Lance Roberts: This Market Is Like A Tanker Of Gasoline

And passive ETFs & margin debt will set it afire
Tuesday, May 30, 2017, 2:09 AM

Lance Roberts, chief investment strategist of Clarity Financial and chief editor of Real Investment Advice has authored a number of impressive recent reports identifying potential failure points in today's financial markets. 

In this week's podcast, Lance explains how the massive flood of investment capital into passively-managed ETFs, along with record amounts of margin debt, has the potential to set the markets afire:

Fundamentally, there’s nothing different in today's markets because, at the end of the day, they are about evaluations, earnings -- those types of things. Technically, the market is very different today because of quantitative easing, computerized trading etc.

What we see are two things happening, in particular, that people should be paying attention to. One is that investors are herding into passively-managed ETFs now, which is creating a dislocation between the underlying realities of individual stocks and their prices, because the piling into ETFs is requiring stocks like Facebook, Amazon, and Google to be bought in much greater volumes than they otherwise would. And people are making an assumption that there will always a buyer for every seller in the market.

Now that’s absolutely true. But it's often argued by the mainstream media that "For every buyer there’s a seller, so it doesn’t matter when the market turns. You’ll be okay." But you won’t, because, yes, at some point there is a buyer for every seller, but it always begs the question: At what price? And because of all the piling into these ETFs, when the market eventually breaks, yes, there will be a buyer; but that buyer could be at many percentages lower than where prices were before. We could very well see a vacuum appear in prices, with a gap down so sharp and so fast that it not only paralyzes most investors who may be hoping to get a little bit of recovery to sell into, but then will start triggering margin calls.

There’s been numerous articles written about margin debt: "margin debt is not a problem; don’t worry about margin debt." Well, margin debt is not fine. We’re at record levels of margin debts. It’s like a can of gasoline. If I set a can of gasoline in the middle of a room and nobody touches it, it's fine. But drop a match into that can of gasoline you have a different story.

So, the only thing that’s been missing up to this moment right now is the herding of individuals into a specific type of investment. But just like with real estate in the past, we have now people herding into ETFs. And now, with all these computers basically acting on the same set of information pushing stocks in the same direction because they’re all working off the same set of information, the market is like a tanker of gasoline. And somebody’s going to put a lit stick a dynamite into it because when this all reverses, you have these passive indexers become panic sellers. And then that beings to immediately trigger a reversal in the algorithms, which all feed on themselves in a negative direction. And the gap that opens up between the bid and sell prices will be staggering.  

Click the play button below to listen to Chris' interview with Lance Roberts (45m:28s).


Chris Martenson: Welcome to the Peak Prosperity Podcast. I am your host Chris Martenson. It’s May 25, 2017, and today we’re going to be talking with leading market analyst and commentator, Lance Roberts. As this is being recorded. Stocks are powering to move all time highs signaling well what exactly. That’s what we’re here to find out today. CNBC and the Wall Street Journal and other market cheerleaders want you to believe that everything is awesome, but are things really awesome. So, let’s find out. Lance, hey he’s one of my favorite market analyst and commentators. He has a background of 25 years of private banking and investment management.

Lance is currently a silent partner for an RIA in Houston, Texas. The majority of his time is spent analyzing, researching and writing commentary about investing, investor psychology, very important today, and macro views of the market and the economy. His thoughts are not generally mainstream and that’s why I’m going to love talking with him today, you’re going to love him as well. He is also the chief of strategist and economist for Clarity Financial, editor of Real Investment Advice dot com and the talk show host of the Lance Robert show at KSEV 700. He publishes regularly in Seeking Alpha as well. Real pleasure to have him on. Let’s welcome you, Lance. Welcome to the program.

Lance Roberts: Absolutely, happy to be here.

Chris Martenson: First, is there anything else about your background I might have missed that will help our listeners know who you are and where you’re coming from.

Lance Roberts: Well, it’s interesting. I started my entire career as I was managing a deposit CD book for a bank in Austin, Texas and I started three days before the crash of ’87. My boss had me entirely convinced the entire crash was my fault, and so after that our bank eventually got bought by NCNB, which was North Carolina National Bank, eventually became Nations Bank; and we were bought and closed down along with the rest of the acquisitions and I wound up overseas managing money for high networth investors out of Monaco and several other countries. And what I learned there was it set a lot into my overall background and thought process about managing money which is not losing it: the conversation of principle, the management of risk. Well markets can do things that are totally illogical at times. Th ere is one thing that’s always the same which is this time is never different and once again I hear way too much right now because of central banks, because of this because of that this time’s entirely different but it’s not.

And eventually what goes up does come down there’s a simple thing called a four-market cycle and well we’ve enjoyed a very brilliant first eight years going on to nine years, the first half of the market cycle there will be pay back and those paybacks are fast, swift, sharp and totally unexpected and everything that people are building into their beliefs structure about it, etc. can be reversed literally on a dime when something unexpected happens.

Chris Martenson: Well, now let’s talk about that full market cycle because you recently penned a piece. I saw it on seeking alpha on the five universal laws of human investments stupidity and loved it. I think investors are being especially dumb here. Its context; I follow I know and I agree with pretty much everything John Hussman says. Great guitar player by the way; good voice, too and I’m such an inherent to his views for two reason, one you already mentioned one of them, it’s never different this time. And two, he’s got the data. He’s got the historic rigger to back up what he says. And according to him, investors are not paying very good attention to history here. Do you agree with him on those accounts or have any other reason to think maybe people are being dumb here?

Lance Roberts: Well first of all it's always interesting. I have a great respect for John Hussman, we communicate regularly on different issues. We’ve had dialogues back and forth on particular issues on fundamentals and valuations, etc. People tend to immediately discredit anything that he has to say, simply because they go looking for his performance of his particular fund or whatever it is; or they look at his writings – oh he’s been wrong and say he’s been wrong for so long that he’s just wrong now. The problem is, is that as you stated, his work and his research his based on careful analytical analysis and he goes through the data, he looks through the underlying structure and he makes very well practical arguments as to what is the particular issue he’s covered but most importantly when talking about evaluations and forward returns, the data is clear and this time isn’t different than it was previously. Just lately you always start to see towards the end of a particular bowl market cycle. People coming up with new excuses. If you remember back in ’99 it was well, if you’re trying to invest like Warren Buffett, that’s like driving dad’s old Pontiac. This is all about eyeballs page and we found out - no it’s not about eyeballs per page. It’s about how much dollars you’re actually putting down on geo bottom line.

In 2007, it was different this time because we were in a quote on quote, goldilocks economy. The fed had it all under control prime mortgages were contained. They weren’t. And today what we’re seeing is a very different type of bubble forming that is completely triangular exclude evaluation once again and the bottom line is what we pay for something today is based upon the future cash flows and expectations and corporations over the long term and it’s how we get paid back. Well now it’s, we don’t even worry about that, just buy an ETF, be a passive indexer we’re creating this new bubble inside of ETFs this whole passive indexing mentality. Very similar what we see in the past. This time were making excuses. This time is different because evaluations have been elevated for the last ten years, so the medium long term evaluation no longer matters at fifteen times earnings. It’s now nineteen times earnings. We're really not that overvalued it’s all okay. I’ll be fine just hold on and things we’ll work out, just remember nineteen or twenty or twenty-five times earnings that means a dollar invested today, if you capture a hundred percent of the earnings, there distributed by the company, it will take you twenty-five years to get your money back. That’s the problem, and when your market value is where they are today over next ten years, or twenty years just as John Hussman has shown multiple times, you’ll be close to zero.

Chris Martenson: Close to zero, and of course this time is never really different. But let’s talk about ways that it might actually a little be different. Big article, in the Wall Street Journal last week about the rise of the quants and I don’t know if everybody saw it. But a quant is someone who uses math and writes algorism and computers can do the trading for you and now we all know that the market structure, something I’ve been commenting on for many years, particularly through the work of [?] and others like that that we have a very different market now and its subject to flash crashes and microsecond trading, and colocation servers and all this. Lance, is this market really one where we can historically look back and say here’s how markets should behave, here’s how they do behave or is there something fundamentally different in the market structure now.

Lance Roberts: Fundamentally, no. There’s nothing different because remember the fundamentals are at the end of the day about evaluations, earnings, those types of things. Technically, the market is different today because of all the reason you just laid out in terms of quantitative trading, computerized trading etc. What we see our two things happening in particular that people should be paying attention to is one, as I mentioned earlier that herding into ETFs now has creative a dislocation between the underlying realities what’s happening inside of individual stocks because their people piling ETFs that require stocks like Facebook, Amazon, and Google to be bought. We’re starting to get this attachment between what’s actually happening with the underlying equity of the stocks, experts what happening with the ETfs. There’s going to be ultimately, I wrote I article about this called, about passive and recently that when this break, whenever it breaks it will break that people make an assumption that there’s always a buyer up for every seller in the market.

Now that’s absolutely true and this is often argumentative given by the mainstream media that go for every buyer there’s a seller matter, so it doesn’t matter when the market turns. You’ll be okay. But you won’t because at some point there is a buyer for every seller but it’s always the question at what price. And because of all the piling into these ETFs that when the market eventually break, there will be a buyer but that buyer could be percentages down much way over where that buyer initially appears and we'll see a very rapid break in the market in a vacuum will appear in prices and the gap down will be so sharp and so fast that it not only paralyzes most investors who are now going to start hoping to get a little bit of recovery to sell into but then we’ll start triggering margin calls. And there’s been numerous articles written about margin debt. Margin debt is not a problem; don’t worry about margin debt. Margin debt is not fine. We’re record levels of margin debts. But it’s like a can of gasoline. If I set a can of gasoline in the middle of a room and nobody touches it, it's fine. Nothing happens, it’s a nerve. Drop a match into that can of gasoline you have a different story. So, the only thing that’s missing at this moment right now is this hurting of individuals into a specific type of investment. Just like real estate stocks, we have now people hurting into ETFs. This is now being driven back to your point about quantitative trading; so all these computers are basically acting on the same set of information pushing stocks in the same direction because they’re all working off the same set of information. So, this is like a tanker of gasoline. And somebody’s going to stick a dynamite into it, because when this all reverses, you have these passive indexers become panic sellers and then that beings to immediately trigger a reversal in the algorithms, which all feed on themselves in a negative direction, and the gap that opens up will make the gap in the Lehman crisis appear minor.

Chris Martenson: Now let’s talk about this; this is such a fascinating market structure to understand I -- maybe you can help me understand this. I looked at it and I couldn’t believe what I was seeing. it was on Zero Hedge awhile back. It showed that the number of ways to engage with stocks through something like in ETF. So, an ETF, for those listening, is a basket that’s meant to attract the underlying share of stocks. You might buy an ETF in the SNP 500, as the SNP goes up the ETF goes up. And the way they do that is they couple the ETF to the underlying shares. There are not apparently more ETFs and vehicles like that than there are individual shares. Did you see that piece of data?

Lance Roberts: Absolutely, absolutely.

Chris Martenson: So, help us understand that, because to my unsophisticated way of thinking it means that; let’s just make it simple, I’ll make the math simple and work this out in my head. If there are a thousand different shares, types of companies out there, listed with ticker symbols, and there are fifteen hundred ETFs out there, it means there’s basically 1.5 representation. It means that as these people start to sell ETFs, there’ s going to be more selling than there is actually shares outstanding. If I haven’t butchered that too badly, it means that’s their actually leverage on the number of shares that are outstanding. They would all have to be rectified both I guess on the way up and the way down.

Lance Roberts: Well, that’s right, if you take a look at a lot of shares and the market: the individual side. Step aside from the ETFs for a moment, go look at what’s happening at the underlying individual stocks that are in these baskets and you’re seeing more what we would consider more abnormal movements in the stock because of this exactly, as you stated is exactly the right way is that you’re getting this leverage of buyers, because as one buyer goes in to buy an ETF, then at that one marginal buyer effectively buying one and a half time stocks is actually being purchased by the purchase of ETF. Then, you leverage that with the fact that you have a lot of these ETFs that are using option structures in order to leverage those ETFs. So, now you’ve got options on top of the leverage on top of the stock. So, this is back to our original point about this quant driven market. The information flow into the market is all bullishly biased and these algorithm’s, where there looking at political headlines or geopolitical headlines or stock trading headlines, company headlines, whatever is driving these algorithms. All these algorithms are all basically messed up and they’re all trading up information exactly the same way but this is what we saw last Wednesday.

When that initial headline hit, let me rephrase that sorry. This is what happened a couple of Wednesdays ago, when the headlines hit about James Comey, and the potential that there might have been an obstruction of justice. What you saw was a very rapid decline in the market. Almost one and a half percent in one day and this is the beginning of those reversals. Fortunately, right after that the headlines cleared and algorithms went back to work, but there will be a point to where once these algorithms fit, they will hit major support points. When those support leverage levels are hit, that would trigger more selling and so forth and so on. And as we were talking about earlier, the thing that happens to the individual investor; and this is the difference the individual investors has been lulled into the place of consistency that it's simply, every day is a buying opportunity, and every opportunity for a dip is just something not to worry about and it’s all fine, it’s just this high level by both the federal reserve and by the media and by the market action in and of itself. That at some point when that reverses and that decouples and things begin to run in reverse, it will happen so rapidly that investors will be trapped into a paralysis, where they are simply trying to make the justification if a decision comes back I’ll sell but it won’t come back, it’ll go lower. If things go back to where it was I’ll sell and eventually there where there simply just like oh well I’m here where I am, I’m just going to sell everything now. And typically, that’s the bottom of the market.

Chris Martenson: Now we’ve had a lot of conjecture out there, including recently by Asher Edelman saying, that he has no doubt the PPT is behind the market rally, this and that, but it seemed to me that – remember January 2016, everyone was kind of going bad, emerging markets were blowing up, and the dollar spiking. It was a lot of chaos out there and January was pretty awkward, and February it all turned around and then we had Brexit just a few months later in that same spring. And a few weeks of confusions and then things turned around and then we had what I really thought was a black swan moment was Trump being elected. That was not on my radar screen until 10:30 that night and remember we had the Dow down 8- 900 points and then turned around in a couple hours and went the other way. Would you – do you think those are the kind of moments where, Mr. Edelman’s -- I don’t want to put words in his mouth, do you think, is that what he’s looking at, or is he saying more general people are starting to suspect the entire advance of the market at all moments now?

Lance Roberts: It’s not the individual. The individual player is very, very small relative to the markets today. There’s actually a very good article out, just today talk about the number of people and the population of the country. Take a look at the statistics, 80% of Americans have less than five hundred dollars in the bank. The average American 401 K balance is less than one year salary. American consumer debt listed at all time high and the wages are continuing to remain stagnant. People are living, really for the bulk of America, really living kind of paycheck to paycheck. It’s not the individual player that’s in the markets, that’s driving the market in any direction. What we’re talking about here is talking about institutions, we’re talking about hedge funds but most importantly we’re talking about central. I tracked the central bank changes on a four-week moving average for the federal reserve and I’ve gone back and I traced this back over time. You can go back and look at the lows in early 2016 and immediately at the lows we were hitting at the lows in February 2016. Janet Yellen made a call to ECB and to the bank of England. The next day the markets started climbing higher, and that was the end of that sell off.

When we go, and look at Brexit and we go and look at the election of Donald Trump. What we see there is that the Fed's balance sheet hasn’t grown. It’s been flat line; what happens though is that all these reserves were a bondsman sure on the balance sheet. And when the interest payments come in they reserve those in cash and at opportune moments they come in and they redeploy that cash and you can see if you zoom in on the Fed's balance sheet you can see the wiggles from one week to the next week about what’s happening within the balance sheet and they line up almost perfectly with market bottoms. Whenever there’s a market bottom, you’ll see the Fed come in and start redeploying the capital that’s been accumulated on their balance sheet. So, the balance sheet size is not changing that why its flat line. It’s the difference between the cash roll off and the reinvestment of that and that’s one thing they were talking about this week with the Fed minutes, is that coming up later this year, bank of – JP Morgan thinks it’ll happen sometime in maybe September that they’ll start reducing that reinvestment. See that’s extraction through the equity of the market and you couple that with higher interest rates now you’re actually talking about tightening money for the end of the market. Tightening is really started to slow the economy a bit and I’m not sure that work out really well for investors but there’s a direct correlation of what central banks are and the market responses.

Chris Martenson: Well that’s fascinating and I haven’t thought to track the wiggles like that and that makes a lot of sense. And just a piece of information that’s always been odd to me and I can’t go any further with it because nobody will answer, but we know the Chicago Mercantile Exchange has a central bank preferred incentive buying program, which is a program reserve for its highest volume participants. So, apparently central banks are buying enough stuff on the Chicago Mercantile Exchange which are all leverage products for the people listening. These are options in the future primarily and we’re the commodities and we’re in equities and bonds. So, we know central banks are in there. I’ve scoured their balance sheets. I’ve scoured the minutes the foot notes. I can’t find a single central bank that will admit to owning a single CME product but they’re in there, so I don’t know how to put those two dots together but it makes me – let’s just say, curious about what’s going on there.

Lance Roberts: I don’t think there’s any great secret or any great conspiracy. We know that jus since the beginning of this year, central banks have injected more than a trillion dollars into the market, just this year. The differential between the federal reserve and the European bank and bank of Japan is that without a congressional charter change, the Federal Reserve cannot buy stock, they can only buy government guaranteed insurances which our genuine bonds and US treasury. But of course, when they buy those bonds how that money winds up into the market is basically they’re crediting the reserve accounts banks and then take that capital and say well I can either loan Chris money for 30 years at three and a half percent and maybe he’ll pay me back on a mortgage or I can just go invest it into highly liquid commoditised investments at a huge amount of leverage, oil future and demonized bonds etc. trade and that flows immediately into the financial markets and that what we get discontinued with.

Back to our original point that brought this up is, if you will notice there’s always a very interesting pattern that exists will break a major level of support that historically if when you break a 50-day moving average you break a previous bottom of support in the market; generally markets will fall to the next support level where you may find some buyers; and what we’ve seen in particular of over the last several years, is that the markets will break a level of support and magically will just buying coming out of nowhere at points where normally you would not see that happen; and I think the example of the election night is really key, because I was down at Fox during election coverage that night on Fox and we were watching the futures as more and more states fell in Trumps favor, but I don’t really believe this is going to happen. More and more states fell to the favor of Trump. We were down 800, 900 points I’m thinking man, tomorrow morning is going to be a bloodbath. By the time I got up in the morning we’re almost to even a will positive right out the gate and it was a flood of equity, where normally you would have not expected that to occur and normally it would not have happened in those circumstances, had you not had the influence of central banks coming into support markets to keep the deterioration from happening.

Chris Martenson: So, lets – I can actually put myself in their shoes and say, I get it. So, they can’t afford a big downturn at some point in time. There’s been a lot of commentary about how the fed and other central banks have really got themselves into a corner if they don’t market to such a level they can’t afford to have them fall so they can’t let them fall. But under that strategy there has to be some sort guiding principle, and that I think was always was, hey, growth is going to come back at some point. Let’s be honest. We’re friends here. Growth is missing. It’s missing in action it has been on the global stage for more than a decade at this point we are sub-par, sub-trend full capacity however you want to measure it and it doesn’t seem to be able to get off the market at this point in time and the United States were always looking at we’re going to have a first half recovery and a second half recovery and I guess a third half recovery. They keep going and every time we keep pulling in these weak returns, where is there – is there a point, Lance, where there’s central banks go, this isn’t working, we have to try something else or lost in this regime until - where beatings continue until morale improves.

Lance Roberts: I think it’s a nail in the head. One of the best examples to look at as far as the country and people quickly dismiss this. I think it’s wrong. Let’s look at Japan. Japan’s been trapped in this low growth rate recession type environment with subprime interest rates now for over 25 years. But what similarities do they have versus the United States. And this is where people quickly dismiss the Japan comparison, it’s an island, it’s over there have nothing to do with us. But they have an aging demographic problem. They have very low birth rate. They massively underfunded pension system where maximum amount of people that are drawing off it and you take a look at every economic environment that they have in Japan and we have very many of the same things here. We have the lowest birth rate since the 1940s of new children coming into our economy. We have an aging demographic with the baby boomers. We have more multi generation families living with each other since the great depression, 30% of the millennials are still living with their parents after graduating college.

You have these, all have an impact on economic growth and so to your point we continue to lug along here at 2% growth and very interestingly, Bariatrics of Economics Analysis has tried to rejigger under calculate economic growth in the first quarter they keep adjusting first quarters economics growth and it still comes in week we have cold weather during the winter. They keep adjusting for cold weather which we already have existing and then we have this recovering the second and third quarter, then we roll off again in the fourth quarter and the first quarter and this has been the cycle and it had been a very impendent sticking cycle to get through the next two couple of quarters and then we start this whole process over again and it’s been this consist abend flow really ever since 2009 and that hasten changed and we take a look at the employment numbers and yes we’ve created tons of jobs but with clearly jobs weave the lowest jobs claims since the 1970s, and yet we don’t have any real type of wage growth, and you take look at the consumptive side of the equating where people were buying 70% of our economy is personal consumption expenditures, yet that really isn’t showing any track of growing on a strong basis fight the fact the very body supposedly has job wants a job. But of course, we get into the real numbers we start looking at the number of people they’re the prime working age, between 25 and 54 that should be working, only half those people are working.

So, there’s the real issue economically and to you point and to your question which is yes, this whole premise behind quantitative easing and this easing, this kind of ejection of capital supposed to do one thing and one thing only. They were supposed to lift asset prices temporarily to get consumers confident about the economy when they get confident about the economy they’re going to start spending which is going to create the virtue of cycle in the economy creating demands for business, then businesses need to hire more and deploy more capital to meet the demands that put more people to work in this virtuous cycle of the economy, the Fed raises interest rates a little bit, gets off to zero and that’s supposed to happen after two years of doing this. We’re now nine years into this program and we are in no better position than we were nine years ago; and here’s the danger - is that there is an end point to this where the economy is going to start correcting regardless.

Economic cycles are not indefinite. They are finite and we may be very well seeing signs of economic deterioration and the end of this economic cycle; and with the Fed still near zero in terms of their interest rate policy and then of course with their monetary policy already running full speed ahead. Globally, there’s really a lot less ability, a lot less efficiency in these quantitative programs from what we saw previously, so the bang for the buck after the recession may be very limited, which allows the recession to be much worse than if they backed out of this program four or five years ago. Let the economy have a secondary recession like we did in the late 70s. We had back to back recessions. Let the economy work through its debt revulsion. Get the economy back on track and then help along the way. Now the problem is they’ve gone so far for so long there’s no option to exist when the next recession comes.

Chris Martenson: What a fantastic answer. It makes me think immediately that some of the -- there are certain economist I do like to follow. One of the is Steve King and he makes a point that, hey look it’s one thing to measure this side of the equation but there’s two sides on a balance sheet and maybe you should look at debt as well. So, you mention some of these components before that household debt now at all time debt now all time new recorded even though we’ve got median wages, real wages that are fairly staged and if not declining on a real basis. But corporate debt, also is at all-time highs and margin debt, all-time highs and so everything seems to be fully stuffed with debt at this point and time and it feels to me that it needs to be accounted for as well. Because at least we look at corporate earnings, and people say oh well look at corporate earnings. Unless you adjust that for the debt that corporations took on to retire shares, you’re not really apples to apples in this comparison. And when, not if, but when that down turn comes that debt is now the preverbal in a mill stone of the neck of corporate health and profitability and all that other stuff going forward. How do you – when you’re looking at these things, are you factoring the increasing debt has stability and maybe is?

Lance Roberts: Well, absolutely, of course. This kind of goes back to some of the fundamental questions we were talking about earlier when we were looking at the markets; and you take a look at the amount of debt the corporation has relative to its debt assets ratios are at an all time highs. But we shouldn’t be there, the company’s like apples we were flushed been loading up on debt like buy back shares pay dividend, it’s been a very, very efficient use of capital I can borrow so cheaply for 20 or 30 years. Why not borrow money at 1% and pay out a 2% dividend? That works really well over time. Well, the problem is though we are leveraging up all these companies. If we take a work, and I did a study this recently, we combine household debt, corporate debt, government debt. Combine it altogether we’re eleven hundred percent of GDP. And the important thing to remember about debt is that when you have debt it requires service. So if I have a dollars’ worth of revenue growth coming into my company so at the top line I earn a dollar. Well, I’ve got to service that debt, so that takes away from my dollar that I earned by having to service that debt. So, that interest payment goes out. So, that mean less money as an investor or consumer to go reinvest capital to something productive for economic growth, and this is the big difference.

Just recently Donald Trump introduced his budget and he says okay so here’s our budget and over the next ten years, mind our we’re already nine years into an economic cycle. Over the next 10 years we’re not going to have a recession, and economic growth is going to grow to 3% and interests rates will remain fairly flat. Sounds fantastic. But the problem is you can’t get to 3% economic growth because back in the 60s and the 70s and early 80s when Ronald Reagan which is what everybody looks back to. Well last time we did tax reform we got this big economic growth that led to this super cycle bubble in the 80s and the 90s. Well when that started, the average debt household network was about 60%; today it’s 140%. So, back in the 60s and 70s, you had interest rates of 14% and falling; you had inflation that was high and falling. What do you have today? Interests rate that are low and potentially nowhere to go but up, inflation nowhere to go but obviously up or flat. You don’t have the same drivers today that you had to boost economic growth. And this is the thing that’s been missed by the Fed.

They keep hiding and praying that you’re going to get the returned economic growth, we’re going to be able to get reduced leverage and it’s all going to be fine. But the problem is that everybody is now assisting solely on debt trying to make ends meet. Consumers, the reason why I have five hundred dollars in the bank is because they are tapped out to the hilt with credit card debt not because of buying more. Let’s go back, we were talking about personal consumption expenses and retail sales and people were going in debt to buy more stuff, more ippons more pads more of this more of that more of everything else. Then you would see personal consumption expenses and retail sale going up, not reaming flat. We’ve got accelerating growth in debt, but retail sales aren’t growing at the same pace because people are simply buying the same amount of stuff and having to pay more for it, and more on debt just to maintain their standard of living, not increase their standard of living; and that’s the differential.

Chris Martenson: That is very well said and of course those factors in the 60s and 70s are not going to repeat and i'll add one more. My listeners are familiar with this, which is during that period of time we had rising net energy per capita flowing in, so economics is one things but if you understand this from the energy standpoint rotate the cube look at it that way, energy’s everything and a country with energy you can do lots of things. A country without energy can do very few things. So, having risen net energy per capita, I believe, once you put that into the formula and say, oh I can make a case for rising standards of living. Those have been stagnate to even declining now and know some people enamoured, but understand now we're drilling up to 5 miles of hole in order to tap into a well that might produce 250, 300, maybe 500 thousand barrel of its life. But it’s not a 10 million barrel or a 30 or a 40-million-barrel sort of a well you could find once upon a time. So we're doing more to get slightly less out, you take that friction and start to spread that across the economy this begins to make sense to the -- the Fed has no clue about energy as far as I know. I don’t think they have a single person over there who understand where we are in the energy story. And so, speaking of oil, I know you tracked this, and very interesting news while we were recording these today, Opec met last night and kind of said hey, we’re going to hold pad on the number of cuts we already have in place. I see oil slipped pretty heavily from 52 and even touched into 48, staggering around 49. What do you make of OPEC? What do you make of their decision, and big question, is OPEC really, how big is open anymore?

Lance Roberts: They’re still very important. Despite the fact that we have shell production kind of coming out of our ears at the moment everybody we’ve put 18 billion dollars into the Permian basin. We are extracting oil from there. It's only about 10% of all the total oil production we have. We still important about 6 to 7 million barrels a day from oil from overseas this far, here in the US. We’re a long way from quote unquote dependence and the problem is now to drill off shore, you’re talking about needing a price per barrel around 60 to 70 or maybe 80 to make that a viable structure to traditional wells. They need a higher level of oil than 50. They need close to 60 to make drilling traditional wells actually profitable. Right now, energy companies are piling into the shale because they can drill at 20, 25, 30 dollars a barrel in the shale field to create revenue. Remember, these companies they don’t just – these corporations just don’t sit around out of the goodness of their heart. They all say “Well, you know, we have a lot of supplies. so we’re not going to drill right now. We’ll just wait for supplies to be depleted. Then we’ll start drilling again. Well, they won’t be in business. They have employees, they have businesses, they have operations, so they’ve got to drill regardless of what the price is. They’ve got to do activity to generate the revenue. So, what this does, though - this additional activity drags out the amount of time that we’ve got an oversupply of oil that we’re going to have to deal with so the demand in balcony is go ingot take a long time to work out and hits is why we look at the forward curves on energy.

Most companies here -- I live in Houston by the way, so have a lot of contact with energy companies and I ask the CEOs of the companies what they’re doing. They’re doing what they can to maintain businesses. They’re drilling where they can find good opportunity at fairly low cost and their betting on oil at being $50 a barrel in 2 more years. So, they’re not expecting a huge recovery in oil prices and they’re simply doing what they can to maintain production right now, lower their internal cost, and talk about automation, and the impact of automation and loss of jobs. Oil and gas companies are doing everything they can to start automating a lot of procedures to take people to of the field and put people into central locations to monitor wells remotely using technology to lower their cost of operations. This is the future of where we are in oil and gas and it is going to be a very different environment going forward and it’s very like going to be a very long time before we see tremendously higher oil process until we resolve this supply that we currently have on hand.

Chris Martenson: Well, indeed and it’s – It will resolve at one point because we do need that off shore we need those larger flowing, sort of well structures that are out there. But it’s been fascinating to watch the shale story come out and of course a lot of the same technology in that story and then there’s a lot of price reduction in that story so if you want to know what I’m talking about, I know you do, Lance. But for people listening, just take look the oil services companies and their stock prices. They’ve got killed they were doing everything they could to stay in business which meant really slashing their rate; when not if but when there’s enough tick in the drilling activity, look for the amounts that they can charge to go back up again. So, we’ll be having that side of the story. Boom Bust, right?

Lance Roberts: And by the way talking about oil companies, let me make a quick note of about, earnings one of the big stories is that I’ve seen lately, a lot of the stock rice’s going up. It’s no longer about Trump. It’s all about the earnings recovery story. Well first of all remember they were talking about earnings recovery on a year to year so we’re comparing some positive earnings growth to negative earnings growth a year ago. So, we’re getting this big recovery – earnings are up a tremendous amount from last year because of the earning recovery. Where is that earnings recovery primarily coming from? From oil and gas companies. Because when the price of oil bottomed cam backup, you go from basically $30 a barrel to $50 a barrel. That’s almost a 75% increase in the price of oil, a tremendous boon to earnings, a big surge in the earnings for energy companies said to the SNP. So you’re seeing this earnings recovery but earnings have now been stagnant our entire quarter is going to be lot more limited over the next few quarters which is going to potentially put in jeopardy this whole earnings recovery story. It’s a side note because of oil.

Chris Martenson: All right well final question here, just to switch topics really quickly. It’s about real estate. I’m not sure how close you follow this. I’m tracking many markets especially in Canada and Australia clearly to me, in bubbles. We’re talking ell over a million dollars for average homes in Toronto and Sydney. Let’s talk Toronto, looks like rolling over after posting a pretty tasty 30% game in the past. Not quite bitcoin in parabolas there, but 30% is a monster gain in real estate. Would you agree that that sounds like a unsustainable sort of an advance and do you think either of those markets or any other one you might be tracking are due for a correction here?

Lance Roberts: I think housing prices in general are going to be due for a correction, and the real question is what’s driving those markets. Particularly in Canada, we saw tremendous amount of money that was flowing out of China, and we saw the decline in the Chinese yuan. And we saw money flowing out. Of course, there was a lot of concern about interest rates had spiked here in the US. We’ve gone up to 2.6% and they were like, “Well the bond bull markets over. We’re now going to go to substantially higher highs;” and I wrote articles back then saying, no, no, no, no they were not. This is simply China selling bonds because they’re simply trying to stabilize the falling currency because Chinese citizens were yanking money out of the Chinese who invested and can’t Canadian real estate now they’re moving into Houston real estate, they’re moving into Florida real estate. So money’ s migrating around but coming out of China. That’s where a lot of that initial selling of US bonds came from that had interest rates moving up. Now subsequently, despite the bond bear story back down to 2.25%. Interestingly enough, despite this idea that the stock markets are off into a new run, the new high, bonds aren’t buying it and that’s something you really need to pay attention to because bonds tell the real story that’s four times the size the stock market.

What bonds generally tell you is that economics is not recovering, Trumpinomics is not happening and there’s a real price that’s going forward but specifically about real estate. I think specifically you see this real estate market break. It’s not just in Canada, it’s going to be in the US also some of the same inflation and assets prices and some of the bigger areas of the country like California, etc. That is going to severely impact. Because a lot of those houses that were bought after 2008, they were bought by major hedge Funds and turned into rental properties and there will be a point that they will become mass liquidation of those rental properties by hedge funds to basically capitalize on their gains that is for their investors. These people are not in the rental business, they’re in the investment business. And so, you get a break in real estate market that invests into the US. You’re going to get a net regulation sales

Chris Martenson: That would be, of course, a really troubling dynamic at this point. I have to say, this catches me whenever I hear it; unequivocally good that house prices have gone up but that’s not true if you’re a millennial who’s been trying to get into a first home and got themselves priced out, courtesy of Federal Reserve buying motors back security rates down, doing everything they could while Blackstone bought up huge houses you can’t afford as a millennial. That’s one art of the story, the second If I own a house I don’t actually want the price to go up if it means my insurance andropathy go up all I want to do is live here. The only people who really gain are clearly the people who sell that house and then march off with the money and downsize or do something with that. It’s a very tiny minority but it’ always presented as if these are unequivocally good for everybody not really when you think it through.

Lance Roberts: Absolutely not, houses are an expense. If you own a house, you know this. It costs, taxes, maintenance, repairs. At the end of the day, we anchor on prices. Oh, I bought the house for 100,000. Oh, I sold it for 200 000. I’m a genius. Well if you go back and add up all the taxes, expenses and repairs and the house you probably lost money. To your point. You make a very good point. People need to remember that the housing market is driven by what happens on the very fringes. The few people that are buying versus the few people that are selling versus the entire value of the market itself. Now if you take a look at the housing market, and it’s interesting, I just saw a commercial today, just to kind of go back to the point about debt and where we are. Take a look at auto loans and auto debt. Those are all hiding out there. 33% of auto loans are subprime; student loan and auto debts, subprime auto loans, light loans, those are all hiding out. There’s 33% of auto loan delinquency rates are now coming - up student loan debt. I just saw a commercial the other day. It was like we’ve got a program for you, if you can’t afford a house and don’t have the money for the down payment, don’t have a job, that’s okay, we can help you get a loan with requirements for 3% down payment. We’re repeating all of those things we did heading up to the last real estate bubble by doing exactly the same thing again and expecting a different outcome. The outcome won’t be different.

Chris Martenson: Never is. So, the definition of insanity right there. We’ve been talking with Lance Roberts. What a fantastic interview. Thank you so much for your time today.

Lance Roberts: Sure absolutely, anytime. I love doing it.

Chris Martenson: All right and please again tell our listeners about the best ways to follow you and your excellent work.

Lance Roberts: Well, best way to do is to simply go to our absolutely free web site. Its realinvestmentadvice.com. we post something there almost every single day. We have a weekly newsletter that goes out, talking specifically about market dynamics as well, investing strategies, all free. Simply go by the web site realinvestmentadvice.com and while you’re there you can also pick up some podcast from our real invest hour, which is a financially related radio program as well as Lance Roberts show that also focuses on politics and economics and you can listen to our podcast with Chris Martenson that we just had on last week.

Chris Martenson: I hear he’s okay.

Lance Roberts: Good guy.

Chris Martenson: Fantastic. All right well Lance again thank you so much for your time. Let’s do this again.

Lance Roberts: Absolutely, love to do it. Thank you.

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macro2682's picture
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Agree with much of this...

I agree with the concerns about passive investments/ETFs. This is the first time that market participants (including institutional investors) are happy to buy equities arbitrarily.  The thought is that picking winners is a fools errand and that reducing fees is the name of the game.  Hard to disagree with them looking at the numbers  

This changes the capital market assumptions associated with some of the fundamentals of price discovery.  This isn't the first time prices have de-coupled from fundamentals, but it's the first time it's happened in a static way. 

I have two fundamental opinions (that are at odds with one another):

1.) That there will be a lump-taking market calamity during the Trump years.  The cure for populism is to frame it for the murder of mom and dad's retirement savings. 

2.) the market cannot correct until there is a capitulation top that lures in weak handed bears. 






macro2682's picture
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One possible outcome...

Perhaps foreign policy blunders and embarrassment under trump will swing the pendulum back to a liberal version of populism, and THAT's the patsy that will get framed.  Who knows. 

macro2682's picture
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One possible outcome...

Perhaps foreign policy blunders and embarrassment under trump will swing the pendulum back to a liberal version of populism, and THAT's the patsy that will get framed.  Who knows.  

LesPhelps's picture
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The End of a Nine Year Business Cycle?

Ok, once again I'm looking for the nine year cycle?


Uh, gee, the blue line has been below zero for the last 9 years.  In fact the blue line has been below zero almost continuously since 2001.

I know, "Pay no attention to the man behind the curtain!"

The only nine year cycle I can see is the cycle of world banks controlling every asset market.

Unless you are talking about the nine year cycle of the SEC ignoring massive, global market manipulation through program trading.

And please, don't even consider supporting the official GDP numbers, unless you are willing to support the official reported inflation numbers, since the inflation numbers are used to calculate the official GDP growth.


SagerXX's picture
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macro2682 wrote: The cure for
macro2682 wrote:

The cure for populism is to frame it for the murder of mom and dad's retirement savings. 

Brilliantly phrased.  Wait for this.  I also suspect it's coming.  Or BIG WAR.  That'd do the job, too.  

macro2682's picture
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Are you being sarcastic here?  I feel like this chart shows pretty clear 9-year cycles between the lows (on both lines).

darcieg76's picture
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I think his point is that the
I think his point is that the growth is below 0% almost the whole time since 2001..so negative growth to less negative, for the most part.
That said, I see 8-9 years, followed by 12 years, followed by 7 years (1982/3-1991, 1991-2002, 2002-2009), but I guess the 9-year is an average?
LesPhelps's picture
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Business Cycle

Negative growth, year after year, does not support the on-going claim that we have been in a growing economy and positive business cycle for the last 9 years.  What it says to me is that we have been in a disguised/unreported recession almost continuously since around 2001.

Perhaps there have been peaks and valleys within the overall declining economy, but the economy has been declining none the less.

What I see around me doesn't look like a robust economy, much the opposite.  

Even worse, we have rapidly increasing debt AND a declining economy. It's just scary.  

Can the entire globe file for bankruptcy?!

richcabot's picture
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The other economic driver in the 80's

The economic improvement in the 80's was also very highly driven by the microprocessor.  Countless industries were revolutionized by the availability of low cost computing.  Costs were driven down, labor efficiency improved, new industries were created.  The operation of virtually everything was changed.  I don't see a similar revolution on the horizon.  The current big things are biomedical (which has increased, not decreased, medical costs) and social media (whose impact on GDP is debatable).  

climber99's picture
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Fun to watch.

But, but, asset prices are going up - we must be getting richer. <sarc> 

When I see an expensive car or home I think that person is either a) in horrendous debt;  b)  must be a criminal of some sort like a drug dealer/medical insurer/ lawyer/banker or c) must be an old person or has inherited money from an old person.

Our energy descent back to an agrarian society is going to fun to watch, speaking as an old person (no kids).




macro2682's picture
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Positive business cycle

I think an economy experiencing a 9 year period where negative growth is "less bad" can be considered a positive business cycle. 

LesPhelps's picture
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macro2682 wrote: I think an
macro2682 wrote:

I think an economy experiencing a 9 year period where negative growth is "less bad" can be considered a positive business cycle. 

Sounds a bit like a period of remission in an otherwise terminal case of cancer.

In today's world, the monetary price of a "less bad" business cycle is measured in trillions and sourced from debt.  The ecological price tag is more of the same, only bigger.

karenf's picture
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Of course there is no growth

I  emailed Jeffrey Brown to get his two year update on his oil numbers and yup sure enough...

Top 33 exporter's production still increasing since 2005 BUT exports continue their 2005 decline because exporter's internal consumption continues to go up.  Peak oil continues hidden in the overall production numbers that look so good.  Of course we aren't going to get growth.  How can we when we don't have more energy?

cmartenson's picture
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Ding, ding, ding!
karenf wrote:

I  emailed Jeffrey Brown to get his two year update on his oil numbers and yup sure enough...

Top 33 exporter's production still increasing since 2005 BUT exports continue their 2005 decline because exporter's internal consumption continues to go up.  Peak oil continues hidden in the overall production numbers that look so good.  Of course we aren't going to get growth.  How can we when we don't have more energy?

We have a winner!

It's very difficult to get growth without energy consumption, of oil specifically, going higher.

Of course, maybe the last 60 years are now meaningless?

Well, even if this chart is going to be rendered somewhat meaningless by artificial intelligence, starting in ten years or so due to lower gasoline/diesel demand because of smart transport....then I would remind everyone that this next one begins to bite in about 2-3 years:

Luke Moffat's picture
Luke Moffat
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Alternative Energy

I don't understand all of this pessimism - future GDP will be fueled by empty promises and shattered dreams!

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