Sunday, May 06, 2012 I gave an Exclusive Interview to the "Daily Bell"
with Anthony Wile that I would like to share with my readers.
The Daily Bell is pleased to present this exclusive interview with Mish
Introduction: Mike "Mish" Shedlock blogs at Mish's
Global Economic Trend Analysis, for which he has won awards from the New York
Times, Time Magazine, Bloomberg, CNBC
and Strategist News. Mish is a contributing "professor" blogger at
the economic and financial education site Minyanville and offers podcasts
every Thursday on HoweStreet. He's a registered investment advisor
representative for SitkaPacific. He says that unlike many free-market
"Austrians," he emphasizes credit impacts and deflationary trends
within larger business-cycle manifestations. When not writing about
economics, Mike enjoys photography; 80 of his photos have become magazine and
Daily Bell: Give us some background.
Mish Shedlock: My background is actually in computer programming and
engineering. I worked for banks for 20 years primarily as a computer analyst
working on the technical end of applications. I was an assistant vice
president for Harris Bank for most of that time. AVP was as high a position
as technicians could get. When Bank of Montreal bought out Harris, I left to
become a consultant.
Shortly after 9/11, contracts dried up and I was out of work for three years
with literally no income. When the economy was doing well, I wasn't. My
message at the time was cash is not trash and be prepared to lose your job.
Needless to say, few listened.
I started a blog in 2005 hoping to be discovered as an economic writer. Given
there are millions of blogs the success of which are near-zero, one might
even think such a chance would be impossible since I had no background in
either economics or investing.
However, I had some excellent teachers, primarily but not exclusively
Austrian-economic minded. A person named Heinz Blasnik from Germany taught me
economic fundamentals. I picked up many ideas about debt from
Australian economist Steve Keen. More recently, Michael Pettis from China
taught me nearly everything I know about trade. I blended those views into my
own model on credit.
I received lots of help from others at numerous spots along the way. Barry
Ritholz at the Big Picture Blog promoted some of my material and Calculated
Risk created the first template for my blog.
Daily Bell: How did you get interested in investing?
Mish Shedlock: Shortly before I lost my job, I started hanging out on
stock message boards. I met some pretty smart minds on a place called Silicon
Investor and I ran one of the most popular boards on the Motley Fool.
Daily Bell: Why do people call you "Mish"?
Mish Shedlock: Every bank I worked at formulated user IDs out of a
combination of one or two characters from first names and six characters of
last names. Thus my login to many banks where I worked was Mishedlo. I used
that name on the Motley Fool and Silicon Investor. In stock message chat
rooms, people truncated that to "Mish." I thought "Mish"
had a nice ring to it and adopted it as my "brand."
Daily Bell: Tell us about your relationship to Sitka Pacific and how
it was formed.
Mish Shedlock: Sitka Pacific was founded by Brian McAuley. His
background is not stocks or the economy, either. Rather, Brian worked for a
biotechnology firm. I met Brian on the Motley Fool in early 2000. At the time
he was trading for himself, then himself and family, then friends of family.
Once you get above ten, you need a license. He got that license and decided
he no longer wanted to work in biotechnology but rather the investment community
by putting their needs first. Indeed, Sitka always puts client needs first.
That does not mean we will always be right but rather we will never do
anything that puts our interests first. I am proud of the fact that our
backgrounds are not Wall Street oriented.
Daily Bell: Tell us about Minyanville.
Mish Shedlock: Shortly after I started my blog John Succo, a
Minyanville "professor," asked the founder, Todd Harrison, to post
my columns. There was some concern by the Minyanville staff that I did not
have a Wall Street or hedge fund background. However, eventually, my work
stood for itself. I have always believed that being an outsider and not
having preconceived notions about money supply, money multipliers,
buy-and-hold strategies and efficient market theory (which I think is
nonsense) to be to my advantage. I was the first industry outsider (I was not
yet at Sitka) to make "professor" status. The term simply means
Daily Bell: What is your relationship to Dollar Collapse?
Mish Shedlock: Many of the ideas I write about come from articles I
read elsewhere. Dollar Collapse and Bloomberg were at the top of the list.
Currently I get many stories from Financial Times. Also, writers from
around the world send me links. "Brisbane Bear" sends me stories
every day from Australia. "Bran" sends me links every day from
Spain. I get email updates from Michael Pettis in China and from Steen
Jakobsen, the chief economist from Saxo bank in Copenhagen, to name a few.
Literally I am swamped with links from all over the world. My goal is to make
sense of the news. Sometimes I agree with those I quote and sometimes I am
very harsh. Either way, I try to add something to the conversation, not just
copy a story.
Daily Bell: How were you able to find the time to do so much incisive
Mish Shedlock: When you are out of a job, with no income, you have
plenty of time on your hands. That is how it all started. Now blogging and
Sitka Pacific are full-time jobs. I am reading and writing 14 hours a day on
many days. However, it does not seem like a job. Many times I am laughing my
head off at what I write and hope others do, too. One of the best compliments
I ever received was when someone asked me to please remind them to not drink
coffee while reading my blog. That request came from someone who spit coffee
out his nose trying to suppress laughter while reading my blog.
Certainly I am not always humorous. Sometimes I am sarcastic, angry or
questioning. There is no particular slant I try for. However, my role is
always the same: to make sense out of the news in an educational way that
people can easily relate to. I am pleased the New York Times recognized that
effort, naming my blog, along with Calculated Risk and the Big Picture, as
their number one idea for the year. (See "NYT 10th Annual Year in Ideas - #1 Idea of the Year
Daily Bell: Do you consider yourself an Austrian in some sense?
Mish Shedlock: Absolutely I am Austrian. Money supply and credit are
paramount in economic analysis. However, many Austrians missed the mark badly
by failing to consider credit. To me, inflation is an increase in money
supply and credit with credit marked to market. Deflation is the opposite.
Those who predicted massive "price inflation" based on rapidly
rising base money supply or M2 missed the boat and missed it badly. Many
Austrians called for treasury yields to go to the moon. When oil hit $140 in
2008 I called for record low yields across the entire yield curve. Most
thought I was crazy. My rationale was based on credit, the demand for more
credit and the value of credit on the balance sheets of banks. The demand for
credit plunged, the value of debt as an asset on balance sheets plunged and
in response, yields plunged.
This set of events was very predictable but many called for hyperinflation
based on rapid increase in base money supply and the misguided money
multiplier belief that increases in money supply get lent out ten times over.
In practice, the money multiplier theory is nonsense and the $1.5 trillion in
excess reserves at the Fed proves
it. Banks lend under three conditions, all of them required: 1) Banks are not
capital impaired. 2) Banks believe they have credit-worthy borrowers. 3)
Credit-worthy businesses and individuals want loans. If any of those
conditions fail, credit expansion goes nowhere (at best) and is negative if
Except for student loans, credit expansion has indeed gone nowhere in this
recovery. I wrote about credit expansion recently, complete with nice charts,
in my post, The Real Consumer Credit Story: Virtually No Recovery in
Revolving Credit, No Recovery in Non-Revolving Credit.
Daily Bell: What is your position relative to Bill Still, Ellen Brown
and others who espouse public central
Mish Shedlock: Should populist Ellen Brown get her way, I would have
to rethink my US hyperinflation position. Sadly, Brown is another one of
those who understands various problems with the Fed, but proposes a solution
that is worse, putting state politicians in charge of printing presses. When
push comes to shove, the Fed would protect the banking system. Politicians
would not. Moreover, the idea that North Dakota, a small, loosely populated
farm state is in good shape because it has a state bank is preposterous.
Worse yet, Brown takes that absurd position to the extreme, with a proposal
to end the Fed and put California politicians (state politicians in general)
in charge of printing money to support union causes. For further discussion
please see "Lawmakers Threatenn to Take Over Monetary Policy."
Daily Bell: You want to end the Fed don't you? What would you put in
Mish Shedlock: One word: nothing. The free market can easily set
Daily Bell: Do we need government bureaucrats to dictate the
production or the price of cement, oranges, automobiles, computers or copper?
Mish Shedlock: Anyone proposing such an insane idea would be laughed
out of the room yet we expect a bunch of academics, with no real world
experience, to do something far more difficult: set the proper amount of
money and the interest charged on it. The idea is as ludicrous a Russian
central planners setting steel production levels. Results speak for themselves:
a series of economic bubbles and collapses with increasing amplitude in both
directions. The result is a shrinking middle class and increasing wealth
concentration at the top.
Daily Bell: Does Greenbackerism lead to inflation? If not, why not?
Mish Shedlock: Before there can be intelligent discussion, one must
define the terms "Greenbackerism" and also "inflation."
Let me ask a simple question: What's more important to the economy, home
prices falling from $600,000 to $250,000 or the price of steak going from
$4.99 to $5.99 or gasoline from $2.50 to $4.00. People constantly moan about
the latter, but economically speaking, the plunge in home prices is far more
important. I discussed this at length in "How Far Have Home Prices 'Really' Fallen? HPI and the
I suspect the answer to your "Greenbackerism" question is,
"Yes, eventually," with an emphasis on eventually. It is
safe to say, regardless of your definitions, that printing is unsound and
ultimately, printing money leads to bigger boom-bust cycles or other economic
distortions that crucify the middle class.
Once again, my definition of inflation is an increase in money supply and
credit, with credit marked-to-market. Deflation is the opposite.
Let's compare the practicality of my definition vs. a definition that
involves prices or a definition that involves money supply in isolation.
If the definition of inflation is a nominal rise in the CPI, then the
inflationists have allegedly been correct. However, treasury yields are at
record lows, home prices are at record lows, jobs have languished and credit
has stalled. Simply put, most of the things one would expect to see in inflation
have not happened. The same holds true for those who only look at exploding
base money, forever predicting the money will multiply ten times over and
treasury yields will soar.
On the other hand, my credit-view of deflation has accurately called for most
of these things, including the rise in the price of gold and a collapse in
the value of houses. Like Humpty Dumpty, people can define the term inflation
however they want, but those who miss the boat on credit are left wondering
why the economy is not acting as generally expected by their definition.
Most Austrians completely missed the ramifications of collapsing credit and
the collapsing value of credit on bank balance sheets. Similarly, virtually
all Keynesians missed the boat on the housing bust. In general terms,
Keynesians missed the inevitability of a collapse that must follow a reckless
expansion of credit. Only those who focused on credit have been properly
aligned with what is actually taking place.
Daily Bell: What's the future for the EU?
Mish Shedlock: No currency union in history has ever survived without
there being a fiscal union as well. Since there will not be a fiscal union,
the Eurozone must break up. The ideal way would be for Germany and the
Northern countries to exit. The painful way will be a piecemeal exit. I
expect this to be long and painful.
Daily Bell: How about China?
Mish Shedlock: China is due for a "hard landing" which I
define as less than 3.5% growth for the rest of the decade. I expect
commodity prices will likely crash and the commodity producing currencies
such as Australia and Canada will take a big hit as well.
The Economist believes China will be the world's largest economy by
2018. I suggest 2030 may be optimistic and Chinese growth will average 3% or
less for the rest of the decade. For a discussion of the implications, please
see "12 Predictions by Michael Pettis on China; Non-Food
Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the
Hard Landing Coffin?"
Daily Bell: If China goes into a meltdown, the world faces a
full-scale depression. What's your take?
Mish Shedlock: The US will actually fare relatively well in a collapse
of China. It is the trade surplus nations and commodity produces that will
take the biggest hit as noted in the previous link.
Daily Bell: Where is the US headed?
Mish Shedlock: The US is headed for recession. The US recession will
not be as bad as Europe, but corporate earnings will sink like a rock. The US dollar
will strengthen much to the dismay of the hyperinflationists. Then, after
Europe, China, and Japan take big hits, then and only then will the final
plunge in the US dollar occur.
Daily Bell: Where is Japan headed?
Mish Shedlock: Japan is all but guaranteed to blow up before the US. A
mere rise in long-term interest rates from 1% to 2% would consume nearly all
government revenues. Ironically, I like Japanese equities but only hedged
against a plunge in the Yen. After 20-plus years of deflation, Japanese companies
have almost no debt but the currency risk is huge.
Daily Bell: Are you confident of your businesses success in the US?
Mish Shedlock: If you mean me personally, yes, pretty much so, but not
overconfidently so. I am debt-free. We paid off our mortgage this month. The
key will be to catch the turn. I will not be bearish forever.
Daily Bell: Are you thinking of traveling abroad?
Mish Shedlock: Personal difficulties make overseas travel problematic.
I am now involved in a fundraiser for ALS research (Lou Gehrig's Disease). My
wife is in the late stages and nearly immobile. She has been on a feeding
tube for over a year and cannot eat or drink anything, including water. So
far, people from at least 22 countries have made donations. I ask everyone to
please consider making a contribution. To learn how you can help, please read
"My Wife Joanne Has ALS, Lou Gehrig's Disease."
Daily Bell: What do you think of US monetary policy?
Mish Shedlock: It's hopeless. We should get rid of the Fed
specifically and all central bankers in general. As noted earlier, central
bankers are nothing but serial bubble blowers. The irony is they purport to
be "inflation fighters." In reality, central banks are the very
cause of inflation. Bernanke even wants a 2% inflation target. Economically
speaking, it's crazy. Eventually asset prices and wages do not follow
consumer prices and all hell breaks loose, which is precisely where the
global economy is today. I have some nice charts of inflation targets and
real disposable income in "Huge Problem With Bernanke's 2% Inflation Target
Explained in Pictures."
Daily Bell: On US government statistics?
Mish Shedlock: Any statistics that need to be produced, the free
market can do better and cheaper. For example, Gallup does monthly surveys on
unemployment and they do a very good job. Do we need a mountain of highly
paid government bureaucrats to gather unemployment stats? I think not. Most
do not believe the stats anyway.
Daily Bell: What's in the future for gold and
Mish Shedlock: Gold is money. When available, the free market has
always selected gold as money. Government decree cannot change that fact.
Silver, however, has a huge industrial component. Sometimes silver acts like
money but most of the time it acts more like a commodity plaything. Would the
free market accept gold and silver as money right now if allowed? I don't
know but I sure would like to find out. What sets me apart from the Prechter
deflationists is my recommendation that people hold 10-30% of their
investment capital in gold. I do not have a price target but strongly believe
another big surge is coming.
Note that gold does not necessarily respond to movements in the US dollar.
For example, the US dollar index is near 80. The dollar index was at 80 in
late 2004 and gold was just over $400. If gold is not responding to moves in
the dollar then what is it responding to? I suggest gold has responded to
central bank efforts to revive credit. It has also responded well to
sovereign credit stress.
The Fed wants home prices to rise. The Fed also wants another credit lending
spree. Neither happened. Clearly, the Fed can provide liquidity but it cannot
determine where (if anywhere) liquidity goes. Since more liquidity efforts
are surely on the way, and gold is the likely beneficiary, I highly doubt
that gold has peaked. Eventually there will be a huge currency crisis and
gold will soar.
Daily Bell: Tell us more about the performance of your firm.
Mish Shedlock: Sitka Pacific manages portfolios that look across asset
classes in an effort to generate absolute returns without exposing the
portfolio to catastrophic drawdowns. You can find more information including
our 6-plus year performance track record at sitkapacific.com.
Daily Bell: What's your investment strategy?
Mish Shedlock: Sitka Pacific is very cautious right now. Our Absolute
Return strategy currently has a position in gold, but is otherwise
essentially market neutral. Our current mission is risk avoidance with a
focus on avoiding the next big decline. We feel risk is high and if we avoid
big drawdowns we will more than make up for it by hopping in when valuations
are more attractive. To be fair, I said the same thing over a year ago.
Sometimes the market has other ideas. That's why we do not use leverage, and
we are never net short.
My personal views on risk and valuations are reflected in my post, "Misty Water-Colored Memories, Dirt-Cheap Stocks, and
Patient Opportunism." I also believe there is a strong
likelihood of "Negative Returns for a Decade." There are numerous
references in the preceding link.
Daily Bell: Do you believe there's a power elite
that wants to create global government?
Mish Shedlock: Yes. One can easily see it in Europe. Many are angling
for what I call the European "nanny zone." One can also see the
idea in various IMF
Special Drawing Rights proposals.
Daily Bell: Is that a good idea?
Mish Shedlock: Obviously not. It will fail for the same reasons the
Euro will fail. Europe is the big test and I think the Eurozone splinters.
Should the Eurozone actually hold together, expect zero growth for at least a
decade. Germany will take a huge hit regardless. Either Germany provides more
capital, or the Southern states default leaving Germany holding the
"euro bag." Expectations that Germany will decouple from the rest
of the Eurozone are thus nonsensical.
Daily Bell: What about this tax situation? Why the current emphasis on
Mish Shedlock: Hiking taxes in the midst of a global recession is
foolish at best. Europe and the US need work rule reforms and pension
reforms, not higher taxes. I strongly support ending collective bargaining of
public unions, scrapping Davis-Bacon and all prevailing wage laws and
instituting national right-to-work laws. Many US cities are effectively
bankrupt by making pension promises that cannot be met. Greece is bankrupt
for that reason (and others) as well
Raising taxes is not the answer. So what's the solution? I have an eight
point proposal in "Public Unions Bankrupt Illinois: Unpaid Bills Top $9 Billion
as Comptroller Reports 'State Treading Water'; Mish's Eight-Point 'Bold' Plan
to Save Illinois."
Daily Bell: Where do you go from here?
Mish Shedlock: I am thinking about writing a book on the direction the
US should take. I have lots more ideas. However, the problem is finding the
time to do it.
Daily Bell: Thank you for taking time from your busy schedule for this
interview, and our best wishes to you and your wife.
Mish Shedlock: Thank you for the invitation.