Wolf Richter joins the podcast this week to discuss the deterioration of the global macro situation, and how he is seeing growing signs of recession breaking out across the economy:
I think that was one of the biggest mistakes the central banks made during the financial crisis: They stopped the debt from blowing up. So we never had a cleansing.
In a recession, normally companies de-leverage. They go through bankruptcy, they shed their debts, and you have this big wave of debt restructuring. This is painful for bondholders and banks, but it clears out the crap that is clogging up the pipeline. And so these companies reemerge or get bought out and the debt just disappears. The same with consumers: they unload their debts through various methods, and so when the recovery starts, you are not suffocating under this huge load of debt.
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That has not happened in the United States, particularly, but in other countries, too. That debt never got fully blown out. And then the recovery started with 0% interest rates and monetary stimulus, which only encouraged companies and individuals and governments to take on even more debt. So now we’re burdened with such an enormous amount of debt that I think it is very hard to even breathe for the economy. A lot of people out there are worried about this, which is why you hear now voices saying we need a serious reflation. They need to come up with a lot of inflation to wipe out that debt. And of course, that will be a fiasco for our economy because if you have any uptick inflation without an equivalent uptick in wages — which we have not been getting — then you will destroy the consumer. And so this is not a great solution either.
But we are still solving the too-much-debt-problem with too much debt. I mean, the Fed is still saying We will make money for free and you just need to borrow more money, and that’s its solution to having too much debt. It’s insane when you look at it.
Restaurants, a classic leading indicator of economic spending, are having one of their worst periods since the 2008 crisis:
Restaurants are a key indicator in an economy for discretionary spending. You do not have to go to a restaurant, you want to go. So we keep our eyes on restaurants for that reason, plus it’s a big part of the economy — it is about 4% of GDP, about 10% of the jobs.
Now we have indications that the industry is running into hard times. We have restaurant bankruptcies this year of chain restaurants. They are just piling up and of course these are all the older chains that have taken on lots of debt with encouragement of the central bank and now the leases are going up and expenses are going up and sales are going down, and the only way out is for them to declare bankruptcy. There are, I think, 14 chains that have declared bankruptcy in the last 10 months. That’s a lot. That’s as bad or worse than during the financial crisis.
We have the restaurant index that has dipped into the negative now. We have the restaurant owners and operators getting bearish on the overall economy. They are usually a pretty optimistic lot and so now, in the next six months, they are seeing that it is going to get worse rather than better. So, the restaurant business is getting hit. The casual dining, fast dining sectors — these are the ones that are particularly under the gun right now. If you’re running a restaurant like a TGI Fridays or Black Eyed Peas or one of those you’re losing your customers. People do not have enough money and they are cutting back on restaurant spending.
And housing in previously “bulletproof” bubble markets like San Francisco are finally straining under the weight of their unaffordability:
So the numbers, they seem really crazy to people to the people who live in other parts of the country.
Here in the Bay Area, San Francisco isn’t even the most expensive place. Palo Alto and Silicon Valley are a lot more expensive. But San Francisco is big so we see the numbers. I think the median teacher makes around $65,000 a year here. I mean, forget about buying a house. There are not that many houses in San Francisco; they are very expensive, like a $1.3 million median price, somewhere out in the Avenues, far away from everything. So let’s talk about apartments, let’s talk about condos. For renting an apartment, if you have a salary of $65,000 a year and you are looking at a one bedroom apartment, nothing fancy, just a median one-bedroom apartment that rents for $3,400 a month, a little over $40,000 in rent a year. So you pay taxes on your $65,000 in salary and social security and so-forth, and then you have practically nothing left to be on rent. So forget buying groceries, forget buying clothes, this is it. So you have to pack a two-teacher couple into a median one-bedroom apartment and that will barely work financially. And raising a family in a one bedroom — and one-bedrooms in San Francisco are small, I mean these are tiny places — people do that, it’s not uncommon. This is what we call a housing crisis: when the median income cannot afford a median home anymore. You need to be quite wealthy to afford a median home.Now if stocks double or triple in price, it doesn’t really have an impact on the real economy. People do not have to live in these stocks. They do not have to buy them. They do not have to eat them, but when you start talking about housing doubling, the cost of housing doubling in a span of a few years, now you are talking about real life getting so expensive that it is no longer affordable for the lower 80% or so. And I hate to say lower 80%, but that is really what it is, so this is where a housing bubble is very destructive in the real economy. When you walk around San Francisco, you see a lot of little shops and restaurants that are closing. There’s not a lot of retail given the income levels in San Francisco because we do not have much money left after rent. So this housing crisis is starting to eat up a bigger and bigger part of the economy. Housing bubbles are treacherous, and when they blow up, which they always do, they become even more treacherous. They impact the financial system in fundamental ways and they wreak a lot of havoc. So creating a housing bubble, or as the Fed calls it: “healing the housing market”, is both terrible on the way up, and terrible on the way down.
Click the play button below to listen to Chris’ interview with Wolf Richter (47m:27s).
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and it is October 10, 2016. Now, as we enter the late stages of the third massive, central bank inspired bubble in 15 years, there are precious few voices that have been steadfastly pointing out along the way just how idiotic all of this really is. Hang on, did I say third bubble? I meant global interconnected set of interlocking bubbles, because that is really where we are. We have a stock bubble, a bond bubble, we have got real estate bubbles, everything that you would expect when you expand central bank balance sheets by tens of trillions of dollars. Today to discuss macroeconomics, real estate, bubble dynamics, debts deficits, and someone I have been reading for years, Wolf Richter, proprietor of Wolfstreet.com. Wolf lives in San Francisco. He has got over 20 years of C-level operations experience, including turnarounds and a VC funded startup. He has a BA, an MBA, and an MBA. Hey, Wolf, welcome to the show.
Wolf Richter: Well, thank you, Chris, for having me.
Chris Martenson: It is a real pleasure. I have really been looking forward to having you on, and I love knowing how somebody got to where they are. So, can you just give us your quick back story? What did you do before you began writing for your internet audience?
Wolf Richter: Well, I was doing business my entire life, so running different kinds of companies until most recently, most recently but that was all really a while ago. I was doing this startup in Belgium; that was 2002, 2006, that time period, a telecom startup, and we—and I had to travel a lot to the United States, and this is where the idea first got kicked off that I needed to do something different where I publish my insights, because every time I came to the United States, I saw just completely obvious signs of a housing bubble. So, in 2005 for example, I remember the moment so vividly, I was sitting at an airport waiting and there is this young woman next to me talking on her cell phone. She was flipping condos that she had not even seen in an airport that you could not go see, because she had a nine-to-five job, and I thought this is insane. This is going to blow up. That was 2005 and things just got worse. We had money in a closed-end bond fund—in an open-end bond fund and one of those money market approval-end bond funds, a big one, a huge one and the mortgage backed security started to show up and some of the data and the ten biggest precisions it had were mortgage backed securities and I got really worried, cracks were starting to appear in the banks. So, we took all of our money out. Not a month later, the bond fund started dropping. It eventually lost 60-percent of its value before they took it off the internet and it turned into a massive series of class action lawsuits and all kinds of other things, but you could not read a thing about the stuff in the mainstream media. So, that is bubble after bubble, burst after burst and the media does not pick up on it and that is the underlying thing her and I thought, good grief. I am seeing this with my own eyes, but I am not reading about it. Now, what is wrong? Why was I able to get out of this bond fund and other people that did not know, and that did not see what I saw, were not able to get out of it or were able to get out, but too late and they lost a huge amount of money? And so, then we had the financial crisis and the bailouts and I was talking to my wife about all these things and I was furious and I mean, the legalized corruption at the Fed, at corporate America, in congress, in banking, it was just terrible and how people just creamed off at the top and there was a Fed audit and those kinds of things, and my wife got sick of it. She said, just do not talk to me about this stuff anymore and then I decided in 2011 to start my website and I had a predecessor website. I switched to the new name in 2014 and we have going gangbuster ever since. It is a passion, I love doing it. There are so many things that I like to write about that are not necessarily in the mainstream media. That is really what I focus on. I focus on financial and economic analysis that is not in your obvious sources. So, this has been a great move and my wife does not have to listen to me anymore and the website is doing great, so wolfstreet.com has been—it is growing rapidly. We are going to hit one million pages a month here, this year. We are close to it right now, so this has been great to me.
Chris Martenson: Fantastic and glad you have your outlet. I had to do the same thing. My wife did not want to hear me railing against the things I was railing against, but do you remember, what was the first thing you wrote about?
Wolf Richter: Oh gosh. I wrote about, very early on, I wrote about the Swiss franc peg. One of my first articles in 2011, first major articles in 2011, I wrote about IBM’s, what I call, the hocus pocus machine. It is shared by backs and how it uses those to manipulate its earnings. I wrote about those kinds of things. I had very few readers at that time, so I think my Swiss article was really the hottest article I had at that time, and it got maybe 200 readers or something.
Chris Martenson: Ah, the early days.
Wolf Richter: The early days, yeah.
Chris Martenson: Now, would you say that you are writing specifically to counteract maybe some of the cheerleading that happens in the mainstream press or how do you select the material that catches your eye?
Wolf Richter: Well, I certainly have been accusing of that and I would probably admit to that. I do not particularly try to counteract the mainstream press. I just try to give a point of view that you cannot see in the mainstream press, so that is very difficult to find and I try to give analysis and data that is not obvious. It is not on the front pages, so I use a lot of government data. I use a lot of data that comes out of research organizations and it is all data based. I rarely get into rants. I mean, they are fun to read, but I try to stick to the data analysis and it just turns out that right now I am bearish in a lot of things so I do not buy the hype. There are a few things I am bullish on and I say that, so I am not a perma-bear; but right now, I think we have so many problems that have accrued for so long that it is very difficult to be bullish in a lot of things.
Chris Martenson: Well, let us talk about some of that, and I certainly share that view. I guess, look, if I am going to neatly encapsulate my view, I just call in bubble economics, right? So, I was a huge critic of the Greenspan Fed, and I was a big critic of the Bernanke Fed, and I am an even larger critic of the Yellen Fed, because I think they are each making mistakes that are compounding on their predecessors; and the mistakes are now larger and larger and larger. So, Greenspan, 1994 he was facing a hiccup in the corporate bond market and he decided to do something. Well, this is geek talk here for people that are listening. Do not let your face hit the soup bowl too hard. Try and break the fall when I talk about this, but he implemented something called the sweeps programs, which basically allowed banks to take demand accounts, sweep them into a fictitious set of accounts just before the stroke of midnight, so when they took their snapshot, they would not have to hold any money in reserve against those accounts, because they got swept out of demand accounts into non-demand accounts, and then at 12:01, they got swept back. That was just a little hocus pocus that Greenspan engineered, but it allowed banks to be free from the constrictions of having a reserve requirement, which gave us the money printing spree which enabled things like pets.com and another thing, gave us the dot com boom. That blew up, then we got to, what I thought were, emergency blow out rates of Greenspan and then Bernanke bringing us down to one percent gave us a housing bubble, that blew up and here we are at zero percent and I shudder to think what sort of blow up we are going to get as a consequence of this little period of history. That is how I see all of this, as sort of through the macro monetary lens of mistakes. How do you view it?
Wolf Richter: Well, I am certainly not disagreeing here. I am on your side on these issues. I think I want to add one more thing about central banks and I think you sort of touched on it. But, each central banker or each central banks of the Yellen Fed is going to try to outdo the Bernanke Fed, just like the Bernanke Fed out did the Greenspan Fed when it comes to handling recessions and crisis. So, already Yellen mentioned that she wants to get Congress to allow the Fed to buy stocks and corporate bonds, and currently the Fed is not allowed to do that. So, she is already preparing the groundwork for doing even more than Bernanke did. So, each successive Fed has, it seems like, a mission to be even more powerful and even bigger in the markets and even more manipulative than the prior one; and that is really concerning, because for Wardy and up there and I call it the no exit monetary policies because once you get deep into it there is no good way out. And so, I just wanted to add that, that I think it is—there is a passion among these Fed bankers to out-do the prior generation of Fed bankers.
Chris Martenson: Now, you spent some time in Japan, which I understand from a book that you have written, to me, they are the poster children for the no-exit monetary policies, and now the central bank, the Bank of Japan is amongst the largest shareholders for equities; and they continue this and they have just recently re-upped their ETF purchase program to slightly more insane levels. And so, we are now in this crazy twilight era where central banks, through the magic of printing money out of thin air, will potentially become some of the largest asset holders in the world. You know, it just kind of snuck by most people that the Federal Reserve is now, through its MBS portfolio, the largest landlord in America by a good chunk. That is an amazing thing, is it not, to get to that point where central banks are majority holders of real stuff? So, speaking of your no exit monetary policy, where does that end?
Wolf Richter: Yeah, I was just joking the other day. I wrote an article about declining rents in New York City and in San Francisco, and we peaked here and so rents are going down. And I was just joking the other day, saying yeah, the central bank is going to buy stocks and bonds pretty soon, and then rents keep dropping below by certain point. It is just going to start raining apartments. Rents go up, you know. Like you said, where is the limit? Once you can start buying stocks and bonds, why not rent a bunch of apartments if demand’s with us—if rents are too high and people cannot afford them anymore and they have to come down, the Fed will prevent them from coming down by renting them and by buying condos outright, you know? I mean, they are already buying mortgage backed securities, why not buy the real estate itself. And so, once you get into this mindset that there needs to be more and more tools in the toolbox, as Yellen says, yeah, there is really no end to what they will end up buying and there are real consequences in the economy. This is not—buying government bonds is one thing and it creates a bubble, but people have to live somewhere, so creating a housing bubble has real consequences. It makes life very expensive for a lot of people and creating other bubbles, sooner or later, it is a big wealth transfer from those that at the lower levels of society that depend on paying for some of these things and to those who receive it. And so, I think at this point, you have a Fed that is already trying to add tools to its toolbox, because what Bernanke gave Yellen is just not enough, it seems.
Chris Martenson: Just not enough, yeah; just throwing trillions into the market. So Wolf, let us bring this home, because the consequences, I think, are important. I want to talk about this, and yes, if the Federal Reserve rents apartments to try and keep the prices up, because that is the right thing, well, it is the right thing for people who are dependent on the rents. But for the renters, that is not the right thing, and this has real consequences. You wrote a great piece a while ago. It was about San Francisco specifically, and I think you focused it around teachers and what it would take to buy a median house. Just if you could walk us through that example, because I think it is just the absurdity of it, just how unfair this really is, but also how unworkable it really is for people who are even what I would call solidly middle to upper-middle class.
Wolf Richter: Right, and in San Francisco, we are a little bit special here, you know?
Chris Martenson: Of course you are.
Wolf Richter: So, the numbers, they seem really crazy to people, to the people who live in other parts of the country; but here in the Bay Area, the reality, and San Francisco is not even the most expensive place, Palo Alto and Silicon Valley is a lot more expensive. It is much smaller, so it does not usually show up in the statistics, but it is crazy there; and some of the other small towns in Silicon Valley are just even more insane. But San Francisco is big, so we see the numbers. We have, I think the median teacher makes around $65,000 a year here. I mean, forget about buying a house. There are not that many houses in San Francisco. They are very expensive. They are 1.3 million, median price, somewhere out in the Avenues, far away from everything. So let us talk about apartments. Let us talk about condos. For renting an apartment, I mean even renting, if you have a salary of $65,000 a year and you are looking at a one bedroom apartment, nothing fancy, just a median one-bedroom apartment that rents for $3,400 a month, that is about 40,000. That is a little over $40,000 in rent a year. So you pay taxes on your $65,000 in salary and social security and so-forth, and I do not think teachers pay social security; whatever they are paying in their pension funds, and then you have practically nothing left to be on rent. So forget buying groceries, forget buying clothes — this is it. So you have to pack two people, two teachers, a two teacher couple, into a one-bedroom, into a median one-bedroom apartment, and that will barely work financially. If you want to raise a family in a one bedroom, and one-bedrooms in San Francisco are small, I mean these are tiny places, and people do that. I mean, this is not uncommon, but this is what we call the housing crisis, when you cannot afford, when the median income cannot afford a median home anymore, so you need to be wealthy to afford a median home. Of course, financially, long term, that does not work, and we have rent controls, or people who live in certain buildings that are rent controlled, can live there forever and their rents will not go up very much; but buildings that are not rent controlled, yeah, they will evict the tenants or they will raise the rent so much that the tenants have to leave. And so you have the situation where during the middle of the year a bunch of teachers have to leave San Francisco, because the rents went up and they cannot afford the new rent, and they have to pack up and leave even the Bay Area, so the school district came up with a rule that, I think, was finally overturned, but came up with a rule that you could not evict teachers during the school year, because they were losing teachers during the middle of the school year because they could not afford to live in San Francisco anymore. When we had the housing crisis, that is how everybody calls it, and it is insane. You have a stock bubble, and that is fine. If stocks double or triple in price, it does not really have an impact on the real economy. People do not have to live in these stocks. They do not have to buy them. They do not have to eat them, but when you start talking about housing doubling, the cost of housing doubling in a span of a few years, now you are talking about real life getting so expensive that it is no longer affordable for the lower 80-percent or so. And I hate to say lower 80-percent, but that is really what it is, so this is where a housing bubble is very destructive in the real economy. When you walk around San Francisco, you see a lot of little shops, because people here are strung out due to housing costs, so they do not have that much money left to go to these little shops and go to the restaurants. And some of the restaurants are doing very well, but others, obviously they are very difficult to manage here and a lot of shops are closing. There’s not a lot of retail, given the income levels in San Francisco because we do not have much money left after rent. So, this housing crisis is starting to eat up a bigger and bigger part of the economy. So, housing bubbles are treacherous, and when housing bubbles blow up, which they always do, they become even more treacherous. They impact the financial system in some fundamental ways and they can wreak a lot of havoc. So, to create a housing bubble, or as the Fed calls it, to heal the housing market, that is terrible on the way up and it is terrible on the way down.
Chris Martenson: Yeah well, let us talk about healing the housing market, because the mainstream press does a great job of alluding to rising housing prices as being unambiguously good, like we should just all cheer, like hey, house prices are up nine percent this last quarter. They all clap for that, but you are talking about there is a housing crisis. Obviously, this comes about when house prices go up too fast and they really stretch and then break people’s livability. The other part that usually is not talked about is that if my house goes up in price, well sometimes my property taxes follow along with that. Of course, my insurance cost might go up with that. There is a variety of things that just sort of—like my house did not change, but my cost of operating it sure did, right?
Wolf Richter: Right. Now let me throw in something else here. You cannot actually benefit from that increase in home value unless you take equity out of it through a bigger mortgage, because if you try to sell the house to profit from it, from the home price increase, you are going to have to buy another house at the same inflated price. So, all you are doing is paying more real estate commissions and more finance cost and insurance cost and taxes, as you mentioned, but you cannot benefit from a housing bubble if you are not an investor. But if you are a resident in that home because you sell it, you get a lot of money for it and then you have to live somewhere else. And unless you move from San Francisco to Detroit, yeah you could benefit, but if you stay in your own neighborhood, you are swapping two assets of the same value. There is no gain in there.
Chris Martenson: Absolutely, so let us talk housing bubble from the other side real quick, then. Recently, I have seen some notable rollovers, sales volumes just reported in New York down 20-percent on certain apartments. San Francisco seemed to have slowed down a bit in spring. I remember reading some articles in the June sort of timeframe, that there was a slowdown, London, obviously, Vancouver off big-time. Now Wolf, are these just signs of a cooling off period, or do you think that we are at the first part of the bubble bursting here?
Wolf Richter: Well, every housing market is different. It goes by city, and so you look at Houston’s oil bust market and Houston has a commercial real estate problem that blows everything else off the charts. On the commercial side where Houston’s really get hit, San Francisco has a condo problem and an apartment problem and a rental problem, too, in that sense, you know, because they have built. I do not know how many towers have gone up in the last few years and there is tens of thousands of new units coming on the market and there are 65,000 units in the pipeline. San Francisco in that base, 800,000 people here, so that has a big impact of there is an oversupply coming online now. That is what we are feeling on the condo market, so rents have are going down, condos have gone down in price every year, but house prices are still up so how is it so hot in San Francisco? They are still hot and they skew their overall numbers, and in the last many years, nobody built a house here. Single family homes just are not getting built. It is a city of apartments so that is what is getting built, and so, the average numbers, or the median numbers that include houses and condos, are sort of in the flat area, but the condos are now trending down and rents are trending down. New York City, like you said, we have already seen declines in rents. We have seen problems in the luxury end, in apartments and elsewhere, and then you have other markets like Seattle, they are still booming like crazy. So it is all mixed. The national numbers will start turning when enough local markets have turned that are combined large enough to bring the averages down, and that happens rarely. That happened during the financial crisis, during the housing burst, but rarely does the national average go down, because the housing markets are different and they are timed differently. So, one may go down for three years and one may go up at the same time, so it sort of balances out. But if you are an individual owner, they are already a number of markets in the United States where the bubble is deflating.
Chris Martenson: Just deflating, so is this just letting the air out or do you think there is the sign that there is some sort of an adjustment coming that could be more severe?
Wolf Richter: I think this will—there is no such thing as a plateau in real estate. I think it is boom and bust in the current environment. But the bust may not come like in the stock market in the short period. It may be many years and it may have declines in the single digits, in prices, year after year after year. This is kind of how it happened in Japan. They had a housing bust that lasted decades, and there were some sharp declines, but a lot of it was just small increments year after year after year; decade after decade, really. Demographics play a role, you know. There are other things that are important, but like San Francisco, these prices are not economically sustainable. You cannot have median homes that require a multi-millionaire to live in, because we do not have that many multi-millionaires here. The prices kill demand, and that is what we are seeing now, that demand has withered. And so eventually, with housing, you have a real economy that gets in the way. Stock markets can go to insane heights without much resistance. The housing market does resistance building up to these high prices because it is just economics, people just do not have that kind of money.
Chris Martenson: And a lot of this, of course, is due to falling mortgage rates and a lot of that is due to monetary printing, and so, in many respects that with a lag, the housing market is still subject to the same forces that are driving and underpinning the stock market, which is: will the central banks keep doing what they are going to do? Obviously, lots of people speculating about that, you are focusing on the numbers. I would love to turn to those numbers. In particular, every time Janet Yellen comes out in an FOMC meeting, she talks signs the economy is strengthening. Let us go there, because at the macro-level, first off, global trade, what are you seeing in global trade right now?
Wolf Richter: Global trade is weak and that has a lot of people concerned. Now the meme is that global trade is weak because the free trade movements have lost strength and there are barriers to trade now being built up and those kinds of things. And that covers up the real issue, which is demand, and global trade is all about the goods producing economy, so about manufactured goods, about raw materials and so-forth, and not about the service economy. The goods producing economy in the United States, in China and Europe, has been very weak, in some places has been declining, and so that shows up in global trade. The service economy includes health care. Healthcare in the United States is around 18-percent of GDP. It did not get there because Americans use more health care. It got there because of enormous price increases in pharmaceutical products and other things and concentration of insurance companies and those kinds of things. So now you a sector in the economy where there is very little competition, that can raise prices insane rates and they are starting to eat up more and more of GDP so there is less money left for other things. And so, I think the goods producing economy, which, by the way, also includes pharmaceutical products, which are like 12-percent of total wholesales in the United States, is pharmaceuticals. I mean, it has gotten to that point of insanity there, but there is not that much left for other things, and so, in the United States, we see manufacturing output in trouble; same in China. With some countries, the cheap countries, so-called, they are doing a little bit better. We are having issues in Europe with manufacturing, so there is no way that trade can look good when the goods producing economy globally is in bad shape, and so we have had trade numbers that are declining. This is a bad sign for the goods producing economy.
Chris Martenson: Now, the theory was, you know, starting in 2007, if we just slap another 50-60 trillion of new debt into the world, we will get this economy going again. Of course, being over 200 trillion just debt, not liabilities, but just debt, is a claim saying that, hey, we are expecting rapid growth to return. Isn’t there some nervousness out there now that, hey, where is the growth? I know like Jeremy Grantham said structurally, we are not going to have growth for a long time, you have Steve Keen, an economist, saying of course you are not, look at the debt levels. But for a variety of reasons, hasn’t enough time passed where we can go, wow, we are not seeing the former levels of global growth and that should be causing some nervousness in the markets that I have not seen priced into stocks or bonds yet.
Wolf Richter: Yeah, that is correct and, unfortunately, and I think that was one of the biggest mistakes the central banks made during the financial crisis, they stopped the debt from blowing up so we never had that cleansing. In a recession, normally companies de-leverage. They go through bankruptcy, they shed their debts, and you have this big wave of debt restructuring and this is painful for bondholders and banks, but it clears out the crap that is clogging up the pipeline. And so these companies reemerge or get bought out and the debt just disappears, same with consumers. They unload their debts through various methods, and so when the recovery starts, you are not suffocating under this huge load of debt. And that has not happened in the United States particularly, but in other countries, too. That debt never got fully blown out, so then the recovery started with 0-percent interest rates and Q-e, which encouraged companies and individuals and governments to take on even more debt, so now we are burdened with such an enormous amount of debt that I think it is very hard to even breathe for the economy. And I think there are a lot of people out there that are worried about this, and you hear now voices saying we need a serious reflation. They need to come up with a lot of inflation to wipe out that debt, and of course, that will be a fiasco for our economy, because if you have any uptick inflation without an equivalent uptick in wages, which we have not been getting, then you will destroy the consumer. And so, this is not a great solution either, but everybody sees that there is too much debt out there and we are still encouraging—we are still solving the too-much-debt-problem with too much debt. I mean, the Fed is still saying we will make money for free and you just need to borrow more money and that is the solution to having too much debt. It is insane when you look at it. The Fed would never use the word insane, but that is what they are doing.
Chris Martenson: Well, the beatings will continue until morale improves, and if 0-percent will not do it, how about we lock all your money down, take cash away and give you negative interest rates and we will just set that dial to max pain. What is it, -3-percent, -4-percent? Tell us, what will it take for you to take your money out and go and spend a bit, as if that was the cure for everything, if we could just all spend more and of course, my view, my work in the world, is to say yes, you could possibly goad people into spending more this quarter and you would have a couple of good years maybe, but longer-term, where are we going with that story, because you cannot grow infinitely forever. There is some limit to this that has to make sense and where I get concerned is that the central bank has somehow adopted the dogma that whatever is good for finance and whatever is good for Wall Street is obviously the same thing, transitively, what is good for the rest of the country, and it is not really true. And so, at some point, we are going to have to admit that the tail is wagging the dog. We are growing the financial system simply because that is what it wants, and that is what we need in Japan, again, posterchild for that. Demographically, I can make a strong case that a very good economic outcome for Japan would be a slightly declining economy over time to match the population, both demographically and aggregate in numbers, as well. They should be experiencing deflation and that would be, overall, good for everybody, but, cannot have that. They need something else.
Wolf Richter: Interestingly about the Japanese economy, where he keeps calling it the lost decade or how bad the economy is doing and yeah, they have a rapidly declining working age population, but when it comes to GDP per capita and GDP per working age person, Japan is at the top; especially at GDP per working age person GDP is by far higher in Japan than in any other developed country. So, their economy, given the demographics they have their economy is cranking, it is doing really well they are working hard and efficient and so all the numbers do not look good because you have—your working age population is shrinking very rapidly and aging rapidly, and the people that are now entering the workforce — they are not very many, I mean, this is a very small number and so you have that issue but in terms of per working age person their economy is doing really well and I go there quite a bit, my wife is Japanese so we have some contact there and we look at it on an individual basis and they are doing okay. They do, however, have an enormous fiscal problem, and I do not think there is anybody in the world that imagines that this somehow can be solved in any way other than monetizing the debt and I think that is what their central bank is doing. They are just going to keep buying these government bonds until they are owned. Right now they—by the end of 2017 they will own like 50 percent of it, they will go to 60 percent, they will go to 70 percent in a couple years. They will completely control the government bond market to where they will not have a debt crisis and I think the Japanese are really keen on avoiding chaos. They will have, maybe, a yen crisis which is a lot easier to manage than a debt crisis. They will continue to print money and they will monetize the debt that they have and keep control over it, at the same time at some point they will have a major problem with the currency and that can balance itself out. Japan is an exporter so they can always get enough hard currency in by exporting, so they will not run out of hard currency to buy materials they need from other countries. So, they have a way to manage a yen crisis, which other countries do not have, when their currencies collapse they get in real trouble. Japan will not have that problem. It will be a huge hit to their national wealth, to the wealth of individuals, but right now they have this debt that has powered their economy for so long and now nobody can deal with it anymore other than just monetizing it. So, I think that is what they are doing. Regardless of what the central bank is telling us, that is the plan, I think. They are just going to go forward and monetize 70 percent or 80 percent of their debt so in order to avoid the chaos, the Greek like chaos that comes with the debt crisis.
Chris Martenson: Well, I have been looking forward to their yen criss for a long time. I agree, I think that they will succeed beyond their wildest hopes in debasing the yen at some point but who knows when that comes. Alright, so if global trade is slowing down and I love that point you made about how the health care is a parasite that is consuming more and more of the economy. So, we can detect maybe some of that excess service consumption in less importing that is going on. What is going on with the restaurant industry right now in the US?
Wolf Richter: Restaurants are a key indicator in an economy for discretionary spending. You do not have to go to a restaurant, you want to go to a restaurant or it is convenient, maybe you need to go but you do not have to and so, we keep our eyes on restaurants for that reason because number one, it is a big part of the economy it is about four percent of GDP, about ten percent of the jobs in the restaurant industry, so it is big. These are not well paid jobs a lot of people do work in it. And so now we have indications that the industry is really running into hard times. We have restaurant bankruptcies this year of chain restaurants. They are just piling up and, of course these are all the older chains that have taken on lots of debt with encouragement of the central bank and now the leases are going up and expenses are going up and sales are going down, and so the only way out is for them to declare bankruptcy. There is, I think, 14 chains that have declared bankruptcy in the last ten months. That is a lot. I mean that is as bad or worse than during the financial crisis. We have the restaurant index that has dipped into the negative now. We have the restaurant owners and operators getting bearish on the overall economy. They are usually a pretty optimistic lot, and so now they are seeing—in the next six months they are seeing that it is going to get worse rather than better. So, the restaurant business is getting hit. The casual dining, fast dining sectors — these are the ones that are particularly under the gun right now. If you own a very well run, very good, high end restaurant in San Francisco or other cities, you are probably going to do great at the upper level of our economy. There is plenty of money and plenty of spending, so these restaurants can do very, very well; but if you are a restaurant—if you are running a restaurant like a TGI Fridays or Black Eyed Peas or one of those, you are losing your customers and your customers—you are losing customers for two reasons: number one competition, you are not keeping up with it and number two, people do not have enough money and they are cutting back on restaurant spending.
Chris Martenson: Right, so this leading indicator says things are falling off a little. So, we really do have a very mixed bag of indicators here that collectively do not really point to much super positive, but the thing that is a little odd to me is of course the equity markets priced in here as if we were just about to recover like crazy into some new promised land and my only way I can account for that is central bank printing and people speculating that—it is the only reason I would buy, personally over here, if I was in this country, the only reason I would buy a negative yielding German bond is because I am thinking it is going to become more negative. And if I am in Germany I can make a case for, woo I have to—I am a treasurer of a large corporation. I have to keep my money in Deutsch Bank or over here losing 0.4 percent a year, I will do that because 0.4 percent is not the same as losing 40 percent. I will do that. So, I can make the case for that but speaking of that German bank in our time remaining, I would love to—Deutsche Bank, obviously on a lot of people’s minds this past week, by the way I see equally horrible stock prices for other major money central banks in Europe but Deutsche Bank is in the news. What do you see there?
Wolf Richter: Well, obviously they waited way too long to bail out Deutsche Bank. Deutsche Bank already raised capital twice since the financial crisis, and it did so when the stock price was still relatively high, and so it sold equity and it sold these contingent convertible bonds that are similar to equity; and they can be bailed in, they are designed to be bailed in when the bank gets in trouble, so bond holders get a pretty good coupon when things are going well but when the capital levels drop below a certain level at Deutsche Bank those CoCo bonds, as we are calling them, are getting bailed in. So, the owners may either get equity in return or may get nothing in return and that is designed that way. So then if they have done that twice. Now the CoCo bonds have plunged in value and the shares have plunged in value and they cannot really—it is very difficult to sell these into the market. I mean, they would have to offer a huge yield to sell these CoCo bonds and the shares they would have to sell a lot of shares to get a little bit of money. So, that sort of missed a train on this now and they are needing a lot of money, really. I mean, they are fine it is just part of it but a big bank like Deutsche Bank is not going to get tripped up by a fine that is five, six or eight billion dollars. The damage that Deutsche Bank has on its balance sheet is far bigger than that so it would have to raise 20, 30, 40 billion dollars and there is no market there for that. So, that is the problem and the market know that and so the market is going to beat up on Deutsche Bank until there is going to be a bailout of some sort and it will come. I mean, Germany will not let Deutsche Bank collapse like Lehman collapsed. It is way too big, it is way too important for the economy, it is way too important for the global economy and Deutsche bank assets are 58 percent of the—or amount to about 58 percent of the GDP in Germany. That is how big it is, two trillion dollars in assets it is gigantic in a country that is not that large. So, there is no way they are going to allow Deutsche bank to collapse. There is also no way that they are going to bail in depositors. So, I think those are the unwritten ground rules for bail out here that have made bail in stockholders through an equity offering that the government buys. So, the government will buy 50 percent of the Deutsche bank. Deutsche Bank may issue lots of share that are equivalent to 50 percent of its outstanding shares, so that will be a huge hit dilution for the current stockholders. They will probably bail in some of the CoCo bonds and junior bonds, and then that will probably be enough and so you will—and maybe not. Maybe they will have to put in some more taxpayer money. So, I think that is how it will happen. I do not think there will be a cataclysmic collapse of Deutsche Bank. This is just not going to happen.
Chris Martenson: No, I would agree. I mean if they did let it happen they would get the dunce award of the year, because Deutsche Bank is much larger than Lehman at this point and too systemically important to let go. It would just be a disaster but of course politically it is going to be very hard for the Germans, who have been really stir and task masters on Greece and saying, oh no, if your people are committing suicide and thousands of businesses are closing per day and people are actually starving and we had to do all of that so that you would maybe even sell your airports to other outside investors. You cannot hold Greece’s feet to the fire like that and then go, oh yeah we just got to bail out our own bank, though. So, banks over people that is going to be politically a tough thing to pull off.
Wolf Richter: Exactly, that is why I think bail-ins are going to be the key. There have to be enough bail-ins to pacify the German public. So, if you ruin stockholders and you hit junior bondholders enough, you have got to remember a bank bail-out is a bail-out of the bond holders. That is really what it is, I mean that is what we did in the United States we bailed out the bondholders of all these banks and so if there is a recognition that, okay bond holders pay the price, stockholders pay the price. Okay maybe taxpayers will chip in a little bit but given the fact that stockholders and bondholders pay many tens of billions, yeah they will pacify the German public and other European countries as well because that is the issue in Greece. Who pays and who is getting bailed-in and they made bondholders pay the price and they made some, I think in Cyprus, they made some depositors pay the price. So, in Germany they will not be depositors but there will be a price. And even then, it could cost Merkel the election. I mean, that is kind of—I mean, there is a lot of opposition to any kind of bail-out of Deutsche Bank in Germany right now with the media all over this and I remember seeing an article that said who needs Deutsche Bank in one of the largest newspaper and I mean, there is a lot of opposition to this and Deutsche Bank has turned into a gambling institute and Germans know that. I mean, it used to be a revered institution until it went off track just like the US banks and Germans do not identify with Deutsche Bank, anymore. I mean, it has gotten into derivatives and it has gotten into all kinds of other risky things that are not part of the German vocabulary, so there is sort of a little bit of schadenfreude here in it and Germans are not really big risk takers and they never really forgave Deutsche Bank for taking all of those risks. So, I think Merkel will have a hard time negotiating that, but I think she would rather lose the election than watch the German economy go down in flames if Deutsche Bank collapses. So, I think that is a tradeoff she will make and even if she risks her election she will not let Deutsche Bank collapse.
Chris Martenson: Well, thank you for that insight. I agree with that and you have given a lot of additional things to think about there. So, thank you for that and Wolf thank you so much for your time today. We could keep going. We did not even get to the leaning tower of San Francisco, which I know people are going to want to hear about. So, we will send them to your website where they can read about it, because if you do not know about the leaning tower of San Francisco, you really should. So Wolf, again, your website…
Wolf Richter: Wolfstreet.com
Chris Martenson: Great, and we will send people there and congratulations on getting to that million pageviews a month and we will see if we can get it a little higher here and you are doing great.
Wolf Richter: Let me add a little comment here. We are almost there, so we are going to reach it so we have not quite gotten there yet.
Chris Martenson: All right, well I want to hear the ringing bell when you get there. So congrats on that and keep doing it and I hope to have you back on again sometime.
Wolf Richter: Thank you, Chris.