$4.47 in Debt gets us only $1.00 in Growth?!

$4.47 in Debt gets us only $1.00 in Growth?!

Published on Mar 8, 2016
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259 Metric Tons of gold purchased in ETF’s since Jan. 1

$4.47 in Debt gets us only $1.00 in Growth?!

Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference

Stephen SchwarzmanThe following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More


0:00the McElhaney weekly commentary covering monetary economic and geopolitical news
0:07events
0:11get your hands out of my pocket I know what happens if you regularly put your
0:16hands in my pocket and think that what’s in them belongs to you you’re gonna
0:19think that everything belongs to you and lo and behold that is the curse of the
0:23modern era where again we have printing presses which create an inflationary
0:28bias and which also conveniently continue to increase the tax take by the
0:34you s Treasury now here are Kevin oric and David McElhaney
0:44welcome to the metal veiny weekly commentary along with David Michael
0:48Franti David goals had a great run here i mean we started around 10:50 here a
0:53couple of months ago and now we’re up past 12 50 but they’re still this
0:58anxiousness amongst gold owners guys who followed gold down over the last few
1:03years and have heard that it really had nothing to do with people selling gold
1:06it had to do with manipulations in the paper market what we call the short guys
1:11yeah I can imagine a prisoner of war has been slapped around so many times that
1:17every time he looks at his captor he just expects something painful to happen
1:22again and you have winces just oh not again and he told market has been very
1:27unforgiving for three years
1:29liquidations to the ETFs definitely short pressure if you’re looking at the
1:33commitment of traders and growing short commitments that is people were
1:38profiting from the downside and we’ve mentioned that something significant
1:42change to in January and what changed was the ingrained belief that the
1:48central bankers actually do hold the Sun Moon and stars in place and perhaps
1:53that’s something that’s not quite fitting for the job description not
1:56quite fitting to their skill set
1:58well in as long as that belief was there you could have the Goldman Sachs and
2:01Merrill Lynch’s dump paper contracts in the market or sell gold that they didn’t
2:05even really own you know I noticed the contract market got to the point where
2:09there were over four hundred ounces of gold being sold or purchased on paper
2:15for everyone else that actually existed we’ve never seen anything like that
2:19before but that’s happened in the last month and not just existed as in out
2:23there in the universe but was a deliverable on those contracts as it
2:27existed on comics so you know what was actually deliverable was asked in number
2:32of ounces compared to what was being traded but for every short every time
2:35you sell something short that has to be covered at some point and are we seeing
2:40short squeezes not just in gold right now but we’re also seeing it in iron
2:43we’re seeing it in copper we’re seeing it in areas that we thought were going
2:47to go down forever it seemed well and that’s where the squeezes have been the
2:51most
2:52attic and iron ore this last week oil the stock market there has been some
2:57significant movement higher has people have been short the market have had to
3:01cover been inspired to cover being on the wrong side as the price starts to
3:04move against them a little bit different in that it’s not entirely short squeeze
3:09that’s driven the price thus far the amount of the houses that have been
3:13bought through the exchange traded products which will talk about it a
3:16little bit has been considerable and that really does represent a sea change
3:20after three years of liquidations liquidations liquidations now you have
3:26purchases purchases purchases and this is not a game this is actual metal that
3:30has to be set aside and is taken out of the system which is intriguing so when I
3:36say there’s a sentiment shift this is people changing their minds about the
3:41extent to which central bankers can control economic outcomes and that is
3:46changed because the evidence shows that it should change the evidence shows that
3:50actually QE has not created a tremendous amount of economic growth whether it’s
3:55in Europe or the United States actually negative rates continue to disappoint
4:01both in the european space but also in Japan and you have corroded who’s being
4:06asked the question is there more that you can do well yes he can take rates
4:09even deeper into negative territory that these again are indications to the
4:14average investor that yesterday we thought they had it well in hand today
4:19we believe that they have challenges which cannot be addressed with the tools
4:23they have in there too long and I have to say discussing some indigestion the
4:26in wall street date you know people remember the movie Wall Street where
4:30Michael Douglas went to No
4:32lunch as long as the markets are doing what they’re gonna do let’s go have a
4:36little steak tartare attempt on the green you know it and the Manhattan
4:41restaurants at lunchtime especially the steak restaurants are full of
4:45stockbrokers who are just assuming that the central banks have things under
4:49control the volatility index if you recall last year at this time we talked
4:53about the usual certainty that was in the market why not go to lunch central
4:58banks have got our backs covered
5:00that seems to be changing these guys are missing lunch here a lot more than
5:03they’d like to and most of your big steak houses whether it’s Bobby van’s
5:07Delmonico’s sparks nothin lewinsky’s just to name a few
5:12they’re more and more and eat lunch time according to Bloomberg article which
5:17it’s not an article that saying paleo
5:20protein specific diet is out it’s that this massive decline and lunch visits in
5:27the city has to do with people wanting to stay at their desks they need to stay
5:32at their desks and volatility has increased you had radical intraday swing
5:37this and they’re being generated by high-frequency trading algorithms and
5:41your lunch out may cost you more than the tablet may cost you your job it is a
5:46traders market after all and you’ve got guys take for instance the Goldman Sachs
5:51this week cutting five to ten percent of the fixed income and forex group who
5:55wants to be the guy that away from his desk when consideration is being made as
5:59to who stays and who goes so low and behold this job insecurity on wall
6:04street plays itself out in this forum
6:07there’s no more to martini lunches so those blue crab cakes that you had at
6:11the writers in might be the last big lunch that you have before you pack your
6:14bags well you know it’s not just happening with lunch its volatility is
6:17also increasing the awareness of banks to just go ahead and pull some money out
6:22and increase their cash positions you know there seems to be mentality right
6:26now not just the most commercial banks but even central banks in Europe let’s
6:31go ahead and raise our cash that’s right to the commercial banks like HSBC who
6:36for their clients are saying I quote economic trends continue to drag lower
6:40they’re not particularly interested in increasing risk and sort of quote
6:45unquote buying the Debs they’re concerned enough to be bumping their
6:49cash allocations from what was 6% to it is now 17 percent interview their head
6:55in the right direction
6:57the report which is published this week says cash is king
7:00in a world with overhang specifically debt overhangs and the concerns are
7:05there’s the report reads unless corporate earnings start to turn up
7:09there is very limited upside for economically sensitive assets such as
7:13equities
7:14well it’s not just they just bc I mean it’s JP Morgan as well
7:18JPMorgan seems to be looking at the stock market with the sort of a weary
7:22interest at this point
7:24write the recommendation is that any bounce in price the stock market should
7:28rise you should be selling stocks into that strength but Goldman Sachs
7:33continues to say bye bye bye bye bye when I hope they’re saying someday to
7:37their clients because I wonder why they still considered a privilege that is
7:41their clients considered a privilege to be a Goldman i’d the sentiment you’re
7:45right it’s JP Morgan saying look we have a looming risk of crisis looming risk of
7:52recession the worsening outlook of economic growth it is corporate earnings
7:57which year over year are looking very ugly and we don’t see that changing
8:02anytime soon so you do see strength in the stock market again this is not a
8:06time to be enthusiastic and less enthusiastically selling ok but the
8:11system that has worked so far has worked mainly because of monetary printing
8:14quantitative easing things that we talked about come from the central banks
8:18in the form of monetary policy
8:21Dave you been predicting over the last few weeks that were probably gonna see
8:24some effort towards fiscal spending in other words if you can’t print it and if
8:30you can’t make it happen by lowering rates than what you do is you start
8:33spending on a government level and may not in an election year show up here in
8:38America but it seems to be happening north of us well and I think it will
8:42show up as soon as 2017 here in the united states and the new prime minister
8:46Justin Trudeau is reversing the priority of mr. Harper and that administration of
8:53keeping a balance budget you’re talking about Canada and the problem here is
8:57that yes you seeing slowing economic growth and this is what you the Morgans
9:01looking at this is what hSBC is looking at this is not just the united states
9:06and certainly you can march out a number of economic statistics would say oh no
9:10no the USS
9:11is in recovery but look at the top four trading partners Canada China Mexico and
9:17Japan are all deteriorating economically if they are the top trading partners for
9:23the united states how is it possible that we are growing while our top four
9:26trading partners are in contraction again if you wanting sort of extra
9:31evidence it’s just not there but it is an election year Dave so we are going to
9:35see growth numbers were gonna see better employment numbers I mean we’ve talked
9:38about this every election statistics a massage later this year I’m gonna
9:43introduce a gal who’s written a fascinating book on GDP and it’s
9:48basically a study of how GDP has been constructed through time I know that
9:52sounds very boring but the point years is you get to see how political that
9:58particular number is and when someone has the opportunity to benefit from a
10:04better printed number you know who is that person and how did they actually
10:07influence it it’s a fascinating book it’s a fascinating story and that’s
10:11something we’ll bring into the commentary later this year
10:14back to Justin Trudeau if he’s not wanting to balance a budget which is he
10:19wanting to do he wants to spend money that the government doesn’t have so
10:24government spending is coming deficit spending is coming and the intriguing
10:28element here is that world leaders are witnessing the ineffective economic
10:34response to negative rates both in Japan and other places and after the first
10:39time they’re questioning the limits of monetary policy well what a surprise
10:42what surprise the reality is politicians would like to see the benefits of
10:48monetary policy and when they don’t get what they have they do have a scapegoat
10:52they can always turn on the hand that his pet them and say look these guys
10:57just have not done their job now we will have to make up for lost time and if
11:02monetary policy doesn’t work then fiscal policy must be pushed the inclination is
11:08to quote unquote do something and that’s what they must do that inclination is
11:12just too great when you use that as an example you were a goalie growing up and
11:16you know goalies they found
11:18but you criticize the goal if he does nothing but a lot of times it’s the best
11:21thing that he can do so he has to jump to the right aureus to jump to the left
11:25at some point right I played goalie in hockey and lacrosse and soccer for
11:30punishment and there is this inclination to move in the art of the offense is to
11:36deceive the goal is to where you think he’s taking it and most often times if
11:41you just stood fast right in the center
11:44you’ve got fancy footwork to deal with the handling the puck in such a way that
11:48it looks like he’s getting around you and there goes right between your legs
11:52it’s the inclination that must be followed this need to do something we
11:57talked a couple of weeks ago at the bridge to nowhere that we have here in
12:00Durango politicians have to end its infrastructure projects and that serves
12:04as the road which Trudeau is going down and I think other politicians are as
12:10well as putting money into the pockets of the middle class that’s what Justin
12:14said he’s going to do I these infrastructure projects we’re going to
12:17put money in the pockets of the middle class and I suspect the state side
12:23infrastructure here in the United States these projects could very well start
12:27with helicopter pads in every major city are you sure you know you’ve just been
12:32ruined by Ben Bernanke ok you just thinking helicopters all the time you
12:36have more cash from the helicopter how do you get money to the people who are
12:40going to spend it can we do the infrastructure projects but then we can
12:44have direct delivery and maybe I’m wrong maybe it’s not helicopter pads maybe
12:48it’s what we need for drones Amazon’s gonna protected and maybe they can be
12:51our cash delivery service
12:53ok but let me ask you about inflation because we’ve seen monetary policy fail
12:57while they printed trillions of me not just Canada pit which created trillions
13:02of new dollars that really have not gotten into the economy they’ve gotten
13:05into asset prices but wouldn’t this be an inflationary push well that’s the
13:10issue isn’t it because money in the hands of the masses is far more likely
13:14to be circulated through the economy so that issue of dead velocity that issue
13:21of velocity say tame as they’ve printed trillions all of a sudden is reversed
13:25and some money to the masses
13:27may likely have more of an inflationary effect than they were anticipating or
13:31hoping 42 percent is what they hoped for but we’ll see how that translates as
13:36they try to put a chicken in every pot that sort of approach to monetary and
13:40fiscal policy stimulus if they don’t in fact get more than they hope for 2017 in
13:45any regard promises to be a very fascinating here and if you are as an
13:50investor on autopilot financially and you’re not concerned about this
13:55transition in monetary and fiscal policy
13:58you know that speaks really to a desperate political need to grow the
14:02economy which is where things we talked about with too much settled check last
14:05week is ingrained belief that we must grow grow grow then you’re in trouble
14:10this is a point that Robert Higgs made on our program several years ago he
14:14called the Leviathan Leviathan hats to continue to live in for it to continue
14:19to live it has to grow and for it to grow it has to spend deficit spending
14:24well it’s so what he calls the Leviathan is what we know is the state apparatus
14:27and it will feed on whatever it must in order to survive and that’s in the form
14:33of financial repression or negative rates a form of financial repression
14:37that’s just one type of feeding you’ve got engineered inflation that’s another
14:41type of feeding for the state apparatus you get the redistribution of wealth of
14:46the fiscal policies that’s yet another way that Leviathan feeds in the
14:50transition is now immediately in front of us we have fiscal policy which is
14:56meant to buttress the Grand monetary policy experiments in Trudeau is just
15:01the man who happens to be giving a voice to it but by 2017 when we have a new
15:05president he’s the first he won’t be the last to say we need to quote unquote
15:10invest which is really a politician’s euphemism for deficit spending in check
15:17last week brought up a great point he said you know we’re not against
15:20capitalism capitalism is just fine but the problem is growth capitalism is
15:24almost like a false religion the belief that you always grow that things always
15:28get better
15:29and that expectations seems to come into the political mainstream I mean
15:34trudeau’s just responding to what a politician does and that is a promise
15:38continual sunny days right well economics professors may be too much is
15:43notable exception here they insist on proposing the same things over and over
15:48again even results are disappointing mark Shriver is always providing a wide
15:53range of if it to me very historically interesting quotes and he brings goethe
15:59into the mix this week I quote such people continue an error because they
16:04are indebted this is speaking of the professorial type such people continue
16:09an error because they are indebted to it for their existence they would have to
16:14learn everything over again and that would be very inconvenient how can their
16:19experiments prove truth with the basis for their evaluation is false
16:23they do not prove truth says get to know our is such the intention is the only
16:29point with these professors he says is to prove their own opinion they are
16:34perfectly satisfied if they can create a way empirically had a few brought up
16:40something to the group here just a few hours ago when we were meeting that for
16:45the person who does want to come in and balance the budget let’s say we have a
16:48presidential candidate who comes in and balances the budget will be immediately
16:53puts us into a depression of course because we’re living on life support
16:57right now the economy has to have this deficit spending and we have absolutely
17:00no growth you brought up in the example of the central banker right after world
17:05war one in czechoslovakia who came in and did all the right things with not
17:13too great of an outcome for him but the economy itself for Czechoslovakia they
17:18were the beneficiaries of a great policy that ended up getting him killed at the
17:23Trade
17:24racine was responsible for taming inflation post-world War one and
17:30bringing about some economic stability in czechoslovakia but it took pains to
17:35do it well the problem lies what he implemented
17:38created a recession and that was necessary in order to sort of clean the
17:43system out and within 24 months the economy was rip snorter growth I mean it
17:50was the right thing to do but the emotional response of people who are
17:54impacted by that we’re talking about an emotional response we’re not talking
17:57about a rational response of the simplified when people experience pain
18:01they react and that pain response to our racine was I will feel better if you are
18:08dead and the assassinated in doing the right thing I mean I think there’s only
18:12one candidate who would do the right thing and attempt to balance the budget
18:15I think it’s Ted Cruz but you know Ted Cruz would put us in a greater
18:19depression doing what makes sense to you and me in terms of economic policy
18:23pursuing a balanced budget trying to sort of clean up this mess and this debt
18:29addiction that we have I think he understands the issues in play the
18:33problem is
18:34since you’re talking about a teetotaler which I believe is the problem is a
18:38teetotaler is not the person you need for counseling someone is trying to get
18:42off of an alcoholic addiction because that teetotaler might give them advice
18:45that kills wrote well and the people just don’t seem to want it so let’s just
18:49go ahead and say infrastructure spending deficit spending will probably be a part
18:53of whoever the next president’s attempt to please the people that’s because the
18:58economist on both sides of the aisle whether they’re republicans or democrats
19:01whoever makes up the president’s economic council they subscribe to this
19:06idea of smoothing the business cycle in so yes at this point infrastructure
19:10spending will be apart of the next us’ president’s attempt to do that
19:15smooth the business cycle promote growth and it is a critical tool that will be
19:21used to respond to the next round of economic crisis are challenges rest on a
19:27faulty thesis which is what’s pointed out as a continual growth expectation
19:32that’s right we must have growth we must continually push for it by any means
19:36whether that’s debt whether that’s inflation or anything else that enables
19:41us to live at a level we think we deserve which is actually beyond our
19:47means david is an amazing the periods of deflation in history
19:51shown that sometimes that’s when the most money actually gets into the
19:55pockets of the middle class let’s say Rana can it’s fascinating to me I read
19:59the Bank of International Settlements paper this last week and it highlights
20:03all of the instances of deflation going back about three hundred years and it’s
20:08fascinating that economists’ pick on the nineteen thirties deflation here in the
20:13united states and if you look at the panoply of deflation ‘he’s that we’ve
20:17seen in the historical economic record that’s the one that doesn’t fit any of
20:23the others which one does not look like the others in yet that’s the one they
20:26refer to always is the nineteen thirties the test case for what we should learn
20:30from deflation because in fact the irony is that the great periods of deflation
20:35including the one just prior to World War one major period of deflation it was
20:40full of growth you had real wages which were on the increase in fact you were
20:47flirting with deflation for a better part of a hundred years in England and
20:51then in the United States as well and in David Hackett’s book The Great Wave he
20:55highlights how real wages were on the increase from 1800 to 1900
21:01this was a period of monetary deflation which subsequent historians and
21:07economist have written off as particularly harsh you have swings in
21:12employment when don’t you have swings employment but what was actually
21:16happening is that it was incredibly generous here average tradesmen you had
21:20an increase in real wages which is an increase in household wealth the problem
21:27for central planners primarily in the 20th century this is a twentieth-century
21:32problem is that wage increases because they’re in the form of decreasing prices
21:38paid for the things that you want it’s not taxable rate so if the economy looks
21:43like it shrinking in monetary value the tax intake is lower even if you’re
21:49coming away with more in your pocket I don’t know the island’s ever pointed
21:53this out but 1913 was when we created our central bank and started running the
21:58printing presses 1913 is also the year we created the income tax
22:03we did not have an income tax prior to nineteen thirteen which means they could
22:08guaranteed no more deflation as long as they get pretty well in this is a
22:12question of who deflation is good for it actually was good for the tradesman his
22:16real income was on the increase
22:18not necessarily good for those who would be indebted not necessarily good for the
22:24banking system that the debate over income tax in this spree 1913 period was
22:30fairly intense the new york times in 1909 says this win man get into the
22:35habit of helping themselves to the property of others they cannot easily be
22:39cured of it
22:40the discussion was get your hands out of my pocket and I know what happens if you
22:45regularly put your hands in my pocket and think that what’s in them belongs to
22:48you you’re gonna think that everything belongs to you and lo and behold that is
22:52the curse of the modern era where again we have printing presses which create an
22:57inflationary bias and which also conveniently continue to increase the
23:01tax take by dus Treasury
23:04you wonder where that hey we have to have 2 percent inflation comes from the
23:08deflation is an evil to be fought with no elements to it at all and our modern
23:13economists’ look at the nineteen thirties as the only period of deflation
23:17as a test case and as it stands out according to that study by the Bank of
23:21International Settlements it actually is the anomaly is the one period of
23:26deflation which is unlike every other period of deflation their 24 so read
23:32explore this more fully in the months ahead but I love with fiber published in
23:37one of his recent research reports
23:38comes from Michael Lebowitz and it shows a point of departure between our economy
23:45and the massive levels of debt which over time have accrued anyone want to
23:50guess where that gap begins to appear where our debt levels are increasing
23:55dramatically more than art general economy as a GDP is so at some point
23:59what you’re saying is there is a time when debt increases in GDP increases in
24:03their somewhat stable together
24:05okay and then there’s a time when debt just increases exponentially relative to
24:10the size of the economy from 1968 to 1980 this period is where if you’re
24:17looking at the chart you see a radical departure let’s call it the seventies
24:21and eighties was not interesting that’s just about the time that the Bretton
24:24Woods system fell apart I mean we went off the gold standard in 1971 it’s not
24:29without coincidence that that was the last period of transformation in our
24:34monetary system that is the end of the Bretton Woods monetary agreement 1971
24:38was the formal date but you had deteriorated throughout the late sixties
24:42which preempted the nixon administration’s quote unquote temporary
24:46supposed to be temporary suspension of the dollar gold peg in the next month we
24:53do want to explore the transition in the global monetary system and the
24:59transitions we anticipate in the near future to this global monetary system
25:03where did invite harvard political economist Jeffrey Friedman into that
25:07conversation along with Michael Pettis who’s been a guest on the program before
25:11has tremendous respect for Jeffrey Friedman’s work there
25:14Harvard well Mike Barry Eichengreen these guys have input into the people
25:20who are making the decisions about the next monetary system in our discussion
25:23with freedom is going to center on which monetary systems cater to which
25:30political constituencies explorer who in the 21st century will receive
25:36preferences and why this has been his area of expertise I mean I think he’s
25:40one of the only guys who’s written concisely about this I think the
25:44political debate over money will in our day be as contentious be a spirited as
25:49any we’ve seen in the past due to the extreme benefits of a particular
25:53monetary system which are conferred to a particular group and society more than
25:59ever we are very aware of the extreme nature of rich and poor we have this
26:04wealth invalids and it’s been exaggerated buyer central bank monetary
26:09we’re seeing it with Trump and standards and we’re seeing the anger toward that
26:13it is the issue of the day right at those too
26:16people reflect a middle-class revolt if you will
26:21from the establishment party lines and they’re just flat and angry part of it
26:26they’re angry about is this radical departure of the common man’s wage from
26:31the super rich and it’s the same kind of political rancor that we saw in the days
26:36of the robber barons and I’m telling you the conversation will ultimately center
26:41on the nature of money and the monetary system that we have as it did in
26:45previous generations because remember when we went through the period of
26:49determining whether not gold was going to be central to our monetary system or
26:53gold and silver medalist system silver was wanted by your export community and
27:00your agrarian people who are running farms why because silver was inherently
27:04inflationary there was more of it and you could inflate the monetary system
27:07more easily with it then you could gold and so with that inflationary bias there
27:13were people in the economy who benefited and therefore wanted it and lo and
27:17behold dunno why the gold system is chosen it had to do with stability being
27:23favored by the banks and Wall Street Journal usual way we don’t have that
27:28anymore and to be honest with you I prefer the gold standard not because I’m
27:31a banker but because I prefer stability
27:34well that’s right all boils down to balance of payments no we don’t have to
27:37located but you know when you have gold if you spend more than you have then you
27:42have to ultimately balance payments with the real stuff now let’s go to a
27:46different issue here then there was a time Dave when the decision was made to
27:50start going into debt in this country we’re the largest creditor nation for
27:54hundreds of years several hundred years then we became the largest debtor nation
27:58quickly so there was a time when you went $1 into debt and you got $1 worth
28:04of growth ok but you passed that period of time and then you start going $1 into
28:09debt and you get less than a dollar in growth so can you give the progression a
28:13little bit of how that works to the previous issue that Leibovitz was
28:17highlighting this research is it coincidental that are dead problem began
28:22to accrue starting in about 1968 and 1971 is the gold standard started
28:26falling apart we started with debt to GDP
28:29running at equivalent levels by 1987 a short time after the gold paper money
28:35disconnect our total outstanding credit that includes private corporate and
28:39governmental debt had reached this again by nineteen eighty seven hundred and
28:43fifty percent of GDP ten years later
28:471997 were at two hundred and fifty percent of GDP what that means is for
28:52every dollar in growth you’re spending two and a half dollars in debt
28:56ten years later after that we’ve 2007 who he’s nearing three hundred and fifty
29:00percent and I think by 2017 will in all likelihood exceed four hundred and fifty
29:06percent of debt to GDP again we’re talking about total credit which
29:10includes private corporate and governmental this is the trend since
29:152000 taking in a rolling average since 2000 in order to grow the economy we
29:22have averaged an increase of $4.47 of new debt to achieve $1 of economic
29:29growth is an extra dollar of GDP growth so I think of the girl to comment and
29:34realize that although these numbers are unique to our circumstances story the
29:39cause is not unique people with ideas right history for better for worse and
29:43the ideas that are writing our history are worn out they have been for at least
29:49forty years they’re gonna probably still dust them off interim again I mean like
29:53you said they’re going to deficit spend some more to build the infrastructure so
29:57you’ve got the trudeau’s of the world who will continue to pile on more debt
30:01as a quote unquote stop-gap measure its not stop it’s the whole story it’s what
30:07has driven our and the global economy in a growth mode in recent decades it’s
30:12excess liquidity flowing here flowing there but that excess liquidity has
30:17grown significantly because debt and liquidity are today one of the same
30:22thing what subjects said last week you know GDP is really not gross domestic
30:27product it’s gross debt product
30:30ok so let’s go ahead and talk about payroll taxes ok
30:34the labor department is going to continue this year we’ve already talked
30:37about it being an election year we’re going to see numbers that are
30:40questionable but are they real
30:43there is this curious case of flat payroll taxes even as the labor
30:48department boasts of new jobs you think about this you’ve got a rising workforce
30:52in increasing workforce which should mean there’s more people getting paid
30:57which means there should be an increase in payroll taxes and yet this point
31:02about Jim Rogers this last week and this a brain teaser how do you have payroll
31:06taxes not rising at the same time that the labor market is improving so again
31:12you have to look at these government statistics and say I mean is this like a
31:17creative writing course the question posed by Jim Rogers this past week was
31:22what he do what he did with payroll taxes it’s inconsistent and he was
31:27suggesting this in the context of saying basically there’s a hundred percent
31:30chance of a recession in the next year do you consider the jobs numbers from
31:34last week when you look at them yes there’s reason to hold them suspect we
31:39have January numbers now we also a February numbers now and what you
31:44normally expect is retail carnage following the Christmas holidays how is
31:50the Labor Department reversing what has been a law of the jungle if you’re
31:54talking about retail you know where you hire people in late November and early
31:59December your staff up for the holiday season where you make 75% of your money
32:04in retail and then you lay off in January and February because those here
32:10slow months and yet the labor department is telling us that you have no not a
32:15diminishment in retail jobs in January and February but an addition of 55,000
32:21retail jobs in February and that’s after an increase of 62,000 jobs in retail in
32:28the month of January so this is where it looks like a fish if it swims like a
32:33fish if it smells like a fish maybe tissue maybe it’s fish well
32:37you know shifting to China just for a little bit here because China doesn’t
32:41seem to apologize about watching its people controlling its people so in a
32:46way gives us a good chance to see the direction maybe were going to go you
32:50know snowden when he came out he revealed what the NSA was gathering
32:54honest we’ve already heard the Google Google their whole goal is just to
33:00accumulate in a bit of information they don’t care how it’s gonna be used they
33:03just want to control all information we interviewed a year and a half ago or
33:07about a year and three months ago Nazli Shokri who was an expert at how the
33:13borders between countries are falling because of the Internet in you know she
33:17said there’s only four outcomes one has to do with freedom but the farthest on
33:22the 4th outcome has to do with complete loss of freedom you’ve gotta listen to
33:25that if you haven’t listened to that interview go back to December I think it
33:29was 2014 with it and listen to it because she’s well-spoken she didn’t
33:34have an agenda she said look let’s look at this as a fact I T I think added a
33:39lot of value to this conversation about information control its China now who is
33:45setting the newest standard for status problem solving using big data and the
33:50status problems that they want solved our unique hits the Chinese Google but
33:55it’s going to be applied to watching the people but pre crime basically like the
33:59movie win big brother meets take data what do you have in this is a platform
34:05that euphemistically they’re calling a united information environment IDE
34:12chairman of our listeners have watched the Tom Cruise movie Minority Report
34:16Bloomberg this week wrote about the Communist Party in China empowering the
34:21largest state-run defense contractor they have 25 billion USD in revenues
34:27this is the China Electronics Technology Group they’re developing software
34:30application for pre crime before you do it they’ll know before you know that’s
34:34right and they’re gonna know what actions you gonna take of a terrorist
34:38orientation as they link your bank accounts your job your hobbies your
34:42consumption patterns footage which they collect from surveillance cameras web
34:47traffic activity social media data along with of course the secret file that they
34:52keep on almost every Chinese person called the day I proudly announcing that
34:57incorrectly which contains your work permits your health records your school
35:02reports in select cases it even has personality assessments and of course
35:06all the data points which are kept on record
35:08collected from neighborhood in formance they combine this the analyzed it
35:12without rhythms and it helps them predict terrorist activity it helps them
35:16identify subversives
35:18really does it sounds like the movie and you know you said you may be
35:21mispronouncing it but I’m thinking that the American translation if you call it
35:24the day on in China I think it’s the dang it here in America I don’t want to
35:29know that well it’s the laboratory of human control and coercion which has
35:34been newly inspired and upgraded with the latest technology in the latest
35:39technological toys I realized that it was the last clinton administration
35:43which shared missile technology with the Chinese but I wonder if it’s the next
35:48clint administration which looks for a little quid pro quo a little reciprocity
35:52and once the algorithms for themselves we know the FBI the NSA would no doubt
35:56keep such software from being abused I mean they respect our constitutional
36:00rights we know that for a fact you can trust the government we know that for a
36:04fact and certainly on the side of the pond we have great confidence in the
36:08ability of our government to take a vast amount of data in never ever ever ever
36:14ever abused it I know I’ve brought up my Amazon Prime account but I’m watching
36:19how societies evolving around Amazon Prime in around Google and I can see it
36:24even in my own account the other day ordered a couple of books that were sort
36:27of out of character of the group of books that I’ve ordered in the past and
36:31it was amazing how the recommendations had changed you can imagine if the
36:35government’s watching them in saying
36:37huh has he got some new ideas speaking of new ideas I loved the conversation we
36:44had with too much last week and did put a dent in my bank account because from
36:50Amazon ended up with about two boxes of books I savor part of any book is a
36:58bibliography where I can ask the question if I appreciate what an
37:03author’s writing what informed their thinking on that topic
37:07who did they read how did they come to these conclusions and so the curiosity
37:12trail goes deeper and deeper and deeper and wider and wider and wider and
37:16sometimes you end up reading stuff that you like I don’t know how it fits in but
37:20lo and behold you do find ultimately value-added in terms of the way that
37:26books have influenced other authors that you respect and well Dave and I’m gonna
37:29reveal something I hope you don’t mind me for revealing to the listener but
37:32there’s three things you do when you read that I think you should be imitated
37:36one is you rewrite the book while you’re reading it you don’t own a book that
37:40you’ve read that you haven’t completely marked up and written in that’s number
37:44one number two is a lot of the guests that we have I’m like Dave where do you
37:50come up with the guests that we have a lot of income from bibliographies they
37:53come from books that you’ve read that you read the bibliography you order the
37:57book in the new talked to the next person down that’s a great second way to
38:01do this in the herd people civil where did he get his vocabulary including me I
38:07have to go look things up sometimes after we do a show like what what did he
38:10just say but at the end of all of your books on the last page of the book any
38:15word that you encounter as you come across that word you write that word in
38:20the back of the book and you make an effort to actually add that to your
38:23vocabulary I’ve always appreciated the three aspects of the way you read and I
38:28think that would be a good practice actually for any young person listening
38:31to the show start marking in your books started working at the bibliography in
38:36ordering other books and if you come across a word that you dont understand
38:39ur you’ve never heard before
38:41write it down and learn it I think most people are familiar with the concept of
38:44active listening
38:45where you are engaged in a deeper level in a conversation with someone and it’s
38:49difficult to have a real conversation with a lot of the people that we do read
38:54because quite frankly a lot of the people who have written books were
38:57interested in their dad so how do you listen actively as you’re reading a book
39:02that is an active reading posture and so yes I have two different plans I usually
39:06have two pins in one hand a red and a blue and I’m writing different notes
39:11relating to different things in the margins but there is an active listening
39:15which you can bring into a book which allows you to get a lot more out of it
39:20remember a lot more of it own it and you in essence have had a legitimate
39:25conversation with the author versus a more passive approach of I think I
39:29remember this in such maybe he was talking about this in such I debate the
39:33author often times when it’s not just a book did you read a lot of newsletters
39:37you read a lot of reports ok let’s take jim grant you have an active
39:42conversation with Jim Graham both personally sometimes when he’s on the
39:45show that you have a very active conversation with him in his newsletter
39:49Bill Gross ok shifting back to the economy this week I know that you
39:54appreciated what Bill Gross had to say and his comments I think our spot on as
39:58we’re talking about debt in the limits of debt as fascinated by Bill Gross’s
40:02comments this week as he says look decades of credit expansion is coming to
40:06an end to let this sink in and we’ve said this before it was her hope here
40:11and I’m day I know if we are at the end of a multi-decade credit expansion what
40:17are the implications for money what are the implications for investors what are
40:22the implications and if this is the case he suggests banks are permanently
40:26damaged in we will not return to pre-crisis 2008 2009 levels and as we
40:33discussed earlier there’s only so much depth at an economy can carry before
40:38growth slows the for growth goes negative or you start the write-down
40:43process where you begin to have to wipe out some of that debt
40:46and that deleveraging of it is what the financials specifically your banks and
40:50Wall Street firms have long feared and it’s also what the central banks have
40:54fought with every tool in the box on this brings me back to how we started
40:59this program you know one of the fears that gold owners or future gold owners
41:03have is the control that so far has been exercised in that market in the paper
41:09futures market but the investor market now is the swing vote isn’t it the
41:13investors are coming in they’re saying no I’m not buying contracts go ahead and
41:16give me my cold I mean look at the ETF gain in tonnage of gold just in the
41:22first two months of this year the predictable sources of demand in China
41:27India primarily jewelry demand you know that 2,500 to 3,500 tons per year are
41:34going to disappear into those packets which you can count on that every year
41:38right
41:38add to that some central bank to man which has become positive since 2009 and
41:43that’s an interesting trend in and of itself to think about central banks
41:47accumulating gold after twenty-eight years of getting rid of it but then
41:51you’ve got this small segments and it is the smallest segment but this is where
41:56prices are made
41:57prices in any asset are made at the margins if you have one more buyer then
42:02you have sellers than the prices are going up if you have one more seller
42:05then you have buyers that prices are going down to it doesn’t take that much
42:09in this case it is actually quite a bit after three years of net withdrawals
42:14that is liquidations from the gold exchange-traded products you have
42:19inflows since january first of two hundred and fifty-nine metric tons
42:24that’s two hundred and fifty nine tons of coming off of the market and going
42:27into a vault that’s right that’s the most since June of 2010 investor
42:32sentiment has indeed shifted and it appears that the cyclical bear market in
42:38gold is over we continue to see consolidation of your year-to-date gains
42:43I think we will over the next month or two
42:46typically april and May are not the strongest months of the year for gold to
42:50see us digest what we’ve seen since the beginning of the year would be normal
42:53but I think as you head towards the fall
42:56I think you see a continuation of growth trends which takes us back to that 2001
43:01to 2011 growth trend all over again why is the world considering gold this time
43:07it’s a little bit different this time then in that 2001 to 2011 period
43:12certainly there are economic similarities we had more debt than we
43:18needed them and we’ve doubled down said that is a very real element but on top
43:23of that we have seven trillion reasons why people are moving in the direction
43:27of gold that’s the number of dollars currently in negative yield in
43:32government bonds and there’s gotta be more added to that they’ll be ten
43:36trillion reasons why people are moving to gold over the next year or two as we
43:40add to the number of negative yielding government bonds and people begin to ask
43:45that question do I believe that the monetary mandarins of our day to central
43:49bankers who have become our central planners do they have this well in hand
43:54are they
43:55achieving what they told us they would in the real world economy via monetary
44:00policies it to the degree that that confidence fades with us you have a
44:04sentiment shift and a major adjustment ahead a major adjustment had not only in
44:10the gold market to higher prices but also the stock market in equities to
44:15lower levels and it was just talked about the stock market before we wrap up
44:18here because there are many of our listeners that are still in the stock
44:22market and they’re wondering what the levels should be this year or going into
44:272017
44:28the current bear market in equities has been in place for over a year and it’s
44:33evolving into a similar pattern like we had in 2008 2009 and initial decline
44:39which your pundits have categorized as a healthy correction and of course they’ve
44:43only categorize that after the fact it’s not as if they said well we need a
44:47healthy correction and should anticipate one once you’re down 15% to save face
44:52you say it’s a healthy correction don’t worry about it this
44:56is in the context of deteriorating market breadth that’s just a technical
45:01measure of buying and selling and the number of stocks that are doing well
45:06versus the number of stocks that are doing poorly and there’s far more stocks
45:11that are in a declining trend than those few standouts where investors are sort
45:16of clustered around in focus their energies you’ve got a decline in market
45:20breadth you’ve got declining earnings you have a weakening economy which all
45:25opens the door for face to their market later this year alone like you said JP
45:31Morgan JP Morgan is saying go ahead and sell into the rallies are they not
45:35that’s correct you get hSBC is well it we spoke of earlier increasing their
45:39cash position preparing for what lies ahead which in our opinion if you’re
45:44looking at the Dow Jones Industrial Average is a sub 15,000 number with a
45:48shot to even some 13,000 this year its gonna hurt some portfolios definitely
45:54and I think since January 1 what is fascinating if you’re looking at these
45:58market dynamics this is absolutely critical if you wanna say they’ve known
46:02and we had a correction now we like Goldman Sachs believe that the stock
46:07markets moving higher rip snorter will have a great finish to the end of the
46:10year
46:11explain this to me then this is what I would consider irrefutable proof that we
46:16have tough times ahead as the price declined by 15% in the Dow and the S&P
46:22it was with increasing volume as we’ve watched this what I would consider bear
46:28market rally it has been on declining volume and that is never the basis for a
46:34next move higher if you talk about a bull market in stocks you need to see a
46:39major rush to the entrance and what you’re saying instead as a major rush to
46:44the exits and then on every rally just as JPMorgan a suggesting it’s being sold
46:48into and there’s not that many people who want to buy so declining volume
46:52trends
46:53stock prices increase and increasing volume trends every time you see a
46:58downswing
46:59that I think has to be paid attention to it is a tell tale of a bear market you
47:05know last night we were out eating dinner and they had on the television
47:08one of the games that’s moving into this March Madness you know one of the
47:11basketball games and I couldn’t tell whether the game was a big year and they
47:16don’t follow it that closely but the cameras in the should’ve done this the
47:19cameras took a pan of the lack of audience and I thought well these are
47:26two teams that nobody cares about there were virtually no one in the seats
47:30except for the parents of the players and go ahead and let’s continue with our
47:36dinner will watch something a little bigger later and see that’s the thing
47:38the stock market we don’t get a chance necessarily to see the pain of the seats
47:43how many people are actually interested in what’s going on we just see the
47:46numbers go up and down but what you’re saying is the numbers when they do go up
47:50we’re seeing more and more seats vacating that’s right and i think that’s
47:54absolutely critical the volume statistics are telling you what’s next
47:59so invest or divest accordingly so we’ve talked about the stock market talked
48:05about bonds we try to cover these areas we’ve talked about bolt we’ve talked
48:08about oil little bit about politics but what do you do on that so what’s your
48:13recommendation were two months and we’re actually in our 3rd month into 2016
48:18where do we go from here what’s the recommendation to the person who’s
48:22listening who’d like to have some sort of guidance you know for anyone who’s
48:26been listening this is going to sound like Pete and repeat if this is the
48:30first time you’ve heard asked if a recommendation that it may be trash or
48:33refreshing first I would make sure you have an adequate store of liquidity and
48:39what I mean by that is either cash or gold bullion I mean these are things
48:43that represent money and liquidity and allow you to prepare for what is next
48:49I don’t look at gold and silver as sort of a cul-de-sac where you go you park
48:53you die
48:54it serves a purpose at some point you will spend ounces you will spend dollars
48:59you don’t hoard dollars for the sake of owning dollars do have them for the sake
49:03of something else its potential energy is what it is that’s exactly right so
49:07increase your potential energy now what does that mean in practical terms it may
49:12mean reducing I’d equity portfolio exposure i think you must have some
49:17offset to the impact of both monetary and fiscal policies moving forward so I
49:23see gold as coming back into the limelight in 2016 2017 and 2018 I think
49:30we’re back in the same kind of market moves that we had in that 2001 to 2011
49:36period there will be years immediately ahead of us where we have double-digit
49:40returns if I had told you that last year you would have laughed at me to say it
49:44this year is just to say what has already happened in two months not 12
49:49and we could book our profits for the year and have had a very good year in
49:53these two months what i’m saying is that as sentiment shifts and people are
49:57concerned about risks inherent to the global economy and how we grow from this
50:04point I think you begin to see an allocation shift a massive allocation
50:09shift prioritizing cash prioritizing gold prioritizing low volatility and low
50:15risk however you can define low volatility low risk and liquidity i
50:19think is absolutely imperative we haven’t done it already
50:23the market may be giving you a gift right now as JPMorgan suggests you
50:26should be selling into strength you’ve been listening to the McElhaney weekly
50:29commentary I’m Kevin O’Rourke along with David McElhaney you can find us at
50:34McIlvaine a.com
50:35see a LV nor I dot com or give us a call at 800 525 9556
50:46this has been the McElhaney weekly commentary the views expressed should
50:51not be considered to be a solicitation or recommendation for your investment
50:55portfolio you should consult a professional financial adviser to assess
51:00your suitability for risk and investment join us again next week for a new
51:04edition of the McIlhenny weekly commentary