Grant Williams: A Punch To The Face For Central Banks (02/15/2017)
Grant Williams, publisher of the economic blog Things That Make You Go Hmmm and principal of Real Vision TV, talks to the Peak Prosperity podcast to discuss his expectation of a return of volatility to the markets.
The markets are experiencing zero volatility and total calm even though the political situation around the world is growing more and more chaotic!
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and it is February 2nd, 2017. Wow. Here we are, just a couple of weeks into the Trump presidency, and things could not be choppier or more interesting, I mean, pretty much everywhere.
Socially, politically, geopolitically, everywhere seemingly except in the stock markets of the world, which from the US to Germany to Japan, all applauded the idea of a Trump presidency. And I mean, starting at 1:30 in the morning Wednesday morning as the results flipped from a putative probable Hillary win to Trump.
Now when you put it that way, it’s kind of a nonsense statement, the idea that all of these markets from Japan to Germany would all be cheering a Trump presidency. But that’s the current narrative, at least in the markets running. Flawed as it is, that’s what’s being used to explain why things are the way they are in the world of financial assets.
It’s highly counterintuitive. I really want to explore this and many other topics besides. I am beyond delighted to have back on the show one of the very best, and I mean that, very best thinkers and observers in the business.
To help us find the signal in this choppy sea of noise is Grant Williams, who has, to his own amazement and chagrin, more than thirty years of experience in investing and finance, and who writes the very popular investment newsletter, Things That Make You Go Hmmm, of which I’m a huge and unabashed fan.
His writing is always witty, full of context, and accurate; easy to follow as well. And he is the principal in the production company known as Real Vision TV, which is the world’s only video on demand channel for finance and investors.
Welcome, Grant. As always, really, a huge pleasure to have you back on the show today.
Grant Williams: Chris, thanks for inviting me. It’s always so much fun sitting and chatting to you.
Chris Martenson: Let’s begin here. I used the word Trump. And I mentioned equity markets, again, all across the Western world plus Japan, they all shot up in lockstep. I can’t tell the charts apart if you strip away who’s who in this story and just show me the charts.
In response to the Trump victory, what sort of theories should we be entertaining for this very counterintuitive outcome?
Grant Williams: Well, I think it’s really interesting because they did all jump up. I think a little bit of reality is starting to dawn in the first five or six days of his actual term, as they’ve seen unpredictability.
And that’s the thing markets hate most is unpredictability. They can deal with good news. They deal with bad news pretty quickly. It’s sometimes painful, but they do discount it very quickly. But unpredictability is the enemy of markets.
And I think in President Trump, we have a very unpredictable force who, I suspect, is deliberately unpredictable. I think that’s part of his shtick. That’s part of his tactic. So markets need to get used to that.
And I think that’s what you see in the last week or so. We’ve started to see that volatility come back. And there’s no surprise that the market would rise between the elections and inauguration. That happens fairly frequently.
But I think now scales are starting to fall over the markets, away from the markets. They’re starting to think okay, what are we dealing with here. And the answer is an agent of change and an agent of volatility. And that is going to cause problems for markets, I suspect.
Chris Martenson: But still, how do we make sense of the idea of German DAX market rising starting at 1:30 in the morning there, in the dead of night? How does an investor, if this is what’s at play, come to the conclusion that the German market needs to rise pretty smartly because Trump seems to be the winner? Really, I’m having trouble connecting that dot through, what I would call, normal transmission mechanisms.
Grant Williams: I think you’re absolutely right, and I’ve spent a lot of time thinking about this. And the more I think about not just that, but the incredible amount of counterintuitive moves that we see in markets.
And I think it’s all inextricably linked to the rise of computer trading. I think it’s linked to these algorithms that go out into echo chambers, look for words in headlines, and drive the market accordingly.
I think the algorithms predicted that once the election was over, we’d get a period of stability. And I think as the percentage of the trading conducted by these automated trading systems rises, the New York Stock Exchange now is above seventy percent, they manage to actually hijack the direction.
And once you get this momentum, markets start going up based on the back of algorithms. Then we start to see the day traders coming on the back of it, and they kind of get a bit of confidence. And it’s not just markets.
Markets are global now. There really is only one equity market around the world, certainly when they’re going up. We’ll see when markets turn and start to go down. And I think that’s definitely something we need to talk about, because I suspect it will be very, very different market action when this trend turns.
But I really do think that this amalgamation of markets in the eyes of computerized trading all around the world is a big factor in why we see markets go up together, go down together, and react in parts of the world to news that’s decidedly not local and not necessarily bearish for that particular part of the world.
So, we really do live in an entirely new world. I don't think we’ve had a bidirectional market through which we can understand what these things do. The markets have been drifting higher, for essentially the entire period of time that these machines have gained ascendency.
And so we as humans are trying to figure out what this means, trying to figure out how it works. And we don’t know because we only know which way it works in one direction. When we start to see cold hearted, trend following algorithms determine that the path is down, when you really are going to need human beings.
And I’ve talked about this a lot. When markets are going up, I can guarantee you there’s an offer. At any price at any hour of the day or night, someone will show you an offer, and it may be significantly higher than the last trade, but there will be an offer. But when markets turn and go down, people forget that oftentimes there are no bids.
And I’ve said this countless times. Every flash crash we’ve seen in the last five or six years is a dress rehearsal for what happens when markets genuinely want to go down. They’re not fat fingers. They are automated trading systems looking for a bid, finding it down ninety percent, and hitting it.
And when you think about what’s going to happen with the absence of market makers, thanks to Dodd-Frank, the absence of liquidity providers on the buy side through regulation and through just the restriction of balance sheets amongst the traditional places that people would go for liquidity, I think we’re going to see something really quite shocking when the markets really do have a turn.
And I get the feeling that’s coming. And I think this introduction of Trump that we talked about and the volatility that he brings with him is going to be an agent of change in the markets. And I’m very, very nervous about what a downward trending market looks like in the age of automated algorithmic computer trading.
Chris Martenson: Well, I am, too, because I’ve been following the work of Eric Hunsader at Nanex closely, and I’m sure you have as well because he’s the only person I know who’s really parsing the amount of actual volume that’s there in the markets and also liquidity, which are actually separate terms that sometimes...it took me a while to sort of detangle those in my own mind.
But for people who don’t want to really get into the market structure deep in this conversation, I don't think it’s necessary. Centered on this idea that you said that this is a brave new world. These are new markets. They are run by silicon based trading forms, not carbon based trading forums, which are humans.
So these silicon based forms are out there. They’re doing things. We see these flash crashes show up in the markets all the time, which is where a price moves really aggressively in one direction or another.
There’s flash crashes upwards as well. There was a flash crash in treasury yields, which was this huge buying panic a little over a year and a half ago now. So these are extraordinary moves.
And I wonder if this isn’t part of the reason that I think that the central banks are actually scared of the very markets they’ve enabled in some sense because I don't think anybody really...you said markets hate uncertainty. But humans do too.
I’m very uncertain about these markets in the same way you are. How much do you think that the so called powers that be at these central banks are also scared in the sense that they don’t understand these markets rise well but perhaps stumble badly, is about as much as anybody understands about them at this point. Do you think they share that or do you think they’ve got better insights?
Grant Williams: I don't think they have better insights. I think they have one thing that we don’t, and I think it’s actually to their enormous detriment. And I think that’s a solid belief that they can control markets. I mean, I really think they do.
Bernanke’s famous interview on 60 Minutes when he was asked about his confidence level in being able to control inflation. Without missing a beat, he said a hundred percent. And then he repeated that. When the guy questioned him on it, he said a hundred percent? And Bernanke said a hundred percent.
And I think that attitude pervades those corridors and understandably so in many respects, because they’ve had a couple of decades of solid success in pushing the markets around where they wanted them to go, rescuing them when they’ve started to fall oftentimes just with words, not with actions. And I think they were pretty confidence.
But I wrote about this a few months ago, people forget, particularly central bankers, that every now and again, the markets tend to punch central bankers in the face. And the last time we really saw this, I think, goes back to the day that Soros forced the pound of the European Exchange Rate mechanism back in the early 90’s.
And this was something that Soros had his bet on. The central bankers had said this is solid. We’re not going to do anything. The markets took the other side of that when they sensed some weakness. And within a day, the UK was forced, the chancellor was forced very sheepishly in front of the TV cameras backtrack.
And that was the last time that these guys got punched really hard, and it’s almost twenty-five years ago. So I think memories are short. I think confidence is high, both on their part and in them on the part of the markets.
But we are, it seems, reaching a point of newly introduced volatility, and it really only takes confidence on the part of the market in central banks to wane for their powers to be weakened considerably. Because without that tailwind of people believing in what they’re doing and believing that they will be successful, they then have to prove it.
And I think you and I both understand that really markets are and will always be bigger than a group of eight or nine or ten guys around the world with a plan and a desire. And if they are forced into proving their strength and proving what they can and can’t do, I think they are very quickly going to find out that there’s an awful lot they can’t do. And it could get very, very ugly.
Chris Martenson: I think this seems like a good time to turn to your latest piece for your subscribers, which is titled Peak Optimism. Of course, I love the word peak in that title. Very well done. You chose a quote for the front of that piece from Voltaire which reads, “one day everything will be well. That is our hope. Everything’s fine today. That’s our delusion.”
First, start there. What can you share with us about this idea of peak optimism? It seems like it’s dovetailing into peak confidence in the Federal Reserve at all.
Grant Williams: I was talking at John Mauldin’s conference a couple of years ago on a panel, and John asked me where I thought that there were bubbles in the world. I said I think there’s a bubble in confidence in central banks. I think that is a bubble, and I think it’s going to burst. It’s gone on for another couple of years, as these bubbles tend to do.
But it struck me going into this year, to all the things you’ve spoken about with the response to Trump’s election, the optimism on the part of markets...and I choose that word carefully as opposed to market participants because I really do think that the markets have taken on some kind of life of their own through these computers.
The optimism is such that with respect to Trump in particular, since we’re discussing him, the belief that he would execute a flawless landing in every area that he was going to try and be an agent of change was remarkable to me.
The comparisons to Ronald Reagan were everywhere going into the inauguration. But when you look at the comparisons between the environments that Trump is inheriting versus that which Reagan inherited, it’s really quite stark.
Trump is coming in with the tenure with a one handle on the yield, whereas Reagan came in with, I think, a fifteen handle when he came in. Or certainly a ten handle. Certainly double digits. CPI was in double digits with Reagan. It’s down at one. The S&P was trading at seven times earning versus twenty-four for Trump. And he’s really inheriting a market that when you look at it compared with Reagan’s there’s nowhere to go but down.
And even though Reagan’s looked great and it was up and the market rallied one percent between election and inauguration, the first eighteen months, he saw a quarter of the value of the S&P wiped off. We saw a horrendous eighteen month bear market.
And so for the markets to assume that this last few years of heavy stimulus based rallies in markets and gentle climbs without any real troughs to continue, I just think, shows a level of optimism, which frankly I don’t understand. I really don’t understand where it’s coming from.
And I think at this point, a lot of human participants in markets don’t understand it, either. But they’ve become conditioned over the last several years to either buy the dip or to just go with the trend. And the trend, until proven otherwise, is up.
And I think they will have taken great solace from this time last year when we saw the first six weeks of 2016 were very, very shaky indeed until, once again, the central bank stepped in to the rescue.
And so you really have conditioned an entire market to believe that this central bank put is alive and well. It’s stronger than markets. And Trump is going to achieve the perfect landing. Europe is going to stick together through all this. BREXIT is going to not really matter. China’s debt problems are not going to blow up.
I mean, it’s remarkable to me the optimism that the markets are investing in...I don’t remember a world this uncertain at any point in my thirty year career, actually.
Chris Martenson: I don’t either. And let’s turn now to this topic of delusion, and perhaps self-delusion. The stress I’m noticing in so many people at individual levels and the markets themselves, it seems quite apparent in its source, at least to me. I see an enormous gap between our current narrative, which boils down to everything’s awesome or everything’s fine don’t worry, and our current reality, which is for all the reasons you just listed and some others everything's not fine.
And it’s really an astonishing gap that’s opened up where it feels like that last moment in those bubbles where everybody wants to cling to the idea that it’s perfectly normal for a hairdresser in Las Vegas to have nineteen homes, which she’s not selling or renting because she’s decided she’s going to sell them at a higher price. Or for a speculator in Monet to say he’s perfectly comfortable buying this for twice the price of the last person because these things only go one direction.
It really feels to me like everybody’s on the same side of the boat, but there are so many warning signs that say no, this is not the case. And by the way, Grant, I can do this financially. I could do this politically. I could do this socially. Or I could deconstruct this ecologically.
And all of these areas individually have so many troubling signs, that to believe in the narrative that everything’s good. Trust the financial masters to just keep running asset prices up and we’ll all be happy as a result, it’s really breaking down across every dimension I’m tracking.
And yet, the people in charge seem unable to grasp that. And the media seems unable to really wrap their heads around this at this point in time and do anything other than attempt to just stick to the status quo.
So you travel a lot. I’m just wondering, how is this sort of dynamic being felt qualitatively, if you can, or quantitatively? What are you really noticing as you travel the world?
Grant Williams: Well, a very similar dynamic. I think everything you said there, it’s fascinating because that’s exactly what’s going on. But with people talking about it being different this time, the one thing that I’ve noticed that is a global phenomenon, when you talk about these asset prices going higher as they have done.
Back in 2005, 2006, the price of everybody’s home was going up. And this was kind of the ubiquitous phenomenon. Wherever you went, homes were going up. And these Las Vegas hairdressers were buying the nineteen condos, and they were all going up for a time.
What we’ve seen this time around is that the participation in this incredible rise in asset prices has not been ubiquitous. It’s been confined to luxury apartments in New York and Vancouver and Sydney, Australia, and Singapore, where I live, and Hong Kong, and places like this.
It hasn’t been something that has touched everybody. The increase in asset prices has gone to the people who own assets, who own fine wines and fine art and classic cars. It’s classic, classic signs of a bubble in a very narrow increase in asset prices.
And that’s something that I have seen everywhere. I live in Singapore. We’re starting to see the housing bubble there burst. There’s an island just off the very south of Singapore called Sentosa, which is stacked with a casino and a theme park, but also a lot of luxury apartments, the prices of which went from two million dollars to ten million dollars over the last seven or eight years.
And anecdotally I’m hearing that a lot of those prices, now the houses are back on the market, offered at six but the bid is back at two or three. But people aren’t hitting the bids. So, we’re not seeing that headline sticker shop when the first deal gets done.
But that rally in asset prices has in certain places petered out. And it’s the places that were hottest. And you know as well as I do, this is a chain reaction. Once these things start falling over, people get nervous elsewhere.
And the other thing I would say, when you talk about the media being unable to get this, I tweeted out a link the other day. I was sitting in an airport somewhere, and I forget where. And CNN was on. It was the end of the day, and the headline said Dow plunges more than a hundred points on something Trump had done.
I think it was the immigration ban. Market plunges a hundred points on Trump’s immigration ban. Now when you start putting out things about markets plunging a hundred points, which that day was point six of a percent, you understand that the media, which is where everybody really gets their information. Very few people actually do the digging. They take stuff at face value.
When that’s the narrative, you try and generate hyperbole. You try and generate sensational headlines to try and attract viewers to attract clicks for advertisers, et cetera, et cetera, you end up creating a very false impression of both sides of this. You exaggerate the good. You exaggerate the bad. And people really don’t know anymore.
And I think this phenomenon, nowhere has it been more obvious and more potentially dangerous than in the media’s coverage of Donald Trump and the way he’s responded to it.
I think he has a very good point about the way the media’s covered him and the way quote unquote news is disseminated these days. But you have a guy with an axe to grind in a very powerful position who is about to take on the Fourth Estate, which is a very powerful institution.
And when you get two powerful forces colliding, there is always fallout. And I think the public are going to see that happen and be the victims of it rather than either the media or Trump himself.
So it’s a very, very dangerous world. It’s a very fragile world. It’s a world that is elevated in all sorts of places, whether it be asset prices, whether it be markets, whether it be confidence, and all your points about politics, geopolitics, they’re all correct.
But we don’t know how this is going to resolve itself. I suspect it will be a loss of confidence somewhere in something. It may be a loss I housing prices. It may be a loss in politicians. It may be a loss of confidence in the media. I don't know.
But as soon as confidence starts to wane, people realize how much of where we are is built on faith and confidence. And that’s not something you can print. You can’t print confidence. You have to instill it. And you can only instill it really once you’ve exhausted your words through actions. And the actions that are going to be required to reinstill the kind of confidence that’s going to evaporate are going to be really, really painful.
Chris Martenson: This is a perfect segue here, I hope. And I hope I don’t go too dark on people with this one. So last night, yesterday, there were some pretty violent protests is one word, but you might call them riots, in Berkeley, California.
And I found them deeply ironic because the protesters or rioters, they were worried that an invited speaker stood for the sort of intolerance that might lead to violence. So the protesters assembled and then rioted in a very intolerant way and became quite violent.
And I look at all of that, and on one level I understand it. It’s a reaction to something. And by the way, there’s evidence sneaking out now that the mayor basically told the police stand down or these are our people or whatever. It wasn’t handled like I’ve seen.
Like Occupy Wall Street was met with phalanxes of riot police who were ready to do battle. The people at Standing Rock who are protesting a pipeline very peacefully have been met with a degree of violence that was not on display at Berkeley from the authorities.
So anyway, however this is playing out, I’m reminded here of studies they did in the 40’s and 50’s where they would take a rat, put it in a cage. And there was no way to escape this cage. It was a blank, barren cage. And the floor had a grid on it. And they would start shocking the rat. Very unpleasant for the rat. But the rat would tolerate it and figure out how to curl up in a ball and survive.
The problem came when you would put another rat into that same environment, and the two rats are now being shocked. And now they don’t understand the shocks. They can’t control them. They can’t escape them. But now they have somebody to blame. They look at the other rat and they say it’s you. And they will kill each other given the chance.
And I have that sense of people are being shocked but they don’t really know why or how yet. And the third irony in this story for me is that I felt the people in Berkeley were right to be angry, were right to feel like they needed to protest for something, but they had the wrong face attached.
They were fighting the wrong rat in the cage, I think, because they should’ve been protesting Janet Yellen at this point in time. They should’ve been holding accountable the people who are most responsible for driving the largest wealth and income gaps both in all of recorded history at this point in time.
So it was Plutarch who said that a gap between the rich and poor is the oldest and most fatal ailment of all republics. Now leaving aside whether we have a republic or not, there is this extraordinary gap. And these income and wealth gaps, these are the direct and proud achievements of an extremely activist federal reserve and their ilk in other countries.
So in your views, how much of this social tension is really the direct result of policies that everybody knew and should know by now we're really going to create the exact sorts of gaps that we’re experiencing now?
Grant Williams: Well, Chris, I think one of the great things that you do, and you should be roundly applauded for it, is you have these conversations. As you said, you talked about being worried about going dark. These are important conversations to have.
And they’re important for people to listen to with an open mind because that’s the big problem that I’ve seen as a foreigner traveling around America, which is a country I’ve loved since I first went there at the age of seven or eight. I’ve lived there for a number of years, and it’s very close to my heart.
But the absence of a willingness and ability to have these conversations with an open mind is the single biggest problem, I think, the country faces because to me, you’re absolutely right. The root cause of all this can be laid at the feet of the federal reserve.
But the problem is, it’s a very complex transmission mechanism. And it’s one that people struggle to understand because it does require an awful lot of commitment on the part of some of the ones who understand it to really figure out how a press conference by a very New York sounding lady once a month is the reason why their groceries are going up, is the reason why they can’t afford that house.
These are very complex issues, and people, for the most part, are reluctant to go down the road of discovery to understand what they are. And I totally get that because even for guys like you and me that have spent our lives in finance, we’re sitting there going how does this all work now? It’s kind of tough to piece together.
But I think you’re absolutely right. I think the federal reserve, and not just the federal reserve, I think they’re the leader of the pack. But the Bank of England and the Bank of Japan particularly and the ECB and the People’s Bank of China, all these guys have followed these policies which have kept the wheels on a very shaky wagon.
I struggle to believe that they didn’t and they don’t understand what’s happening here. I think they went into this believing that this would be a short term solution, that things would organically get better and they’d be able to wind this stuff back.
So I think this was a calculated risk on their part. We are going to increase wealth disparity, but it’ll only be for a couple years and then we can get back to normal and wind it back and it’ll all be fine. And here they are.
I’m putting a presentation together I’m going to give in South Africa next week, and one of the charts I’m putting in is the total balance sheets of the central banks as the divisor versus total equity market caps around the world.
And when you look at that chart, you see that in 2008 the chart plummets, and then it flat lines, which essentially means the markets are going up exactly in alignment with central bank balance sheets.
And there’s no way out for these guys now. They’ve started doing this thinking it would be short term. They’re eight years in. There’s no way they can unwind it. We know what happens when they start talking about things like tapers.
So I think they’re the root cause of the problem. I think it’s a very insidious problem that they have now gone so far that they can’t do anything about unwinding it through choice. So what they have left is hope.
The one thing they have left is hope. Okay. Right. Yeah. So they’re hoping that they get some growth. They’re hoping that things kind of turn around, but if they don’t, they’re going to go back to printing more because that’s really all they have left. They’re going to go back to lowering rates because that’s all they really have. And they’re going to exacerbate the situation here in terms of wealth disparity. That’s really all they can do now.
And if you look through history, you will see this happen time and time again. And sadly, it always, and I mean always, ends in great social upheaval, sometimes revolution and oftentimes war. I mean, you talk about going dark, this is why these conversations are so important.
I gave a presentation about this in January 2015, talking about the parallels between 2015 and 1914. And they’re eerie. And the first question I was asked after I gave the presentation, a guy put his hand up and he said “so, are you saying there’s going to be a war?” I said no, I’m not saying there’s going to be a war. But what I am saying, and people need to understand, is that there’s not not going to be a war.
And I wasn’t being flippant. It’s a fine distinction to make. But you have to understand that after fifty years of peace around the world largely, certainly in terms of large style conflicts, the possibility that we could see another conflict is one you have to entertain, because the possibility or the probability of it happening is no longer zero.
And any time you have an event of that magnitude, when the probability of it happening is no longer zero, you have to at least do the exercise of thinking about it, discussing it, thinking your way through it and try to understand how that will change the world and what you need to do to protect yourself.
These are, as I said, important conversations, and kudos to you for being one of the few people out there with the guts to actually have them.
Chris Martenson: Well, thank you for that. Trust me, Grant, there’s not a day goes by that I don’t wish that I was selling celebrity gossip news instead. But such is my fate. Here I am. But it is vitally important. I really have the sense that we have to really entertain these thoughts.
So, you mentioned this central bank balance sheet expansion. It’s driven some extremes. So just one of them, John Hussman, good friend. And I love his work. And I love the math behind it. And he put out a chart recently that is just...I know you picked it up as well. And I’m going to post it below this podcast so people can see it.
But what it is, it’s a chart of median price, so this is median price of the S&P, index components, divided by the median revenue. So, it’s a ratio. And this ratio, this chart goes back to 1986. And it wobbles around. Somewhere the ratio might be .9, and for periods of time when it got really stretched, it went up to one point three, maybe one point five. In 2007, right before the big plunge, it hit 1.8, and that was really stretched. And then we had our big correction. It went all the way back down to point seven.
Well, it’s never been where it is currently. It’s at a little over 2.45. It’s just this straight line driven right up to the stratosphere. And the central banks did this on purpose. They know that it’s creating a wealth disparity. They had their fingers crossed the whole time.
But come on, we’re eight years into this. We’re out of the idea that we’re about to have...they’re always like well, we’re going to have a first half recovery. And then it’s a second half recovery. And now it’s a third half recovery. They just keep going around.
And here we are really in just giant nosebleed stretch territory. Now Grant, when I go to these wealth conferences, I find two classes of people in there. One - there are people who have their own money and they’re scared. They’re worried. They’ve never seen anything like this. They’re pulling their chips off the table.
There’s another class of people there who manage other people’s money, and they shrug their shoulders and say what are you going to do? I have to stay fully invested.
Again, we look at how stretched things are. Really what is the alternative at this point if we were going to talk to either central bankers or to people who are managing large amounts of money who both feel trapped? They just shrug and what are you going to do? I can’t unwind my balance sheet. What are you going to do? I’ve got to stay fully invested. What’s the way out for them at this point in time, if there is any?
Grant Williams: Unfortunately, for the central bankers, I don’t think there is a way out. The analogy I came up with when I was trying to describe this to someone was these guys have been backing themselves further and further into a corner for the last seven years through all these extreme policies.
And we got to negative interest rates, and if you remember when that happened and we had twenty-three percent of global GDP being produced in countries that were under a negative interest rate environment, at that point in time I said the market can now see the central bankers’ shadow on the wall.
So we didn’t know how far away the wall was. But now when you get to that point, they’re backing into it. So, they can’t see how close they are to the wall, but we can now see that they’re really reaching that point.
And when you think back to that moment in time when we had this negative interest rate phenomenon, there was so much written about it at the time. People, very smart people, talking about how this was the new paradigm and interest rates could maybe go to minus two percent.
And most people are sitting there scratching their heads saying how can this possibly continue. But it seemed at that moment that this was the new environment we were going to be in. Negative interest rates were here, and we just had to kind of get used to it and figure it out and this was the new world.
Now six months down the line, you look back on that, and it really was a very, very brief moment in time, even though it seemed almost endless when it happened.
Markets quickly repudiated this whole idea of negative interest rates very, very quickly. And that, to me, was a sign of something. I think you have to pay attention to stuff like this, and you have to try and put it all in context.
But the market rejected negative interest rates essentially. Still around the edges, they’re there. But really, as an increasing phenomenon, it’s been shot down. And so, that’s the first time that these guys have really done something and the market said no, that’s not going to work for us.
So, in terms or a way out for them, I don't see it. I think they are now in this so deep that they have to keep going the way they’re going. The car’s pointed forward so they have to keep their foot to the floor.
And if you think about it in cold, hard terms, you step away. You say what if the market, the loan market, let’s talk about the US equity market. What if it fell fifty percent from here? Where would that take it back to? It would take us back a couple of years. Really not that far. It wouldn’t take us back to the horrors of the debts of 2008.
They’ve engineered the ability to allow markets to fall twenty percent, and that is not really going to put us back very far. But the problem with allowing that, and I think this is a big part of their thinking around this, they’re thinking of trying to engineer markets higher particularly to avoid any major market dislocations.
When you read those headlines, when the average man in the street who doesn’t really follow the market and he may have some passive investments, his pension or 401k, but he doesn’t really follow the markets, when he wakes up in the morning to headlines that says stock market crash, he panics. If you can avoid those headlines, you can avoid wide scale panic.
It’s an important thing when you’re trying to keep the wheels on the whole thing, which is essentially what they’ve been trying to do since the whole system almost went under in ’08.
So, if markets start to fall, ten, fifteen, twenty percent, people will panic. And that has to be avoided at all costs. So they let the markets fall two, three, four, maybe five percent sometimes if they can. But then people started to realize well, this thing is going to start feeding on itself. We can’t let it fall any further.
So your question, that’s a long winded reply, for which I apologize, but your question about whether there’s a way out for them, no, I don’t think there is. I think the market is going to show them the way out, but it’s going to be a very painful exit for them. And they’re now going to exit with their tails firmly between their legs.
And central banking as it has been over the centuries will once again be discredited and will go through a period of remodeling. What that looks like, we don’t know. But I think it will be thoroughly discredited at the end of this.
Chris Martenson: Well, that was a fantastic answer. And it leads me to my next question perfectly, which is around the dollar. And noting here that I’ve got my little Financial Times newsfeed up, and I’m seeing some really troubling stuff out of Europe. So I guess we’re going to loop back to the counterintuitive moves as well.
But the headlines here are the Greek manufacturers suffered the worst month since the bailout aftermath. So here they are. They’re supposed to be well on the way to recovery according to every IMF forecast, and they’re not.
And Greek bonds, of course, are suffering a violent reaction across Europe. We saw bonds in Europe have a very bad reaction, probably one of the worst months of January they’ve had in a long time. And this is despite eighty-five billion euros a month flowing into those very same bond markets courtesy of the ECB.
Your thoughts on Europe and how this going to, and how this is, influencing the dollar right now?
Grant Williams: Yeah, Europe’s...I’m fascinated by Europe, and I have been for the longest time. As a proud Brit who, had I been living in the UK, would’ve very easily chosen to vote leave in the Brexit Campaign, I’m amazed that Europe has held together this long, frankly.
And I think the chance of it surviving in its current form is essentially zero. They’ve, again, gone down this road of propping it up and spending all kinds of money to try and maintain the status quo, which is a status quo that doesn’t work. I mean, this idea of monetary union without fiscal union is laughable.
It’s amazing when you go back and read some of the things Margaret Thatcher said about Europe back in 1979 when she refused to be a part of it as the British Prime Minister. It’s so prophetic, it’s frightening. And she nailed it when she described what the problems were.
And so I think what Brexit has been a catalyst for, and you mentioned the IMF forecast, which were wildly wrong in terms of growth on the up side. But with Brexit, they’re all wildly wrong on the downside.
And they talked about what a catastrophe it would be for Britain the day they left the EU and how Britain would fall into the sea and become a third world country. It was really apocalyptic stuff.
And since Brexit, the UK economy, it was the strongest GA economy in the world last year. They’ve upgraded the forecast again. Nothing bad has happened. Now that’s not to say it won’t as it feeds its way through.
But the problem comes with the fact that the French go to the polls in May. The Dutch go to the polls, actually, I think before that. We may have an Italian election after Renzi stepped down coming up. And the Germans go to the polls in October.
And so when all these polls happen, what the people are going to see when they look across the English Channel is a Britain that’s thriving outside the EU. Now Britain may encounter some Brexit related problems later in the year. But it’ll be too late.
The people who are going to vote, are going to be looking at Britain and go you know what, they stepped away and their economy is doing great. We’re here in Italy with this enormously high unemployment rate. We’ve got a banking system that’s on the edge of collapse. We’ve got no way of competing on level terms with the Germans. We need to devalue our currency, but we can’t. They’re going to go to the polls thinking vote leave has worked out okay for the Brits.
So, the problem that Brexit is creating for the establishment in Europe is significant. And when you look at the mess in French politics at the moment, Le Pen, it’s going to be a stretch for her to win, but she can do some real damage. And let’s remember what a long shot Trump was.
So, it’s really coming to the point in Europe where those forces of breaking up the union are growing stronger. And in Germany, who are staunch Europeans, you have the other problem, which is rising inflation. And that’s the Achilles heel as far as the Germans are concerned.
Once you bring inflation into the equation in Germany, the Germans get very agitated very, very quickly. And we’ve just seen a sudden spike in inflation in Germany to one point seven percent, which doesn’t sound like much, but the speed and the rate of change is worrying to Germans.
We’ve seen housing market in either Munich or Berlin, I forget which now, which is the fifth most overpriced housing market on the planet. Now anyone that knows anything about the German housing market knows that the Germans are not owners. They rent. So there hasn’t been a housing bubble in Germany because it’s not an ownership culture.
But with negative rates and with the problems they’ve had, the Germans are pouring money into housing. And so you’ve got apartments in the major German cities that are fifteen times income. That’s not Germany. That’s Shanghai. That’s Singapore. It’s Hong Kong. It’s parts of London. It’s not Germany.
So everywhere you look, there are forces pulling the union apart. And the only thing holding it together is a group of people whose life’s work has been the creation of this monolith. And they’re doing everything they can to defend it purely for reasons of pride, purely because they don't want to see their life’s work invalidated.
And again, it’s a problem when no one’s taking a cold, hard look at what’s happened to the poor Greeks being chained to the EU, what’s happening to the Italians, what happened to the Spaniards. If this was a fight, the referee would’ve stopped it. But it goes on.
And at some point, the people are going to get the chance to vote. And if it carries on the way it is, they’re only going to vote one way, and that’s for less Europe and more individual countries. And the bigger success Britain is, the more problematic that becomes for the European bureaucrats.
Chris Martenson: It’s the same problem we’ve got over here in the US, and I think elsewhere, which is the ruling class said trust us, and they turned out not to be trustworthy. Jeremy Grantham has a very nice piece out recently, which has basically said that every single move has basically been towards marginalizing the middle and lower classes and accumulating more and more wealth towards the top, which you and I understand is partly a feature of a debt based money system, particularly one that’s leveraged and full of financialization.
It’s something that happens. If Blackstone can go out and get a cost of capital at one percent and buy apartments and be competing with me at four and a half percent, they win. And that’s part of the landscape now. But all that’s really happened is that we’ve seen that individual people get left behind.
You’re right, Brexit is...I love the way you phrase it. It’s a real problem for the ruling class because it showed that people assumed some of the power back, and it actually turned out to be a good thing for them. And that’s a genie that’s tricky to put back in the bottle at this point in time.
Grant Williams: Exactly right. Exactly right. And Trump has only exacerbated that. And amazingly, when you look at what Trump’s done since he got into office, if you take...I mean, I know this is difficult for everybody to do right now. But cooler heads must prevail. If you strip out the emotion surrounding Trump and you look at it through the lens of politics, what he’s done is very, very smart politics.
He got voted in as a man of action who was going to drain the swamp and do all these things. And forget whether you agree with what he’s doing. He’s gone in on day one to try and solidify his base in a very polarized country.
And he’s written executive order that means the wall’s going to get built. And he’s put his immigration ban in place. And he’s going to do this, which I think is a great idea, about eliminating two laws for every one you put through.
Chris Martenson: I love that one. That one’s great.
Grant Williams: Yeah. But this plays very, very well to his base. Now the wall’s not getting built tomorrow. And the immigration ban has already been kind of walked back. But he’s gone in. He’s done what he’s promised people he’s going to do, which is very “unpolitician.” And so he’s solidifying what was a very strong base.
And the people that think he’s going to go away quietly or mess this up I think are missing the point here. He’s run his campaign very, very cleverly, which is how he managed to talk to people in these echo chambers and put multiple messages out to different groups at the same time. And I mean, it was masterful in the age of the Twittersphere.
But I think the success he’s having is in solidifying his base. And that’s dangerous because as I said, it’s going to create tremendous volatility. And the only way that people are hearing about what Trump’s doing is through the media, which as we said at the top of this conversation are pitched squarely against him.
So on the one hand, you’ve got a man who’s doing an awful lot of stuff to appeal to the people who put him in power. You’ve got an agitated media that don’t like what he stands for, don’t like what he’s doing.
They’re reporting on the protests at the airports, for example, with the immigration ban. Well, those protests were in Los Angeles and in New York and in Miami, all fringes around the country where the democrats were strong. You didn’t hear about any protests at airports in Des Moines, Iowa, or Boise, Idaho, or anywhere in Pennsylvania.
And so you have a very polarized country, and it’s a problem. And until people can try and step away from this polarization and understand what’s going on and try and come to terms with it and work out how to deal with it, as I said, this volatility is going to increase. And the rate of change is going to increase. And that makes everybody nervous.
Chris Martenson: Absolutely. And of course, I am a holder of gold specifically because of its role during uncertain moments and during volatile moments. It’s not an inflation hedge for me. Great piece about gold a long time ago now, it feels. Nobody cares. Is anybody beginning to care in your travels in the Western world or is it still just sort of this paper trading vehicle that’s more or less the anti-dollar to the Westerners?
Grant Williams: Interestingly enough, that kind of echo chamber has maintained its sort of airtight qualities, which I’m interested actually more than surprised about because we’ve seen a lot of things happen. I think a lot of the driving force for the gold, the falloff in the second half of last year was the dollar.
But we’ve seen the demonetization in India, which is enormously bullish for gold in the long run certainly. But we haven't reached that point yet, again, where people feel they need it. And a great friend of mine, Simon Mikhailovich talks about this more eloquently than just about anybody, this idea of one point four billion Indians sitting down to their evening meal on November the 8th at one minute to 8:00. And then ninety seconds later, eighty-six percent of the currency was worthless.
These doors close. And once they’re closed, you can’t open them again. So the whole idea of this gold phenomenon, should I have some, should I not have some, the day you realize you should is the day when you can’t get it anymore or it’s too late. And so everybody has to kind of understand this themselves.
And I think anybody that puts all their eggs in one basket, and I run into a surprising amount of people that are sort of ninety percent in gold, which I think is a dangerous maneuver, diversifications is always sensible. But to have a portion of your portfolio allocated to gold in a zero interest rate environment, to me it’s not really anything to even argue about. I don’t understand the counter argument to that.
And at some point, that’s going to, at the margin, become more obvious to people. And it really doesn’t take many more people to care for a market that size to heat up very quickly, as we saw right after I gave that presentation in December of 2015. We had seven months where the gold price increased by thirty odd percent. And the junior miners were up a hundred and fifty percent. That’s what happens when you get some momentum behind this thing.
So, if the correction we’ve seen in the dollar continues, and certainly the Trump administration and the Federal Reserve are talking down the dollar, I think you could see some real fireworks in gold. But I don’t buy it to trade. I don’t buy it to sell. I buy it to own it for a time when I might need it.
Chris Martenson: Myself as well. And it is just an enduring mystery to me that at least the press in the West remains very hostile to the idea of gold. Again, when I have private conversations with very wealthy people, they have the same lack of concern and questioning that you do. They’re like oh, no, of course we’re going to have some gold.
It’s really, I feel like, almost like a retail perception management project at this point in time. And somebody should study it from more of a psychological slash behavioral economic standpoint at some point in the future.
But it really feels like one of the more important statements somebody said to me at one point back when I was younger and I was trying to work out how the world worked, they said “justice is a middle class perception. The rich know better. The poor know better, each from different directions.”
So really, there’s a perception of gold, which is really sort of there’s this middle classish sort of Western perception around it, which feels like it will have its awkward moment with an unpleasant policeman at some point in the future.
Grant Williams: Well, it’s ironic you say that. And it’s the perfect illustration, because the ownership of gold is largely in the East where people are poorer. You talk to wealthy people who understand it as a protection. They have something to protect and they want to protect it. And then you go over to India and Pakistan and Bangladesh and parts of the Middle East where gold is in the DNA.
These have been poor people. They’re coming into the middle class now. But they have been poor relatively speaking for generations. And so they understand that. So, I think it’s a great point and one that perfectly highlights, I think, why this misunderstanding of gold is because you obviously have a large middle class in the West that don’t feel like they need it, which is fine.
But at some point, people are going to be forced into reevaluating what it means, and I suspect at that point in time, they will decide they need some. But whether they can get some or not is a whole other matter.
Chris Martenson: Indeed. Absolutely. Well said. And unfortunately, that’s all the time we have for today. Thank you so much for being with all of us, Grant. Please tell our listeners where they can subscribe to your must read newsletter and also about Real TV.
Grant Williams: Sure. Thank you. My website is ttmygh.com. That’s Things That Make You Go Hmmm dot com. And realvision.com is another project which I’m very passionate about, which is just our attempt to go around the world and speak to the brightest minds we can find in finance in an environment where we give them a chance and the latitude to say whatever they want, get deep into conversations with them and really try and explore and help make people better investors by learning from the very best.
And seeing as I’ve got you on, Chris, I want to make sure you confirm this on the air that you and I will sit down for one of these conversations. I need you to say yes in front of all these people.
Chris Martenson: It would be my honor. So, that’s a yes.
Grant Williams: We’ll get that together. I can’t wait.
Chris Martenson: Fantastic. Well, thanks again for your time. We’ll talk soon.
Grant Williams: Great. Thanks so much for having me.
Originally posted here.
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