Grant Williams: Why The Smart Money Is So Nervous Now
If you drop anybody into any momentous period in history, it’s really tough to perceive it at the time. It’s only when you look back on these things with the benefit of hindsight that you really see how historic they really are. But for many people right now who can forget the narrative and can forget what they're being told by various interested parties, if you can stand back far enough and take a practical look at what’s happening, I think it’s much easier to see certainly how far from normality things are today.
So believes, Grant Williams, portfolio and strategy advisor for Vulpes Investment Management, and proprietor of the economic blog Things That Make You Go Hmmm.
In this weeks' podcast, Grant and Chris discuss the growing anxiety they see among experienced investors. More and more, those who have made long, successful careers in money management are realizing that the system has morphed into a strange beast they no longer recognize, nor trust. Fear of epic, perhaps historic, dislocations in price when the current market reverses is causing more and more of the "smart money" to sell out now and seek safe harbor:
We don’t know how it will end, but something has to give. It’s a question of what it will be. Because when you start playing with the forces of nature you can suppress them for a while, but they will eventually overwhelm you. We’ve seen this constantly throughout history. I’m a big reader of and a big follower of history because I think the answers to everything lie in there somewhere if you pay attention to the signals.
So, for example, the central banks interfering with the natural price of capital by suppressing interest rates and fixing somewhere where they really shouldn’t be you at that point, have interfered with every single transaction on the face of the planet. And so if you interfere with every transaction that happens on any given day anywhere in the world you are going to get transactions that are not natural. And if they’re not natural at some point they will revert to where they ought to be and I think we’re starting to see that. We saw that in Switzerland, we saw the natural forces reassert themselves once that peg was removed, and it was incredibly violent. And it moved the idea of hyper-volatility back into the public conscious.
Imagine what happens when the Fed does the same thing and says “Hey you know what we promised you for the last six years? Well we can’t fight this thing forever. We’re out”. Imagine the volatility that’s going to unleash. And at some point, this has to happen. Sure, plenty of people can make hay while we go along and they can close their eyes to what they may instinctively know is true and they can buy the markets and they can chase the trend and they can follow these things up. But at some point, it’s going to turn around and bite them. When that happens, if you’re not prepared for it or you’re still fully invested, there will be no way out. Not in the time frame you need and not at the prices you want.
What we risk is a switch in the market, a real switch -- which is something that obviously the central banks and governments of the world are desperately trying to avoid happening. When that occurs, we will see how this new world works in the opposite direction. And it’s going to work similar, except for the fact that you’re going to have a bunch of people looking to sell alongside the robots. And when markets are going up it’s very, very easy to product more stock. People can issue more shares, there’s always new stock if you want to buy it. But if instead you want to sell stock, you need a bid -- and this is something people often forget: sometimes there are no bids. And where there are no bids, you can’t sell. The first bid you might see may be down 20, 30, 40%. Guess what? The robots may well start hitting those; so you’re going to see incredible dislocations in markets once the wind changes direction and markets head the other way.
A tremendous number of people talk to me about how the financial system is broken -- and they mean that in the worst possible way, in that this doesn’t work anymore. And when we do get this resumption of natural forces, people are genuinely concerned about what happens at that point because what do you do with an entire financial system that doesn’t work anymore? They’re very afraid about the steps that will be taken to counteract the amount that has built up by the interference over the last six years by outside agencies that have as I said corrupted -- and I use that term in the true sense of the word -- that have corrupted price signals all around the world. The financial system that we’ve all grown up with and that every economics text book talks about doesn't exist anymore. This reality is not going to be obvious to everybody until it just stops working. And very, very smart people are very, very nervous about that.
Click the play button below to listen to Chris' interview with Grant Williams (54m:21s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I’m your host Chris Martenson. I have often said that you should keep a journal because you are living through extraordinary momentous times. On simply the monetary front, things that have never happened before and which have never been attempted before are happening almost every day. There’s a full fledged currency war going on with 20 central banks having recently lowered key interest rates. And yet the more things change, the more they stay the same. The all too human desire to have a free lunch stalks the halls of power today with the same ruinous determination as it did ancient Rome.
And as always history can provide us—can—provide us with the essential clues we need to figure out where we’re headed. Helping us with both the essential context as well as the current data we need to make sense of the world around us is Grant Williams, portfolio and strategy advisor for Vulpes Investment Management in Singapore, a hedge fund running 280 million dollars of largely partner’s capital across multiple strategies. Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses. Grant also writes the popular investment blog, Things That Make You Go Hmmm, of which I am a huge and unabashed fan. His writing is always witty; it’s full of context, accurate, easy to follow. Welcome Grant, it’s a real pleasure to have you on the program.
Grant Williams: Chris, likewise. I’ve been a big fan of what you’ve done for many years now so it’s a real treat for me to be here.
Chris Martenson: Well thank you. So let’s begin with today’s financial markets. With stocks at record highs and powering higher every day, not just in the US but Europe and Japan as well, and a huge swath of sovereign debt trading in negative territories, here’s my question: Just how historically unusual are today’s circumstances?
Grant Williams: Great question. Funny how I think the answer is only going to be revealed once this is history. I think if you drop anybody into any momentous period in history it’s really tough to see it at the time; it’s only when you look back on these things with the benefit of hindsight that you really see how historic they really are. But I think for many people right now who can forget the narrative and can forget what they are being told by various interested parties, if you can stand back far enough, take a practical look at what’s happening, I think it’s much easier to see certainly how far from normality things are. I mean we have -- we have quantitative easing in Japan, QE10. We’ve had the Fed print 4 trillion dollars in the last several years. As you’ve said we have all these countries with -- in a race to the bottom with interest rates. We’ve got currency wars; there are so many things that are happening that really aren’t things that you expect every day. And for them all to happen together is absolutely unprecedented. And so everywhere you look that word "unprecedented" is more and more in every day use.
For example, the Swiss National Bank move recently which led to a 40% move in an hour in a G7 currency. Completely unprecedented. And yet a few days later it’s out of the news cycle. And so we have these events happening everywhere. We’ve had the reintroduction of volatility into the markets which has kind of almost passed people by because the focus is exclusively it seems on these all time high levels in stock markets, which again you can argue how extreme the bubble is. But I don’t have any doubts that we’re in yet another bubble. You have all time lows in government bond coupons and if you take France for example, which is to me the most obvious one perhaps apart from Japan, and you appreciate the fact that the French have never been able to borrow money in recorded history for lower interest rate costs than they have today, you know something is wrong. But it’s only really when the history books get written and these eras come to a close and you can disseminate them that the truth reveals itself. But I think there’s going to be more books written about the last six or seven years and the next five than in any point in time since the Second World War.
Chris Martenson: And you mentioned France not being able to borrow at low rates in recorded history, they have quite a long recorded history of bond sales, don’t they?
Grant Williams: We’re talking 600-700 years. If I said to you “I’m going to give you the chance to go short an asset that’s in a 700 year high,” you’d take that bet. You’d have been wrong once in the last 700 years.
Chris Martenson: It’s astonishing, it really is astonishing.
Grant Williams: But it’s everywhere, it’s everywhere. It’s not just you know, I’m picking on the French government bonds because I think it’s ludicrous. But we were talking just before -- just before we started chatting and the Italian bond is trading below the US; it’s crazy. But you can find examples of this everywhere you look.
Chris Martenson: And with Japan of course being one of the obvious poster children for this, some recent data just came out showing that household spending is still in negative territory. It’s falling. Kuroda has done everything he can to stimulate, pumping massive amounts of money not just into the Japanese bond market, which is now dead for all traders except for the Bank of Japan, which is the Japanese government bond market, but they’re throwing 3 trillion Yen a month into the equity markets. I don’t know if that’s just domestic or if they’re buying other stock markets. But when you have central banks openly monetizing 100% or more of government debt and openly dabbling in equity markets that’s -- has that ever happened before?
Grant Williams: No I don’t think it’s ever happened. What we’re seeing now is unprecedented. I keep using that word, but it’s true. I mean Japan is an interesting case because the mindset over there is so entrenched and you can clearly see that no matter what these guys do now this deflationary mindset has taken hold. I was living in Japan at the height of the bubble and it was a very different place to what it is now. But it’s taken over 20 years to get that way. You can’t change a psychology that’s developed over 20 years by throwing a bunch of money… There’s a classic example that the Japanese government gave out vouchers. This is a few QE’s ago; I lose track of when this exactly was, in the late 90’s I think, maybe early 2000’s. They gave out vouchers to every citizen for an amount of money. It wasn’t a huge amount of money but it was basically an amount to go spend. “Go spend this in the shops. Go buy yourself something nice.” And they had an expiration date on them so that the idea was it would force the Japanese to go out and spend this money. And you know what people did? They kept them. They hoarded them because they figured the government would extend the date on them. So that mindset is very difficult to break just by doing the same thing over again, only harder. So Japan has been baffling to a lot of people for a number of years now and at some point when the confidence that they manage to generate in this JGB market evaporates—which it will. The Swiss National Bank have proven that this whole idea of defending something in unlimited amounts doesn’t work. When the confidence goes it’s all over. The big question that we’ve all been wondering for several years now is: When is that? And we just don’t know. We’re not going to get any warnings; it’s just going to happen one of these times.
Chris Martenson: And Japan of course is an easy case to look at. Their population peaked in 2008. They’re shedding population in aggregate numbers year on, year out and unless they radically change their immigration policies that’s going to be true for the next 50 to 60 years. And yet they’re trying to stimulate a very active program of growth and inflation and animal spirits in what is effectively a very advanced retirement colony that I could make, I think, a better argument for why that economy needs to shrink in a pre-ordained and rational way. What happens when you attempt to stimulate something that fundamentally doesn’t want to be stimulated?
Grant Williams: We’re getting into the argument about natural forces here and trying to disrupt—actually the Japanese population is a really, really good example of this. When I moved to Tokyo in 1989 we all knew that in the early 2000’s, the first decade of this century, the population was going to start declining. Everybody knew that. They looked at the demographics, they looked at the projections and they knew. But it was so far away that nobody could conceive of needing to do something about it. And sure, here we are now. You’re right the population of Japan is going to shrink from 127 million to 89 million by 2050. It’s baked in the cake and you’re right the answer is immigration policy but that is something that is anathema to the Japanese; it’s not something that they’re going to do. So we don’t know how it will end but something has to give and it’s a question of what it will be. Because when you start playing with the forces of nature you can suppress them for a while but the reason they are forces of nature is they’re natural and they will eventually overwhelm you. We’ve seen this constantly throughout history, and I’m a big reader of history and a big follower of history because I think the answers to everything lie in there somewhere if you can track it by the signals.
So for example the central banks interfering with the natural price of capital by suppressing interest rates and fixing them somewhere where they really shouldn’t be, you at that point have interfered with every single transaction on the face of the planet. And so if you interfere with every transaction that happens on any given day anywhere in the world, you are going to get transactions that are not natural. And if they’re not natural at some point they will revert to where they ought to be and I think we’re starting to see that. We saw that in Switzerland, we saw the natural forces reassert themselves once that peg was removed and it was incredibly violent and it moved the idea of hyper-volatility back into the public conscious.
Imagine what happens when the Fed does the same thing and says “Hey you know what we promised you for the last six years, well we can’t fight this thing forever; we’re out.” Imagine the volatility that’s going to unleash. And at some point this has to happen. And many of people can make hay while we go along and they can close their eyes to what they may instinctively know is true and they can buy the markets and they can chase the trend and they can follow these things up. But at some point it’s going to turn around and bite them and when that happens, if you’re not prepared for it or you’re still fully invested, there will be no way out, not in the time frame you need and not at the prices you want.
Chris Martenson: It’s an interesting way to put it. The suppressed volatility is something. You know I traded very actively in the markets, futures, options, some equities. I shorted a lot of home builders from 2007-2008, a couple mortgage insurers; that was a lot of fun. And then something broke and my systems didn’t work anymore and it took me a year or two, probably it was 2009 before I discovered that there were these computer robots on the other side of the trade and I just wasn’t up to the task of being a human against them. And so now after having looked at the work of Joe Saluzzi and others and looking at the book Michael Lewis wrote, obviously something in our market structure seems broken to me because it’s trading in ways that seem to be run by algorithms more than humans. And I look at trading volumes and I look at the whole overall structure. I don’t feel like I understand really what this market is anymore and I’m thinking that a lot of people have an expectation of how markets worked based on an idea of a market that I’m not convinced exists anymore. What’s your take on the market structure these days?
Grant Williams: I think you’re absolutely right. I don’t think markets that people have spent any amount of time in them have come to understand. I don’t think they exist anymore but they’re -- the high frequency algorithm trading conundrum is really interesting because if you think about the timeline during which they’ve kind of risen to supremacy, it’s been since the global financial crisis in 2008. So they’ve essentially risen to primacy during markets that have gone up relentlessly. And so we haven’t yet seem what happens with those automated trading systems once the trend turns and the trend is down because human beings have emotions. These robots don’t. So when the market turns and they turn because they are by definition momentum trackers, once the momentum swings around to a downward moving market and they have no emotion, they will just sell. The same way they just bought. So this "buy the dip" mentality that a lot of which is down to the algorithmic trading becomes a "sell the rally" mentality. And you can’t just turn these things off. It doesn’t work that way.
So what we get a switch in the market, a real switch which is something that obviously the central banks and governments in the world are desperately trying to avoid happening, we will see how this -- how this new world works in the opposite direction and it’s going to work similar except for the fact that you’re going to have a bunch of people looking to sell alongside the robots. And when markets are going up it’s very, very easy to produce more stock. People can issue more shares, there’s always new stock if you want to buy it. If you want to sell stock you need a bid and sometimes—people have forgotten this—but sometimes there are no bids. And where there are no bids, you can’t sell. And the first bid you might see may be down 20, 30, 40%. Guess what? The robots may well start hitting those; so you’re going to see incredible dislocations in markets once the wind changes direction and markets head the other way.
Chris Martenson: I agree completely with that, having seen of course the flash crash in May of 2010. But these micro flash crashes that are happening in all sorts of securities and issues on an almost daily basis. There’s clearly something quite odd in the market structure. So I’m with you on this that when the turn comes it could be very, very rapid. And so people who think they’re dancing near the door may discover there’s no door there at all. And that’s something I think is probably under appreciated, not just in equities but I think in the bond market as well.
Grant Williams: Well six years is long enough for people’s memories to become a little cloudy, amazingly. I mean despite how severe 2008 was. People seem to think now, they can remember 2008 as a near miss; they think "that was bad but we got away with it." The simple truth is 2008 wasn’t the big crash, it wasn’t. We’ve seen falls like that, not as violent or short, but we’ve seen markets move to that kind of extent in the past. What we haven’t seen is the policy response to it, which was so desperate and so severe and yes, it’s managed to get equity markets up to all time highs but that doesn’t help out an awful lot of people. Psychologically it actually does something very, very important and that is condition the general public to believe that everything is actually okay. It’s interesting, in a monetary sense you might only effect 19, 20, 25% of the population materially by the stock market being an all time high. But the general public tend to gauge how serious an event is by what the stock market does, whether invested or not. If the headline in New York Times is “Dow crashes 20%” or “Dow falls 500 points” people tend to get very, very scared very quickly. If you don’t see those headlines when something happens you think may be bad but the stock market is okay, people kind of think “Well if it was really bad the stock market would fall, and it hasn’t so things can’t be as bad as we think.”
So here we are, we’re six years in. Markets are dislocated all over the place. Optically they look great but I -- I work on a project for Real Vision Television—we travel all around the world interviewing some of the smartest people in finance and I’m amazed and starting to get quite alarmed by how many really smart people are really, really nervous and getting more so. That’s a huge red flag to me. When the smartest guys in the room, the guys who are always early calling tops and bottoms are starting to get very, very nervous then I think other people need to be nervous too.
Chris Martenson: Absolutely. I just wrote about an anecdote I’ve collected recently talking with a very large real estate investor, very smart guy and he’s beginning to sell out to what he calls the "dumb money." He has probably five cycles under his belt. He’s seen it all come and go before; so for him that’s a normal cycle. But then when I talk with people who are—typically the more they know about finance, particularly the people who have decades of experience, those are the ones who concern me because it’s not just that they’re nervous “Oh we might have a fall.” They have something almost more existential, almost like a dread under there like "this could be bad." Are you detecting that too?
Grant Williams: Yeah absolutely I am. The number of people who talk to me about how the financial system is broken, and they mean that in the worst possible way in that this doesn’t work anymore. And when we do get this resumption of natural forces, people are genuinely concerned about what happens at that point because what do you do with an entire financial system that doesn’t work anymore? So they’re very afraid about the steps that will be taken to counteract the imbalances built up by this interference over the last six years by outside agencies that have, as I said, corrupted—and I use that term in the true sense of the word—that have corrupted price signals all around the world. That financial system that we’ve all grown up and every economics text book talks about, it really doesn't exist anymore. It’s not going to be obvious to everybody until it stops working, and very, very smart people are very, very nervous about that.
Chris Martenson: You know and here’s part of the reason I’m nervous is studying history I’ve seen that if we back way, way up and we look at economics and finances as just a means of apportioning humans' desire for resources, and then money and claim and money-like objects just become claims on resources, we’ve seen what happens in history when the claims get out of balance with the real thing. So from 2008 to current, global financial debt has just exploded, and we're at I think—according to The Kinsey—at about almost 200 trillion dollars of debt globally. And so those are the claims and obviously the global economy is not growing nearly as robustly as the claims. So ultimately we’ve seen this on a micro scale, if I can call the Wymar experience a micro scale. What are written about in history books is wealth destructions but they’re not really, they’re wealth transfers, if you look at them the way I do, which is that before and after the Wymar hyperinflation experience they are just as many acres of farmland and buildings around and people and productive property plant and equipment. But what happened was a lot of people got wiped out and who owned those things changed hands rather violently and dramatically. Is that possibly getting close to what you think the concern is here, is that there’s a big reset coming and that this will be a moment of wealth destruction for most people? Or are they worried about something more profound than that?
Grant Williams: No I think that’s exactly it. I think there has to be a reset. I think it’s become apparent and it’s becoming more apparent to more people almost by the day that this system doesn’t work anymore. And it doesn’t work anymore because of the level of debt that’s been loaded up over the last 40 odd years since the end of the gold standard. And it’s interesting because humans are a very progressive species and we look at the advancements that we’ve made in technology. We look at the motorcar and the airplane and the computer and all these things that have progressed mankind forward. And so the people assume that that translates to every facet of human existence. But unfortunately human nature is not necessarily progressive, it’s cyclical. And so we see these turns where we see monetary debasement as far as back as the Romans. Since the dawn of money there's been monetary debasement. Back then it was all physical. It didn’t have computer generated money; they would clip silver out of the coins. So monetary debasement, extended credit, over extension, rises and falls of empires—these things happen much more regularly than people believe.
You look at hard money standards; in the last 200 years the world has been on and off some kind of metallic standard and has in fact been on some kind of hard money standard more than it’s been off in the last 200 years. It just so happens that we have all coincided with the period in the last 40 years where it’s been off. So it seems almost impossible for people to grasp the idea that we could go back that way, but humans are cyclical in nature. And again, we are getting to that point where what’s happened, what’s been allowed to build up is unsustainable and historically when we've reached those points, you tend to have rather violent outcomes as widespread changes are forced onto a system that no longer works. And when I say violent I mean volatile. I mean some of them have been violent, physically violent, but they never happen smoothly. And if you just take a look for example at the chart of the Federal Reserve balance sheet as it goes into 2008 and then the three big, big leaps up, virtually straight up as the QE programs have been launched, and you try and picture that chart in 10 years time—anyone that’s spent any time looking at charts knows that charts that look like that don’t resolve themselves in a sideways move forever or a gentle decline or a gentle advance. They just never do that; and that’s down to human nature.
So I think the system is broken, it no longer works anymore and what’s happening now is the world is trying to come to terms with what it needs to do and what any kind of new system needs to look like, and the answers I suspect will present themselves in reasonably short order.
Chris Martenson: So let’s talk about that. You mention the key event for me which was August 15, 1971 Nixon taking the world off the gold standard and putting a bullet in the Bretton Woods Agreement and we’ve been on a floating exchange rate system ever since. I’ve been a proponent of people owning gold because it’s the only monetary asset I can point to that’s not somebody else’s liability at the same moment. And so let’s talk about gold. You’ve written a lot on the subject and a lot of it is just fantastic. I’ve been following it very carefully. Many say because the price of gold has been going down since 2011 it means it’s not a desired asset, but paradoxically in the East, notably China and India, a lower price has led to higher demand, not less. It looks like East and West have different narratives on gold running here.
Grant Williams: Yeah, so true, and you’re right I write about this a lot. But by background I’m not a gold guy. I just happen to believe that there are periods in time when certain assets are things that you have to own and right now and for the last decade plus, I’ve been a believer that gold is something that everybody should own. People get caught up in the price of gold and the differentiation you make between the West and East is really important to understand because gold is not something -- I’m talking to you from Singapore. People don’t trade gold; it’s not a trading instrument. It’s a means to protect, preserve and accumulate wealth, period. It’s the reason why ETF’s when they’ve tried to launch gold ETF’s in Asia they never really work because people don’t want the ability of buy and sell paper gold at the press of a mouse. They just don’t want to do that. What they want to do is convert some of their money into physical gold because they’ve seen throughout history, and obviously the history where this has happened is far more recent here in Asia where they’ve had major dislocations and they’ve had in China for example the rise of Communism. And they’ve had events where wealth has been either confiscated or destroyed overnight and by owning gold they’ve seen previous generations either get very, very wealthy comparatively, in a very short space of time because they had gold when others didn’t. Or protect their wealth against marauding forces of one kind or another.
So when you look at gold—and I talk about this all the time, I’m sure people get fed up with me talking about it but there is a very, very important difference in understanding the difference between the price of gold and the gold price and they are two different things. When people talk about “Hey what’s the gold price today,” well the gold price is up or down $20.00. The gold price is the price of a piece of paper, that gold price is set on the futures exchange, the COMEX. The price of gold is “Hey how much do I have to go pay that gold dealer to physically acquire X amount of the metal? And it’s a completely different thing. And when you lay out paper on top of physical assets like this, eventually the pyramid just becomes unsustainable. And we’ve seen in the past -- certainly the last three years as gold has gone from $1,900.00 down to its current price of just above $1,200.00—you see a lot of people fixate on the price. And say “The bull market is over; we’re now in a secular bear market in gold.” Well one thing you can absolutely guarantee is that unlike a bunch of shares, look at the changing components of the Dow, a whole bunch of companies have gone to zero. Gold will never to go to zero; that much -- I can promise you that right now. And having an asset that cannot go to zero is a very, very important thing to do. And if the price goes down 20 or 30% but it’s a small part of your portfolio, then the rest of your portfolio is doing pretty well. And it’s a bearable loss. But when the time comes when you need gold, when the time comes—and by the time I don’t mean the period, I mean the day comes when you need gold—you will not be able to buy physical gold. It just won’t happen. Not at the price it was trading the day before you needed it. And so I really don’t focus on the price; I just focus on owning the amount of gold that makes me feel comfortable that should these dislocation take place it will help me preserve my wealth. Because the one thing, the one thing you have to avoid when trying to invest your money and trying to grow your wealth is big, big draw downs.
Chris Martenson: I absolutely agree and you know we were talking before about -- before we starting recording—about number of bets I would have lost. I would have lost a bet on gold big time, or if you’d said to me “Chris I’ve got a situation where China alone is withdrawing an amount of gold equal to or greater than total world mine output just through its Shanghai gold exchange, and India of course is drawing an amount about half that and so we’re in a major structural deficit of gold…" it’s flowing rapidly. It has to be coming from somewhere, that’s what I love about gold, it’s a physical substance. And that massive deficit just says that the west has to be coughing up an enormous amount of gold; where do you think that’s coming from?
Grant Williams: Well I mean it -- this is the beauty of it. I mean this is the beauty -- imagine where gold will be trading if the only gold price on earth was the price of physical. If there were no futures, if there were no derivatives, you could only buy physical gold and sell physical gold, just imagine with those dynamics you just described where the price would be trading? And I think anybody, whether a gold bug or a gold bear, no matter what the persuasion, if you gave them those dynamics they would have to agree that the price would be materially higher. And so the fact that as you said these dynamics taking place is purely a function of the ability to sell paper gold, the fact that you can short gold ETF’s… How can you short gold? Unless you’re actually the owner of a mine who can dig it out of the ground and fulfill that commitment, how do you short gold? You can’t. You can short pieces of paper and then hope that when the time comes you can actually repay in paper and you don’t have to be held to account and deliver gold.
So Asian central banks now, and not just Asian central banks, we’re seeing it in places like Turkey and Iran, they’re banks all around the world who are buying physical gold. They don’t buy futures contracts; they aren’t buying ETF’s. They’re taking delivery of physical gold and they’re putting it in places where it’s going to stay for some considerable amount of time until they need it. And if you think that the Chinese Central Bank cares one hoot that the price has gone from $1,900.00 to $1,500.00 or from $1,500.00 to $1,200.00, they don’t care. They just want the gold. They don’t care what the price is because—and again, I’ve spoken about this recently. The Chinese know that if at any point in time they accumulate let’s say 10,000 tons— and there are some very, very good pieces of analysis that will make very strong cases for the fact that they have 10,000 and multiples of that potentially. Alasdair McLeod has done some great work on this. But the day the Chinese say “Oh actually we don’t have 1,054 tons like we’ve been saying for the last six years, we actually have 10,000 tons,” any paper losses they made buying that gold between 1,500 and 1,200 evaporate that day because the gold price resets materially higher. And this is the reason why the Chinese don’t want anyone to know how much gold they have because they aren’t done buying it.
So I want to own an asset that the largest institutions in the world are completely price insensitive buyers on because they will continue to buy it if it’s trading at $1,200.00, $1,100.00, $1,000.00, it really doesn’t matter. They’re going to buy more at those levels and at some point, as you quite rightly pointed out, the maths don’t work anymore and there isn’t any physical gold. And so at that point the Chinese say “Hey you know what, we want to buy some more. We’ll pay $1,100.00 again”. Well the gold is not available at $1,100.00 anymore because we physically can’t meet the supply. You’ll have to buy at $1,200.00 or $1,300.00 or $1,500.00 or $2,000.00; it doesn’t matter. The price will move in the direction it moves because it suddenly becomes a question of buying it to secure a physical demand and not to trade it for $100.00 profit. And that’s going to be a seismic day for a lot of people.
Chris Martenson: Well I’m wondering if some people who are smarter are anticipating that day. You’ve done great work on this whole idea of gold repatriation and I see that Austria has now just added its name to the ring of central banks who would like to have its gold back from foreign vaults into its more home spun vaults. So what I found interesting in the Austria story that just cropped up—I’d love your comment on this—is that like Germany they reported that they discovered that they had no ability to audit their gold that was being held at the Bank of England. Now this isn’t like you or me showing up and asking to see some stored gold. But another central bank that owned it and they couldn’t see it, they couldn’t touch it, they couldn’t count it. Here’s the question: Can you give me a credible reason that makes sense for why they couldn’t audit or see their gold?
Grant Williams: No. There was an easy answer for you [laughter]. This whole thing is fascinating. To me, what I find really interesting in this -- and this is a theme that if you look carefully enough is developing in all kinds of interesting places, and that is this move towards central banks going their own separate ways. Divergence in policy with regard to interest rates. The Swiss clearly did not talk to the IMF or ECB or the Fed before they removed the peg to the Euro, which would have been unthinkable just a year ago. This coordinated monetary policy has been something that they’ve all been very focused on as they try to lift the world out of the post 2008 situation it was in. And so with the Austrian example what I find fascinating is that we know they couldn’t audit that because the time was not that long ago where, had that been the case, there’s absolutely no way they would have come out and told the world that. They would have circled the wagons and discussed it among themselves, but kept quiet. But the Austrians a couple years ago announced how much money they’ve made from leasing their gold out; they actually came out and put a number on it. And said, “Hey look we’ve done a great job for the people of Austria. Through leasing our gold out we’ve made—" I think it was 10 million Euros -- no it was higher than it. I forget what it was now. The point being they made a whole bunch of money leasing their gold out. They bent that as something that was great for the people of Austria, but anyone watching the gold market looked at it and said, “Oh okay fine, so you admit that you’ve leased your gold out. You admit that you haven’t had control of your gold.” Now this is the next little step in this passage. They’re now saying “hey maybe we, like all the others, want to get our gold back.” The fact that they’ve come out and said "they won't let us audit it," is really interesting to me because when Hugo Chavez started this little game of musical chairs back in August 2011, he said “I want my gold back.” It was 99 tons from the Bank of England and I wrote at the time, I said that this is the starting pistol in a race -- we don’t know how long the race is but we know who’s running in it and it’s every central bank that has gold in another location. And if you’re sitting in a room with a finite number of chairs and you see each one of these finance ministers get up to “go make a phone call” and he’s out there saying “Hey listen, can we get our gold back?” You don’t want to be the last guy leaving that room because the chances are you know that if you’ve leased your gold out as the Austrians clearly said they had, and there’s all kinds of line items of central bank balance sheets that refer to gold not as gold. Ironically the Japanese actually refer to it as gold, but the Fed, UK they all have gold leased or swapped. These arrangements are in place. So if you're sitting there and you see this kind of slow progression of central bankers who say “I’ll be back in two seconds guys” and they come back and then the next thing you read is that they’ve started to repatriate their gold, you don’t want to be the last guy to try and get his gold back.
So the Austrians have now moved, having opened their book to the world and told us they were leasing it out, they’re now trying to get control of it after the Germans have done theirs and after a whole bunch of small countries done theirs after Venezuela that really didn't move the dial. Well suddenly the countries are getting bigger and the Germans put the cat amongst the pigeons when they tried to do it, singly unsuccessful in the first year and now things have picked up ever since because of the bad press they got, I suspect.
The important thing here I think is this divergence in Central Bank policy because in the middle of a currency war, it is every man for himself. And once it’s every man for himself you start to get central banks doing things to protect their own people, their own balance sheet, which is what the Swiss National Bank have done. And in the gold market, that’s clearly what the Austrians are trying to do. And so if that continues and if that spreads and we see a whole bunch of central banks all saying “We want our gold back,” it’s going to really let us understand what’s been going on in these markets for the last several years. With all these conspiracy theories about the fact that there are multiple claims on every bar of gold in a lot of these central bank vaults—we will find out if that’s true or not. And if you look at the numbers, as you do, and you look at the flow of physical metal, somewhere there’s a number that isn't right. Somewhere in this equation where you get these guys buying more than the world’s supply of gold, at some point in this equation there’s a number that isn’t true. It’s like checking your accounts when two numbers don’t match. And it’s very possibly the number we’ve been given by central banks about how much physical gold they have in their vaults. Well guess what: If they all want it back we’re going to see very, very clearly what those two numbers are. And if as a lot of people, myself included, suspect there is a degree of uncertainly around the voracity of those numbers, you’re going to see some extraordinary things take place in the gold market I think.
Chris Martenson: Well it’s -- I’ve been expecting that to happen for a long time. I’m surprised at the amount of gold that must be hemorrhaging from West to East. It’s a very, very large number and I -- there’s a lot of smoke in this story. There absolutely has to be some fire. I’m not at all clear on what’s really going on in the leasing market. I’ve talked with people who are involved in it and they say, “Oh no, no, no when they lease gold it never actually moves, never leaves their physical possession. It might go from cage A to cage B but it never actually leaves." But then when you have somebody like Austria saying “Can we see our gold?” The only reason that makes sense to me why somebody would say “No”—because it’s not hard. You open the vault and you say “There they are. There’s bars, there’s numbers on them," very easy. Not a hard audit to run—is that those bars or those numbers don’t exist.
Grant Williams: Yeah that’s precisely it; you’re right. People say “Oh, no no it doesn’t leave the vault; it just gets moved from cage A to cage B, or in some cases it doesn’t even leave cage A. It’s recorded in a book that there’s a claim on that bar to somebody else." And guess what: As soon as you lease that, immediately there are two claims on that gold bar. So you have to resolve that. And if the resolution of that little conundrum is done in a way that is potentially disruptive to the market, it spreads like wildfire and suddenly everybody wants their gold back. And technically speaking, every gold bar that’s been leased—there are at least a couple of claims on it. If it’s only been leased once then you have to resolve it. So it’s -- the gold market is a fascinating place. The opacity surrounding it is legendary and none of us really know -- and that’s kind of the beauty of it and that’s kind of why we haven’t seen this dislocation that a lot of people that follow it have been waiting for. But it just means that when you get to the point where the opacity becomes a lack of trust, gold is something that has always been associated with trust. You know “As good as gold,” is an idiom in the vernacular; it has been for hundreds of years. When that trust becomes central to the gold market and it’s all about—as we’re seeing on the fringes—securing physical ownership of your asset because you don’t necessarily trust that yours is the only claim on it. Then this opacity surrounding the gold market could disappear in a hurry.
Chris Martenson: As good as gold, you know we had that picture recently of Putin hefting one of those 400 ounce bars. I can’t wait for the day we see Putin hefting a derivative contract to connote that same sense of solidity and value. [Laughter] You’ll wait a long time before you see that picture.
So you wrote a really brilliant piece called the "Economic Consequences of Peace," riffing off of the title of that seminal works by Keynes, just brilliant. Can you very quickly—what are some of those consequences of peace? It’s such an odd title you know that there are these consequences of peace. But you came to some pretty interesting conclusions there.
Grant Williams: Yeah well it was purely the consequences of the economic peace that I was talking about and that is the fact that you know since -- and we’ve spoken of this already but since the world went off the gold standard in August of 1971 the Bretton Woods Agreement was designed to stabilize the world after World War II. And the peace that was agreed upon at Versailles after World War I was a very dangerous one because it heaped so much pressure on Germany and that pressure drove the Germans back to war just a couple of decades later. So with the Bretton Woods Agreement they tried to come up with a system that would ensure peace, and it did. We had -- to almost three decades after World War II until the oil shocks in 1970. So you had this peaceful economic environment. The imbalance has built up which is why the gold standard was essentially scratched by Nixon in ’71. But since then they’ve done everything they can to maintain this economic peace and that’s meant dropping interest rates instead of allowing the downward half of the business cycle to assert itself and to have creative destruction.
So to maintain that economic peace what they’ve had to do is just expand credit. And if you look at charts of GDP growth versus the growth in credit it’s amazing. To me it’s one chart you look at and the penny should drop to most people that the growth the world has seen in the last 40 years has been a growth in credit. And so there comes a time when you can’t maintain that economic peace anymore. The cost of it becomes too expensive and that’s I think what 2008 was the first warning shot, was that it’s getting too expensive to maintain this peace through the expansion of credit. Here we are six years later, they’ve managed to find some more ways to keep that going. And once again it’s creaking at the seams.
My point in the presentation was that if you look back through history you see that at any point in time where the price of peace became too expensive, the pendulum swings the other way and the world ends up in conflict because wars are a natural cleansing process, unfortunately. And if you look through time as I said, you know World War I happened when conditions around the world were very, very similar to the conditions we’ve seen in the build up to here in terms of this pull and push between East and West, the debts overhanging the world; there are all kinds of parallels. And so people ask me when they see the presentation that most common first question I get is “Are you saying there’s going to be a global conflict”? My answer is always the same; I say “Look I’m not saying there’s going to be a major war. But what I am saying is there’s not not going to be one”. I think that’s a very important distinction to make. That the reasons why there could be a major conflict are increasing very, very rapidly and if you look carefully -- if I would have said to you a year ago that there would be essentially a full scale military conflict in Europe, you would have told me I was insane. But that’s in effect what we have in Ukraine now. It’s happened and it’s continuing to happen and once it’s happened it’s hard to stop.
So I think people need to be aware of historical parallels. I think people need to understand that right before World War I everybody assumed that war was unthinkable and yet it happened. Right now everybody assumes that we’re never going back to the days of huge major conflicts. And we might not go back to the kind of grinding trench warfare we saw in World War I or the millions -- tens of millions of people in the hand to hand combat we saw in World War II. But this idea of major conflict is something that people need to at least entertain and do the thinking for themselves about how you -- what might cause this, and if it does happen, would there be post conflict—everyone goes into a conflict assuming it will be a short one—would there be economic benefits in terms of rebuilding, restructuring? And the answer, unfortunately, is always yes. It’s not a fun subject to talk about but by ignoring it I think people are doing themselves a disservice. You need to understand the forces at work and the fact that these things have never stopped happening in all the years of recorded human history.
Chris Martenson: I particularly liked the way you were putting parallels between World War I and current because looking back at World War I there were -- now we can point to "oh, well there was this Arch Duke that got shot" but really the tinder had been laid and carefully re-laid and there were broken promises and treaties and failing empires and poor leadership. There was a whole host of things that created that tinder pile. Today I’m a little concerned that I talk with people at various levels of government and nobody can answer this question: What exactly is so strategic about Ukraine that we have felt that we had to demonize Putin individually, and Russia more generally? What’s really the gain here besides, I don’t know, final NATO expansion into a last piece on the Risk board, just so they can have a complete set for the next roll of the dice. Nobody can really explain to me what the -- what was so compelling that we felt that we needed to drag things to where we are, but here we are. There’s been an extraordinary breakdown in diplomacy so bad that Kissinger himself came out and said “Hey what are you guys up to?” When Kissinger comes out and says that, I think you might be down the rabbit hole, is my view on that. And so I’m looking at this and does -- it feels like it has some similar flavors in the sense that nobody really seems to know exactly what’s happening or why, but more importantly to Kissinger’s point, what exactly the end game is. I feel like we’re entering a period without -- with some ideas about what we want to do but not why.
Grant Williams: Yeah I think that’s absolutely right. It’s always good to have a guy in a black hat in a movie, right? And Putin fills that role to perfection. But if you have missiles in Poland realistically with the range of missiles you don’t need missiles in the Ukraine, you can get all the coverage you want from Poland. As you say this global game of Risk has been going on for quite some time now. And it’s getting to a point—I think Putin’s concern is that the regime change in Ukraine was a dress rehearsal for what the West wants in Russia. There are always and everywhere unintended consequences when you do anything like this. Again, interfering with natural forces. And what’s happened, which is the thing that a lot of people are missing but it’s I think by far the most important consequence of this rationing up of the pressure on Putin is that it’s driving him to China. And it’s driving him into the open arms of China frankly. And when you get a Eurasian block it’s, again through recorded history, it’s the most powerful block that exists on the face of the world. If Eurasia is united in one block it’s -- it has by far the largest amount of people, it has by far the biggest economy. It has by far the biggest foreign exchange reserves. It’s a powerhouse. And so by isolating Putin and pushing him into the orbit of China it’s a very, very dangerous unintended consequence.
And when you throw into the mix the fact that Germany particularly, and by extension France, realized that realistically Russia is a good trading partner for them. China is an important trading partner for them. And I thought it was very, very instructive that this Minsk Accord—those orders and the cease fire lines were guaranteed by the Russians, the Germans and the French. And so if the US continues with its threats to put lethal weapons into Ukraine, you then make the Germans and the French have to make a very important decision about allegiance. And the past has definitely been an alliance with America. The future, who knows? I think there’s been plenty written about the future and where any current growth is going to come from and for an exporting nation like Germany you need growth; is that going to come from the United States or is that going to come from China? Well I think you’d be hard pushed to make a case that you’re going to significantly increase your export markets in the US, whereas in China and the East it’s a very easy case to make.
So this political posturing and all these moves around the Risk board are throwing up alliances that could come back to haunt the West, actually quite soon. So as I said Putin is a great villain to play but by demonizing him, isolating him, if China weren't there with open arms it might be successful. The fact that there are all kinds of alliances both financial—the new BRICS bank that was ratified by the Russians coincidentally this last week as an Asian competitor to the IMF. You’ve got the Chinese opening the largest Yuan trading center in Zurich. You’ve got the Swiss clearly moving away from the fiat currency world and courting China and courting the Middle East. So things are shifting in ways that it’s very difficult to plan for unless you’re willing to step back and take a look at a very large picture and entertain outcomes that might seem a little far fetched, but should they happen, materially shift the balance of the world. And that’s exactly what’s happening right now.
Chris Martenson: Grant that’s very well said and I want to take that one final step back and ask you this last question, which is a very big picture question. So what are your thoughts about the idea that a debt based fiat money system accumulates claims—or debts if you will—in a nearly perfect exponential fashion, yet we live on a finite planet with finite resources. The question is: Is there any hint of concern about that conflict among the financial people with whom you interact?
Grant Williams: I think existentially there is. But the good thing about financial people in many ways is that they tend to look at the numbers in front of them, and as we spoke before about the Japanese demographic problem, they don’t look that far down the track because by its very nature in finance you are generally benchmarked monthly or yearly. Finance have their annual bonus review and people who run funds announce the results quarterly or monthly in some cases. So you can look at exponential, you can look at logarithmic, you can look at linear, but you’re only going to project it to your next kind of reporting mark in many cases. And so right now the sort of independently wealthy family offices and the like that have these long term time horizons and can withstand the kind of volatility that you -- you have to be able to withstand it if you’re going to invest for the long term because you have to be able to be wrong for a considerable period of time. It’s -- I always say at the top and the bottom there’s only ever one buyer and one seller. There’s only one person who ever gets the top price of the commodity. And so you have to allow for the fact that you are likely, it’s not just a possibility, it’s very likely that you’re going to be wrong for a while. So this exponential versus linear conflict is one that I think generally speaking has a longer time frame on it than the fast majority of people are willing to countenance. And so there’s great opportunity there if you are someone who can invest along those lines and have the latitude to be wrong for a while.
Chris Martenson: Well said and we’re going to continue this conversation hopefully in the future. We’ve run out of time for today. I want people to be able to find you; you’ve stood up your own website now I understand.
Grant Williams: Yeah people can come to the website, it’s TTMYGH.com, it’s Things That Make You Go Hmmm dot com, and also RealVisionTV.com, which is another project I’m working with [Inaudible 00:54:05] which is a kind of financial Netflix.
Chris Martenson: Yes I’ve seen that, it’s fantastic, with Kyle Bass was an interview I saw?
Grant Williams: Yeah we’ve been -- the response from the industry has been fantastic. People are -- like you Chris there’s a lot of people that are very concerned about what’s happening and they want the chance to get their thoughts out there and we like to give them, just as you do, we do what you do with video and you’ve spoken to some tremendous people and I’m sure like me you found that they’re very happy when given a platform like yours and like ours where they can say what they feel and take their time to lay out their views. The amount of brilliant minds in finance is extraordinary.
Chris Martenson: Well I will be editing this whole thing down to just 90 seconds but thank you so much [Laughter].
Grant Williams: Any time.
Chris Martenson: Well thank you so much for your time and I hope we can do this again soon. We’ve been talking with Grant Williams. The website you should go to look at is TTMYGH.com. His Things That Make You Go Hmmm newsletter is available there and it’s just fantastic, can’t recommend it enough.