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David Collum: Everything That Mattered In 2018

And what lies ahead for 2019
Wednesday, December 26, 2018, 12:49 AM

The only thing nearly as enlightening as reading David Collum's epic Year In Review is listening to him and Chris Martenson riff about its highlights.

Strap in, grab some eggnog, and listen to this year's recap:

Everyone thinks the markets are now correcting. But compared to the size of the correction I think both you and I expect, this is just a drop in the bucket. This is merely the vibrating puddle in Jurassic Park. This is not the big one.

What's amazing is this recent romp, which has lasted now almost 10 years, is the only gigantic bubble that I'm aware of in which the storyline behind it is just complete garbage.

Every other bubble, like the Tech bubble -- well, tech is amazing. The 1920's bubble -- wow, we just invented electric power and cars and planes. There's always a great, great story.

This particular bubble in which we have had for 10 years is central banks are going to print money to cover our backs.

That's the stupidest Goddam plotline I can ever imagine.

Click the play button below to listen to Chris' interview with David Collum (87m:25s).

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Transcript: 

Chris Martenson: Welcome everyone to this Peak Prosperity podcast. I am your host, Chris Martenson. It is December 19th, 2018. Hey, listen, we are here today talking with Dave Collum about his year in review and is continuing our annual tradition. Listen, it's the best year in review in the business. And it's, listen, in order to know where we're going, we’ve got to figure out what just happened. What better than a gigantic romp through where we have just been?

Now for those of you unfamiliar with Dave he is professor of chemistry in chemical biology at Cornell University. And in addition to his academic interest Dave authors this macro-economic assessment entitled, Year in Review. It's hands down, listen people, the best synopsis of everything and anything that mattered in the previous 12 months. And Dave's latest year in review can once again, thankfully be found in full and all its glory in PeakProsperity.com where you can also download a PDF for your offline reading pleasure wherever you happen to do that. I'm excited to have him with us now live in order to expand on these really excellent insights.

David Collum, thank you so much for being with us again.

Dave Collum: Thank you very much. You think this is a Friday upload? Is that the target date?

Chris Martenson: Absolutely. We are going for Friday.

Dave Collum: We have been doing this for years and you know, we go back probably 20 years, back on some you know, Doug Knoll's chat board or something. It has been a long time.

Chris Martenson: We are both celebrating 10 year anniversaries this year. Ours has been the 10th year since the initial release of the crash course. You, for being the 10th official year, I guess, of your own amazing year in review, so congratulations on that.

Dave Collum: Yeah, it's you know, I feel like I got to pull my brains out through my nostrils like an Egyptian when I do these. Painful.

Chris Martenson: As you painfully reflect back and given the ultrawide ranging views in display from your year in review -- what are you most surprised to be here discussing with me yet again that has not changed since last year? Maybe since we started?

Dave Collum: You know, everyone thinks the markets are now correcting. It, you know, the correction I think both you and I expect to sell large, this is just a drop in the bucket. This is the vibrating puddle in Jurassic Park. This is not the big one. What is amazing is this recent romp, which has lasted now almost 10 years, is the only gigantic bobble that I'm aware of in which the storyline behind it is just complete garbage. So every other bubble the tech bubble you say, well tech is amazing. The 20's bubble, wow we just invented electric power and cars and planes. There is always a great, great story. This particular bubble in which we have had for 10 years is central banks are going to print money to cover our backs. That is the stupidest Goddam plotline I can ever imagine. That's just dumb.

Chris Martenson: Well, it is just dumb. And here we are again, so I want to get into all of this. We are going to look at the debt and economy and all these other things which are -- what you are alluding to is that there is really no narrative to support this one, right? So we have the tech narrative, the internet. It was transformative. A lot of dumb things got done on the back of the credit bubble that Greenspan blew back there is the 90's.

Before we get there we got to describe the caveats. Dave, you described yourself as 1/1,124th economist what does that qualify you for?

Dave Collum: Nothing. Absolutely nothing. Yeah, everyone has at least that much economist in them. Yeah, I'm a big believer in the 10,000 hour model. We can get into it if you want. People ask me about global warming, I'm like I haven't spent 10,000 hours, so my opinion isn't worth anything. My wife gets mad, but you know, I think I've got the 10,000 hours logged in trying to understand markets from sort of a 35,000 feet perspective. It's not -- it's not that I understand them the way some of these serious Wall Street guys do maybe, but it's from standing back and looking at it and trying to take a wide angle lens view in understanding it in the context of history. That semi qualifies me. I am pretty good at taking complicated problems and turning them into stupidly simple metaphors and stuff like that.

Chris Martenson: Well maybe we share that same trait. That is really my only addition I can offer to this. I tell people I'm not an economist, but I play one on the internet. So Dave, you've also described yourself as a permabear, I have done the same thing to myself. But more subtly, I am actually a perma skeptic of several ideas. One is the idea that debt is the same thing as wealth. Another is that you can print up prosperity via central bank mechanisms or maybe I'm a skeptic of the idea that the Fed's Overton window is near wide enough for the many predicaments we face. What are your thoughts there?

Dave Collum: Well, yeah, I agree. In fact, one of my big concerns is when the time comes not to be a big skeptic you and I are going to be so scarred that we crawl out of our little layers and say you know what? The birds are chirping because the world is going to look like it just burned down. And we are going to have to know when it's time. What happened was in '09, everyone says people sell at the bottom out of fear, right? I was in Cash on '09. I failed to buy at the bottom out of greed. And the greed was I was salivating, the greed was history showed we were at a historical fair value in '09. People think we were in some depths of deeply, deeply discounted shares. That is just bologna. And you can see it on -- one of the things I did this year more than any other year, I was just banged on the evaluation issue because I just got to lay it all out there this year so when we finally do regress to and through the mean people can say gee, I read that somewhere, right? So we never got beyond fair value in '09. And history says we were going to. So I blew it by saying, you know, we got more downside. You can't just regress to the mean you got to go below it.

Then the Fed jumped and something I have yet to find a single person claiming credit to have seen and that is they dumped $20 trillion into the system. You remember when Bear Stearns got bailed for 30 billion and it was mind boggling and now that is a quaint number. For them the Fed and central banks to dump $20 trillion was so unprecedented it caught me on my heels.

So I rode out this market. I sat on the sidelines. I have been watching in amazement and maybe you know, hoping for some schadenfreude at some point. This is the one cycle I would say I played poorly. Even though I held a lot in gold so did okay for a while, but.

Chris Martenson: Yeah, I'm in the same boat and we've been in the same boat. We have been preaching safety and security for a long time. And let's be fair about this, too. 2009 we saw the central banks start to dump a lot in and by 2011 they had unwound that it got down to 0 new additions. But then they freaked out and threw more in. I thought QE2 they got to be dumb dumping in how dumb can this get?

Of course a couple more cycles 2016 there we were it looks like it does now in early 2016, late 2015 the market is going oat the bear market equity territory. We have outflows, currency gyrations, skyrocketing interest rates at the margins, it's coming towards the center. All of that reversed one morning at 2:30 in February and everything went the other direction.

Now we have the data, we see the central banks in 2016, 17 largest additions to the balance sheet in the entire cycle. Even as they were saying everything looks good. Unemployment is -- they were saying the nice palliative statements, but what was really happening is they were putting emergency levels of liquidity in. Let's talk about 2019 and that context. They are all publicly committed to not doing anymore of that. Do you believe them?

Dave Collum: No, but I'm you know, and I use a King Cnut metaphor, illusion this year in which Cnut standards says watch, I'll hold back the tides. And then he says, see nobody can hold back the tides. And so I think it's kind of a King Knut moment where for a while it can look like they are pulling it off, but at some point they are cannot pull it off. Regression the mean will happen. It kind of feels like somewhat real. And my biggest fear is they will somehow find a way to make it stretch over a dozen years and crushes with the scariest of all variables, the consumption of time.

So a fast collapse gives you know, gives people who want to buy deep value opportunities a great opportunity. If they just grind the thing for straight 12 years, nobody wins. Nobody wins under those market conditions.

Chris Martenson: Well maybe Illinois. Oh no, probably not Illinois.

Dave Collum: I think Illinois is taking losses in the locker room taping up their wounds. Yeah, exactly.

Chris Martenson: For those listening what I am referring to is you and I, everybody listening has lost because we lost 10 years of interest income, which is about a trillion missing dollars that did not flow into helping our children pay off student loans or to start businesses or any of that. That trillion flowed to the big banks and what did they do with it? Record bonuses. The usual story. That decade has lost and it killed the pensions, all of which are under water. So Dave, I know you wrote extensively about pensions. How do you think the central banks or the Fed in the US sense how do they go about addressing that? Do they do it directly or do they try indirectly by propping markets and hoping, fingers crossed, this all works out somehow?

Dave Collum: Well, the market prop won't work now because we just propped the market and the pensions went from poorly funded to pathetically funded. If a pension in -- the pensions there were in 2012 were funded to the extent of 85%. Now they are funded to about 35% and that's after one of these roid rages. So what's another roid rage going to do for these guys? They're dead. I think the pensions are toe tagged and bagged. I don't think there is any mathematical way for their pensions to grow or tax their way out of the mess they're in. I think it's a done deal. And then the question comes down to who gets screwed? And I think we might see pensioners get crushed and then there might be people who are just destitute. They will be eating out of dumpsters.

Or, the model that I picture the most is some goofy model in which the Feds pretend like they are just loaning the states money to put in the pension funds, knowing the states will never pay them back. So they will monetize state debt. That is going to tick me off. That is going to -- there are some massively overpaid pension plans across the country. They are ridiculous - -there are people retiring at $800,000 a year in public service that is just crazy. There is no chance I want anyone paying that tab. Anyone who didn't incur it. If the state wants to pay it because they agreed to it, that's fine. I don't want that washing up on my doorstep.

Chris Martenson: Yeah, well said. One of the things in this year in review like others so many great quotes packed in. Here is one that really stands out for me from Tony Dedon, the founder of Edelweiss Holdings, "We have abolished the idea of failure, nature's cleansing mechanism. As a consequence, we have lost real economic vitality. We've substituted finance for industry as the locomotive of economic growth. In GDP terms, hey, it looks terrific, but it's neither enduring nor real."

Great quote there. I mean, that's what we're really talking about is this institutionalization banishment of failure, but what do you get when you stop that process?

Dave Collum: What you do is it is the equivalent of hanging onto a gangrenous leg. It doesn’t work well in the end. So you get -- all sorts of zombies. There is the classic zombies of companies, which the definition of zombie like there is a definition of zombie, but there is. Basically, there is a company that can't pay its interest payments with its cash flows, so it has to take out debt to pay its interest payments. That thing is dead. The company is no longer a financially viable institution. The question is how long they stay walking the earth, right, before someone puts a bullet in their head like in a zombie movie. It is totally up in the air, but they're dead. They're not coming back. And at some point their productive assets will be auctioned off on some courthouse steps somewhere. As long as the Feds keep propping them up they keep popping up doing damage. The zombie metaphor works perfectly for me. And so when it finally gives way all these mistakes that the market has made because of the excess capital that has been dumped into it will surface. All bodies will be floating to the surface before we are done.

Chris Martenson: Yeah, I guess the idea there that some people are holding onto is the ultimate Fed put, can the Fed keep all these different zombies alive? Big one in my book as I study it closely is the shale space. Shale operators have not made money on a free cash flow basis since they started. Their so-called break even prices are a complete fantasy or fiction or fraud depending on which F you like. And they are kept alive --

Dave Collum: There is another one I like more. The bomb. Yeah.

Chris Martenson: Yeah, that one. So these you know, this idea let me take exception with Tony. How can I because he's just so famous. But he says, "We've abolished the idea of failure…" maybe we've just instead of abolished the idea, what we've just done is we have just delayed a much larger failure -- would you agree with that?

Dave Collum: Well, I would interpret Tony more literally and that is we have abolished the idea of failure, but we haven't abolished failure.

Chris Martenson: Not the reality of it. You got to spend some time with him, didn't you?

Dave Collum: Yeah as Jim Grant said -- I quoted this one, he said, "You can change what people think, but you can't change what is." He has got this -- yeah, so Tony is a real smart guy. And he's old school, right? In Switzerland he manages old money. His goal is to carry that wealth from generation to generation without losing any of it, so there is kind of a inherent conservatism to what he thinks about. And it wouldn't look inherently conservatively wacked out to anyone from another era. To the current era he just looks like an old, stodgy bastard. And you know, it's going to be a classic case where the old guys are going to say yeah, I've seen this plot before. I know how it ends.

Chris Martenson: I got to ask, Dave, is 2019 the year that valuations matter again?

Dave Collum: I don't know. You know that's true, too. I actually read an article by Larry Summers, I am bottom feeding now. And he basically does some Bayesian analysis where he shows the probability of a recession sort of changes over time and it gets higher and higher. But then it plateaus. And so some number of years out it just each year has a certain coin toss and quality to it. And the argument he makes is therefore it doesn't matter how old the expansion is the probability now is becoming a constant with a lot of noise of course. I got to think that is wrong. It might be based on empirical observation. I don't know. But the longer an expansion goes the more scar tissue you develop and the more damage you develop from the expansion. Expansions are great, but then they start doing and stuff, right? And you start over expanding. I think expansions do die of old age. I don't believe Summer's model. It might be like someone who is 80 years old the chance of dying at 81 or 82 or 83 is about the same, but they are closer to death than a 20 year old.

Chris Martenson: Yeah. You know, bless you for reading Summers. I don't subject myself to that very often. In fact, not this year at all, I don't think. Good on you for doing that.

But come on, this is the longest expansion. Second longest in history. And lots of recession signs sort of starting to creep up. Let me ask you this -- how is the economy doing?

Dave Collum: I think it stunk for 10 years. And I now it's starting to show signs of failure. And so, for a brief period this year all of a sudden it was giving this Goldilocks high fives. I'm thinking, how can this possibly be? A year ago I was writing about this stuff and there was already cracks in a number of regions of the economy, like housing and auto and things like that. I actually asked rhetorically, did I miss a boom? Did I blink or something? And in some sense the answer is yes because what we had this year were these one of expenses. They start with the hurricane rebuild from the '17 hurricane season. They are still rebuilding. That shows up as GDP. That doesn't show up as wealth, but it shows up as GDP. And then you had the taxes -- the tax reductions, all of a sudden there was this sort of road rage euphoria. Fantastic more money is coming from overseas. Turns out that money was always in some bank. That money was in some bank like HSBC and Bank of America, stuff like that. So it's not like bringing it over here is any sort of construct that's worth even thinking about. It's in the multinational banking system. Then the third one was the tariff war. You say I don't know if that is bad for the economy. Not early on when people started front running it and they started doing stuff very quickly to be the tariffs. And so they were doing all sorts of exporting and importing and all the moves you make because you say it is going to get harder once those tariffs are in place. So we get this polis of pretariff activity, which I sort of bizarrely call “tarifying.”

Dave Collum: So I think we did get a boost. I think we jammed some adrenaline in the corpse and it flinched.

Chris Martenson: You know, as I drove around I think you noted this as well, I saw help wanted signs here and there. They seemed to have an uptick, but you know the usual statistics that people were citing, like initial claims-- I kept beating the drum on this, but it was too complex to really get much traction with. And the number of people who qualified to file initial claims has plummeted to an all time low. They're exhausted. To really qualify for an initial claim you have to have held a full-time job that qualified you in some fashion. So all the people who are part-time you know, sub 30 hour a week so they don't trigger any healthcare benefits or whatever they are up to is just fewer people qualify. So that number was just one of many in this series of US government Soviet crop report equivalent reporting that doesn’t tell us much. How do we -- signal from noise where do you see the balance of that in terms of indicating where we are in this economy cycle?

Dave Collum: I absolutely have spotted the economic warning signs, but don't forget, these are the lowest run in the economic pattern. If someone is listening and they are in one of these jobs, no offense, but these are the jobs that require no skill to speak of, require certain personal skills maybe. When you see how employment in front of McDonald's this is not the same as Caterpillar is now hiring 2,000 people. Those are missing I think. I watched those. I don't see factories being built. I don't see any of the stuff that is part of the real economy. What I see is the consumption economy. We both know you don't get rich by consuming. Right? The whole idea that we are a consumption economy is completely insanity. That guy should be fired. There is no such thing as a consumption economy. You have an economy where you make stuff and then you get to consume after you make some wealth. And the consumption is the -- is reaping the profit of the wealth creation. It isn't the wealth creation per se.

Chris Martenson: And this is right at the heart of, I think, what has bothered me the most as a skeptic. I am skeptical of this idea that wealth is in any way created by the Federal Reserve. They are a distributive or redistributive organization. They take from one and give to the other. They don't just create purchasing power out of nothing, but they have handed a lot of purchasing power to the 1%. So the question is well, where did that come from. I think at least part of that is contained a little bit in this one quote. So many nuggets, but I pulled this one out of your economy section. No maybe broken market section -- yeah, broken markets. The quote here is, "Equities grant 300 plus percent off the lows while the GDP tracked the Great Depression compounding at 2% a year." That to me, sort of encapsulates a lot in this, which maybe sums up this statement -- this time is different. The Feds created real wealth. It's enduring. It's going to last. Equities are up 300%. We don't need that stinking economy. We got price support by the central banks that got our backs. Is that a fair way to characterize or am I missing something?

Dave Collum: Yeah, well the other one the metaphor that I loved; it is so deeply buried, right? It is something -- I have people -- I have an acquaintance who read one of my year in reviews twice on an iPhone. There's a psychosis under that, right? The metaphor I really like flipped out there that would go easily missed is the Feds made stone soup. They brought out the pot. They threw a stone. They said if you guys can throw your private enterprise guys could throw a few things in here that would taste better, right? So, that is all the Feds do is they bring out the kettle and the stone. And they hope the free market will actually bring the rest. And so yeah, I -- you can't print the prosperity. I think roughly speaking the equities have to follow the GDP. I get a little tangled up in that detail sometimes, where I say okay, but let's say GDP didn't grow. You are still producing wealth every year. You and I as sort of resource consumption guys realize that, you know, you can't keep growing the GDP indefinitely because we'll swallow the earth, right? It will be the stadium with the puddle in the middle of the stadium that exponentially blows up.

I've never even all the way back to high school, understood the idea that the only -- the only way for the economy to be healthy is to just keep growing. Fill the known universe with elephants if you do that.

Chris Martenson: Absolutely. There is this other idea, which I think you did a great job unpacking in this Year in Review, is this trollop that oh, you know, equities grow at 10% a year. Equities are a claim on something. If you have both equities and debt both compounding at twice the rate that your underlying economy is compounding, even if you had infinite resources, eventually you have a math problem. But once you understand resources are limiting there is a Ludwig minimum somewhere in that story, right? Even once you find that limit in there it is absolutely grade school math to prove that you can't have equities and debts compounding faster than your economy forever. It's just hard, but oh my gosh that might be one of the hardest concepts to get across to people, which means I don't think we are talking logic. I think we are talking belief systems. That is something I think you expose well is how many beliefs systems are just easily scratched at.

Dave Collum: Last year I banged down back of the envelope calculations where I tried to figure out why equities don't return the same as bonds. And you say, well, of course, they don't. Everyone knows that. I know, but why not? Why wouldn't the free market arbitrage those? And I came to the conclusion it must be in there for long-term they must return the same as bonds. Actually, Ben Graham said that. I think he didn't live in this era. Then what happened is after I wrote that last year all year long I thought about that. It is the name for Baader Meinhof syndrome where you are noticing things you wouldn't have otherwise noticed. What you notice is there are a lot of people out there saying equities don't return squat over time.

For example, Rob Arnaud, who was said by Howard Marks to be one of the true geniuses, right? I know Howard Marks is good. Arnaud says equities are going to return when you correct for everything about 3, 3.5% a year over a long period. And there is no one who realizes that. And no one, no one corrects for things like fees and corrects for things like taxes and corrects for things like when you have an inflated gain not a real gain, but an inflated gain you get tax done you actually lose. Again, I talked about it last year. I spent more time trying to get a little bit deeper. I pulled out this McQuarrie paper I actually got sent to me by Jesse Feldman, he said in case you missed this -- which I had, of course. It was this paper talking about, look, over time you can get this. I think his estimate was too high. He said over 40 year periods you can get killed.

Now there is a chart in there, if people are listening to this, go read it. There is a chart in there that I think is the scariest chart of them all. It is a plot of the inflation adjusted S&P or Dow. I can't remember. And what I do is everyone always says how long did it take inflation adjusted to go from the peak where you don't want to be invested through the trough and get your money back? That's the favorite trick and it's usually about 20 years. But what people don't notice, what this chart shows so clearly is that after you get your money back 20 years later on the capital gains you go through a rise -- every time you go through this rise which now you are in the black and it dips back to the final dip. The point where you go back right back to where the original peak was before you finally exit that awful sort of edy that you're stuck in -- turns out to be between 40 and 70 years later. You literally can go 40 to 70 years on an inflation adjusted capital gain of 0. It happened four times in the 20th century from four major peaks to 40 to 70 years later hitting that same price again on a dip before it finally took off and hopefully doesn't go back.

This is the most terrifying chart that -- and I couldn’t get guys like Liebowitz to create it for me. I used chemdraw to create the thing. Real sophisticated thinking for you, chemdraw to make finance charts. And I made it myself. Said this is what I'm trying to get you to make. It's a scary chart to me. The other thing we talk about if you are investing throughout this -- you buy in at 29 and you keep investing, you are still fine. I go, yeah, but if in 1929 you were 40 years into your investing career you got no compounding left. You got no price cost averaging left in you.

So a millennial who starts buying now they will be fine because they will buy all the way down and all the way up. They will be fine. The boomer who has got 85 or 90% of their savings committed to the risk assets right now will never recover.

Chris Martenson: Well, indeed. That 3 and 3.5% return I might decompose that into 1% population growth and 2% productivity. There you go.

Dave Collum Population growth. That's a biggie. The other thing is history 3.1 to 3.5% does not include changes in valuation. So he says throughout an entire market cycle like Hussmann likes to do you get 3 to 3.5%. Assuming no change in valuation, whether you want to go high to high or high to low it doesn't matter. Now, what he also said was that if you now factor in the valuation change that he thinks would get us to the mean value, the next 10 years is going to compound at -3% and that will kill people. That is going to be demolishing. And Felder concludes that and Hussmann is even worse and Jeremy Grantham says that. These are not nitwits. These are smart guys. Now other people just don't even pay attention.

Chris Martenson: So yeah, no and Hussmann is the guy that really does it for me most. I mean, he just takes the data, just runs the math. Just has these incredible correlation charts between returns and valuations where the only way to escape that negative return over the next 10 years, according to Hussmann is for something to be profoundly different this time. Something has to change. Right? And --

Dave Collum: Not going to either.

Chris Martenson: What's that?

Dave Collum: It's not going to. For 200 years it hasn't happened, so I don't know why it's going to happen now.

Chris Martenson: Well, I guess the only thing we can hope for is that behind the scenes the Federal Reserve and the other banks are going to just continue to prop things back up forever, hey Hosanna never should we have trouble.

Dave Collum: That is the key though. We are at a super high valuation. If they just prop it up then we go back to Rob Arnaud's 3 to 3.5% ,assuming there is no change in valuation.

Chris Martenson: Yes.

Dave Collum: That is the predicted 3 to 3.5%. Here is the problem, then you start getting cascading failures because pension funds are 7 to 8. So they are going to be coming in light. What do they have to do? They have to take corporate profits and dump them into the pension funds to bring them up to speed. And all of a sudden corporate profits drop and guess what? You're not going to get crushed. There is no way out of this. We perceive we have created twice as much wealth as we’ve actually created. How do you get out of that? That's a delusion that will only be resolved by an awakening.

Chris Martenson: It's true. I got six different directions I want to go with this. Let me first -- let's take the core of delusion, to finish that out, and then I'll get into corporations.

Debt. Debt is the thing that the Fed and the federal government will tell us can be safely ignored. Hey, deficits don't matter, Dick Cheney quote. The Fed never factors in debt growth when it's saying hey, look at how great things are. So there has been a debt super cycle in place, Dave, since the early 1980's. Now that broke in 2008. The US Federal Reserve said, not on our watch. Now there is another 100 trillion just of debt with which to contend on the global balance sheets. Take us through the role of debt and I don't know in everything we see and hear and touch and taste today.

Dave Collum: Well, debt and lack of savings are two sides of the same coin. The boomers have plenty of debt at a personal level, boomers have plenty of debt and they have no savings. So if they had a ton of saving and a ton of debt at least you could cancel those two but they don't. The millennials have saved nothing, the younger generation, and they seem to not know it. So great survey showing that they have something like the average 30 to 35 year old has something like $15,000 and thinks they're retiring at 56. You guys, I thought we did a lot of drugs when I was young. This is crazy.

And the boomers are so toast and they are out of time. The clock has ticked. It is a compound clock that got lost and again, I don't see mathematical ways out. The pension funds are basically just leveraged. They are basically just debt. Society owes these pensions. They can stiff the people, of course, but you know, when a state is funded to the tune of 20%, no way to grow out of it and someone has got to either write a check or tell these people they are not going to get paid.

We are certainly seeing some of the latter. But that's huge debt. Then you got the sovereign debt, which gets a little vague. I don't even know. They print the crap. How do you know what the consequence is? I have trouble with the consequences of the Fed's balance sheet. I think it was Minard who said they could have gotten 19 fold inflation and they didn't. And I said, yet. But you and I both I think we're predicting massive inflation. It hasn't shown up yet it also could be one of these time bombs, right? Ready to go off.

Chris Martenson: Inflation always shows up where the money flows and the Fed printed, but they didn't print and hand it to the government directly. They printed it to the financial market. So what did we see? We saw Gulf Stream, luxury yachts, trophy properties, gems, art, wines, collectibles that the rich are interested in, those went through massive inflation as did financial assets, which the Fed considers those wealth not a form of inflation so I have a disagreement around that. I would argue we did see inflation. It just didn't go to the places you expected it like milk.

Dave Collum: I thought the Bernanke savings club model was stupid.

Chris Martenson: Yeah.

Dave Collum: It was totally irrational. And actually William White of the BIS also said it was nuts. Actually, one of the books I read this year was by Mervin King and he brought it down to such simple terms. I said oh, I get it. I now know what he is saying. Mervin points out the savings club model is that what we did is we sent dollars overseas buying with the big trade imbalance and buying Chinese goods, buying oil, buying all these things that should have come back in the form of an inflationary pressure on our goods. Should have come back in the form of buying up stuff from us and what it did is it came back in the form of investment money.

It sent treasuries up and interest rates low and it bid stocks up which sent them to the nosebleed valuation section. So the savings club, meaning the investment targeting of those overseas funds instead of coming back causing goods inflation, caused asset inflation. So in that sense the model made sense to me and it was really Mervin King who sort of brought it to clarity. He said what you end up with is asset inflation and a lousy economy. And I'm going, and that's what we have. So I guess that model is pretty good, right? It makes sense. So we get these huge asset gains and not a lot of economic activity except at Burger King.

Chris Martenson: And for those listening, Mervin King, ex-governor of Bank of England. And one of the people who had a memoir that came out a few years after the financial crisis that said oh my gosh, people we were hours away from full blown systemic crisis. Very scary. We had to do some crazy things. Do you think, Dave, that is still what is driving the central banks at this point is some lurking nihilistic fear of a systemic crisis that would get out of their control?

Dave Collum: I have two fears. My first fear is that and that they are looking going holy cow, we can't have a recession. Now, if the Fed reaches the point where it says we can't have a recession we are in trouble because the Feds of the past were always the root cause of the recession and they knew it. If the Feds say we no longer can even step on the economy to solve our inflation problems then we got a big problem. My bigger fear is that they don't know this. They are actually that clueless. And so you know, whatever. I get in trouble every time I pick on the Fed. There is always some Fed lover that wants to smack me around for a while.

Chris Martenson: Yeah, well I think you and I are going to have that schadenfreude victory bump because they have been absolutely clueless and not least of which is they are unaware of the fact the earth has limits and they are very busy peddling to create the exponential debt model in perpetuity. It's just dumb. It is absolutely ridiculously dumb. We need people who have systems thinking and we have got people who are Taylor rule junkies. It's just not working out over there at the Fed. But we will see -- we will get back to that in a year or two.

I need to get back to corporations because -- can we discuss corporate buybacks, please? Dave, first, I have a really bad habit, which is I get in these really useless, stupid Twitter arguments with people. I know I shouldn't. It's almost like a compulsion at this point.

Recently having gotten into an argument with people who are claiming that corporations are doing great. They have all these great productivity improvements. And in fact, they funded buy back entirely out of free cash flow. I'm like what are you nuts? Did you not notice the $5 trillion in new debt they poured on, which matches the buybacks. Help us understand the role of share buybacks, please and getting to where we are and what it might mean of the future?

Dave Collum: Have you talked to Adam within 24 hours? Because I actually sent him an email last night on this.

Chris Martenson: No, I haven't.

Dave Collum: Had an arithmetic epiphany. I do an analysis on the simple company and I concluded that if a company has cash on the books and they take the cash and they do a corporate buy back and the market is liquid enough the buyback doesn’t influence the price, that the shares should move precisely zero. 0/0 the shares should not move.

I look at this, I go, how is that possible? It turns itself right out of the arithmetic. And I say okay, let's assume that they do push the price of the shares up. What I end up concluding is the per share ownership of productive assets by the share buyback that push ups, that pushes the share price up actually drops so the investors who are sitting on the shares while the company is buying back shares is actually losing. They own a smaller fraction of the company on a per share basis so the value of their shares is going down.

And meanwhile, the price of their shares are going up because the bid is driving them up and I realized that while they are doing share backs to push the bid up they are actually depleting the net worth, in reality, of the investors who are sitting on those shares. And that hit me last night. And so I sent something to Adam and he sent something back. I called my brother and I called a friend at Goldman or ex-Goldman and I said to him, look at this. Tell me what I'm missing. He couldn't see a hole in this. Get Adam to send me a rough draft of part one before you upload it. I want to wedge in a little bit more. I had actually missed this -- I actually had drawn the wrong arithmetic conclusion on what share back should do to prices.

And then, of course, the share buyback to the extent that when you drive up the shares by putting a bid under them, there is no mathematical way to predict how much they should go up because it depends on the nonlinearity of the whole liquidity thing. An example I said was that Kodak one time jumped $4.00 on the last 200 share trade of the day. That's how little you can push a share up with.

So, when a company is putting a constant bid under its shares, what it is doing is forcing the valuations to the roof. And meanwhile it turns out the -- it's hurting the investors to the extent that, although the shares are soaring. The per share ownership of productive assets is dropping. And that's the part I didn't get.

Chris Martenson: I don't get that -- why is the per share ownership -- because a million shares half of away I still own one of those thousand shares doesn't my percentage allocation go up?

Dave Collum: Let me see if I can do it verbally. We have 900 million of what we will call the value of the company and 100 million of what we will say is assets. Somewhere where they store their money. If they take the 100 million and they buy back shares and it doesn't move the share price, they will drive -- they will drive the share count from -- let's say 100 million shares at 10 bucks a share, what they will do is take 10 million shares off the market, but their balance sheet will be $10 million light. Arithmetic now says 90 million shares owns a $900 million company and no cash. As a consequence, the value those shareholders has is still 10 bucks a share to the penny.

Now what you do is you say -- I don't know if that made sense. I am going to lay it out. Now what you say is what happens if they drive up the price of the shares? So what happens is they take their 100 million in cash. They start buying shares. But because they are driving up the price 100 million doesn't buy you 1 million shares at 10 bucks a piece because the price is going up, so you buy less than 10 million.

Chris Martenson: Got you.

Dave Collum: I got a balance sheet that has 900 million dollars' worth of company, but has over 90 million shares, which means the value of the shares is now less than 10 bucks. Because they bought froth. And that's -- it's so simple. And then I started asking, well what if they leave the shares on the books? They are not supposed to. They are supposed to be extinguishing them. It just doesn't get any better.

Chris Martenson: Well let's be clear, GE bought a bunch of shares back and how did that work out?

Dave Collum: And Oracle. Holy -- GE, in case your listeners don't know this, GE is so insolvent. GE is a zombie of a higher order and I think Powell is staring at GE going oh my God what happens if GE goes? They got $170 billion worth of debt. That is what you call AIG, right? That is huge. You got Deutsche Bank which is huger. They are doing laps around the drain. There are some big beasts out there waiting to exact revenge on these non-free marketeers yeah.

Chris Martenson: Yeah, absolutely. To make this very temporal and sort of date this interview we are doing this on December 19th, which is the Fed day. They just announced their rate hike decision. They are going to hike. Maybe they are only going to do two next year, not three. Wasn't quite dovish enough. The S&P was up 38 at one point today now it is down -21. The market is not happy with anything other than complete abdication by the Fed. Looks like we are not happy -- I think the Powell Fed is different from the Yellen Fed, which I hated and the Bernanke Fed which I loathed. Right? But Powell is not blinking at these markets. So as they go down this corporate share buy back the highest level of it happened just at this last quarter, finishing up at the first quarter of 2018. Highest ever. I think that is going to go down as stupidest ever. Would you agree?

Dave Collum: Oh totally. Here is the question though -- so if you plot share buybacks, super impose it upon the S&P they correlate. It is one of the best books in correlation to find out there. And the question is are they share buybacks causing it or is it just that it's dumb money and they don't buy at the bottom and they buy at the top? I don't know. It is conceivable there is so much leveraged buy back activity now that it has to correlate. I don't know if it's that big or not. Do you have any feel on whether the bid under the shares is big enough to, you know; and then when they repatriated all the taxes -- apparently you can't buy back shares overseas. It's a tax event. They had to repatriate them to then buy. So then -- here is a dangerous analysis -- everyone is look at all the corporate debt, but a lot of it was accrued because they wanted to buy back shares, but they couldn't yet repatriate their profits. And so they were looking at the profits overseas going okay we got tons of money we will just borrow money in the US and buyback shares and we will leave that money over there. And then it became this oh make America great, let's repatriate all the profits. Then they pretend like they are going to build plants.

Like they didn't have enough capital to build plants already? Right? They are not going to build plants. We knew they were going to use to financially engineer. So the money comes back and they basically extinguish that, bought more shares and played more games.

Chris Martenson: Yeah, there was no capital shortage. That was not one of the reasons they were not building property, plant, or equipment or investing in their human asset. Yeah, all right.

I have to switch some gears here. I just have to know a couple of things. First Dave, you wrote this, "Aristotle noted that an educated man can entertain an idea without endorsing it. I also have a pension for entertaining any idea until it dies of SIDs or gets legs and I have to chase it down. I am, in short, a conspiracy theorist. We should all be conspiracy theorists because men and women of wealth conspire."

So Dave, I feel that in the US this conversation needs to be had over and over again to undo, let's call it, some very careful programming. Conspiracies happen. And they happen as the rule not the exception is my view. Maybe I'm wrong, but it's my view. So many things move from the so-called conspiracy theory column to the conspiracy fact column. Which ones kind of stand out for you and let's have this conversation about conspiracy theories. I get charged with that all I the time. And I feel like I'm just applying braindead logic in most cases.

Dave Collum: So yeah, I mean, conspiracy theory is just saying I have this theory that they are conspiring. That doesn't seem that inflammatory to me. But then the question is what -- are they conspiring to hide the moon landing ? I don't think. Area 51, I don't think. So there is -- so various probabilities on truth. I don't see how you can possibly look at geopolitics and not realize that the conspiracies are just gargantuan and pervasive in everywhere.

One of the problems I had this year, by the way, one of my readers said this year took a toll on you. She wasn't saying it wasn't a lot of work -- she was saying I can see it in your writing. It was taking a toll on you emotionally. The thing that was killing me is I spent so much time trying to understand Trump and collusion and the FBI. And it's so disgustingly dirty and filthy and corrupt. And the connectivity say oh my God wait a minute, that guy used the lawyer for Fusion GPS, also? There are so many connections you go that's just not right and I couldn't write about it. So the people who think I'm going to explain the collusion stuff are going to be sorely disappointed.

Last year I tried. I just gave up. I said, I got 100 pages of notes just sitting there. I didn't do anything with it. I took on the Kavanaugh hearings. I took on the nerve gas poisoning. I took on a bunch of stuff, but I really felt like I left stuff on the cutting room floor this year. That took a toll on me.

It's so dark that there is a sense of futility, right? There is this sense that we are looking at Roman senators doing bad stuff and there is just no control. And they are so -- the Kavanaugh hearings to me, which I do go into and I am going into really irritate some people on those. But it just the politics are so thick and so corrupt that it is dark. I am going to have joy when this thing starts collapsing. I am actually going to be laughing my way to the bottom. I have been waiting for someone to pull back the curtain on this mess, right?

Chris Martenson: Well, yeah, absolutely. When it comes to the rule of law I think you know, even King Alfred who first started implementing rule of law in 989 in England understood that the appearance and the fact of law is important. And the appearance just got shredded. What Comey did and did not do is just absolutely mind boggling. But maybe something on safer territory to move out.

One of the things I've noticed in lots of markets is that price discovery is no longer a real thing. And that we see price manipulative moves where somebody just dumps tons and tons of things. It could be oil and this and that. Silver because I own some and because I care. If you're a silver producer or miner you should care. We should all care that prices are not manipulated. And it was so patently obvious that prices were manipulated.

Well JP Morgan trader is now up on -- being convicted and facing sentencing on that. Just radio silence across the news about this. But silver has been completely manipulated and for years I was like look at this manipulation. People are like oh, you're a conspiracy theorist. No. Just look at the tape. Look at that. 2:30 in the morning is no time to just put 6,000 contracts up at market, right?

Dave Collum: And 264,000 into gold in the middle of the night one day. But the silver one you are talking about I guess it was a 24 days in a row and it not only went down but you can put a straight edge down it. It was just as linear decay as someone said okay, here is what we are going to do. We are going to knock 2% a day off for 24 days, right? And no one cares. And then you mention the JP Morgan trader who got convicted and he said it was pervasive. He said it wasn't just me. This is happening everywhere. No one cares about that.

At this point the problem is that if the markets were fair value this wouldn't matter. Because they would be manipulating it around prices. But because the market -- I can't buy equities now. I just can't buy them because the prices are so wretched. And then they manipulate them out of the buy zone then it means I got to stay on the sideline. That is what irritates me. I want to buy bargains. Hussmann said he is a grizzly. I said ghoulish.

Chris Martenson: Well myself as well and I get tagged as being a permabear, but nothing could actually be further from the truth. I wish I had things I could believe in that I could value that I could put some diligence into and understand. Every time I scratch at these things and I put a little bit of valuation effort into them I go this is disgusting. I can't buy this.

Dave Collum: What is also true though this is really important and again, there is a Gray Hussmann analysis on this. And that is -- and everyone knows if PEs let's use PE as a metaphor since it is a worthless stat otherwise. Metaphorically, when PEs get down to super low values half of the companies will have even lower PEs. So when the PEs were seven back in 1981, I think it was -- half the companies had PEs below seven. If you somehow think oh I will buy a stock as a PE of 14, and I'll be saving. Oh yeah, what happens when it goes to 5? Or what happens when it soars because their earnings go to hell? I mean, you're not protected. So value won't be protected. The way value is protected is if on an absolute scale it is cheap. It can't be a relative scale. And people say well, what about the emerging markets? I say okay, tell me if the US does a 50% or more correction -- some say as high as 70 I can get to 80. What's going to happen to emerging markets. You're going to do well, there? The answer is no. No. People will sell anything they can to solve the problem. Everything will sell off.

Saying oh what if only the bow of the Titanic sinks? That's not how it works.

Chris Martenson: Well, the front fell off.

Dave Collum: The front fell off, but the guys in the back are drinking mint juleps, right? And so there is no -- once the market gets frothy all ten deciles correct violently.

Chris Martenson: Well maybe that is happening even as we are speaking you know, I said the S&P was up 38. It is now down 55. Just crashed through the 2500 mark, so a round number provided literally 0 stopping power. It is now at 2491 and falling. So maybe it started.

Back to what we were talking about though, Dave, you mentioned the magic word to me the Skripals. The Skripals for those listening were the father and daughter pair in the UK that were poisoned with this novichok class that can only be produced in Russia, poison. I wrote extensively about it at the time. Nothing added up. Not the method of poisoning, not the type, not how long it persists, not the crazy case of the police detective Nick Bailey who somehow got it and never was to be talked about again on and on and on. After all that nothing adds up. Now the whole mainstream apparatus has bought into the idea as heavily promoted by MI6 and the UK government under Theresa May that hey it was a couple of super inept Russian agents that did it. Dave, tell us about your views and that test question you posted to some of your students. I love that story. I tell it to people over dinner. I don't get invited back, but I love the story.

Dave Collum: So to make a long story short. The Skripal story broke out. As an organic chemist I can promise you the Novichok nerve agents are stupidly simple molecules. They are so simple to make that I think there is four ingredients -- every one of them has just four ingredients. I think you can literally take the bottles of each of the four ingredients straight out of your chemical supply house shelving, pour them together into a bucket and you would have a toxic, toxic brew. It is that easy. It is like telling Martha Stewart, go make chocolate chip cookies.

So what happened is the Teresa May crowd came out and said the Skripals they find them in a coma. The evidence that they were poisoned stinks. But let's say they were poisoned by Novachok. They say well, it's Russian technology. It's military grade. I say well, what's military grade? Like unlike the Walmart diluted form? What are we talking about here? I came out and I said, i'll keep it clean -- but I said you idiots who think you are geopolitical experts got to understand that this technology is trivial and anyone who says it has got to be the Russians because it is Russian technology is lying to you. It got ignored. Largely ignored.

And then I did another tweet as a saber rattling ... I said and I said I am just going to say this one more time - whoever is telling you this had to be the Russians because it is Russian technology is a liar. Unquestionably a liar. Now, they may have other evidence to why the Russians did it, but it is not Russian technology. Every country in the world has chemists who are easily good enough to make the Novachocks. Including the ones you would never visit. And so they kept saying but only the Russians know how to make them. I go no. What happened is the second tweet got legs. Next thing I know I find myself doing all these talk shows and going on Russia Today. They liked it of course. And George Galloway show and a, Fault Lines, and shows like that. They would ask me I would say this is stupid. This is simple stuff. If you want to claim that it's the Russians, that's fine but not because they are complicated.

I said my grad students could do it. The test you mentioned is on the final exam of my course in the spring. I told them the story how I ended up in the middle of this international incident. I drew a picture of one of the Novachoks and I said, my assertion is that anyone can make this. I said design a synthesis of this. It's a lecture course not a lab. Everyone but one kid got full credit.

As I said in the second part of my Year in Review thing which you haven't seen yet I say he wouldn’t make a very good terrorist, apparently. So one kid lost points, but they all because the design is pouring water out of a boot. Their arguments kept coming back to only the Russians know how to make it. It was silly, they interviewed this Ruski who was talking out of both sides of his face and he said, something about well it had to be the Russians only they know the structures. And then the interviewer says, but you published them in a book? He says, well I don't know if they saw my book. I'm going, and it was an $8 book. I said maybe only the Russians can afford it.

The Skripal story is a lie. Head to tail a lie. The other area I go into is Khashoggi. I believe he got sliced and diced and fed to the camels, I don't doubt that. I am watching the media chew on Khashoggi and completely ignoring we got 12 million Yemenis starving to death. I go I don't care about Khashoggi. I call him one dead Khashoggi. ODK. We got 12 million Yemenis. I said I don't care about Khashoggi. In that region of the world that is not even a blip.

Chris Martenson: Absolutely.

Dave Collum: So I have had people say oh my God. You know, you're the only one who thinks that. I am going there are women who get raped then get stoned to death of the audacity of getting raped in their country and you are worried about Khashoggi? That's nuts. You're psychopathically misguided. And so I bang on Khashoggi hard. I say you know why you are worried about Khashoggi because the media is telling you to worry about Khashoggi because someone is telling them to tell you to be worried about Khashoggi and there is a conspiracy for you. Oh, then there was -- I am free associating now.

There was Michael -- Mike Kreger I think it was saw a FOX news poll that said on the chlorine gas attacks which again I ended up in the middle of. Said that, should we go to war with Syria over these? And there was 50,000 votes in and it was two to one no. Then two hours later there is another 140,000 votes and it's now two to one yes. I'm going oh yeah, I believe that poll.

Chris Martenson: That's a good poll.

Dave Collum: Hillary must have run that poll. It's a nuts world.

Chris Martenson: It is a nuts world. Just on the Khashoggi thing all of a sudden you saw Trump trying to soft peddle the whole thing and the CIA comes out and says oh no, we have the recordings of this. Magic. And so this all goes back and forth for a bit. I heard Bernie Sanders come out, he was on NPR. He really waxed eloquent about what a grave tragedy this Khashoggi thing was and how the civilized world can't stand for that. Meanwhile, he's dead radio silent on all kinds of other stuff. You know and it's just across the board.

Dave Collum: Benghazi, right? Dead silent on Benghazi. Dead silent on how many people the Clinton's have wacked in their career, right? Jesus. Not one dead Kashogi. That's all it is. It's a dead buy in a region of the world where bodies can be bought from .com companies online, right? It's just a dead guy

Chris Martenson: It happened in Turkey and I don't know how many journalists in Turkey have come up dead in very, very mysterious or even overtly obviously assassinated circumstances, but it's many dozens. And --

Dave Collum: So what it means therefore is it is not about Khashoggi.

Chris Martenson: Right.

Dave Collum: Khashoggi is a stalking horse. Khashoggi is just the vehicle by which they are saying we want to achieve something. I haven't been able to figure out what that is. Her is my view on the Middle East. This is one of my big epiphanies -- I was talking about the Middle East being about oil. I don't think it's about oil. I think it's about war. The war industry is a trillion plus industry. When the wall came down and we couldn't build missiles and bombs and all this stuff to keep the cold war running hot, then we had to find a new enemy. Boom. Terrorists appear out of the Middle East. Next thing you know we are spending -- what did we spend on the war in Iraq? $6 trillion. That's $6 trillion went into the coffers of Boeing and Halliburton and places like that.

So the war industry is making a fortune off the Middle East. So our foreign policy is horrifying understandable unless you say the purpose is to keep them fighting. And then you say oh, now it makes sense.

Chris Martenson: Absolutely. That is my stocking horse for why Russia suddenly became a big, bad boogie man. It's not because they did anything particularly you can point to and say there that was unacceptable. Oh my gosh they had the people of Crimea vote and people overwhelmingly voted to join the country they used to belong to in 54, that's insane we can't have that. So it was called an annexation. And of course, the irony for you and I and hopefully the people listening is that in Crimea they have a more secure voting system than in the United States where we come up with statistically impossible or so deeply improbably I can use the word impossible, results on elections time and time again and neither party says boo about it. And that's how you know the fix is in. As far as I'm concerned.

Dave Collum: So the parties the reason they don't say boo is because to them that's all part of the game. So they are playing capture the flag with the voting. If you learned anything from the 2016 election is that everything is rigged. And then if you learn one more message and they still somehow blew it. Everything is rigged. You watch the primaries. Everything is rigged. Bernie wasn't going to win. They thought Trump wasn't going to win. Completely misunderstood his risk. And they misjudged him and they faked the polls and then they believed the results of the polls. It's like you pulled a rabbit out of a hat you put in there and you are surprised. And that is what is crazy about it. I think they thought they had it in the bag and everything was going to be nice and quiet and after Hillary got elected then Comey would go away quietly and they wouldn't have to call out Mueller and all of that stuff.

Then Trump won and all of a sudden the deep state guys were in a total panic. I don't know who watches this stuff but you got guys like the former head of the CIA out on Twitter saying to Trump, we are going to destroy you. And then he has a fit when Trump takes away his security clearance. I'm going Jesus the guy would be in jail if I had my say. What kind of treasonous crap is that?

Chris Martenson: Plus he's lying to Congress.

Dave Collum: Oh yeah, lying to Congress there's a real crime. Everyone lies to Congress. They lie to each other.

Chris Martenson: I was just reading today the Flynn thing. Oh you can't lie to the government. Everybody knows that. I'm like well, Clapper did. Nothing happened there. I don't know.

Dave Collum: I'm guessing Flynn is one of the only good guys in -- I haven't watched the Flynn thing closely. Just for some reason things go off my radar not to come back. I don't know why. I'm going to guess that Flynn didn't do squat. I'm going to guess he got Martha Stewarted. He got hit on a technically or something.

Chris Martenson: Absolutely. Such is the nature of it. Chronically the thrashings of the empire as it fails to notice its own self-inflicted wounds and ultimate demise is a lot of fun. And you know, for me the frustrating part where I age visibly and where people can notice the impact on my health is there are so many predicaments we have to do something about. This has been the year it's sort of broke into public awareness -- three years I have been talking about the science behind the insects disappearing. And I'm the psychologist training at heart that believes wiping out the bottom of the food pyramid is a bad idea. I hold that view.

Dave Collum: I can't imagine why you would want to lean out the food chain from the bottom up.

Chris Martenson: That's me.

Dave Collum: Bees are going away. Rumor is Roundup is doing it to the bees. That is like a DDT moment except for we can actually live without the birds more than the bees. They seem to go together metaphorically, but.

Chris Martenson: Yeah it is everything. By weight every insect class out there. We can't even clarify them all because somebody hasn't studied why -- how many nidges there used to be. There is just less of them, right? So you know, it's not silent spring. This is the frustrating part. It is silent spring , summer, fall and winter. I mean it's like the whole we are doing like this vast wipe out. It feels like we really need to be talking about that stuff, but to the extent we are distracted by the deep state doing really dumb stuff blah, blah, blah. I don't know. To me, that is the frustrating part is there are conversations we need to be having we are not having that are really important.

Dave Collum: And they put glyphosate on fields on a wholesale level now. It didn't used to do that. If you drive past a field they put glyphosate on it's a brown field and I go -- they didn't used to do that before. The other thing I've noticed, I don't know how this correlates, anecdotally I am seeing a lot more big mammals than I ever used to see. I don't know what that means. We go in the Adirondacks and we are seeing way more deer. We are seeing -- we are seeing much more roadkill, I think these things cycle around anyway. To think that means something I am falling into the trap I warned about.

The other thing I'm watching out of pure entertainment factor is the Ring of Fire. Again, it could be the Ring of Fire is just acting like the Ring of Fire acts, it certainly looks active to me. You can measure the rise of the Yellowstone Caldera; it is rising. It's rising like an inch a year, some ridiculously rapid rise. And you know, we can stop talking about global warming if they Yellowstone Caldera blows. Global warming is going to be the least of our concerns.

Chris Martenson: No we'll be trying to activate global warming if that happens. Then we will be in cooling.

Dave Collum: I just want to drill into it and shoot water into it to cool it off. I'm like come on. Come on guys. Don't do that. Don't do that. Yeah. It's a big zit. You don't drill into it.

Chris Martenson: No, that's not. Let's not. Oh man. So hey, we're coming up on the end of our time. Before we go there -- as you look forward the year in review, everybody we are talking with Dave Collum. We are talking about the incredible year in review, which is now up at the Peak Prosperity site. Come check it out. It will be there. It is up on Zero Hedge. It will syndicate. We will get it out there. Everybody needs to read it. That's the Year in Review. Dave, as you look forward what do you think we are looking at here for 2019?

Dave Collum: Crazy politics. I think the markets have started correcting in earnest. I think this time next year we will be talking about the brutalization of investors and pension funds and stuff like that. You know, I'm laddering money in two and three year treasuries. And you say, well what if it really drops? Aren't you locking it up? This thing won't correct. This monster bubble won't correct in some V bounce thing. This is... the patient investors will have plenty of time to pull the trigger on this thing. And I'm working on plans for how to recognize when it's the right place. Start, you know, investing in things that are rational stuff like that. How not to get caught like in 09, but that's how you get caught, right? Isaac Newton knew the tulip mania was nuts and then he got -- or South Seas, I guess it was.

Chris Martenson: He was the South Sea guy.

Dave Collum: Then he said I was wrong. He bought into it and he got crushed. Right? So you know, and I'm pretty sure Isaac was smarter than me. So you know, I could be duped. I try to get Hussmann to capitulate and go along. I said, “John, until you and Felder goes along this market is going to keep going up.” And that's when he called me grizzly. I can't remember what it was. I said ghoulish.

So yeah, I think the markets are now looking like sort of a precessing top and they are starting to wobble. And a metastable system doesn't wobble for long. I think it will start to give back 10 years of gains. My prediction based on long, long, long term valuations, I think we got at least 50% correction in us. Again, I can get all the way to 80 if we go through the mean. Which you have to do, right? It’s not like Lake Wobegon, you can’t sit above the mean all the time. And so the guys who are sitting in the Dow in 29 and 350 they just couldn't imagine it would be 41 before it was down. They couldn't fathom it. And people say we can't have it go that low because look at the carnage. I say just because you need the returns doesn’t mean you get them? The very fact you need them means you won't get them. The very need -- all those promises we can't fulfill globally -- globally.

So yeah, I think that. I think we'll -- everything else may look fairly normal. The other -- here is the black swan. Conspiracy theory time. Here is a big theory. I think that if you believe in the idea of the deep state, which I do. I don't know if I have defined it well yet. That idea has been around for dozens of years. People think it's a new term and it's not. If they hate Trump, which I'm not sure is true because they either got to win him over and control him or hate him. If they haven't controlled Trump, I see evidence they are. They're going to want him out of there. The fastest way to get him out of there is to make sure we go into November of 2020 with blood. Right? With blood in the streets, economically, so that Trump can't stand up there and say the economy is huge and it is fantastic. I think you want to leave Trump apologizing for destroying the economy if you want him to not be in the White House in 2021.

Chris Martenson: That's certainly interesting. You mentioned crazy politics as one of your year forward things. And as we are speaking I think it was just today, this morning, the yellow vest movement took down the prime minister of Belgium over that crazy apparently --

Dave Collum: They did?

Chris Martenson: Yeah. Well, he offered to resign. Go yellow vests. Those seems to be the direct result of so many years of unfair neoliberal you know, so-called economics which basically shaft everybody to give it to a few multinationals in the top .1%. As well as what the central banks have done. Would you agree the people have finally woken up to the -- how badly they have been screwed and decided that's it?

Dave Collum: I’m writing a lot about this, too, even though I don't talk so much politics. But I talk about this. At the end, by the way, just a warning I actually talk about religion.

Chris Martenson: Oh.

Dave Collum: I believe it will not be polarizing. I am going to take the stance of an atheist pro-choice and endorse religion. It's a how do you lose or how do you win? I don't know which. I think we are in an era now where everyone is mad. I think the beta test was Occupy Wall Street and now you have got more virulent things like ANTIFA and stuff like that. But I blame Obama not because I dislike the guy and not because I dislike his politics, but he made one critical decision that was to not prosecute anybody. And the populous needed to see some retribution and they didn't get any. They got the reverse of it. I think everyone is mad. They know they're not rich. They know they are in trouble. They know they don't have any money and they know they got a big debt. And so, they don't even need to fully understand why they are mad. All they have to do is be in the street one day when some guy lights up a car and go, oh I can do that.

Chris Martenson: Yeah.

Dave Collum: And then they light up a car. Next thing you know, you got the battle of Portland going on, you got Paris burning. You got Belgium. I saw the Belgians were acting funky -- Belgium those guys are like -- what are the Swiss going to start rioting now? What are we doing here? I think we are in a period where people are mad. They are all mad in their own personal way. But they are all willing to get mad together. Arab Spring, one Tunisian lit himself on fire on the doorstep of some building and next thing you know you got regimes falling because the one flammable Tunisian triggered it. He didn't cause it. He triggered it.

Chris Martenson: The spark found a very, very thick tinder pile to land in.

Dave Collum: That's right. A little bit of gas and a match that's all it took. You know Rodney King almost you know those riots almost spread across the country. We nipped them in the bud, but we go away with one on that. That could pick up here. That could pick up anywhere. If you watch the police in these riots, they are so scared. These are a bunch of kids basically. These are not Navy Seals. And these guys are standing there by the dozen and they are terrified of these protestors because they cops can't start shooting. At the same time they can start getting shot. And then what happens? You don't want a Kent State moment.

Chris Martenson: It's all fun and games for the elites until the police figure out they are actually on the same side as the protestors.

Dave Collum: That's the other thing. These guys go home and they're mad. Right? So all of a sudden the praetorian guard says this emperor is not doing for me what I want.

Chris Martenson: Wait, what happened to my pension?

Dave Collum: Exactly. What happened to my pension? That's exactly right. So when it's no longer perceived to be your advantage to play with the team, you switch teams. Then you end up with bad stuff. Revolutions never produce positive change, right? I guess the American revolution did. It's a bloody mess.

What's a quote? Wars are when the government tells you who is your enemy. Revolutions are when you figure it out for yourself.

Chris Martenson: Right. Or as JFK said, "Those who would make peaceful revolution impossible would make violent revolution inevitable."

Dave Collum: Or in the movie The Debaters, the guy at the end is debating this black dude, he is debating Harvard kids on peaceful civil disobedience. And they have to take the side of favoring it. The Harvard guy says look, you got to favor the letter of the law. And this kid says, "You better hope I can do peaceful civil disobedience because the alternative is terrible." And I'm going that's exactly right. That's exactly right.

Chris Martenson: Right. To undo all of this I guess is to see many decades of neoliberal policies that began under Bill Clinton in the United States in earnest, would have to be undone. I know Obama was smooth and very polished and he was a very easy person to listen to, but he prosecuted zero Wall Street bankers and pushed water cannons against the Standing Rock protestors who were simply saying, hey we would like to have some peaceful say in how our water is treated. It was optically one of the ugliest moments I have seen and where I lost all faith in him as a moral individual pursuing moral things, right?

Dave Collum: Right. You know, I didn't mean to convey I was supporting him. In the -- inside the beltway model there is a lot of wretched people. The scale is from 1 to 1000. You know and I can blame Bush, Jr. for tons. I have to go back to Bush, Sr. before I start finding someone where I say I'm okay with what I saw there. If I could beam President -- I just finished Hoover's biography. Oh my God, he was one of the great ones.

Chris Martenson: Really?

Dave Collum: But he happened to be -- oh he's unbelievably impressive. Unbelievable -- you got to read his biography. He saw the Depression coming. He was trying to head it off at the pass, but he didn't want to let government get big. And so he didn't want these men -- and by the way Roosevelt was a punk best I can tell. Yeah, I think Hoover was one of the really great presidents during one of the most wretched four years windows. In some sense he was like Carter. Carter inherited four years of disaster.

Chris Martenson: Yeah, I mean if you look at that period of time, you had Wilson singing into the Federal Reserve Act in and that was in 1913. 20 years later the United States defaults and has to cough up all of its gold which is still held as gold certificates on the Federal Reserve's balance sheet. That was the first national bankruptcy right there. Only 20 years it took the Federal Reserve to bankrupt the country. That is pretty fast, don't you think?

Dave Collum: Yeah, they really -- the fledgling the youthful fad got us into a mess fast. And now I think they are smarter. Now I think they know better. Oh yeah, we won't blow it this time. I promise. We know what we're doing. Yeah, I get in arguments with some Fed heads. It's not productive, but it's good sparring.

Chris Martenson: Sure. They slayed the business cycle and replaced it with a credit cycle. Oops. Yeah, good thinking on that one. And didn't learn anything from the 2000 blow up, learned even less from the 2008 blow up. I think we are looking at the 2019 to 22 blow up.

Dave Collum: How do you see the resolution of all this debt?

Chris Martenson: Oh, massive defaults.

Dave Collum: Crudely thinking deflationary collapse or inflationary wipe out?

Chris Martenson: I’m a big believer still in the 1998 Eric Jansen of I Tulip theory which says we have to get some really, really scary deflationary implosion that then brings us to Venezuela style money for the people and then run, run. Do not walk and buy anything you possibly can the minute you see that Fed check show up in your mailbox, which could be a Treasury tax holiday, maybe a rebate for last year's taxes, too. All of it monetized by the Fed or your state municipal -- your state municipal program that is being bailed out by the Fed. Whatever that is. When the Fed begins in earnest to monetize money for the people that's it. It's lights out. Venezuela in five years. Set your egg timer. Against that backdrop we have a five year missing oil exploration hole that is going to show up as supply shortfalls in about a seven year lag.

Dave Collum: So we haven't been exploring?

Chris Martenson: No. No. 2014, 15, 16, 17 we have to wait and see what the 18 figures are. Those four years are the worst four years of oil discoveries in the entire series going back to 1920.

Dave Collum: Our energy independence model is not sitting well with you.

Chris Martenson: No. Longer, more complicated story, but oh my gosh. No. What we did was we took a really important resource and we used it to support three excellent years of F150 Silverado and Chevy Tahoe sales and it is going to turn out to be one of the worst decisions ever made. Future generations will look back and say, you did what?

Dave Collum: They are getting crushed, too. It's not like there is any stickiness. I owned energy all the way up. I started buying somewhere around 01, 02, then I held onto it and I got crushed. Then my employer actually booted me out of it, I think it was in May of last year.

Chris Martenson: That was helpful.

Dave Collum: I didn't even know it. I didn't even know it. And I go what just happened to my portfolio? Where is everything? I called them they said oh yeah, we booted a bunch of the funds that are available. We put you into a lifecycle funds. I go oh, great. So I just wanted to put it into cash. I said should I just buy the energy back because we had beaten the crap out of it. Well it turns out them booting me out saved me about 15% so far. I am not yet looking like an idiot for not re-entering. And that is an irrational investor who is willing to be invested, but when booted out is not willing to reinvest. There is a conflict. There is a conflict. But it forced me to say, would I buy it now? I said no. I probably emailed five hedge fund managers and said, would you buy it now? This is the dilemma I face. They all said no.

Chris Martenson: I wouldn't either. Not yet.

Dave Collum: So, I'm waiting. You know, I'm going to be buying in that throws of whatever chao sis coming and I got to figure out what to buy. I don't want to buy AMD or something like that. But there will be stuff. There will be assets, productive assets that are purchasable, I think, within five years.

Chris Martenson: I agree. I am developed in my own buy list that includes hard assets, real estate, productive real estate. I am looking at energy, resource things like that and there are companies that make sense. But Netflix with a PE of 212, sorry not right now.

Dave Collum: Yeah, the FAANGS are not where I want to be right now. I would have liked to have been there before. I would have sold them is the problem. I would have said oh man these things are not working out. I would be the guy who took his founder share of Apple and used it for beer money, right? Then I'd really be hurting. I'd rather have never owned them.

Chris Martenson: This last year and a half two years has been perhaps the hardest. 2015, 16 I was saying okay people this is it. Head and top shoulder this is going. Then they poured the gas on. Then Brexit came, so that was a bad time to let things fall apart. And then you know, Trump was elected, so that was an even worse time. So they just poured, the central banks is they in this story, they just poured more and more fuel on this. And I just kept watching this saying I can't participate in this anywhere.

Dave Collum: I'm feeling stupid.

Chris Martenson: Stockholm Syndrome, I'm grateful for the 2.8% you can get on three month T bills, you know?

Dave Collum: Exactly.

Chris Martenson: Oy, what a sad state of affairs that is.

Dave Collum: That almost seems like a luxurious cash flow.

Chris Martenson: Right. Oh my God --

Dave Collum: It feels like a refreshing non-zero number.

Chris Martenson: But I'm really just sucking air at the bottom of the container door; what little air can come in. It's just awful.

Hey, Dave, thank you so much for your time. Thank you for writing this year in review. It is the highlight of my year. So many people's years. We are going to get it out as widely as we can and really looking forward to everybody's comments that come with it.

Dave Collum: Sounds great to me. I owe you part two, but it's coming real soon. It's written. It just needs -- I'm reordering references. I'm two hours away, I think.

Chris Martenson: Excellent. So with that -- hey everybody we have been talking with Dave Collum, Professor of Chemistry at Cornell -- place I actually went to for a brief period of time and Dave, thanks for your time today.

Dave Collum: You bet.

About the guest

David Collum

David Collum, is the Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time.  David has contributed many Year in Review articles and podcasts to the Peak Prosperity community. 

2013 Year in Review

 

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11 Comments

travissidelinger's picture
travissidelinger
Status: Bronze Member (Offline)
Joined: Nov 17 2010
Posts: 42
Excellent Review

Thanks again.  Totally enjoyed it.

treebeard's picture
treebeard
Status: Platinum Member (Offline)
Joined: Apr 18 2010
Posts: 634
Twilight Zone

Doing analysis when you live in the twilight zone is a tough job.  But everyone wants accuracy and hard dates.  Always interesting and entertaining.  Kudos to those who take a stab at trying to sort this all out.

 I guess I am in a mode at present where I’m not taking it seriously, if you can’t laugh about it, you’ll wind up suicidal. Sure, still working at all the basics to create a better world, but things have gone so far off the deep end where do you start when talking to people?

It does feel like all the pieces are starting to shift, where both economic and social transformation are starting in earnest.  If I talk to people who want to protest this or that, I tell them heck with that, BUILD LIFE BOATS

dcm's picture
dcm
Status: Silver Member (Offline)
Joined: Apr 14 2009
Posts: 225
war, oil, and terrorism

Dick was an old fashioned guy

DIck would say things like: "the American way of life is non negotiable"

Dick taught his president to say it too

Dick knew peak oil was imminent

And DIck knew Iraq had some of the last old fashioned oil - easy, sweet, and "inexpensive"

So Dick started a club: The National Energy Policy Development Group

Then DIck helped start another club: PNAC

Then something strange and horrible happened

DIck blamed it on Iraq

Then Dick built the biggest US embassy in the world

And DIck helped pass laws that made the Constitution blush

And made anyone into a terrorist

Dick even said the War on Terror would go on for a long time

And Dick was right

But what Dick didn't realize

Was that the world was not old fashioned like him

The world was growing up, and like a teenager,

it too wanted cars, and microwaves, and lots of things with a switch that goes on and off 

And it wanted oil too

So like a teenager, it stopped doing everything DIck told it to do

And when DIck got mad

It only made things worse

So DIck increased the "corporal" punishment

until the world started hitting back

and then it ran away

 

 

Pipyman's picture
Pipyman
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Joined: Apr 24 2011
Posts: 65

A little more cognitive dissonance alleviated......

 

 

newsbuoy's picture
newsbuoy
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Joined: Dec 10 2013
Posts: 336
In 24th Century BC

Long ago in a place not so far away a guy named Ptah-Hotep said "Be cheerful while you are alive."

Interesting analysis coming from a conservative, hard sciences view of the sudo-science of economics. I hope it's not too impertinent of me to note that when the envisioning of revolt comes up "the battle of Seattle" (20-years ago!), and LA Riots (26-yrs ago) or ANTIFA (was BLM mentioned?) roll off the lips easily while so-called "white supremecist" and neo-NAZI and homaphobic mass shootings don't seen to registar as rebellious chaos. Not trying to read anything into the presenters arguements as this is observed elsewhere in the MSM and other cylos of miasmic intelligencia (note to self).

I've been reminded of something, and I don't remember who, said that the greatest mistake the German jews made was not battling back against the NAZI and anti-semetic forces growing in Germany at the time. Thinking that establishment society would never allow it to get out of control and didn't want to cause trouble.

"...but you got to serve someone"--B. Dylan

cestin's picture
cestin
Status: Member (Offline)
Joined: Sep 26 2010
Posts: 18
Consider this "conspiracy theory" on Fed popping the bubble

Chris, you might consider the possibility that the Fed is doing the bidding of a "global elite". That the agenda is to crash the markets and create an opportunity for an IMF baiiout with their Special Drawing Rights currency. Ultimate goal being a global currency reset to create a centrally controlled global reserve currency replacing the US dollar. The global elite then have the power of money creation at their fingertips. See 

http://www.alt-market.com/articles/2403-the-economic-end-game-explained  

http://www.alt-market.com/articles/3310-the-economic-end-game-continues 

http://www.alt-market.com/articles/3229-the-new-world-order-will-begin-with-germany-and-china 

for more details, as proposed by Brandon Smith.  Seems to me to be the only explanation that makes sense for why the Feds are raising interest rates and Quantitative Tightening.

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 969
May I ask a question?

What could the Fed do right? If they hold the interest rates at zero, they're blowing the bubble. If they raise the interest rates, they pop it.

I'm going to contend that (a) they may be raising the interest rates for the wrong reasons, but (b) most people here shound agree that the interest rate rise is still the best thing under the circumstances, yet (c) it is going to be extraordinarily and dangerously painful.

In light of that, I'm going to say that conspiracy theories about this are a bad idea. They can make that "dangerous" bit suicidally hazardous; or they could (at worst) cause the Fed to go back to its old ways.

We should nod sagely, note points b and c above, and hope for the best, prepare for the worst.

cestin's picture
cestin
Status: Member (Offline)
Joined: Sep 26 2010
Posts: 18
Agree Michael that popping

Agree Michael that popping the bubble is "the right thing" for them to do.  Because they've already done the "wrong thing", by blowing up the bubble through liquidity injection since 2008.  And, yes, it's going to be extraordinarily and dangerously painful.  Look at what "painful" could most likely mean.  Imagine if there was no bailout in 2008, there would have been a freeze-up in liquidity in the global banking system.  That would create an instant Depression for the entire globe.  A heart attack in which blood (money) stopped flowing.  Money stopping flowing would stop food distribution, food production, medical services - everything.  The same as in the Great Depression, except then the US was an agrarian economy.  Not a global economy. So if/when the markets crash AND there is another "mistake" like Lehman Brothers - which is much more likely now with the unregulated derivatives rampant in the system - then a bailout will be necessary again.  Or the same consquences will occur - stoppage of money flowing in the economy, with resultant social impacts.  

So how could a bailout occur?  The Fed rescue again?  Unlikely, since the trust is already broken.  Interest rate cuts, QE to infinity would have no effect because the dollar will have lost trust, after the trillions already created out of thin air.  Money is a trust agreement.  So the only bailout that would be acceptable would be one from a global source.  The International Monetary Fund (IMF)'s Special Drawing Rights (SDR) account.  SDR is a basket of 5 currencies (US$, Euro, British pound, yen and Chinese yuan).  The Chinese yuan would likely becoe partially gold-backed at that point to further lend credibility to the SDR. 

Following an IMF bailout (of all the global markets which would likely crash simultanous with the US market), the SDR then becomes the de facto global reserve currency.  Voila!  Those that control the IMF, now control the currency that controls the world.  First step in creating a global elite that controls the world.

Do you have any other scenario in mind which would make sense, Michael?

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 969
More likely scenario

A more likely scenario would be "bail ins", in which the banks simply seize the money of their depositors and use THAT for their payments (and bonuses).

But at that point, the rage at the outright theft would be huge, and violence would occur. In some areas, like France, the rulers might be overthrown and killed. In some areas, like Rio de Janeiro or Caracas, it might be open season on the poor, no bag limit.

Whoops, that's already happening.

We don't know what will happen, but what is already happening is likely to continue.

I don't know what will happen in the US, either. But it isn't likely to be anything new. Maybe suicides and drug addiction will rise. In Russia they'll do vodka and heroin.

We'll see.

cestin's picture
cestin
Status: Member (Offline)
Joined: Sep 26 2010
Posts: 18
More likely scenario

I've read about "bail-in"'s, but it seems unlikely that the quantities of money needed could possibly come from depositors' money.  Just think about the nature of fractional reserve banking, and imagine that the "blow-up" of derivatives that is going to be the most likely trigger along with a market crash (and a bond market crash as well as housing market crash) - and it seems like the bail out money is going to be on the order of the trillions that have already been pushed into the system.  Not the piddling amount held by bank depositors.  Of course that money will be used as well..  

Following an IMF bailout with the SDR, and a replacement of the SDR as the new global reserve currency, the impact on countries would be a re-evaluation of their currencies relative to the new SDR currency, over the following couple of years. The US, with its masive spending deficit would lose purchasing power of its dollar - high inflation/stagflation and would require much greater austerity in its budget.  (Unlike when its debt is held worldwide as it is now with the US$ as the global reserve currency.)  Then the loss in social programs, food stamps, etc. would not be received well by the population.. The US wouldn't be able to pay for its military either, so perhaps there would be an SDR funded "global peace-keeping" force. Sound like a New World Order yet? China's currency would likely be highly valued next to the SDR global reserve currency, because it has a producing economy.  

These are the events that I might imagine as a followup scenario..

Uncletommy's picture
Uncletommy
Status: Platinum Member (Offline)
Joined: May 3 2014
Posts: 648
Time to stop chasing our economic tail?

I has occurred to me, after reading many of the comments in response to Dave collum's prognostications, that the economy is not one large, multi-variable linear equation, subject to an easy answer. What does strike me, however, is that in all the perplexing factors associated with this subject, we somehow fail to realize what a productive asset is. A few contributors have noted and questioned whether real estate is an asset or liability. Ultimately, IMHO, monetary transactions boil down to a fiduciary function between two parties. Are the subjects of inflation/deflation, interest rates, velocity of money, GDP, etc., just diversions from the discussion of how people relate to one another for the benefit or detriment of society at large? 

Christmas has come and gone and the NewYear is looming on the horizon. Given the current challenges and strife  we see around the planet, I am less sanguine on its eventual outcome. It is popularly suggested that the following was played on the deck of the Titanic before it succumbed to the deep waters of the North Atlantic. Perhaps it is the theme song of 2019:

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