Grant Williams returns this week to set the context for this week's FOMC meeting, where the Federal Reserve is widely expected to hike interest rates for the first time in nearly a decade. To say he is very skeptical of the Fed's ability to continue to control market forces much longer is a gross understatement:
None of this has been tried before and, to me, that just demonstrates the dangers. Once you get into a situation like the central banks did in ’08 with this panicking — everyone calls it the Hotel California — you can’t get out. And, so incrementally, they have to keep doing something. Instead of stepping back and letting free markets and business cycles and forces of nature have their way and flush out all of the impurities in the system, this is what happens. And, yet, this time, for whatever reason, I think since post-Volker, Greenspan has basically started this ball rolling with this knee-jerk reaction to slash interest rates. And, you can kind of understand it, because everyone was still traumatized by the high inflation of the ‘70s. But, they started and they started down that road.
And, if you look at a chart of interest rates in the U.S., you can see. It’s just, from 1980—I’ve marked two points on all my charts for presentations. One is the end of the gold standard, August 15, ’71, when Nixon closed the gold window. And, the next is peak interest rates in 1980. And, if you look at those two charts and you see what’s happened with interest rates since, they’ve been on a course to hit zero ever since.
But, if you step back from that and you say forget the creeping nature of this and how we’ve gradually got here, try and parachute yourself in and look at the situation, and look at it through clear eyes, you'll say, “Hang on, we have negative nominal interest rates, and we have people queuing up to buy the debt of what are clearly bankrupt governments at negative interest rates.” It would take you no time at all to think, “Well, this is, this is ridiculous. Not only that, but this is the end of the road. It has to end here or near here.”
And, so I think that’s where we are. I think we’ve reached the end of the road. That’s not to say the end of the road is a brick wall. We can be trying to turn the car around for a year, who knows, trying to find another way out of this thing. But, we’re there. I mean, believe it or not, we are there. And, so how this thing plays out, none of us know. But, I suspect that the tactics that are going to be employed are going to get more and more desperate, because they have to keep going now. They’re so far in, they have to keep going, and keeping going means doing more and more extraordinary things.
It’s a relative game. There are people that have to be invested. And, so you can herd them by taking away the chance of investing into one thing, i.e., putting rates at zero so you can’t just put your money in cash or short-term Treasuries. By doing that, you know, psychologically, you’re going to herd them somewhere else, and that’s been into the stock market, it’s been into asset prices, which is fine. But, it’s not a temporary removal of that ability to put stock in cash. You have to keep that away from them, because if you give it back to them, if you give them back that option, it’s going to mean interest rates are at much higher levels, which is going to screw all the debt payments. They are going to run for the hills faster than you can imagine, because none of this stuff is what you would choose to invest in, all things being equal. You wouldn’t invest in the S&P where it is now, after the run it’s had. God knows you wouldn’t invest in government bonds where they are now. You might take a long hard look at asset prices and think, “Well, you know what, actually, I might buy some base commodities here, because they’ve been just completely slaughtered.” But, you certainly wouldn’t be investing in the two things that they need you to invest in, which are government bonds and equities.
So, that’s the real problem. And, the fact that they realize that tells me that we are getting to the end of this road, because that credibility is not something they can maintain forever, particularly when they’ve boxed themselves in with negative interest rates.
Click the play button below to listen to Chris' interview with Grant Williams (59m:06s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. I’ve often said that you really should be keeping a journal, because you are living through extraordinary, momentous times. On simply the monetary front, things that have never happened before—never even been tried before—are happening almost every day. Central banks, they’ve gone crazy. They’ve taken it upon themselves to know the right prices for financial assets, for money itself, and therefore, have assumed day-to-day management of the entire economy. And yet, the more things change, the more they stay the same. It’s that all-too-human desire to have a free lunch. It stalks the halls of power today with the same determination as it did in Roman times. And, as always, history can provide us the essential clues we need to figure out where we’re headed. But, people don’t always heed those clues or watch them.
So, helping us with both the essential context, as well as being one of the most informative and entertaining writers and speakers in the business is Grant Williams. Really happy to have Grant back with us today. Portfolio and strategy advisor for Volpe’s Investment Management in Singapore, quite a number of years of experience—won’t say how many—but, a few in finance on the Asian, Australian, European and U.S. markets. Grant also writes the popular investment blog, “Things That Make You Go Hmm.” It’s just a piece of writing of which I am a huge and unabashed fan. So, let me get that right on the table. His writing, it’s always witty, it’s fun, it’s full of context, accurate, great quotes, easy to follow. Welcome, Grant. It’s a real pleasure to have you back today.
Grant Williams: Chris, thank you so much. That’s far too kind an introduction, and you kind of nailed everything there. Not the part about me, but the part about the state of the world today, and that’s as concise and as accurate a summing up as I’ve heard in a long time.
Chris Martenson: Well, then we’re done. It’s been nice having you.
Grant Williams: Merry Christmas.
Chris Martenson: No, no, no. I’m so excited to have you on, because this is really the most bizarre of times. You know, the best of times, the worst of times, it’s also the most bizarre of times. And, this really—I don’t know how to overemphasize this. I mean, people, we go on with our lives, it’s been seven, eight years now since the central banks started all this. But, how crazy is this? So, let me just—we could start anywhere. Let me start with this: What do negative nominal interest rates—"nominal" meaning that’s the rate of interest, not real interest rates. We had a rate of interest, we subtracted some inflation, however that was measured, and came up with a negative number. But, that central banks are openly entertaining—and in the case of the European central bank, have pegged negative nominal interest rates on the board. So, A.) when has that ever happened before? And B.) what do we actually know about how that influences people?
Grant Williams: Well, I think this is the beauty and the terror of what’s happening right now. We don’t know any of this, and as you said summing up, none of this has been tried before. And, it just, to me, it just demonstrates the dangers. Once you get into a situation like the central banks did in ’08 with this panicking, "we have to save everything, we have to throw whatever money we do—" you know, the TARP kind of started this whole thing off. But, once you get in—everyone calls it the Hotel California—and, yet, but it’s true, you can’t get out. And, so incrementally, they have to keep doing something. Instead of stepping back and letting free markets and business cycles and forces of nature have their way and flush out all of the, all of the impurities in the system, which is what’s happened… as you said, history is right there. It’s all in front of you. Anyone could bother to read it. This is what happens. And, yet, this time, for whatever reason, I think since post-Volker, Greenspan has basically started this ball rolling with this knee-jerk reaction to slash interest rates. And, you can kind of understand it, because everyone was still traumatized by the high inflation of the ‘70s. But, they started and they started down that road.
And, if you look at a chart of interest rates in the U.S., you can see. It’s just, from 1980—I’ve marked two points on all my charts for presentations. One is the end of the gold standard, August 15, ’71, when Nixon closed the gold window. And, the next is peak interest rates in 1980. And, if you look at those two charts and you see what’s happened with interest rates since, they’ve been on a course to hit zero ever since. And, everyone’s, I guess, sat and thought in 2008, 2009, well, we’re at zero now, so what happens? Well, that’s what happens. We go to negative [audio breakup] back. Forget present context. Try and remove yourself from the day-to-day news that you see and the reasons given for the Reichs [PH] Bank in Sweden doing this, and Switzerland doing it. Switzerland’s government bond curve is negative out to ten years. I mean, it’s absurd.
Chris Martenson: Ten years…
Grant Williams: But, if you step back from that and you say forget the creeping nature of this and how we’ve gradually got here, try and parachute yourself in and look at the situation, and look at it through clear eyes. And, say, “Hang on, we have negative nominal interest rates, and we have people queuing up to buy the debt of what are clearly bankrupt governments at negative interest rates.” It would take you no time at all to think, “Well, this is ridiculous. Not only that, but this is the end of the road. It has to end here or near here.”
And, so I think that’s where we are. I think we’ve reached the end of the road. That’s not to say the end of the road is a brick wall. We can be trying to turn the car around for a year, who knows, trying to find another way out of this thing. But, we’re there. I mean, believe it or not, we are there. And, so how this thing plays out for me, none of us know. But, I suspect that the tactics that are going to be employed are going to get more and more desperate, because they have to keep going now. They’re so far in, they have to keep going, and keeping going means doing more and more extraordinary things.
Chris Martenson: I agree. And, you know, there’s two conversations I have out there in the world, I guess, broadly speaking. One would be with a group of people who don’t understand finance and all of that and they just sort of have their faith and their trust, and, "listen, I’m just going to keep my head, I’m going to do what I do and hope that all works out." And, then when I do talk with people who have a good degree of finance sophistication and get all this, they still talk about all this as if it’s a relative world they inhabit. So, they’re saying, “Well, yes, I understand that we’ve got negative interest rates, which is why I’m willing to buy a blue chip stock with a dividend yield of 2% or less.” Or, the whole risk structure’s been upended and so the second crowd, even though I would put them in the so-called sophisticated category, they’re still analyzing all of this as though it were just a bunch of relative financial markers that we have to understand relative to each other.
And, I want to circle back to the subtext of this, which is there’s a psychological dimension to this, right? So, people’s investment decisions change based on all this sophisticated financial stuff. So, "oh, negative interest rates, I’ll choose this." But, really, Grant, I mean, haven’t we seen like corporations have somewhat rationally and very sophisticatedly and financially decided that to borrow money and retire their shares by doing share repurchases makes financial sense. But, it has truncated the financial, and also I would think the psychological motivation to go out and actually invest in property, plant and equipment—employees—in the future.
So, the central banks, I think, are moneywise but foolish. Or, however we would put this, that they understand the intricacies of the carpet they’ve woven. They don’t understand what the carpet’s going to be used for in the sense that they’re mucking around, I think, with people’s base psychology. And, that’s something—more and more I think the evidence is starting to stack up and say, “That got really perverted here.”
Grant Williams: Yeah. Look, without question, and I think this is the one thing that they do know. I don’t think they know what they’re doing, because they are permanently playing defense. They’re reacting to things. That’s why we’re having this whole rate hike fiasco going on right now. But, the one thing they do understand is the psychological component of this. And, they know what human nature will lead people to do, which is why people are having this conversation that you just described. It’s a relative game. There are people that have to be invested. And, so you can herd them by taking away the chance of investing into one thing, i.e., putting rates at zero so you can’t just put your money in cash or short-term Treasuries. By doing that, you know, psychologically, you’re going to herd them somewhere else, and that’s been into the stock market, it’s been into asset prices, which is fine. But, it’s not a temporary removal of that ability to put stock in cash. You have to keep that away from them, because if you give it back to them, if you give them back that option, A.) it’s going to mean interest rates are at much higher levels, which is going to screw all the debt payments. But, they’re also going to sell the other assets to get back in there. So, you have to keep herding them, keep herding them, keep herding them away from things and taking stuff away from them.
And, if there’s any doubt about the fact that these guys are focused on psychology—I’m going to read you a piece that I put in a recent letter I wrote. And, I’m cheating here, because I wish could recall it quite exactly, but I just pulled it out, because it’s important I get it right. And, this was sent to me by Stephanie Pomboy of MacroMavens, who’s just a genius.
Chris Martenson: Oh, I love her.
Grant Williams: You should absolutely…
Chris Martenson: She’s great. She’s wonderful.
Grant Williams: …you should absolutely get Stephanie on, because she’s just so smart. And, she dug this out of the FOMC minutes, which were released in November, so it’s the October meeting. And, I saw this quote and when I read it, I mean, I was absolutely staggered that I hadn’t seen miles of column space about this. And, what they said in the minutes was this, it said, “A decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy,” and this is the important bit, “or erode the committee’s credibility.”
Now, the fact that they said that tells you, that one sentence, tells you everything you need to know. They’re in a trap and they’ve said the economy is firming. They’ve promised to raise rates, and now if we defer that rise, people are going to think that we’re lying about the strength of the economy, or worse still—and I think this is absolutely the key, this idea of the committee’s credibility being in doubt, because right now, my belief is that this faith in central banks, which is all-consuming—and that’s a very deliberate ploy on their part—but that faith is the only thing holding this thing together. It’s the last remaining thread. And, so if it goes, if "whatever it takes" from Draghi doesn’t have the same effect, then people are going to step back. And, instead of that creeping, "okay, we’re going to do this" and they’re being herded into different corners, they’re going to step back and they’re going to say, “Okay, without the central banks, let’s take a look at a snapshot of this investment landscape.” And, they are going to run for the hills faster than you can imagine, because none of this stuff is what you would choose to invest in, all things being equal, if you just stepped in. You wouldn’t invest in the S&P where it is now, after the run it’s had. God knows you wouldn’t invest in government bonds where they are now. You’d take a long hard look at asset prices and think, “Well, you know what, actually, I might buy some base commodities here, because they’ve been just completely slaughtered.” But, you certainly wouldn’t be investing in the two things that they need you to invest in, which are government bonds and equities.
So, that’s a real problem. And, the fact that they realize that tells me that we are getting to the end of this road, because that credibility is not something they can maintain forever, particularly when they’ve boxed themselves in with negative interest rates.
Chris Martenson: So, this is a fascinating area, because, of course, I would love to say I could give you a fundamental analysis of the market and we could have a great discussion. But, they don’t matter at this point. We have markets that are dependent on other things.
Grant, I came up through the academic world pretty hard. I got my PhD because I thought that I wanted to teach, and well, I do, and I think I still do it on the Internet. But, in the university setting, I discovered that teaching isn’t actually the game that they play. It’s all about getting—in my field of science—it was more about, "eh, did you get the grants?" and all of that. But, what I did learn from my time in academia was that the egos there are really, really, really hinged on: "Do I appear smart?" And, so the ego of the academic is slightly different than egos found in other professions.
So, when I look at that quote you’re saying, which is the market committee’s worried about its credibility, I can hear Janet sort of sneaking through there, the Berkeley professor, or you can hear Bernanke strain, the Princeton guy, sneaking through there. I hear, like that is, like to an academic, that is a really bad fate to have your credibility challenged. There is no worse fate. That is death to that particular ego structure.
So, I think there’s a little of that playing through, and as well, I think there’s this larger sense, which they understand, they’ve built up sort of a market cult around them, and that this is now a faith-based economy—it’s too strong a term—a faith-based market system. And, the Fed has openly admitted that they are now “market dependent” in their decisions, which means the tail is wagging the dog and they will raise rates unless the Asian markets fall apart right before they’re about to make the decision. But, given all that, I have the sense—and you can tell me I’m full of it or not—but I have the sense that the Fed is now boxed into making a rate hike decision on the 16th of December here in 2015. I think, optically, politically, I don’t know how they get away from that. I think they have to do it. A.) do you agree with that? And B.) if they do, what does that actually mean in terms of how much liquidity might have to be drained to accomplish that?
Grant Williams: This is the key question right now. And, this is why so many people are obsessing over a 25 basis point rate hike.
Chris Martenson: Right.
Grant Williams: Who knows, maybe they go 12.5 basis points. I mean, that would really throw a cat amongst the pigeons. But, no, look, I think you’re absolutely right, and I think they do have to go. And, the very fact that they have to go is the biggest illustration that they are finally boxed in that corner. Because, I’m sure that they’ve spent the last month since they basically came up and said, “Okay, we’re going to go,” looking for any credible way that they could actually not do it. Because, if you think about what happens from here, let’s say if they raise 25 basis points, which I feel they will, I feel they shouldn’t, but I think they’re going to have to.
If they raise that 25 basis points, they’ve then got a couple of choices. They either have to go all out in a propaganda war to try and make people 100% comfortable that this is not the start of a tightening cycle. That’s key number one, because if the market believes that it’s 25 and it’s the first 25 of 100 over the next, however, and maybe it’s a year, markets will start functioning normally again in that they will look forward and they will start to act as to what they believe is going to happen down the road. And, a market with even 1% rates, but a tightening bias, is going to make people reassess an awful lot of investments, particularly equities and credit. So, that’s a major problem for them.
So, if they go out and they’re very, very aggressive in saying that, maybe they get away with this, maybe they get away with this. But, at some point, they’re going to have to go again, they’re going to have to go another 25 basis points. And, that may take two years, that may take ten weeks, we don’t know. But, when they get around to doing it, at that point, we are in a tightening cycle, and suddenly, a lot of these investments that people have on their balance sheets don’t make an awful lot of sense. If they get this 25 basis points away and the data, which has been poor, let’s face it. Apart from the low CPI and apart from the kind of smoke and mirrors unemployment statistics, which foolishly, they’ve pegged themselves to, so that’s causing another problem. But, if the data continues to be bad—the real data, manufacturing data, import/export data, PMIs, if this stuff continues to be poor, there’s a very good chance that they’re going to have to ease again in some form, whether they cut rates to zero again, we have QE4, whatever it may be. And, either way, that’s their credibility gone, and that is when the market has to react.
And, your question ended with perhaps the most important part about liquidity, because what we’re going to see is a liquidity event, and as these markets have gone up and up and up, people have forgotten that in a rising market, there is always stock for sale, always, at a price, there is stock for sale. And, what people have kind of gotten away from and forgotten is that in falling markets, particularly quickly falling markets, sometimes there are no bids. It’s not "get me out down 3%, down 5%, hell, I’ll even take a bid down 10%." There are no bids. So when you get that environment where are no bids and we have 70% of volume on the New York Stock Exchange being conducted by computers, you are going to see all kinds of weird—you know, there are going to flash crashes going off every five minutes in stocks all around. And, that is going to unseat everything. People are going to get so nervous watching this stuff happen. It’s perfectly explicable, but it’s going to make people nervous as hell and just more desperate to get out.
And, so they really, really have done a fantastic job in backing themselves into the tightest corner you could possible imagine. And, thankfully, in my view, we are, I think, about to find out how this at least starts to end, and December 16th is going to be the first step on that road.
Chris Martenson: Thankfully for me as well, because at least it’ll be interesting again. I find these steadily rising markets can be boring, and that’s just, I’ll own up to that. But, you’ve touched on a number of extremely important things. And, the first one that jumps out at me is this whole idea of market structure where the markets are now dominated by these computers and they are dominating not just the total volume, but the quote structure. You know, 99-plus percent of the quotes are out there being generated by these computers, and these computers are both remorseless and fast. So, I think that provides both opportunities and also difficulties for the people who are trying to so-call control the markets to not freak out.
But, when I look at these markets, and I understand that we have 70% of the volume by these computers, and I’m sure you watch as carefully as I do, there are these little flash crashes happening all the time. Where a single issue, a single security, sometimes even the whole Treasury market will suddenly go bidless, or suddenly have massive bids that don’t make sense, or the gold market suddenly getting crushed for three, four, five, six, seven thousand contracts at 1:22 a.m. Weird stuff, right? That’s all fun and games until you have a true liquidity event, and then I think these computers, they go out of parameter for their algorithmic sets. They don’t know what to do, and so, like Knight Capital learned, you just pull the plug. So, I’m sure everybody has a pull-the-plug algorithm subroutine written into these things at this point.
And, so your point about this all going suddenly bidless, it’s not a question of "can I get at 3% down, 8% or 10%?"—I think there’s an opportunity for an air pocket here. And, again, I don’t know, you don’t know. Maybe that’s too much hyperbole. But it’s clearly part of the market structure at this point.
I don’t think a lot of people really appreciate that we can’t really look back even ten years and say, “We know how markets behave when we get into these weird spaces.” Because, we’ve got whole new liquidity conditions, we’ve got way too much over-confidence in the Fed, or under-confidence soon to come. Or, this entirely new market structure courtesy of algorithmic trading and computers and all that. Everything’s kind of different. So, it’s kind of like we’re being asked to take our wealth, put it on a space shuttle that’s never been tried before, but trust us, we’re going to orbit the earth and dock with the space station flawlessly.
Grant Williams: Yeah, I mean, the one thing you missed out on when describing those algorithms—and you’re right, remorseless, relentless. But, they’re also trend-following, and that’s the crucial thing. Because, the trend at the moment is up, and once the market turns and the market wants to go down, and the Fed are out of bullets or whatever it may be, or confidence goes, whatever it may be that turns the general trend of the market lower, those computers will instantly flip around. And, they don’t care, they’re not—they’ve got no intellectual or emotional attachment to the P&L they’re making. They will just become sellers, and they will become remorseless and relentless sellers the way they’ve been buying. So, that’s one problem.
The other problem, I think, you mentioned talking about the central banks, and this kind of goes back to your comment about the academic mindset. And, I think perhaps the most instructional appearance by a central bank in terms of understanding just the level of—call it hubris if we want to, I guess—was when Ben Bernanke appeared on “60 Minutes.” And, the guy asked him the question about—don't forget this was way, way back, we weren’t anywhere near as deep in as we are now—but, he said to him, “What degree of confidence do you have that you can control…”—they were talking about inflation—“…that you can control inflation?” And, Bernanke didn’t even let him finish before he said 100%. And, the guy was kind of taken aback by that. And, he questioned him, he said, “100%?” Bernanke went, “100%.”
Now, you and I both know you don’t say 100% to anything. Anybody asks you a question in markets, in finance, there are no 100% answers. And, so for, arguably the most important man in the world at that point to have the hubris to say he was 100% confident, not only to say it, but to say it twice in three seconds with even more conviction the second time, tells you that these guys actually believe that—it’s the academic mindset—that they can control this. And, that is so dangerous for guys like you and me that have money invested in markets. It’s almost impossible to fathom, but that’s where we are. And, they are going to find out, like we all know instinctively, that there is no 100%. They’re going to find that out, and when they do find out that, let’s say it’s only 99%, well, within that 1% is where all the bad things happen, and that’s what really frightens me.
Chris Martenson: Well, yes, and inflation, of course, has at least two components officially, a third unofficially. And, the unofficial component is they just fudge the numbers when they need to, right? And, I could have a whole discussion about how they fudge it. But, the first two components would be, well, inflation’s a monetary phenomenon. And, secondarily, it’s about expectations, and expectations is a psychological beast. For somebody like Bernanke to say, “I have 100% control over people’s expectations,” a little bit bizarre, right? Must be weird to go on a date with this guy. I wouldn’t even know how to really react in that situation.
But, when we look at the monetary phenomenon, I got asked this question at a conference the other day. And, somebody said, “Hey, you know, you talk about all that money and you show me exponential money. Where’s the inflation?” I said, “Well, just talk to anybody else in this room. You know, try and buy a Gulfstream 650 or ask me how many dollars per square foot it is for a top-end apartment in Manhattan right now, $3,000’s the bottom, $5,000, $6,000’s the top per square foot. Look at art, look at diamonds…” I mean, so the money got sort of concentrated in the hands of the ultra-wealthy and guess what, they bid up everything that they care about, and those are all fantastically expensive at this point. But, so are financial assets. Greatest failing in the Fed ever—well, they’ve had a lot, but this is a big one, maybe I have to argue whether this is the top—was Greenspan deciding that inflation only existed in the CPI, it didn’t exist in asset prices. And, I think inflation is dangerous wherever it houses itself, but in asset prices you get some time, you get to sort of pretend it doesn’t exist or that it’s even virtuous for a period of time. But, inflation is inflation and we’ve got tons of it if you know where to look.
And, of course, the last part of this, what’s the third component of inflation I care about is it’s just doctored. It’s just, it’s a totally manipulated number. For instance, you wander over to the BLS, you look at the CPI construct, and they say, “Oh, here’s our inflation pie chart. 4.5% of the pie chart of things we track is healthcare.” Like, really? Because, it’s 18% of the economy. How do you weight it at 4.5% when it’s 18% of the overall spend? Right? That’s just because, why, well, you weight it low and it’s rising fast, that way the effect is diminished, all that. So, this whole idea of inflation, I think, was actually one of the larger critical mistakes of the Fed. And, now that I’m thinking about it, it wasn’t the biggest. Thinking that risk could be offloaded permanently into outer space via derivatives might be the largest. But, on inflation, I really think the Fed has it just structurally wrong, intellectually wrong.
Grant Williams: Yes, no two ways about it. And, what you said is precisely the crux of the matter. It is that there is hyperinflation. Yeah, we are living through hyperinflation, but the hyperinflation is in assets that the 1% want to own. It is those Manhattan penthouses, it is the jets, the Monet paintings, it’s the fine wines. And, that kind of works for the central banks, because there are only—to most people, it’s a headline in the newspaper, “Munch Painting Sells for $120 Million.” That’s a headline, maybe they read the story, maybe they don’t, but likely they don’t. To a guy worth billions, who’s looking to put his money into something that’s not going to get, essentially, gradually confiscated over time, that’s a real pain, because it means he’s got to pay 125 million bucks to buy that painting next time.
So, it’s happening, and it’s happening right before people’s eyes, but it’s happening very quietly in a small corner of the world that, that not only do people not really care about, but most people over the last sort of four or five years have been conditioned to dislike vehemently. And, that is, that’s where we get into the political side of this whole thing. Because, because it is, it does become a political football and it does become a means by which to, to vilify a small group of people. Because, you know that, hey, these guys have got all the money and we need all the money. So, if we’re going to get it, we’re going to have to take it from them somehow. So, if we make them out to be the bad guys, which is why you’ve seen this 1%, 99% debate going on more and more vociferously over the last few years. This is what happens. You realize that you’re going to have to get some money from somewhere, and you can only get it from the people who’ve got it. And, what it takes to be, I guess, qualified for the 1% would frighten a lot of people. There are a lot of people out there shaking their fists at the 1% without realizing they’re in it. And, they’re not in the .1% where all the money is, they’re in the .99% where they’re coming for you, and you don’t have a lot to give them, but they’re going to take what they can.
So, whichever way you look at this, there are several possible roadmaps and several possible time frames in which this whole thing happens. But, these are forces of nature, and I’ve given presentations about this. And, when you’re dealing with forces of nature, you can’t insert yourself in the process and corrupt them, not for a long period of time. You can do it temporarily, and there are thousands of lab experiments where people can show the results of this stuff. But, ultimately, these things are far too strong to overwhelm guys sitting in the Marriner Eccles Building, or the Bank of England. They keep inserting themselves, they keep tweaking, and they keep upping the amount of involvement they have until guess what, they get to negative rates and they get to the situation they’re in now, where they’re desperately trying to—they need to borrow more money to keep this thing going, but it’s starting to fall over under its own weight. And it will fall over under its weight. People kind of point at the likes of you and I that have been pointing this out for a while, but none of us know when this is going to happen. It’s clear to see what’s going to happen, and just because you’re early, it doesn’t mean you’re wrong, and that’s the thing people need to understand.
Chris Martenson: Absolutely. I would rather be a year early than a day late to this story. But, let me devil’s advocate this. Yes, I do talk with people who say, “Yes, I have been wrong. And, I’m wrong because the market says so, and I’m wrong because clearly there’s no inflation, and clearly we can just print more and more.” And, so let me take this to its absurd conclusion, which is: Why wouldn’t we just eliminate income taxes and why wouldn’t we just eliminate paychecks? Why wouldn’t the Fed just give everybody money? So, luckily, we get to find out the conclusion of that, because I guess, well, Finland just stepped up to the plate, didn’t they?
Grant Williams: Yeah, they did, and they’re talking about giving everybody what they call a living wage. So, the idea is that you sort of take away social services, but you give everybody a living wage, and they get paid that every month as a stipend to live on and cover their healthcare. It will fail. It’s failed when people have done it in history. It sounds like a great idea, and the dangerous thing is they’ll do this and there won’t be any immediate catastrophe.
Chris Martenson: Right.
Grant Williams: People will take the money and they’ll kind of—it’s not going to make things better overnight, but the whole of society is not going to collapse. And, that’s the danger, because suddenly, other people look at it, like they looked at Abenomics and said “Hey, you know, nothing bad’s happened, we should try this.” And, when the Swedes went to negative interest rates, everyone’s watching them very carefully. "Well, you know what, Sweden hasn’t evaporated in a ball of smoke. We should try that." And, it takes a while for these things to filter through and have the effect that they are bound to have, ultimately. It’s in that time where other people kind of look at it and say, “Well, you know, because nothing bad’s happened, it absolutely means nothing will happen, so we’re good to go.” This is how QE has become so pervasive.
And, so, yeah, from what I understand, the Finns are going to try this, and you better believe that everybody else is watching them like a hawk for any signs that it doesn’t instantly lead to Armageddon. And, if that’s the case, they will all have this on their radar of something to do. This will be another arrow in the quiver should things start to unravel.
Chris Martenson: Now, if that arrow ever gets fired in the U.S., that’s when I’ve advised the people who listen to me that you should run, not walk, and buy everything that’s not nailed down. Because, I don’t know when exactly, the timing is tricky, but might as well do it early, by which I mean spend it. Because, this was always something that was anticipated by myself, by yourself, by a number of other people who are observers of all this, which is once you get down to the zero bound and the Fed no longer knows—pumping QE out and giving it to the big banks doesn’t really seem to be doing it. So, what do you do? You got to get the money to Main Street. So, whether that takes the form of a direct monthly stipend like the Finns are doing, or whether my government decides to cut my tax rate in half, or give me a complete tax holiday, or even a rebate for the last three years. Or, I get a check from the Fed. I don’t care. The mechanism is the same. It’s more grotesque overt monetization by the central bank in order to support this idea that they know best what the level of aggregate demand and spending ought to be and they’ll do whatever it takes to get us there. Steve Keen, the economist out of Australia, has a proposal that maybe they give everybody $50,000. But, you have to use it to pay your debts down, and so it’s sort of a "jubilee for the people" kind of a moment.
Any way this gets put forward, Grant, I believe that that’s sort of like the apocryphal mark of the end times, for me. I just, like at that point, how, how are you any different from Venezuela currently, or any other country that’s attempted to print their way to prosperity? I can’t, to me, it’s just like the best advice I know how to give is just go and buy things quickly.
Grant Williams: Well, unfortunately, none of us are any better than Venezuela. We’re just far earlier in the process, that’s all. We’re doing exactly the things that the countries like that, banana republics have done in the past. It’s no different than Zimbabwe. It just hasn’t, we haven’t reached that critical phase where it accelerates yet. But, the funny thing is, when you talk about these kind of scenarios where it’s "run out and buy anything that isn’t nailed down," what you have to try and do is get into the psychology of people at that time, rather than now. Because, right now, you can’t look at it in the cold light of day and go, "yeah, well, if that’s what’s happening, that’s what we do." But, people tend to be thinking differently at that point.
There’s a great case in point in Japan in the ‘90s, when they were desperately trying to break this deflationary mindset. And, the Japanese were hoarding, they weren’t spending their money. They just felt that deflation was there. They felt prices were going to get lower so why buy something now, we can buy it cheaper in a year’s time. And, the government came up with this great idea. They would give coupons to everybody that, well, I forget what the number was, but let’s say it’s 500 bucks, equivalent in yen. So, everybody got a coupon. But, they had to make sure that people went out and spend them, so they put an expiration date on this thing, because they wanted to get this money into the economy, wanted to get the Japanese spending again. So, they sent them all a coupon for 500 bucks, but it had to be spent by, I don’t know, the first of July. And, that, in their mind, was a cast-iron way of getting this money into the economy. The Japanese would go and spend it, we’d break this deflationary mindset and this would turn things around. And, what do the Japanese do? Their mindset was so warped by what they’d been through and the experiences they’d had and where they’d got to in their own psyches, they hoarded the coupons. In their minds, it was a case of, well, if we don’t spend them, they’ll extend the deadline, so I’m going to hoard the—I’m not going to spend this 500 bucks.
So, when you get to the point where people are hoarding free money that you have a limited time to spend, you understand that the psychological component of this is overwhelming anything that these guys can do. And, that’s what you get at the extremes, and that’s the one thing that they really can’t do. Because, when you’ve reached that point, the more you squeeze and the more you push to try and get them to do a certain thing, the more their own mindset sees the negative side of that and pushes against you and tries to stop you doing it. And, we’re close. I mean, we’re a lot closer than people think to that kind of point in time, I think.
Chris Martenson: Well, so the psychology is the critical part of all this. And, Grant, the more I get out and talk with people, I’m seeing a number of bifurcations. Here’s another one. Boomers versus millennials, right? So grossly speaking, boomers, let’s say everybody 50 and older, what they want, Grant, is they just want the status quo to be preserved. And, rightly so. "Worked hard, went through my peak earning years. I’ve saved. I just want this to continue," right? And, the millennials have an entirely kind of a different sort of a psychology to them, which is like "this all looks like rubbish to me," right? "I’m supposed to go to college, spend a lot of money to get a degree, maybe go into debt for that. No corporate fealty whatsoever. The government’s required me to pay into an entitlement system which I can mathematically guarantee will not be there for me, so that’s just wasted money. And, my country’s 18-plus, almost 19 trillion dollars in debt. And, in the United States, it’s all crumbling infrastructure, like bridges that fall into the ocean and cell service that’s embarrassing relative to any European country, and yada, yada." So, the millennials look at all this like that’s not really an attractive deal.
And, so the psychology of all this is that I think that really, what I’m sensing is that there’s a system that’s run its course. It no longer makes logical sense, because you can’t have infinite growth on a finite planet anyway. And, the story’s starting to break down just even within this economic sphere, but God forbid you turn your eye to soil loss, aquifer depletion, species extinction, ocean acidification and fisheries lost, whatever. Like on the environmental side, it’s like, ugh, there’s some awkward stuff to look at there. And, so really, what I think we’re dealing with is not something as much about the numbers as it is about the fact that the larger organizing narrative of why we’re humans on this planet, and what we do to occupy ourselves, it doesn’t really comport all that well with the reality that we read about. When a culture’s prime narrative begins to break down, it’s an awkward time. And, I think I’m seeing that generationally first, if I haven’t gone too far off the reservation in this conversation. But, it’s kind of an existential moment, I think, in some ways.
Grant Williams: Yeah, and it’s, yeah, I’m the father of two millennial kids and I talk to them about this stuff. They get it to an extent. They don’t get it completely, because they’re not as wrapped up in the financial side of it. They get the socioeconomic side of it, but they don’t get the pure economic side of it. And, I think you’re absolutely right. We’ve reached that point where it feels like a change in this beautiful thing that everyone calls "the system." You know, "the system’s going to collapse." "The system’s going to do this." But, these systems get reset all the time, and this one feels like it’s, as you said, run its course.
The problem is it’s such a big concept for people to understand and have to think about. If you force someone to think about, okay, what happens if the entire framework of your everyday life changes, it goes away and we have a different thing? People don’t want to think about that, because it is, it’s an enormous concept, and it’s a frightening concept. And, the outcomes are, A.) too big to really understand, and B.) potentially too frightening to—as you said, that stability, that life that you’ve come to love and you feel like you’ve earned. And, so things like this, when they come along, tend to happen kind of suddenly without people realizing it. And, they are associated with the word "collapse," because nobody wanted to do the planning about it. Nobody wants to think about demographics, for example, which you can see the big picture of what’s going to happen in 25 years. We knew the Japanese population was going to be net declining in 2014, 25-30 years ago.
No one did anything about it, because it was such a big concept. And, if you campaign and you try to make change about something that possibly might mathematically happen in 30 years’ time, you’re going to be laughed out of town. So, anyone talking about making plans for a new system openly is going to get laughed out of town.
But, you better believe that these conversations are going on and have been going on at the very highest levels for some time now. Because, I think it’s clear now that a Plan B of sorts is needed. Personally, I think gold is going to play a part in that, because it will have to. But, I think there are going to be some big changes coming. My fear has been over the last couple of years, and it’s been growing, as to whether than comes about through conflict. If you look through history, you’ll find that generally at major turns in economic cycles, they are associated with major conflict. And, what’s happened in the last year since I gave a presentation about this called “The Consequences of the Economic Peace,” has just reinforced my concerns. And, you look at what’s happening in Syria, you look at the Russia/Turkey situation, you look at Japan and China in the South China Sea. There are all kinds of flashpoints all around the world that provide tremendous pressure release valves when things get to extremes. And, my concern about this stuff is rising by the day. I get very, very worried about this stuff.
Chris Martenson: I share that concern. I’ve been writing a lot lately about the Syrian conflict, and of course, that’s just a dot that we have rewind all the way back for many decades in the Middle East when it comes to the United States’ involvement there and other players. As I look at that, though—I was at this other conference just last week, I was asked by a European gentleman like what did I think of the refugee crisis. And, he was really looking at it from a geopolitical angle, and I said, “Well, let me reorient that for you,” and just note that right now, Europe’s choking on a million-ish refugees seeking to sneak in, escaping a variety of conditions. But, if the resource trends that we know about in the whole Middle East/North Africa region come to pass, which include water—Saudi Arabia pumped all their water out to grow wheat, and it has run out. And, they’re about to start importing. That’s fine if you got a lot of oil. When that runs out, then what? Rapidly rising population. So, I said, “Listen, if you think the million is a troublesome moment, how would you feel about 100 million?” Because, we’re about to enter into these large sort of migratory patterns which could happen for economic reasons, environmental reasons, when a region’s energy runs out, etc., and so forth.
So, I agree with you. I share with you this idea that we have to keep our eye on the conflict angle of this because, historically, almost all conflicts have been about resources. If you study the period of England from say 800 to 1400 and you had all these Viking raids and all the Frankish raids and the Welsh and the British and everybody going at it. Those were fundamentally all dictated by poor harvests and overpopulation. And, that’s just sort of been a pattern that’s been true through all of time. So, when you say you’re worried about these conflicts, is that because you think economically this is how we solve things politically, or are you worried about it as I am potentially on the resource side as well?
Grant Williams: Well, I think both, and I think you get back to what we were talking about just a moment ago, about these big concepts. If you talk about a country running out of water, for example, that’s a concept that from a practical standpoint nobody can really get their heads around that.
Chris Martenson: Right.
Grant Williams: Because, they’ve never been without water, they have no experience of what it’s like to be without water. They can’t conceive of a world where they don’t turn their tap on and there’s water. But, of course, it can happen. It’s why people who have lived through the hyperinflation in South America have a completely different look in their eyes when you talk to them about hyperinflation than anyone who’s lived in the U.S. or the U.K. I mean, you’ll find some very old people in Germany that understand, but we’ve had generations where they’ve never experienced that. So, all of these concepts which you have no experience of, unless you read history and you understand that there are cycles in these things, and you read enough history to see those cycles manifest themselves over time. Of course, it’s impossible to think about, well, I turn the tap on, there’s no water.
But, when you reach these points something has to be done. And, occasionally, if your country has run out of a resource, as you said, right away through time, you go into the country next door that has some and you take it. That’s what happens. I mean, we like to think we live in a world where you would be able to bargain, and you’d be able to have a trade deal with someone to bring in and pay for your water, pay for your wheat, whatever it is you have to do. But, of course, if the country next door is undergoing similar problems and they have their own people to feed and keep happy and maintain their own power, their own grip on the country, well, then, this stuff’s not for sale. So, what do you do? What do you do in that problem? You have to keep your people fed. Rule number one, keep your people fed.
So, just because we’re not in ancient Egypt anymore, and we’re all walking around with iPads, at the end of the day and the bottom of this whole thing, people need to be fed and they need to have water. And, again, this is another one of those concepts that’s such a big thing to think about and such a big thing to talk about that when you do, people tend to think you’re a little bit crazy. And, I’m okay with that, because I’m not saying it’s my base case, I’m saying it’s at one of the tails.
When I talk to people about this, you realize that the main difference between the people that talk about this stuff and understand this stuff, and the man in the street, all it is is the tail risk events that thinkers can conceive of are further out on the tails than the man in the street. Which is understandable, because the man in the street doesn’t spend an awful lot of time thinking about this stuff. But, when you understand that, you know what, your biggest risk doesn’t end at this particular point, it actually continues, and the risks get almost infinitesimal. But, they are very real risks, and you have to actually try and figure out what you’re going to do if some of these really extreme events happen. And, you don’t need to be right, and you hope you’re wrong, but you have to have a plan for what happens when things like a country runs out of food, or a country runs out of water, or a country goes to war.
And, things like a Russian plane getting shot down over Turkey, well, that shifts a lot of people’s possible tail risks out a little further on the curve. Because, they go, “Wow, who’d have thought that the Turks would shoot down a Russian fighter plane? I didn’t see that coming.” But, they’re not all the way along, which is conflict, as I said. I keep stressing this. I’m not saying a war’s going to happen. What I’m saying very carefully is—I’m saying a war is not not going to happen, and I think it’s a very, very fine distinction, but a very, very important one. It’s something you have to understand is a possibility no matter how remote.
Chris Martenson: I agree. And, the way I think of it is with probability, so I’m not yes or no war, it won’t, it will. That’s too binary. I’m not flipping a coin. It’s kind of like I have a ten-sided die, and we’ve got a "W" for "war" on this and otherwise we’ve got an "N" for "no war." It’s kind of like I feel like the 10-sided die now has 6 Ws on it.
Grant Williams: Yeah, that’s a great way to put it.
Chris Martenson: You know, we’re going to throw it and we’re going to hope it comes up an N, but you never quite know anymore, and that shooting down of the Russian jet clearly was an act of provocation by Turkey. I don’t know what they were smoking that day, but it was good stuff, because they clearly were ambushing that jet, and I don’t know what they were trying to achieve. But, at any rate, that just dials it, that puts one more W on my die at that point in time. Because, it’s just, the tension’s up.
So, given all this—and, final question—I’ve just been mystified. I just wrote this, another overly long piece on gold, because I’m looking at supply and demand, all that, and the obvious story of gold flowing from West to East, China’s astonishing appetite for it. And, through all of that, gold’s just been falling in price, largely driven however you want to measure that, gold falls in the paper markets. But, the physical market’s been responding and coughing up just, again, an astonishing amount from Western vaults, at least 1,000 tons, maybe 1500 is my best guess, but it could be as high as 2,000 tons per year for the last two and half, three years now. It’s just been evaporating. How do you square that with the price and do you think there’s an end to that? Or, where’s it coming from?
Grant Williams: Well, I just, I literally just got back from London giving a presentation on this exact topic. And, to me, it’s actually reasonably straightforward. The title of my presentation was “Nobody Cares.” And, I think that’s it in a nutshell. There are people that buy gold and own gold and hold gold, and I’m talking mainly about Western investors here. And, they’re looking at this thing thinking, well, you know, "why isn’t the price going up?" And, I put a timeline up in this presentation that showed all the events over the last three years that ordinarily one would’ve thought would be positive for the gold price. And, I went through them all and you just watch the price go lower and lower and lower. And, the simple truth is, outside of people that own gold and who look at gold, nobody really cares. And, so we fixate on this and we look and we go, "why doesn’t everybody get this?" Why [audio breakup] because more now than ever need to own this, this crazy yellow rock. But, people don’t care, and they’re not looking at it and they’re not thinking about it.
And, so you get this, again, we get back to this whole paper trading, derivatives, we get all this stuff being layered on top of these gold markets. Well, meanwhile, as you pointed out, the physical gold is pouring into really, really strong hands. So, what people have to understand is that for the entire period of time when just a few people care—and it is relatively speaking, just a few people. It’s a very small market. Pension funds, for example, have 0.15% of their assets in gold and gold equities. If that doubled, it’s a $100 billion, just to take them to .3%. And, over time, these guys have at periods in the past been at 5% in gold. That would be one and a half trillion dollars. Just pension funds. Forget hedge funds going into the gold space. And, that can’t happen without stupendously higher prices. But, it’s not happening now. The difference between gold and a lot of other things is that it is a physical asset, and it is something that does have great store of wealth and it’s trusted by over half the population in the world, even though we’re in the smaller half.
The guys in China and guys in India or Indonesia, in the Philippines and Turkey, all these places, for centuries, they’ve put their trust in gold, and they’ve put their wealth in gold. These people are getting wealthier, and so as they get wealthier, they’ve going to convert an increasing amount of all of that wealth into physical gold. We’re seeing that in Shanghai. We’re clearly seeing the amount of physical gold being withdrawn through that exchange is now 52 times that which is delivered on COMEX. And, yet when people talk about the gold price, we’re talking about a piece of paper that trades in the U.S., which is fine. That’s absolutely fine. If that’s what you want to call the gold price, great. But, to anyone in China, Turkey, Indonesia, Philippines, to them, the gold price is not the piece of paper in COMEX, it’s what the guy in the market will sell them an ounce of gold at. And, they’ll buy it.
So, this is another one of those things that is too big for people to see. They focus on the price, and they look at gold going down. They’re not looking at the big picture because it’s complex and it involves understanding other cultures and other countries. It’s just a little bit too much work. And, none of this is going to be obvious until you reach that point in time where confidence goes in the Federal Reserve, and confidence goes in paper assets, when people start to want to own real assets. And, the simplest real asset to own and to buy is not real estate—because most people will need leverage for that—it’s gold.
And, again, you go back to these cycles, people have always gone to gold, always, throughout time, everywhere in the world. And, at the point where everybody suddenly says, “You know, I need to own some gold,” owning paper’s not going to do it. So, the thing that there’s this endless supply of, which is derivatives on gold and future contracts, that’s not what people are going to want to own. They’re going to want to own the stuff that’s been pouring out of the vaults in Shanghai. And, guess what? The people that have been buying it are not going to want to sell it to you, because they’re going to want to own it even more just like you do.
So, just because this stuff hasn’t happened—and it is baffling. But it’s not baffling to me as to why the price hasn’t gone up or even why it’s going down. It’s baffling to me that more people don’t understand why they should absolutely own some gold. They don’t need to own 100%, but they need to own some of it, because it will be an asset that rises amidst a lot of falling assets. It will give them protection. It’s money. You’re not buying something that has a shelf life. You’re buying money, and you’re buying real money.
The day for gold to go higher is going to come. It’s taken longer than certainly I thought, and a lot longer than a lot of other people thought. But, it’s just a question of patience. It’s waiting for that balance to tip for more people to understand it, and more people to realize that, "you know, I need to own some gold." Because, once they reach that realization, the next question is, "okay, where and how do I get it?" And, that’s where the problems start.
Chris Martenson: Indeed. And, every time we see gold or silver have a little bit of a price hiccup, the retail channels just get absolutely crushed in the United States. It becomes four, six-week waiting times. That’s with just a few extra gold bugs and silver bugs saying, “You know what? Price is down, I think I’ll buy a little more.” I mean, it’s like a nominal, it’s like this little tiny little wiggle of the needle, and it creates supply disruptions. Of course, of course, if the pensioned, well-heeled, well-moneyed crowd who are lining up to buy those Golf Stream 650s, if they just turned a little bit of their fire power, I think the market would become chaotic and difficult for the average person to invest in very rapidly. The super moneyed people would always have access. But, everybody else…
Grant Williams: Well, those, I think those super money people—what’s really interesting is the amount of leverage that they could get—instead of going and buying gold bars, go buy a gold mine. Go buy a gold mine and shut it down. Keep your gold in the ground. Because, not only do you own the gold, you’ve also cut the supply. And, the leverage you get from doing that—and it sounds kind of crazy. "Oh, yeah, go and buy a gold mine." But, that’s what these people who have the kind of money to buy the Gulf Streams and the $120 million paintings, that’s not only what they can do, but that’s what they think about when they reach these points. "Okay, I need to own something. What’s the smartest way for me to own it?" Well, if you can buy an asset that not only gives you ownership of it, but takes supply off the market, obviously, you get tremendous leverage to an increase in price by doing that.
And, I fully expect to see that. I fully expect at some point that some of these gold mines get taken private, and just shut down. No storage costs, it’s just sitting in the ground, and you own it, and when higher prices come up, you can open it up again and take it out of the ground. It’s a really smart thing to do if you’ve got an awful lot of money.
Chris Martenson: It’s the best vault in the world, very difficult to crack into. Totally get it. That makes all perfect sense, and of course, it’s, Grant, always fascinating talking with you and I could on forever. And, we’ll do this again. But I really want to give listeners a chance to, obviously, follow up with you more and find out more about what you’re doing. So talk to us about what you’re up to and how people follow you.
Grant Williams: Well, there’s a couple of things, and people can follow me on Twitter, which is @ttmygh, which is just the acronym for "Things That Make You Go Hmm." The website for that is ttmygh.com, and its bimonthly letter that I write about whatever I think is worth talking about. Subjects do range from gold to Abenomics to the U.K. economy, all kinds of things. There’s so much going on right now, as you said, we live in extraordinary times.
Another project that I started a year ago with my partner, Raoul Pal, is called Real Vision. This is a video channel, an on-demand video channel for finance. We basically, like you do, we go around the world and we sit down with really smart people and we talk to them. We don’t talk in three-minute sound bites like they do on CNBC. We let these people talk. And we sit with them for an hour like you do, and we talk about how they think about things. We don’t ask them "where do you think the S&P’s going to go?" because none of us know. But, what we try and get into is how do you invest, how do you structure your trade, how do you think about tail risk, how do you plan for unexpected outcomes. And, it’s a fascinating project that’s gaining some great traction, so we’re very proud of it. And, the website for that is realvisiontv.com. So, take a look. I think you’ll like what you see.
Chris Martenson: We’ve been talking with Grant Williams of TTMYGH, Things That Make You Go Hmm. And, fantastic newsletter, so if you want to sign up for that, I would highly recommend it, and Real Vision as well. So, Grant, thank you so much for your time, very generous, and always entertaining, and I can’t wait to do this again.
Grant Williams: Chris, it’s a great pleasure always. Thank you so much for having me on.