Special Guest: Paul Brodsky spent several decades trading bonds and other
securities for such Wall Street firms as Drexel Burnham Lambert, Kidder Peabody,
and Spyglass Capital, where he actively managed mortgage-backed derivative
funds for over a decade (over 85% of investor capital in that fund was returned
by June 2006, before the wide-scale credit contraction occured). He was co-founder
and co-managing member of QB Asset ManagementQ which serves accredited investors.
He is currently sarting a a consultative resource for professional investors,
advisors and fiduciaries called Macro Allocation Inc.
46 Minute VIDEO Interview
Paul Brodsky introduced himself as a presenter at the Park Plaza Hotel (NYC,
NY) to 200 of the world's largest Institutional Investors from large Sovereign
Wealth Funds, Pensions Funds, Endowments and Foundations .... "I'm Paul
Brodsky, I'm a Gold Bug!" This not only took guts but serious credibility
in front of an audience that doesn't consider gold in their portfolio allocation
decisions. So why would he do this?
Paul had been asked to present the "Case for Gold". It was 2010 and Gold had
just had a run. Though Gold had been the elephant in the room for previous
9 years, Paul surmised the organizers simply felt gold needed some sort of
obligatory representation. His presentation focused on the Global Monetary
System and sheepishly admits he actually never mentioned the world Gold again!
This summarizes the thinking within the community of Global Managers of serious
money.
Paul says he felt he got the invitation because of the thrust and struggle
of QB Asset Management, the hedge fund he co-founded. It showed in Paul's writings
to QB's clients while seeking the truth. He sought an understanding of Price
and Value (which are often quite different) in addition to Alpha generation
for clients.
Financial Repression
"Its easy to think there is a grand conspiracy out there is terms of the banking
system, the policy makers and politicians in the political dimension. It is
very easy to draw lines between all these groups connecting them. I think what
we have is a natural set of incentives that are drawn together by how the system
works. For example, Politicians usually like to spend money they don't have
and the banking system can let them do that! So it is a very symbiotic relationship
- one feeds the other - there is little need that a word be said! There is
no back room, smoke filled discussions going on."
"After the 1971 Nixon Shock, for the first time ever we had a global monetary
system where there wasn't one currency that was 'hard' - that is, backed by
anything scarce. What that did was make everything relative. It made currencies
relative and it made financial assets relative. Ultimately it made performance
relative!"
"When everything becomes relative it makes thing very easy for authorities
to manage the system because there is no governor on them to bring things
back into balance!"
"What was once "the role of the Fed to take away the punch bowl when the party
got going", it was now the Fed that was 'spiking' the punch bowl."
Fractional Reserve Banking
"The system as it is constructed using fractional reserve lending and fractional
reserve banking is the real 'bugaboo'!" Paul is quick to point out there are
two sides to this argument. "Yes, the hard money crowd is correct - it has
allowed us to spend money beyond what may be considered sound, but also this "funny
money" for example helped defeat communism and helped fund the dotcom frenzy
which left a technology footprint that may not have occurred as quickly without
it."
"It has been a terrible flowering of baseless credit, debt that has never
been extinguished. It may all come down in a Minsky like debt deflation
that is ugly - or it may force the Fed and other central banks around the
world to create much more base money through QE and other lines of credit
that diminishes the value of not only our currency but all others - that
gets us back again to relative value and performance!"
"The central banks are devaluing their currencies and devaluing against themselves
in a 'tag team' manner. They are also devaluing against Production. There used
to be only four ways you could get a dollar. You could produce something, you
could borrow it, you could reinvest what you had already earned or you could
steal it. Now banks can make money out of thin air without any discipline.
There is nothing on the other side. Debt is created through the loan process
and it never has to be extinquished if the monetary authority doesn't demand
that."
"We have gone through this great leveraging over the last 35 years. It has
been encouraged by Monetary Authorities in the US and elsewhere. Now we are
at zero interest rates we can't refinance ourselves to another round of leveraging.
We have to find a new outlet for credit or there is going to be some sort of
reconciliation. When you ask about Financial Repression, I think it has been
forced on Monetary Authorities (though its their own doing). It had
to happen. It is a consequence of the past 35 years."
"I think they are boxed, as is everyone else (like the IMF) that is involved"
Who is Going to Stand Up to This?
"It is also in China and Russia's interest to have a baseless currency
and even fractional reserve banks. What it does is centralize power to
decide what wealth looks like in their nations and economies."
"My sense is we have to accept that this is the reality. That for the first
time ever .... I think there is going to be increasing coordination amongst
all sorts of Monetary Authorities and the net loser is going to be the saver
or pensioner in real terms. It is not necessarily a negative on equities, real
estate or anything that relies on credit. It may be bullish on nominal pricing
but bearish on real pricing and value. That is what Financial Repression is
bring us."
.... there is much, much more in this broad ranging 46 minute interview with
a very thoughtful and experienced Wall Street insider telling it the way it
really is:
- Why the death of the infamous Bond Vigilantes occurred and how they got
trampled by the Fed,
- Why we have had a slow migration from Capital producing economies to Credit
producing economies or Financialism,
- Why a policy of unsound money has allowed China and Russia to transition
to modern societies without becoming militaristic,
- Why the global over supply is driving pricing pressures and deflation,
- The eermergence of China's new private mercantilism system,
- The political dimension of the $555T global SWAPS market exposure.
