$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?!
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
