing gold. And he goes through country by country and says the Germans will not like this or this and this. He talks about the Arabs. He goes on and on.
But it is crystal-clear that the dollar reserve currency has every vested interest to keep the price of gold from getting too high. And of course, they lost that battle. But the point is that I do not think that gold ever lost its importance in the global currency regime. I think the United States would love it to be completely irrelevant, because that means the dollar wins. But I think they got it in remission like a cancer. But it never went away. And now it’s starting to surface. And now we have a problem. And we are worried about the renminbi or the yuan – I never know which one to call it –we are worried about that becoming a reserve currency.
I think that anyone who comes along that says, Our currency is gold-backed, all of a sudden they own the reserve currency at that point. But I think it is a battle. I think we are looking at Bretton Woods – what is it, 4, 3, 2, and 1? – I think we are looking at a change in the system taking place. And maybe not, but that is what I am sensing. And that Volker memo is worth a read. Anyone who actually goes to this review and reads the Volker memo, start to finish, it is a great read. It really tells you gold is important, was important, and probably will be important. And they do not want it to be important.
Chris Martenson: This is the interesting part. I am a little torn on this, whether the West thinks it can just be done with gold and is perfectly happy to let the East take it. Or if under the covers there are not a whole lot of people in the West getting very concerned about where the gold is all landing. Because if we do have some sort of a currency crisis – and to me, it is a question of when, not if, at this point – whether it is 20 or 2 years, I do not know. But when we have a currency crisis, there is a very strong chance that gold is going to have a prominent role in how we start to resettle those accounts. And then it is going to be whoever has it. And will that not be the surprise, because India and China will have most of it at that point in time, by any measure. And I do not think that the idea of just handing or ceding a big chunk of power to other countries is part of our plan. It does not make sense to me.
David Collum: I am not sure the gold is coming from our sovereign stash. So this year this year was about shoving gold to the East. I think it was about shoving gold to the East that came from somewhere else. So every hint that gold is being shaken out of the system and then pushed to the East, there was no whiff of it coming out of Fort Knox or the Fed or whatever. It was coming out of other places that were not part of sovereign stats. So it seems to me that maybe we should look. We will get someone to sell you the gold, but not us. So that is a Rickards model. Rickard thinks they are not going to get the gold unless they bomb us.
By the way, I am sure you have seen that great Grant Williams’ plot where he shows the price of gold.
Chris Martenson: Yep.
David Collum: And he indicates where Venezuela asks for repatriated gold. And the gold price went down because of that. Then the Germans asked for repatriated gold this year – which by way, I was hinting at last year. But it finally came to pass this year. Then the gold got crushed after that. And I think it is our way of getting someone else to fork up the gold to these guys, not us. Not us the nation, I think he wanted to get it out of the private stashes and force it by a sell-off. It did not work, in my opinion.
Chris Martenson: Well, we will see. They had some reasonable success shaking it loose from GLD, and I am sure from other weaker hands as well. But that is how these markets tend to work.
David Collum: Well, I think they can just gut GLD. So I do not think they shake it out of GLD. I think they are doing a Corzine MFGlobal on GLD. I think the removal from GLD is not about shaking it loose. I think it is about taking it because at any moment, those banks can take their share and turn them in and take the gold from GLD. Some people say GLD is being used as a fractional reserve gold banking system, which makes sense.
I never trusted it. I read their perspectives. You saw that. It was so vague. It is not allocated gold. But they basically said it could be here, could be there, could be anywhere; go back to sleep. And it was about five pages long. And it was nothing. And so if there is gold in GLD, the banks can take it. So they do not need to shake it out. They can just scoop it up.
Chris Martenson: It is thoroughly interesting to me that gold and trying to figure out where it is at is literally one of the opaque subjects out there in terms of getting hard data. You can get pretty hard data about what is going on in Comex and in its inventories. But that is chump change compared to the OTC market. And then, of course, the central banks are completely opaque about what they are up to.
And I have had long conversations with people who understand the actual mechanisms of gold leasing. And it turns out that it is very difficult to lease gold from central banks. They have really big 20-page contracts. And they detail every possible circumstance around it. But the number one rule is the gold does not actually leave anybody’s vaults when they go. And so when I look at GLD, they list that the custodian for them is HSBC. And then just list the sub custodian as the Bank of England. And then you wander over and notice that Finland says, Oh, yeah, we have a bunch of gold. But the Bank of England has it, and it is being used for something.
David Collum: But do you think that the gold going to China is physically going to China? I would think so.
Chris Martenson: Oh yes, absolutely, because we have one report that the LDMA had shipped 700 tonnes of gold to Switzerland. And a quick phone call confirmed that that all went to Swiss refiners who were turning it into one kilogram bars. And that all left the country.
David Collum: Right, and also, there was this Hong Kong Metals Exchange (HKME) that got set up and then got vaporized. I have no idea what happened there. But that was a short-lived entity. And presumably that somehow involved taking physical possession of physical gold. And I would have thought that the Swiss would go to the HKME and then to China. But also, then the HKME disappeared.
By the way, India shut down their gold market. They completely shut it down. They shut down their gold exchange. This is nutty stuff. So in any case, the gold market is in a state of chaos. I think we are getting more questions this year than answers. But I tell you, I do not think GLD owners ought to think about that as being gold. I think at some point we are going to find out that is a MF Global Ponzi scheme.
Chris Martenson: That is entirely possible. Of course, I have never dabbled in GLD, ever. And have never recommended anybody do so. Talk about confusing things, let us shift to something humorous at this point: CNBC. What a strange, strange thing. This is the part that got me about all of media – I will put CNBC into my media bucket for a moment.
So you look at something like New York Times or any of the other newspapers, and they are just hemorrhaging readers. And they are like, well, this is just – people do not really read anymore that the world is changing. I am like, No, wander with me over to the Internet space where there are lots and lots of readers and eyeballs and actually increasing interest. But the gap between the two is that apparently young people do not think they should pay for their propaganda. They think it should be free. And on that basis, they are not subscribing to newspapers.
And it is a mystery to me when you see somebody like CNBC; they are hemorrhaging viewers. You would think with the stock market hitting all-time new highs that the level of interest would be at all-time highs. Average retail investors have turned away. They are not interested in the story as much anymore, largely because they know that it is just big institutions. It is algorithms. It is hedge funds. It is basically just an ultra-sophisticated playground at this point in time. And CNBC continues to cater to that crowd. And they lose viewership. And that is not their model.
And so I am confused. How do you see that?
David Collum: Well, I went on two Twitter campaigns this year. One was to try to get CNBC to invite me to be a guest host. That was obviously a zero percent probability. But I started harassing them and saying, Come on, I will speak for Joe Sixpack. I can do it. I will give you my resume. I will tell you what I have done. I want to be on your show. And I just got nothing – zero.
But the second campaign I went on was to challenge them on reporting earnings X items, which that is just pro forma earnings. That is just a bald-faced lie. There is just nothing honest about X items earnings. And I challenged a bunch of them on Twitter, saying, Why do you not say what are the items and how much are they when you are talking to these guys? And I got answers like, Well, our traders want those numbers. They would say we do not have time. That was another great answer. I got lots of – oh, there are others. We talk about that a lot. That is a lot of action!
So the bottom line is that it seems as though they want to present the X items earnings because those people are traders, but the 20 million viewers that they could have or should have or did have, whatever it is, they are not the traders trading off. So CNBC is completely missing the point. The people who buy the products on their commercials, they want honest numbers. They do not want fake numbers. And they are trying to get it better.
Kernan, for example, who was a waste of oxygen for a long time, is now starting to realize that the central banks are a problem and starting to realize that rigged markets are a problem. You can hear it. He is getting better. They seem to realize it is the masses, who are supposed to be paying their bills, do not like the garbage. So maybe they will figure it out. Then CNBC will become an honest source of news again.
Did you see the Steve Liesman/Jim Grant debate the other morning?
Chris Martenson: Yeah.
David Collum: That was spectacular. Grant took Liesman right to the math.
Chris Martenson: Yeah.
David Collum: The great line was, I can listen to you from my bed. Now it is time for you to let me talk. I have never seen Jim Grant irritated.
Chris Martenson: I know.
David Collum: He was irritated. So that is what CNBC is facing, though.
Chris Martenson: For a guy with a bowtie, he certainly took it to him.
David Collum: He was tough that morning, yeah.
Chris Martenson: Yeah, he must have got up early. But he had a lot of good points to make. And I think he is channeling – I wish you had gotten on, because it really needs to be said much more directly, which is, We are just tired of all the lies, all the spins, and all the distortions that seem to serve everybody the majority of people.
David Collum: Maybe they listen to your podcast. So it is a standing offer: I will guest host. I will drive down there, all expenses paid by me. I want to be on your show. How is that, guys? If you hear me, invite me down. You can get my email. I am not holding my breath, by the way; just for the record. I do not think they will give me two minutes, let alone guest host. But I got to ask.
Chris Martenson: I know. So in the time we have left, I am interested now – we look at this summary of things. We see there is a bear case to be made on a number of fundamental areas. But fundamentals do not seem to matter, really, at this point in the prices of things. And that is to be expected when you have the price of money itself distorted. Guess what? It turns out that everything gets distorted.
So here we are in our hall of mirrors. We have got debts still increasing at extraordinary rates. So the housing market has not recovered on anything except at the institutional Blackstone sort of level. We have got just bizarre things going on at the Federal government level, with the government just seemingly unaware of any sense of limits. All of that, you put all of that into your magic Year in Review, and peer forward. What do you see coming?
David Collum: To me, this year was about civil liberties. And it just dominated my field of view. We did not really talk about it. You could have touched upon Snowden. But there were all sorts of breaches of civil liberties this year, all sorts of warning shots that say it is problematic. You mentioned Snowden. You can track concerns about the NSA’s potential to go totalitarian, those kind of words, to 1975, Senator Frank Church. And there have been whistle blowers all along saying these guys are dangerous. And then all of the sudden, somehow, Snowden clicked. But he was not the first.
So civil liberty is a huge issue. They have got facial recognition software to make your shopping experience better, but I do not want my shopping experience being approved by face recognition software. We are at great risk of going Orwellian here. And this really came through clear this year. The debt just keeps getting worse. We just keep going bananas on the debt. And these guys, they go on TV. They say, We got to get the consumer consuming. The consumer has no money! It is that simple. The consumer is out of money. The student debt is soaring because the parents are broke. We have got an entire generation that is being damaged daily by opportunities that do not exist that they were promised. And this is scarring.
And then the markets look broken to me. They are so state-controlled. And anyone that says that is conspiracy theory, then excuse me; what is QE? If the market are rigged, then what is QE? What is zero percent interest rates? What is that?
And so I think broken markets, civil liberties, state capitalism that is the plot. Meanwhile, because the Dow is up, everyone is partying. But since the numbers are so bogus, we know we are going to get a regression of the mean. History of bear markets show three big legs down. We have only had two; the next one will rip the soles out of investors if it shows up. And the markets, the economy is immunocompromised. We are fragile. If we get hit with another Lehman-type phase, we are going to really crumble this time. We are really going to have a mess on our hands. And I think it could come.
So my advice is, buy physical gold. I have not lost my enthusiasm for physical gold. And that is my take.
Chris Martenson: That is certainly a take that conforms with mine at this point in time. I have become just absolutely convinced that what the Fed has managed to do is secure the price of everything but really understand the value of nothing. We look at all of the structural weaknesses that existed and all of the structural issues that were there in 2008, and I actually score most of them as worse now, not better. And I think the markets are hopelessly addicted to Fed stimulus. I think the Federal government could not operate without the Fed buying its debt. I am absolutely astonished that the world has just sort of yawned and said, That is fine; you guys go ahead and just monetize your debt.
I will note that emerging economies have been soundly spanked for similar behaviors in the past. Just horribly abused – their currencies, their debt markets, and the IMF forcing them to cough up private assets, utilities, phones, things like that because they have tried to engage in this behavior. Somehow, the U.S. gets away it. Japan gets away with it. The European Central Bank (ECB) is courting a slightly different path. But at the same time, this is all just fake. It is just as fake as can be. But I do not think they know what else to do at this point besides do more of the same.
And the only thing that really annoys me about this because I am perfectly happy to sit back and watch it happen. I have got myself squared away. And I am pretty happy with where I sit in life at this point around all of this. But the part that does still get under my skin is watching the apologists who come out and try to make sense of it and squeeze it through distorted practices and filters. Paul Krugman is my poster child for this behavior.
David Collum: The catch phrase that I have used throughout, and I finally just ended up saying that I will just put it in the title of Year in Reviews, is that Austerity is not a policy; austerity is a consequence of bad policies. And we are talking about saving Europe; austerity was [considered] a bad idea. I am going, What about austerity as a policy? That is what happens when you pull demand forward. That is what happens when you spend yourself into oblivion. Now it is time to pay the piper. This is it. Now we get to deal with the fact that the average boomer has $70 thousand saved. That is it. Game over. It is killed. There is no austerity policy left. There is just austerity.
Chris Martenson: That is ultimately where I see us going. And this is the part that mystifies me. When I peer forward 30 years, I can clearly see that I am very happy going out on this limb, because it is fact that we are going to have to deal with things like you just said – the entitlement programs and the fact that the average boomers who are retiring at the rate of 10,000 a day at this particular part of the boomer bulge are heading into that retirement woefully unprepared. And then I wander over and I look at a 30-year Treasury bond selling at the prices they are selling at. I am like, Who could possibly buy those at that price, except somebody who thinks they will be able to sell out of that when that turns out to be a bad deal?
David Collum: Right. Well, the bond investors are going to be taken out on boards by the time this over. They are just not going to survive. It might be slow. But it will be a fatality for serious – and Ray Dalio said, the way you deal with the bond market is you use leverage. I am going, are you kidding me? You are telling us to lever up in bonds right now. I used to give that man credit. But that is a scary one.
Chris Martenson: Maybe he has got a lot of bonds to sell.
David Collum: Well, he has got a Fed to buy them. So I do not know what the problem would be. I do not know how to explain it.
Chris Martenson: All right. Well, Dave, thanks so much for your time today. This is all the time we have got. I really want to encourage people to read your full report. It does take some time to get through. But it is just beautifully referenced. And I love your witty style in there. And it is just a clean summary. I am sorry we did not get a chance to really dive into civil liberties, because that is actually a very hot topic for myself. Because I do believe that a wealth of a nation comes from having free citizens who are capable of making their own decisions, operating with what they believe to be fairly enforced laws and rules, and that their privacy and patent protections will be honored. And I do think that a robust middle class is a key to the prosperity of a nation. And all of these things have really taken hits this year, big time. So I wish we could have gone into that more. But people can read your Year in Review. And then we can talk about it in the comments underneath.
Thanks so much for your time today. And we will see you in the comments section.
David Collum: You bet.