David Collum: We're Now Stuck In A Global Game Of Tetris
Whether or not you've had time yet to plow your way through David Collum's excellent 2014 Year in Review, our annual podcast with Dave always brings additional color to light -- and this year's is no exception.
To me, the global economic theme is existential risk. That's a phrase I use repeatedly throughout my Year In Review. Things now seem to be coming to a head.
A metaphor that I came up with, that I just love because I know the game well, is that we're engaged in a global game of Tetris. For those unfamiliar with the game: you place these pieces methodically, and then the game starts accelerating. You start placing pieces faster and faster, until you reach some point where you simply can no longer successfully place the pieces in time.
And it feels like the authorities, the monetary authorities, the geo political authorities -- all of those people who are really calling the shots around the globe --are playing that game, and it's accelerating now.
The end of the game is called 'topping out'. And I’m wondering when that topping out is going to occur.
Click the play button below to listen to Chris' interview with David Collum (59m:03s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. Well, if you want to know where you’re headed you have to know where you are and that means you have to know where you’ve been. Continuing with our annual tradition we've got the best year-end review in the business thanks to today’s guest Dave Collum. For those of you unfamiliar with Dave, maybe haven't listened to last year’s podcast or read last year’s year-end review, he is a professor of chemistry and chemical biology at Cornell University where I got my MBA. We didn’t meet there, wish we had. In addition to his academic interest Dave authors this annual macroeconomic assessment titled "The Year in Review." It’s hands down as I mentioned the best synopsis of anything that mattered in the previous 12 months and boy there is a lot of stuff to cover. His latest "Year in Review" can once again be found on Peak Prosperity and I’m excited to have him with us now live in order to expand on his excellent insights. There is so much to cover. Dave, thanks for joining us again this year.
David Collum: Hey, it’s a blast. I love it. It’s just – I would do it just to sit around and chat with you for an hour, so.
Chris Martenson: I would do it just for that reason to talk with you because you really just have been capturing everything that has been going on and boy, so much. I don’t even know where to dive in. Let’s just start here – if you had to pick one, what is the biggest theme for you this year that really stands out in the economy? Let’s start with the economy.
David Collum: Interestingly, the economy is kind of holding up. It was like it was on life support or something all year. And so in some sense this year didn’t feel like the economy as much as other years, but with that said in a late season spectacular moment we got into it with the Russians and the next thing you know the price of oil is plummeting and no one seems to know what to make of it, but I think that will probably turn out to be an important event. I think it will be important economically. I think it will also be important geo-politically as well as militarily maybe. This is a big event.
Chris Martenson: I agree. I am having trouble saying there is much standing out economically particularly, but what I do see is this global theme that if I can put it this way, I wasn’t alive then but it feels like 1911, right? So people say "hey, we don’t really know what happened. An arch duke got shot. We are going to call it World War I that is why it happened. That was the reason." But in truth there were these pressures that had built up, so to me the big theme this year is this breakdown of relations with Russia that I still don’t understand. I don’t understand why it happened or what the end game is. There must be something else happening, but it feels to me like this whole plunge, plummet, crash in oil prices has to be connected to that in some way directly, but certainly it is indirectly connected because it is abusing all the oil exporters badly and Russia being a prime example. So as you look at that oil, let’s turn there because to me that is probably going to turn out to be the macro economic event of the year. Even though it is happening here in November and December. What do you see as behind the oil price collapse?
David Collum: You know, actually just to back out a second since I thought you wanted to keep me on the economy, let me just pan out a little bit and say to me the global economic theme is existential risk. And that is a phrase I use repeatedly throughout my year in review. There are just things that now seem to be coming to a head. A metaphor that I came up with that I just love because I know the game well is this game of Tetris, this global Tetris. When you play that thing you place these pieces methodically and then the game starts accelerating and you start placing pieces faster and faster and you reach some point where you simply can no longer successfully place the pieces. And it feels like the authorities, the monetary authorities, the geo political authorities all of those people who are really calling shots around the globe are playing that game and it feels like it is accelerating now. The end of the game is called topping out and I’m wondering when that topping out is going to occur.
With that said the energy is part of that game. That is one of the many facets of this year that just felt, felt like something big could happen. And so you know, you listen to the pundits on TV and they get the fact that it is about Russia. There is a lot of discussion about how the Saudis are trying to put our frackers out of business. I don’t think that’s it. I think it actually – I think it actually started with ISIS threatening Saudi Arabia and us being in a tiff with Russia, which in my opinion is our fault. So I agree with you. I don’t know what happened. This geo political situation we're in — I can’t even tell you a story about what happened, but it appears to have started when we popped the democratically elected government in Russia and then from there the Russians moved to Crimea.
The next thing you know, we don’t like that. And then the Saudis end up threatened by ISIS. And I think what we said to them — and this is speculation — I think what we said to them is "look here is what we will do. You talk down the price of oil; that will beat up Putin. We’ll take care of ISIS. We will call that even, right?" So the first thing that appeared in the oil sector in my opinion, the first thing that I spotted were the Saudis talking about where they would be comfortable with oil. It is contemporaneous with us starting to sort of sabre rattle against Russia. The Saudis are not comfortable with lower oil prices. They say that for a reason and the reason seems patently obvious to the Crimea problem. Yeah, maybe our frackers are knocked out but the price of oil was doing great. They were selling oil at a high price. So I don’t see how that makes sense.
Chris Martenson: Well, it doesn’t make sense. Here is the other thing to say that Saudi Arabia is interested in putting the frackers out of business. Saudi Arabia produces mostly heavy grades and sour grades of crude. So people often get confused because it is presented in the media as if there is "an" oil market, right? Oh, it’s just oil. Just one substance. It’s like saying water, fresh water. It’s this one thing. It’s not. There are all of these different grades and the truth is that the kind of grades that come out of the fracked area are really light, sweet grades and they are not in competition with Saudi Arabia at all. To have a refinery you have to build it and you have to build it for a very narrow range of crude grades that can be put through that thing. And so our refineries in this country are mostly geared for heavy and sour grades at this point in time. So we are still importing oil and we are still running it through our refiners. We've got all this stuff piling up. When they say in the Untied States "oh, we are interested in exporting oil again," what we are really saying is we are interested in exporting these grades of oil that we don’t even have any use for because we have so much of the stuff here. Because the grades are all wrong. Saudi Arabia is not in direct competition with the frackers because they don’t produce the same product. And that is an important point that really isn’t being talked about much yet.
David Collum: Yeah, boy you are much better at that stuff than me. I think that’s right. And I don’t think that the frackers ever were in any way threatening Saudi Arabia as you say. Interesting at some point in the next few minutes we should talk about whether they understood the collateral damage that would be done as we attempted to engineer a serious beating on Putin. Did we understand all the collateral damage that would be done? It’s not obvious to me that we understood that.
Chris Martenson: This is a great point. I believe — this is my personal view — that the people in the state department are political beasts and the people in the executive branch are political animals and that is what they know. And so geo politically it probably makes a lot of sense to go ahead and crush oil and see if you can really batter Putin a little further. Because the sanctions on his friends and advisors wasn’t really cutting it for some reason.
So when we look at that though, then you have to turn the page and look at the other part of the story. Already we have $150 billion of world wide projects, oil projects that have been yanked. Tar sands, deep water, now shale projects are being yanked. So we are looking at that and the thing those political animals and beasts don’t understand is A.) you need oil to run an economy and B.) the world has spent since 2005 $3.8 trillion and gotten exactly 0 more barrels out of the ground for their trouble. So we are on this treadmill in this story right now where we have to spend huge amounts of capital just to keep our oil quantities in place and that is all now at risk. And I don’t think the political animals really get that. I certainly hope people in the oil business are knocking on their door going "hey, hey no, you have to understand something here, this industry can’t take a year of these prices."
David Collum: And what do you bet they didn’t see the crisis in the high yield debt market coming, right? I think when they crushed Putin, when they went to crush Putin, which by the way and I talk a lot about Putin in this "Year in Review," but the idea of trying to hurt the Russians I mean cause pain these guys are tougher than nails, right? These guys survived the siege of Leningrad. You are not going to hurt them in a way that would hurt us if it was a quid pro quo. But do you think the guys in the State Department understood what would happen to our junk bond market when we crush Putin? I would be shocked if they saw that.
Chris Martenson: I don’t think they think in economic terms or energy terms or environmental terms. I don’t think any of that stuff really fits on their radar screens. I believe they are just purely political animals. And I see that written out again and again and again. Everything the justice department has and has not done. Everything the State Department has and has not done. Everything that Obama proposes and fails to propose. None of those make sense to me on economic terms, energy terms, environment terms, none of that. They are all just political maneuvers. But that’s how I see it.
David Collum: I think that’s correct. And I also think one of the things we witnessed this year was that Obama – you know I gave Obama a pass for a few years. I’m not a liberal democrat, so. I was not a Bush fan either and so I gave him a pass. I thought okay so liberals do have ideas that trump conservative ideas in some areas. So I was open to the idea. I think Obama is a bit of a sociopath and I have really turned on him pretty hard at this point. And I don’t think he’s up to the task of going against Putin. So meanwhile Obama is throwing his rhetoric that he thinks is so clever at Putin. And Putin is this incredibly tough ex KGB guy; he is not going to care about that. He doesn’t care what people think. And by the way his popularity rankings in Russia are probably five multiples of Obama’s here. Right? He is a popular guy in Russia. You’re not going to pressure him. They’ll eat less food. They’ll heat their houses less. They’ll take the beatings.
Chris Martenson: Absolutely. So I do think that I share with you this idea that Russia is a tough adversary. It is not as simple as oh, calling in some NATO air strikes and getting rid of Kaddafi and you know, feeling flush from that and running a little revolution in Egypt and getting somebody tossed out there and you know, doing a little crush action on Syria and whatever we have done in Iraq. I think the State Department had sort of gotten ahead of itself in believing that it really could go undertake regime change wherever it wanted to. And I think that’s what they’re after in Russia. And Putin has said as much, right? He has said they are going for regime change here too. Good luck with that; it’s not going to happen.
David Collum: They think they are going to get one. Putin is done. That’s what I don’t understand. So this whole battle with Russia looks to me like we just didn’t get – you know, why do I think… I don’t know. There was a guy named Meerscheimer who wrote an article that was just truly brilliant. It was brought to my attention. I have been ___[00:12:33] what Meerscheimer said was we wanted Ukraine to be more friendly to our needs, right? And I think at times our needs are kind of whimsical needs. This is not some sort of national security need; this is just what we want. And what we failed to calculate is Russia had to have Ukraine for his needs. Ours were wishes. His were needs. You’re not going to win that one, right? This is a losing fight. So we knock over a regime. We create a vacuum. Russians come running in in unmarked vehicles. I think we must have known that would happen but I don’t know what our end game was. It really seemed like a foolish thing. I am not going to criticize Putin for this. I get Putin’s response. He’s a mean guy. I don’t doubt that. But we elicited his response this time, in my opinion. I think history is going to be pretty punishing to our team on this one.
Chris Martenson: Well, I knew it was bad when both Gorbachav and Kissinger within two days of each other came out of their caves. Kissinger at least lives in a cave, I think, and said "hey, uh, let me give you a little diplomatic tip here." Kissinger basically said "if you don’t have the end in sight, you really shouldn’t be doing what you’re doing." Like he basically said exactly what you said, which is "I don’t think you guys know what you’re doing here." Because nobody can detect what the end game is. So massive uncertainty. Nobody seems to know what the game is. That is why I think it is like 1911. Nobody can explain — and I have talked to people who are very intelligent people who have been in the business, who have been in government and I have been asking the same question, which is "what is our game plan with Russia?" And nobody can say. Even when we say "oh we have put all these sanctions on Russia so that they will do something different" and at best nobody can tell me what the list is. Exactly what would they do differently?
And it was hysterical when they had that G20 meeting down in Brisbane and Harper comes up from Canada and says to Putin, "hey, you really need to get your troops out of Ukraine." And Putin is like "I don’t have any troops in Ukraine." And in this day and age with satellites that if you can’t show a picture and say "there are your troops. See them? See all those troops?" No one can produce the picture so there is — still at the level of the prime minister of Canada is going fact free in a confrontational way with another super power without any data is astonishing to me.
That to me is a larger metaphor for what I’m seeing in the markets as well. There is a lot of fact free sort of positioning and maneuvering going on. I have been extraordinarily bearish on these markets for a while. Not because I think they are necessarily going to go down. Although, I think they ought to in a lot of cases. But because they no longer represent reality to me in any way, shape or form.
David Collum: So the other answer to your original question is what do I pay attention to – I think I spent the majority of ATP in my brain worrying about the bond markets this year. It just, we are hitting multi-century lows and yields which as your readers already know means the prices of the bonds are at multi-century highs. And I actually put a list of yields by country in my review and they’re ridiculous. You are looking at these long duration bonds that are returning nothing. You've got currency risk, you've got default risk. I mean we are talking Spain at 3%, this is just crazy time.
Chris Martenson: And Italy at 2% on the 10 year.
David Collum: Yeah. Those are not investors. Those are either spectators or just pure sovereign interventions, and probably a combination. So the bond market I watched all year. And the best-case scenario — this is the horrifying part — the best case scenario is the market never collapses and you don’t get squat for yield forever. How is that possibly good? And then for the bond owners it is much worse from there, right? The bond owners can lose all of their principal and they can really get crushed. And it is not a retrievable crushing. If they get crushed that principal is gone. For the bond buyers, that would be the best case scenario. You and I probably we would love to see interest rates soar at some point and then we can scoop up the debris. But they are just going to resist that at all costs. So we have pulled all of our returns coming forward. So there is no return left. By the way, since equities are priced to the sky, according to the Case Schiller index, and bonds are priced out of the solar system, if we do have a bad event where things start dropping they are going to go simultaneously, unlike 2009 where bonds covered for stocks. You are going to have a simultaneous paroxysm, to use a Stockman term. And it is going to be so bad.
Chris Martenson: A theme we use at Peak Prosperity is this idea of "from the outside in," meaning that when markets start to go, they go at the periphery first. So in the bond market the periphery are these junk bonds, which I couldn't believe they have traded for over a year with either a four handle or a five handle, right? Four to five percent for junk bonds, right? And so as you mentioned before, this junk bond market is now having a little bit of a "come to Jesus" moment, right? It’s like "uh-oh, risk actually exists" and I will tell you that the 17% of junk bonds, which is a very large number, it is over $100 billion that are associated with the shale drillers is very much exposed to pure default risk at this point in time. And very, very rapidly unless they get access to being able to roll those junk bonds back over again. Every time those bonds come due you are going to see a default going forward unless oil prices rapidly tick up. But nobody had a sense of risk anymore. There was no risk. It was like it had been completely taken away. Central Banks through coordinated printing have apparently completely eliminated risk. That has to be a macro theme for 2014 that I think we'll look back on and go "wow, what were we thinking?"
David Collum: Yeah, and for several years now the term "risk" has been used synonymously with "return." And that is just is surreal to me. The phrase that I have been using off and on for quite a while now is that I think people seeking risk are eventually going to find it. And when put in that way you go "oh my God I haven’t thought of it quite like that." So when they talk about people going out on the risk curve, that is like walking the gang plank, right? And so they will find risk. And then they’re going to discover that it is called "risk" for a perfectly good reason and the bond guys are going to discover that it was a bond and it was so big that they couldn’t see it. I call it a caldera. I actually googled that. Best I can tell, I own that term. I am not sure it is that clever, but I was pleased. It's so big you can't even see the bulge. It’s everywhere. It is pervasive, but it is – it will go away. We know that. There is nothing in the history of markets that says when things get that crazy that they then stay crazy forever, right? It never happens because forever is too long.
Chris Martenson: We’re humans so we’re ruled by narratives. The main narrative that the Wall Street Journal, the Oval Office the CNBC, the whole machinery has been trying to run this one narrative which is "hey look, the economy is doing great. It has really recovered. We've got nice auto sales again." So that is one narrative. And then there is another narrative which is becoming increasingly obvious which is that well, we have this extraordinary wealth gap that is really just courtesy of the central bank printing money and preferentially shoving it into the financial sphere, which drives up financial assets. So the owners of financial assets preferentially become rich. It is not a mysterious process, except for Janet Yellen who came out and lectured us all and said "oh, are you experiencing a wealth gap? Well, you need to be a better entrepreneur. You should probably spend more on your kids and next time you should have wealthy parents." Thank you, Janet, for that little discourse of blame the victim. Love it. Where did you learn that? It was fantastic. Right?
But for 99% of the population of the United States, I think elsewhere as well, what I see is that the pie is no longer expanding like it used to, but the people who have access to the pie first, the 1% or .1%, they don’t know anything other than to keep taking more and more and more. So when the pie is not expanding and you have a small slice that is grabbing more and more and more of it, there is just less and less for everybody else. Wander over to statistics and you find things like food stamp usage and average hours worked and part-time jobs versus full-time jobs — all of those statistics make sense in a narrative that says the economy isn’t growing. It just isn’t. And what parts are there are being increasingly taken by this smaller and smaller cadre of people and that’s a theme that I think is starting to emerge here at the end of 2014.
David Collum: Well, it produces an angry bunch of characters. The other thing is you know, people like to say this is – there is valuation issues here, but it is not like the .com era. There actually is a fundamental difference that people are missing here and that is – and I talked – I remember talking to my dad about this. I said you know, all of these crazy companies that are being overbid, when this mess is over, and it hadn’t started yet, but we were convinced it would be over at some point. We will at least have a bunch of new technologies to show for the pain and suffering of getting overvalued and malinvestments. So we built out vast fiber optic lines we didn’t need immediately and we overpaid and stuff, but at least we know have fiber optic lines.
The current wealth disparity, the one that exists, it is not about the Michael Bells and the Bill Gates and the various tech guys, bio tech guys who are changing the world. It is pure — the rentier class, the pure moving of money class. Even the tech guys I don’t think are getting any richer. You can say "oh yea, what about Twitter?" Somehow Twitter just doesn’t feel like a smoke stack industry to me. I love it, but I don’t think that it’s – I don’t think that it’s so great. It should be a niche. It shouldn’t be the source of growth of industry. It doesn’t put more food on tables. It doesn’t do any of that.
And that wealth disparity is now so grand that we are in a guilded age now where you have these "let them eat cake crowd" and I think that is where – that ultimately there is going to be social unrest. And boy I spent a lot of time on Ferguson and Bundy Ranch and stuff like that too. I think Ferguson and Bundy Ranch are foreshadowing of major social upheavals going forward. By the way, I give credit to the Occupy Wall Street crowd. I think Ferguson stems from Occupy Wall Street and that the Occupy Wall Street guys were the first to figure out how to use social media to try to disrupt society enough to get their attention. And so I think – now you've got a situation where now imagine how many times over the following years some person is going to get abused by the police, right? Unimaginable number of times, right? That’s another theme.
But now you've got this mechanism where some kid gets wacked by the police — this has been happening steadily. But now all of a sudden you got 1,000 grumpy people they can go shut down the George Washington Bridge. They can go shut down infrastructure. They now can feel the power. These guys say "we've got sharp pitchforks now." It is not going to go away. We are going to get protests that are stupid. I’m not sure which ones are smart, which ones are dumb but we’re going to get them relentlessly because when someone is unempowered and then you give the this power, it is intoxicating too. I'm not saying it is right or wrong. I am just saying it is going to happen I think.
Chris Martenson: This is a general theme as the social mood darkens. We have seen anti austerity riots in Brussels. We have seen the mass protests in Hong Kong, which were for a greater, more representative form of democracy. We have seen the protests in Ferguson against unrestrained police violence and lack of accountability. All of those actually fit under a theme for me, which is again back to this idea that the pie just isn’t growing fast enough for both the 1% to take everything they feel they are entitled to and have enough for everybody else to feel like they got a piece. All of these are just representations of feeling like there is some inequity in the system. Whether it is social inequity, justice inequity or economic inequity, that is the theme. It makes sense. And so I think you’re right. I think as the people start to feel – it becomes okay to talk about that inequity, then you get sort of a dam burst. People come roaring out going "yeah, I have been a little grieved about this. I can talk about that now?" And I don’t know if the protests are useful or helpful or not, but I agree that Occupy Wall Street, you know, they very quietly had to put up with a whole lot of police abuse and agent provocateurs and having their faces scanned and their cell phones swept electronically and had records made of them. They had to go through all of that, right? Mostly under the radar. It took a while for the press to catch on and go, "hey, that is kind of goofy stuff you've got going on there."
David Collum: Yeah. So I spend a lot of time channeling Matt Tiabin, Rodney Belko’s books that they wrote on sort of how the lower class is treated by the police. And Belko talking about the militarization of the police. By the way the Belko book The Militarization… what’s it called? Anyway, Rodney Belko look it up something about the militarization of the cops, is such a disturbing book because he tells the story of the increase in the military flavor of the police and it just doesn’t feel like hyperbole. It feels like he is being factual and controlled. And it’s terrifying. And a guy who I think needs a hat tip, and maybe you should have him on as an interview, Michael Krieger. He used to blog about economics. He has just gone totally social. Totally civil liberties. I think it is like he is being drawn by the tractor beam here. He has been out there just screaming. And fortunately, Zero Hedge picks up on him and posts his stuff so it gets some legs. I would like to throw a big heads up to read Michael Krieger’s Liberty Blitz because he is out there fighting this fight. Best I know out there doing this.
Chris Martenson: Yup. I have read his stuff. It is very good. It is almost like there is an outrage du’jour. Every day there is something crazy. Whether it was Citibank sneaking in a provision into the CRomnibus spending bill to put American taxpayers on the hook for whatever derivative bets the banks can scheme up. You know it is just crazy every day there is a little insult like that and it is almost too fast to keep up with at this point. And so there is a little – I have a sense of just sitting back and watching this and going alright, there is very little positive to sort of cling to here politically in my own country that I can believe in. So probably just best to watch this.
And so let me sneak back to this idea of the narrative. So one of the narratives is with equity prices being crammed all time new highs, I think we had 54 separate incidents of hitting new highs in the year 2014, which by the way I think 1929 was the last year we had so many new highs in a single year. And that should have really been very, very helpful to anybody with a portfolio. One of the mysteries to me, Dave, is the state and municipal pension systems — every time I crack open the covers and look into those I am expecting to see them saying, "oh, we are very healthy now. We are back to fully funded" or something and that is just not the case. And what is the explanation for that?
David Collum: I actually think that is logical because what happens is after they crushed their portfolios in ’09 I think a reasonable individual would say, "you got to go back to acting like a pension fund. You got to go back to acting conservative in a proper fiduciary person and quit doing this crazy derivatives garbage you are doing." The problem is they end up doing it at the bottom. I think to say "oh, you just lost all of our money, now you have to speculate some more" is less rational. So the idea that they sell at the bottom, that is not foolishness. That almost had to happen I think. Someone had to step in and say "stop being crazy." So then no one saw the Fed coming at the level that they showed up, right? You and I remember when they bailed out — when they dumped $30 billion, what was it, Bear Sterns. It took my breath away. "$30 billion, are you kidding?" You can find $30 billion under the cushions now. That is such a tiny quantity of money compared to what they actually ended up doing. I don’t think anyone would have believed they'd do that. So to say that a person was stupid or irrational for not getting on this train — that doesn’t make sense to me. There are people who got on. We will see if five years from now they are still singing about it because at some point I think they are going to get crushed. Hussmann points out a truism which is a "duh" moment, but he points out, he says "look, you think you can get out of there that’s fine. Someone will own these assets by definition all the way back down." So maybe you won't be the one holding them, but someone will and that multi trillion dollar extravaganza to the down side is going to crush people again.
I think people are out of money. I think they don’t have the resources to jump back on. And then you and I we watch this bull market go and it was robotically driven, right? This thing just marked up you can put a ruler to it. It was as though there was an algorithm that said "okay don’t let it go below X, make sure it goes up to Y." It is as though it was formulaically programmed into the markets. And you know, the Federal Reserve governors essentially said that in many, many different speeches. They essentially said "we are focusing on asset prices and they will help bail us out of this mess, so things are working."
Chris Martenson: Well, it is very interesting – I noted that you had a couple of interesting statistics on that whole pension thing where you know, the message if I can get one out to people — which by the way the Pension Benefit Guaranty Corps is just now struggling and Congress is weighing this idea of "oh, maybe we should just, all those people whose pensions were guaranteed, maybe we should force them to take less money." That is how they are going to shore up. Congress said we have to shore up this fund by making these people not receive what they were promised to receive. And it is a tragedy because a lot of cases what happened was the companies that end up in receivership at the Pension Benefit Guaranty Corps were raided by LBL buyout firms and other places where they just basically raided everything and then tossed the pension over to the public side. Now the public is saying "I can’t afford it." But you had some interesting stats in there. You noted that just the Chicago Fireman’s pension fund—just the fireman, we are only talking fireman—is $50,000 of liability per Chicago household. And you know that it is probably higher for households that are actually net payers of taxes. The message that needs to get across there is that won’t be paid, firemen from Chicago. It can’t be. Not at that level.
David Collum: Yeah the only way to get out of those at a local level is if someone bails them out at a national level. And that just will exacerbate the national situation. But I could imagine that. Right? You can imagine some omnibus bill that has a Chicago pension bailout jammed in on December 24th at 11:30 pm, right? I can’t say for sure any one item will necessarily be a fatality, because these things happen. But I don’t know — you can’t do it for everything.
But this year was very tame for the munis. The municipalities and states again sort of on a monetary respirator survived this year. I didn’t write too much about them because we are still waiting. And so why write about something that is just treading water? At some point that will become a hot topic. Last year interestingly enough I wrote very little about Asia and said "Asia looks like a continent waiting for something to happen." Boy that was about as prophetic a statement as I can make. That was really spectacular actually. So you know, different years have different themes.
This year seemed to be—here is the interesting thing about this year's theme is that, since it was so geopolitical — there were market movements, but it seemed geopolitical. What made it a little challenging to write about this year is because that stuff the mainstream press does a better job at. And so some years when I am writing I am talking about stuff which I said mainstream press is AWOL. They are not talking about this at all. This year the problems — I don’t think the mainstream press gets it right necessarily, but at least they were on it. They were on Ferguson. They were on Russia. They were on these topics. And they were on Ebola. So in some sense this year was a little bit more rehashing what actually happened and a little bit less about saying "you idiots didn’t get it right." There is still plenty of folly out there that got missed, but a little less than usual.
Chris Martenson: Alright, well let’s turn now to one of my favorite topics which is this idea of market manipulation. The conversation goes a little off the rails sometimes because I’ll have people accuse me of being a conspiracy theorist as if that has to shut everything down. 2014 was an important year for learning about all sorts of market manipulations. Of course we have the overt ones that they tell us about. The Fed is going to manipulate the price of money. It is going to give us a zero interest rate policy. These are all things that the Fed does quite openly. Less openly, we discovered about — what did we discover this year? We discovered that LIBOR London Interbank Offer Rate, that which is the main rate, which 10s of trillions dollars of derivatives and loans are actually measured against and set against, that that itself was manipulated. And by the way, this took real conspiracies, right? Because the way they get the LIBOR is they take eight banks, they also get a rate and then they take the average from the middle four. So the only way they can move that rate is if the middle four are all moving that rate together. So that is a conspiracy. Right? We found out about that. It is probably one of the biggest things you can imagine given the impact it has and they were doing it for years and years and years. The United States basically punted on any sort of action against those people. In Europe they were going and actually I think there will be a few criminal actions in there.
So we had LIBOR, we had foreign currency manipulation, we had rigging in the London Fix in the gold market, you name it. So market manipulations happen a lot. I’ll tell you what, Dave, I think I see market manipulation almost every single day in the tape. And by manipulation I mean when some entities come in and dump thousands and thousands and thousands of whatever they’re doing, shares, options, contracts within a few milliseconds in a way to move price. And they’ll do it both directions either up or down. But when I see coordinated efforts to destroy either the bid stack or the ask stack I say that is manipulation. Somebody was trading with an intention of moving the price to make money. I see it every day.
David Collum: Yeah. First on the question of conspiracy theory — I talk about that every year. This year I get pretty militant. I say "you call me a conspiracy theorist, you are simply trying to shut down a reasonable discussion amongst people who are trying to figure out — they are taking a group of characters who are known to be pathological liars and they are accusing them of lying, right? This is not that odd. What we are trying to do is figure out where and how." And the term "conspiracy theorist" is designed to stop that discussion because it is like calling you a pedophile or something. And I get mad at that. So I say to people "go ahead and call me a conspiracy theorist, but don’t be surprised if I smack you in the face." I mean it just irritates me to no end on that topic. So, yes, I am a conspiracy theorist. I think men and women of wealth and power can conspire and I think part of our job is to figure out where they are doing it. Part of our job as a society is to get them and hang them from the nearest tree and that’s the big failure. That is where Holder completely blew it. Obama completely blew it. So it is a risk-free trade to conspire to rig the markets. And sometimes it might be those guys, but let’s say it is just big money gaming the system. You know, sort of Jesse Livermore kind of gaming, but with huge money.
There is no consequence to that, even if it’s not a sovereign state trying to move the markets to achieve some political goal, which I do think they do. But also the gamers, the guys who can just get stinking rich off the markets saying "well geez, that is fantastic. We can get in this game too. We can do it too. We can sell $3 billion worth of gold at 3:00 in the morning and drive the price down." I don’t exactly know how they do it, but they know how to then scoop up the pieces, cover their shorts and do it again the next morning. I don’t know how they do it, but it appears to be done, yes. And again, no one will ever go to jail unless you happen to be some small time patsy and they throw you under the bus, but they are not going to get the big guys for doing this. I would love to see some discovery in court.
Chris Martenson: It would be great to actually have a real investigation where we could look at real data and see what is happening. To me, all we would have to do is take one of those mysterious 3 am dumps and open the tape up and say "who was it?" Let’s see was this really a legitimate — was this really 4,000 separate market participants all deciding that was the moment or was there one entity? And if that one entity was involved can we see the rest of the trades that entity was engaged in because they probably did something like they were short the corresponding equities that sold, bought some puts and then went into the futures market and did their business. And made so much money on the other parts of those trades that whatever they lost in having to cover their shorts in this side more than made up for it. That’s just –that’s not what trading is supposed to be about, but I see it happening all of the time.
David Collum: It’s the Belgians [laughter]. For those that don’t get that joke the Belgians supposedly spent 40% of GDP buying up treasuries. That was comical. And by the way, Belgium itself is a complete basket case. So 40% of their GDP doesn’t buy up squat. They don’t have the money. They have got their own problems. So clearly someone was using Belgium to do it.
It happens all the time. You know, you can rig the markets temporarily but they will eventually regress to and eventually—for those mathematically not very gifted—through the mean, mandatorily through the mean because if you don’t go through it you don’t maintain the mean. And so when we finally do regress to and through the mean it is just going to be a blood bath because we are so far from equilibrium. And in chemistry when you are far from equilibrium you blow up your lab. That’s when you get explosions and things like that. That is what a forest fire is is far from equilibrium and you get this cathartic purging event because you become very shock sensitive. And so we will get there. I don’t know if we will do a 20 year rot or a 10 minute blood bath, who knows, but there will be a purge and it will happen. And people will say "I can’t believe we did this again."
Chris Martenson: It will be the third time in 15 years that we have fallen under the spell of the Fed's serial bubble blowing act and it didn’t work out great the first few times, but this time I am very worried about it and I will tell you why. It is because of this bond cauldron that you have described. Everything is priced to perfection so there is really nowhere to hide out. If you had a housing bubble, and that starts to blow up, maybe you can go and hide out for a little while over in treasuries, or there is a place to go. Or if you don’t like the United States maybe you can go to Japan. Dave, I can’t find any safe asset classes at this point. I can’t find any safe regions at this point. It seems to me like everybody is being insane. But this is a trader that I studied under for a long time, he used to say bubbles always have a final blow off phase. You have to have that last good surge to the top, which sucks the last molecules of oxygen out and then the whole thing just sort of keels over.
This bubble is really one for the ages. This is not the sub prime crisis, the housing bubble, tech bubble in 2000 all of that stuff to me, Dave, are just symptoms of a larger credit bubble that we have been carefully building since the '70s, early '80s, which was this whole idea that collectively, but particularly at the sovereign level, we could perpetually increase our debts at a faster rate than our incomes. And now you look at global growth on GDP and nominal growth is nowhere near supportive of the rates of debt growth that we have had over the last 10 years. And yet, we continue to grow the debts because the people in charge don’t know what else to do. They just don’t. They are bereft of ideas. It is like whenever Paul Krugman opens his mouth I know exactly what he is going to say because he just doesn’t have any other ideas. Him being sort of I think a key representative of the Keynesian approach, which is just that we can fix everything by printing more money and getting people into more debt. And if people would just borrow more we all have aggregate demand and it would be great. They just don’t understand where things are today economically, but let alone with respect to energy and other things going on. I really feel sometimes like am caught in an insane asylum.
David Collum: Krugman is almost a charicature of the Keynesians. It’s not even fair to the Keynesians to call him a Keynesian. You know, there was this funny, funny QE in Japan too; it was fantastic. So Japan comes out and says "we're going to boost up the equity markets." They are very overt abut that. And it is this idea that somehow if you can print money and let’s say boost the value of all of your houses up and then declare yourself richer. And there was no net gain in productive capacity and no net gain of net worth in any of any measurably thing. It is just a pricetag change. I think our biggest problem — and I have talked about this off and on through the years — is that we compensated people over the years with promises. So instead of saying look — what happens is if you pay someone with cash, if it is inflationary there is this adjustment that occurs. If you compensate someone with promises what it does is it throws the inflation into a holding pattern. So someone says "oh I am now worth a fortune because I have these promises that have been made to me." And they can be municipal pension funds that are underfunded now. They could be assets in your retirement account that are overpriced so you don’t really own that much value.
And these promises are kind of inflation with a lag. And when the boomers start trying to cash out we are going to either see the inflation show up or we are going to see the deflation.
I have done a bit of a switch. I used to be a diehard inflationist thinking a determined central banker can trigger inflation if they want. And I think one of the things I see is becoming this – you know the Austrians got killed this year. "Where is the inflation that you promised us?" And "you guys are just idiots." Austrians also do believe in deflation. And the deflation occurs when there is really not enough to go around. And there’s not. There are promises for which there are no hard assets to back them. So we could have a deflation which would be a form of default.
By the way, the other thing we haven’t talked about is bail ins. Last year Cypress was the beta test. I think I stated explicitly last year that Cypress was the most important story of the year. They confiscated bank accounts recklessly. Now there is all sorts of legislation being put into place all over the world saying that we are not going to make taxpayers bail out the banks. We are going to make the creditors bail out the banks. Everyone says "oh hooray hooray thank god I’m not going to bail out the banks." What the average person has not a clue is they are a creditor. Their deposit is a creditor. And therefore what they are saying is "we are not going to bail out the banks, we are going to have a bank default." That’s what they’re saying. And you’re going to lose your money. So when you say no place to hide there isn't.
So my advice to people is spread your assets around a lot of different financial institutions. If you are fortunate enough to be well off, keep your balances below the promised cut offs and be aware that they can change. And change the style of institution. Don’t just use TBTFs. Don’t just use small, local banks. Don’t just use brokerages. I have a lot of different types of accounts with money in it and I’m still nervous.
And so that gets us back to this is why they gold fans buy physical gold because that is the only place you can store money. Well you can buy a big house. That can go down in value, but the house exists at least. Yeah, I think a big default could take people out and away and you will be told "oh this is an emergency there was nothing we could do" but don’t say you weren’t warned. It could very well come.
Chris Martenson: Well this is a theme that we have been running at Peak Prosperity all year is talking about this wealth transfer that is going to happen. First of all, there is already a wealth transfer under way, which is that we live in a regime of financial repression which has just a few key components. One is to force people into negative real interest rates, right? So you earn 0% on your bank deposits, which are actually not a deposit, but an unsecured loan to an institution, which you just pointed out. So you are getting 0% on your unsecured loan to this institution and your inflation is obviously higher than 0, but they just present it like "oh, well that is just too bad. Inflation is higher than your interest I guess you are just losing purchasing power" as if it is a mysterious thing. But it gets transferred. That purchasing power gets transferred. It is an accounting identity. It doesn’t just disappear. The only question you have to ask is: who is getting it? Well that is easy. We can wander over to the statistics and find out who is getting stinking rich today and who is not and that tells you who is transferring to whom.
And then the other part of this program which is really essential is capital controls. So we have soft capital controls all over the place with the FATCA act preventing – go try and open a – you say spread your assets around – trying to open an account now as an American overseas is very difficult if not impossible in many jurisdictions because the banks are like "you are not worth it dude. Forget about it."
And then the last piece is to make sure the price of gold doesn’t give people a safe place that they can safely go to. You have to put people in a corral and just force them into your financial repression regime. And that is the thing they have been running. And it is an active program. I call it "throw granny under the bus." It is really stealing from everybody. But the thing that is just really difficult about this for me, Dave, is that it is completely obvious that the people who are benefitting from this, which is the government that can go ahead and overspend, and the banks who have first access to that capital — they are both making out like bandits and this is a wealth redistribution.
David Collum: We all are going to lose in the end. There are not a lot of winners when it finally comes to a head. And Hussman had a very clever phrase – Hussman is getting crushed, right? By any measure Hussman is getting crushed. I think he is dead right and he is just being eviscerated because the prices say he is wrong, right?
Chris Martenson: Right.
David Collum: He said you can either look like an idiot before the crash or after the crash. So right now we are looking like idiots. But I would rather look like an idiot now than later. And anyone listening to this who is a bull is just going to think we are a couple of idiots. That’s a guaranty.
Chris Martenson: Because prices are always right, Dave. You know that, right?
David Collum: [Laughter] I know. Price discovery has also been a theme. I post on Twitter a lot. The market goes up 100 points and sits there flat all day long and I’ll post a picture of that on Twitter and I will say "I got to love that price discovery." And every day almost I find a plot of something that looks like somebody just parked it and there is a square root function – the market dips for the first half hour then ramps up and then parks and yeah. This one, it just it is going to make us suffer and you got to white-knuckle it. I am going to have no trouble not jumping in. You know, if they are waiting for me to get in the pool before they throw in the toaster oven, it is not going to happen because the one thing I also know is that – let’s say I was a fool for not buying into this market. I now know that I am a fool buying into this market because it is now every last possible dollar of gain has been squeezed out of prospective gain, right? So now I can’t get in and I know I can’t get in. So there is nothing that is going to get me to say "I better buy."
Chris Martenson: I tell you there is something that would get me to do it. That is when the Fed decides it has had enough of shoveling money into one end of the pig and it decides to shovel money into the other end. And that would be in the form of — let’s say they conspire or work with the Federal government to create a way to get fresh printed Federal Reserve dollars into the hands of people. So this might look like a tax rebate. Like I might wake up in April 2015 and they might say "oh, guess what, no taxes this year and we are giving you back last year’s taxes." That’s when I run. I do not walk. I run and I spend every dollar I have on something. It might be stocks. It might be real estate. It might be more gold. It might be Stradivarius violins. It won’t matter. I’m just going to buy stuff. That to me is the final act in the story.
David Collum: ____[00:52:37] inflation right out onto the top of fold of the newspaper then. But I’m not – I don’t think I’ll buy equities under those conditions. I think I would still stay in some sort of hard asset.
Chris Martenson: Me too, probably.
David Collum: You conceivably could go after maybe something like Wal-Mart, right? I could convince myself maybe a little. To commit right? You know and I know to make serious money in some idea you have to commit to it. And I would just never have the heart to go with that one aggressively. If you think about what it takes to get 10 or 15% of your portfolio committed in one direction, again, if you’re broke it only takes 10 or $15 but if you have amassed reasonable wealth over the years it is a stunning amount of money to get committed in the new direction. You've got to believe almost at a religious level that you are right. That one would not convince me is the problem. .
Chris Martenson: Alright. So here we are. We are winding up 2014. 2015, as you look forward, what are you going to be tracking most closely?
David Collum: I think the energy story and all its consequences — it is unimaginable to me that is not going to play out through ’15. I think, I cite, I don’t have the link to it anymore, but I read the House of Commons met 14 days before World War I and the notes from those meeting, the minutes from the meeting, have not a single reference to military risk. So it is immediately clear to me on that sort of metaphor that if something really, really calamitous kicks into gear we are not going to get a lot of warning. That is why pushing Putin around seems so, so stupid to me because he will lash out. And we will get some nasty stuff if you corner Putin. You do not want to corner Putin I think. And so that could be a big player. At some point when the bond market goes it will just be sit back and try to stay out of the splash zone completely if you can. And again what do I do? I've got a bank account with ungodly sums of money. I still haven’t moved it. I still haven’t diversified it enough. And it could get crushed. It could get crushed. I would be better off than the next guy, but not – I won’t be happy. I still haven’t figured it out completely.
Chris Martenson: Yeah, that is our other macro theme in the wealth transfer is that first there is this sort of slow grinding transfer that is happening because of the financial repression, but we know that there is this massive imbalance between the putative stated current value of the financial assets and the size of the real economy. And eventually those two things have to come back into focus. And they always do. And we will call it a great wealth transfer again. This one will be much more aggressive, much more rapid. It is basically like those people who have their pensions now under the PBGC. They will wake up one day and they'll say, "oh by the way you have 50% less than you thought. We have to cut your pensions in half, sorry." And it just happens and people are like "well where did it go?" That is what I see as the macro theme is that there is a big "where did it go" moment coming. And depending on how you are positioned there will be relative greater and lesser losers in that story. But first you have to know what that story is.
David Collum: Yeah, I’m going to go buy some of that $16 million balloon art and hide in there, I think. Yeah, it is what makes gold bugs gold bugs I think. It is stupid to be loaded up on something as volatile as gold, but I’m having trouble finding other ideas. This year, by the way, I bought gold in ’99 through brokerage accounts, CEF. And I bought it steadily and bought physical sort of handful of ounces at a time until around 2004. And then my position just was too big through a combination of appreciation and buying. And I didn’t touch it again. I didn’t sell any, but I didn’t buy anymore. It just got bigger and bigger and bigger. Then the rout occurred that caused you and I and others to suffer in serious ways. I am back in the market this year and I haven’t been rewarded yet, but I have been back in the market and only buying physical sovereign coins. And for your readers, I pay cash. I get a receipt and I pay cash. I will let them fill in the gap as to why.
There are actually people out there getting their bank accounts confiscated because the Feds decide that they are up to no good. Forbes did a great article that showed these people are not getting their money back. I’m nervous even about that. I am really worried about the confiscation story. I don’t know how to duck it when the Jack boots show up you aren’t going to be able to hang onto much.
Chris Martenson: Well, yeah. So that’s a whole other topic. Maybe I’ll get Michael Krieger on to talk about that. Civil forfeiture, which is just an absolute complete shredding of every possible thing that I understood about how property rights and laws are supposed to work. It is just a disgusting, disgusting display of just it is just – it is stealing. It is just flat out stealing.
David Collum: Complete and utter theft at the point of a gun.
Chris Martenson: Yeah. And call that what you will. Alright, well I’m looking for – I am going to be tracking the energy story. To me that is the – not just in terms of price, but the amount of energy we got. Oh, such a story coming and a lot hinges on how long oil stays down and in this part of the story the Fed discovers it can’t print oil, you know, and other central banks. That is really going to be it. I do think that somewhere in the next year or two there is this reckoning coming. I do believe that — my model is that we the collective status quo defending authorities are going to do everything possible to prevent it from coming. They will do everything. So when it comes it is going to overwhelm them. It is going to be a rather sudden rapid event. I think you are either positioned for it or you’re not. Those are your choices because it will be very hard to maneuver once it is happening I think.
David Collum: And don’t be surprised if the event is hidden under the guise of some other geo political events. It is not going to just happen.
Chris Martenson: Oh, I know. Yeah.
David Collum: There is going to be some event which says "hey, don’t blame us. It was the Russians. Don’t blame us; it was the Iranians. Don’t blame us, it was someone else. That is why your money is gone. This is a national security problem. This is a save American problem. Your money is gone because you are a patriot." It will be some malarkey like that. That is why I think the correlation of war and civil unrest and stuff — that is why it occurs because war covers up. The end of World War II —I have said this several times —at the end of World War II there was rubble everywhere and there were people sitting in what used to be their houses. But what is also true is most of the debts of Europe got erased and no one complained because they were trying to figure out where their next meal was. I am not saying they fought World War II to erase debts, but it does correlate.
Chris Martenson: Yes. It happens. So with that, Dave, thank you so much for your time and for writing the excellent "Year in Review." And we will do this again.
David Collum: You bet.