"Straight Talk" features thinking from notable minds that the PeakProsperity.com audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. The comments and opinions expressed by our guests are their own.
This week's Straight Talk contributor is 'Jesse', founder and proprieter of Jesse's Café Américain (jessescrossroadscafe.blogspot.com), one of the more esteemed and veteran econoblogs. Jesse publishes regular observations on the macroeconomic factors impacting the financial markets, as well as exceptionally rich technical analysis – his price forecast charts of gold and silver are 'must reads' for anyone who seriously invests or trades precious metals. Recently, his site was rated as the fourth-most-influential blog in financial media by Mindful Money.
1. Jesse’s Café Américain has emerged as a well-regarded source for insight into the key indicators driving the markets. Can you summarize your overall outlook for the economy and what macro trends investors and traders should be following most closely?
Stagflation has been my forecast for quite some time as the most likely outcome, with a real protracted deflation or hyperinflation as lesser probabilities.
The reasoning behind this is fairly straightforward. In a fiat monetary regime, the central banking authorities license the shadow banking system to create money through their credit expansion mechanisms. There is a money multiplier, or a natural credit expansion, in a normal growth economy. In the event of a recession due to a business cycle, the Fed can relax reserve requirements and interest rates through their open monetary operations, essentially lowering the standard for credit creation, also known as the interest-rate hurdle, for a profitable return.
In the event of a financial crisis or a credit collapse such as the one in which we are now, the Fed has the ability to monetize existing and new government debt by purchasing it at extraordinary (non-market) prices, adding it to its balance sheet. Additionally, the ability to pay interest on bank reserves gives them a little more fine control on the effects, and even keeping some liquidity out of the system by paying banks to retain a greater amount than they ordinarily would, and raising the bar a little on interest rates. People also forget that the Fed has always had the power to set reserve and margin requirements. This extraordinary monetization effort by the Fed requires a significant amount of cooperation from bondholders and those external entities who hold dollar assets in their currency reserves.
The problem, of course, is that the Fed is only a part of the bigger picture. It is the responsibility of the Congress and the Executive to set fiscal and regulatory policies for the country and the real economy, including import export, jobs, taxation, and so forth. Today, the government, both the Executive and the Congress of both parties, is presiding over a broken system, made so by a relatively tight coterie of monetary interests who have been promoting an outsized, over-dominant financial sector, and the undermining financial regulation since the early 1990's.
I think a particular event occurred around 1996-7 which I have referred to in the past as a 'financial mystery, a coup d'etat.' I prefer not to speak of it more now, but it involves US government officials and China, and Clinton's chief financial people Greenspan and Rubin. It was at roughly the time of Greenspan's 'irrational exuberance speech,' after which he shortly changed his tune and began the expansion of the money supply, which culminated in the tech bubble.
2. You seem to see the root causes of today’s economic troubles stemming from unnatural imbalances and distortions of free market principles – engineered ‘financialization” that exists for the benefit of insiders, not society. Can you elaborate?
Yes. It is fairly well documented that a massive lobbying effort had been undertaken by the Wall Street banks to remove the last restrictions that had been placed on the financial sector by the government in the aftermath of the Crash of 1929 and the Great Depression. PBS Frontline has done a good job of documenting this.
Promotion of such romantic notions as the 'efficient market hypothesis' and the power of self-regulation to free economic growth were promoted actively by thought leaders and by a few well-placed officials and public figures. Regulatory capture proceeded along with the erosion of such principles of the 'fairness doctrine' in the media, and the concentration of power in fewer hands.
We now have an economy in which five banks control over 50 percent of the entire banking industry, four or five corporations own most of the mainstream media, and the top one percent of families hold a greater share of the nation's wealth than any time since 1930. This sort of concentration of wealth and power is a classic setup for the failure of a democratic republic and the stifling of organic economic growth.
3. What do you see as the necessary elements for a solution? What do we need to embrace or enact in order to return to a sounder, more sustainable, and fair system?
The concentration of wealth is not sustainable in a democracy. This concentration has been enabled by the campaign financing rules, and the lack of enforcement of existing laws.
One can cast about at the branches of the problem for years, or they can strike at the root of it, and break up the big financial institutions, reinstituting what Paul Volcker called 'narrow banking.'
We must recognize that a partnership between corporations and government is a dalliance along the road to fascism, inimical to the freedom of the individual. Corporations do not and must not have the same rights of individuals, because it is the Bill of Rights that was meant to balance the power, to protect the individual from powerful combinations and concentrations of wealth and power.
Campaign finance reform, a reform of the civil service, and reform leadership, rather than lip service, from the top down are all essential. It will take a more vigorous effort by the Justice Department to punish criminal activity. There should be little surprise that no one is going to jail, or even being indicted, for some of the most egregious frauds that we have seen since the S&L crisis.
The United States, in what I call a credibility trap, in which no substantial reforms can take place because both political parties are compromised, I am not optimistic that real change will occur until the economic situation get much worse and a genuinely independent third party movement threatens the status quo with serious investigations and criminal indictments. The Tea Party started as a movement for financial reform, but became quickly co-opted by powerful financial interests and slick public relations campaigns. You hardly ever hear about real financial reform from them anymore.
An example was made of Eliot Spitzer to dampen the enthusiasm of reformers for this sort of independent third party movement, so it may be a long time coming. And of course there is always the danger of a 'reformer' whose cure is worse than the disease.
4. Your regularly-published charts forecasting anticipated price movement in gold and silver have been spookily accurate lately. Can you explain your current opinion of the precious metals? And where do you see them going from here?
The precious metals will continue to go higher as long as the fundamental economic situation remains the same. How high they will go depends on how much the US is willing to debase its bonds and its dollars, which are nothing more than bonds of zero duration. Actually I think it is more a matter not of 'how much' but 'how quickly' they are debased. I suspect that the dollar will fall until a new dollar is issued in exchange for the old dollar, with a couple of zeros knocked off, much as what had happened in Russia with the reissuance of the rouble.
Until the financial system is reformed and balance is restored to the economy the dollar will continue to decline.
5. You publish some of the most elegant and useful technical analysis on the Internet. What are the most important lessons you’ve learned as a trader? Do they still hold in today’s liquidity-drunk markets?
Thank you for this. It took me about ten years to create the type of technical analysis I use today. I had looked into almost all the existing systems and even historical systems no longer used, and decided to create my own style that suited my personal needs and preferences. I had been trading the futures, options, and currency markets rather actively since 1999, and spent many hours watching the 'action' in a variety of markets in real time. I researched charting and systems, even gaming systems, very heavily, from Elliot waves to classical charting.
I settled on what I call the Babson System, in honor of Roger Babson the economist, who was also a very successful trader. He did not document his method, so it really is my own creation, but I drew the original idea for it from some descriptions of his methods of charting the markets. Along the way I have studied the trading greats and read their methods. I would estimate I read over 200 books on the subject and much more as it became available on the web.
I have given up trading actively in the futures, so some of the time elements are much less interesting to me now than they have been, and this is reflected in my charting. I used to publish ten minute charts six or seven times a day and spent much more effort on timing. Now I am down to daily charts once a day.
6. What’s your advice to the average investor (not the power-trader) looking to protect and perhaps grow their wealth in today’s turgid markets?
I would give the advice I give to myself. Understand that in the short term, the market as it is now is a game of deception and gambling, and most gamblers go broke. Be very careful about following gurus and systems. Learn from others, but always own your trades so you can hold them with conviction. There are a lot of very smart and highly paid people with the best tools who are playing against you, and they view the market as a zero sum game, with you as the mark. So, ideally pick an area where you know quite a bit, ideally through your own work or some avocation you have, and then invest in it using a long term view and whatever informational advantage you can obtain. Above all, play the longer trends, and do not watch the daily fluctuations in the markets. Never lose your position in a primary trend bull market.
7. Few know the man behind the moniker “Jesse.” Can you tell us a bit about your background and where you developed your expertise in predicting market developments?
I had a somewhat unusual formal educational experience that was more diverse than most, supplemented heavily by independent study. I had a classical education as an undergraduate, heavy in the natural sciences, literature, classical language and history, and philosophy.
My engineering study was almost all post-graduate. After a long stint as a boy programmer and a systems analyst, I was recruited to be an engineer in advanced communications research, specializing in what is called information encoding and compression. Basically the notion was to take any type of information, whether it be data, a picture, speech, or a video, and transmit it cost effectively from one place to another generally by first compressing it, perhaps even encrypting it, and then transmit it to its destination with the right kind of network wrappers using a variety of media from copper wires to satellite links and fiber optics. I spent quite a bit of time working with the ITU in Geneva and the domestic standards bodies in the US, Japan, and Europe to promote more aggressive standards for communications. For those in the computer science racket, I had worked primarily on the bottom four layers of what is called the ISO model with a lot of emphasis on the basic plumbing.
I had a dual career ladder of following innovation from the lab into the marketplace, managing it, and then going back and working on new variations and improvements. I went back for an MBA along the way, ran a major business unit with billions in revenue, rode a couple of Silicon Valley startups with a couple of notable successes, and that was that. I had the chance to do a lot of M&A work during the height of the tech bubble, which was very interesting, indeed.
So I think I have some talent in systems work and pattern recognition. I have always had a knack for taking a problem and tearing it down, developing some approaches to solving it, and finding those areas where it is most likely to fail. This served me well in business. And all the pattern recognition work I did in the labs helps me in charts as well as in understanding the flows of money through an economy. At least I think this is the case.
8. You often look at the “human” – some would say spiritual – factor in your outlook into today’s financial crisis. What role do you think this dimension played in creating the current crisis, and what role do you see it playing in the solutions to it?
I have been very fortunate to have the opportunity to speak with and obtain a passing friendship with a number of very worldly wise people in my life, from politicians to inventive geniuses, businessmen to billionaires. I think this was because I was always ready to listen to the wisdom of experience, and so obtained mentors along the way by asking questions. I once posed this question about the human factor in social change to Pierre Rinfret, who was an economist and quite knowledgeable with regard to worldly things like politics. He thought that there is always a mixture of personality types in any culture. The culture rewards and promotes certain types at various times, and this often moves in cycles. These types can obtain power and wield quite an influence on the rest of their society in terms of policy and values, and popular thought.
He believed that the same type of people who had risen to prominence in the 1920's were back at it again in the 1990's, and that we would pass through a similar cycle. We differed quite a bit on the potential outcomes, but I resonated heavily to this thought, based on some early exposure to cycle theory I had obtained from the work of
Pitirim Sorokin and of personal observations after 25 years in a Fortune 100 corporation.
People are mostly the same around the world, but certain cultures reward and emphasize certain types, so that the culture takes on a different flavor from one to another, and from this time to that time. Japan and the United States are quite different, but I would submit that the distribution of natural personality types are roughly the same. They are just trained and restrained differently, and people will dampen or encourage their own mixed tendencies and preferences in accord with social norms.
Quite simply, this cycle will continue until things get bad enough, and then it will change or be changed.
9. Jesse’s Café Américain was recently rated fourth in a ranking of the most influential blogs in financial media by Mindful Money. What is your goal for the site?
I still don't understand how that happened, and since Time Magazine has subsequently ignored my site completely, I am gratefully relieved. I suspect it was because I have a heavy element of international readership, although the traffic volumes are much less than the big sites.
My goal for the site is to make my site obsolete, because the market will be so efficient and transparent that one could roughly calculate the relative risks and rewards of most investments with something like an improved Capital Asset Pricing Model, although the trick will always be in estimating the risks which do not lend themselves easily to measurement.
I doubt this will happen. I suppose that at some point I will become so tired of this that I will do something else, and then will no longer have time for the site as I will be absorbed in other things. I have made major career changes about every nine years in my life, so I am now overdue. So far this has not happened, and not for lack of my trying.
Being involved in these markets is a very discouraging experience at times, with the things it shows you about human nature. Its almost as disgusting as politics. There must be a God, because only something so powerful could have a love vast and durable enough for those who are otherwise so unworthy of it. And if not, well then, there is always Pascal's wager.
But while I am trading these markets it makes sense to share my own work, if nothing else than to obtain feedback, and introduce the impedance of having to show it to others to make me do the diligence to actually make it credible.
10. What question didn’t we ask, but should have? What’s your answer?
What was the key influence in my life, the greatest influence? I think a lot of credit would have to go to my godfather, who had studied at Harvard under the great Renaissance scholar Douglas Bush. I was always a voracious reader, and he exposed me to quite a few authors early on that shaped my thinking. As he always said, you have to bring the young mind 'flush up against the mind of genius.' Other than that, marrying my wife of over 35 years has been my best decision ever. I can safely say that every good thing that I have has come to me because of her.
If you have not yet seen the other articles in this series, you can find them here:
- Straight Talk with Jesse: Concentration of Wealth & Power Is the Root Problem – 3.28.11
- Straight Talk with John Rubino: The Damage Is Already Done – 3.22.11
- Straight Talk with Catherine Austin Fitts: We Are Victims of A Financial Coup D'Etat – 1.30.11
- Straight Talk with Paul Kedrosky: Don't Depend on Technology To Save Us – 1.21.11
- Straight Talk with Tyler Durden: The U.S. Is Free-Falling Into Bankruptcy – 12.15.10
- Straight Talk with Charles Hugh Smith: Why The Status Quo is Unsustainable – 12.05.10
- Straight Talk with G. Edward Griffin: What's Coming Next Isn't Pretty – 11.29.10
- Straight Talk with James Howard Kunstler: The World is Going to Get Rounder and Bigger Again – 11.17.10
- Straight Talk with Steve Keen: It's All About the Debt – 11.09.10
- Straight Talk with Mike Shedlock (aka "Mish") – 10.26.10
Readers can submit their preferences for future Straight Talk participants, as well as questions to ask them, via the Straight Talk forum.