Co-founder of The Financial Repression Authority, Gordon T. Long has an
in-depth discussion on the current financial situation with Charles Hugh
Smith, of OfTwominds.com and with Rick Ackerman, trader and forecaster of
Rickackerman.com.
The Outlook for Quantitative Easing
Rick:
"I've been shouting from the rooftops that the fed will never
raise interest rates."
If you want to find out if QE is working the first person you have to go
to is the retiree. The whole idea of stimulus should have been refuted simply
by the fact that savers have been cheated for so long.
Charles:
They may go ahead and do the quarter point rates increase because they
have built up so many expectations to that. They will need to do this to
create the allusion that the economy is recovering or else it's robust.
Gordon:
The market may be a key driving factor, not because of the wealth effect;
but because of collateral.
The State of Japan:
Charles:
"The Juggernaut of deflation is so huge now, that there isn't
going to be any time to react. Keep a shoebox full of cash because on that
day we might wake up and the banks won't be open, we will need that
cash."
I don't see the possibility of massive inflation. The only viable way of
getting money into the system is to borrow it into existence.
Japan, is a developed economy that has been in a deflationary setting for
almost 25 years now. We can see what they've done and what effects it has.
They have attempted to stimulate their economy by improving roads and
infrastructure. But it has not worked. Japan refuses to cleanse their
financial system to allow real investment so they have consequently brought
in mal-investment with borrowed money.
Rick:
Japan had something over the last 20 years that we didn't have, and that
is us. Japan has a global economy to export into; we were the buyer of last
resort.
Negative Interest Rates
Rick:
"If you can extrapolate a somehow positive benefit from negative
interest rates, where would this benefit be and how long would it last?"
The idea is if people can no longer park money anywhere, they can only
spend it or invest it, we have to ask, where are they going to invest or
spend it? It's inconceivable that money can find itself into somewhere in the
economy that would promote growth and economic health.
Charles:
In a current example of negative interest rates we see what is happening
with Sweden who is actively pursuing negative rates. The net result is that
it is taking their housing bubble and inflating it even further. Basically it
is pricing everybody out of housing and creating a credit bubble.
Collateral Guarantees
Gordon:
"It is in the cards, in the middle of the next crisis."
We have an approximately $500 trillion swaps market that is underpinned
with collateral. So if bond prices were to drop it would be a horrendous
situation. We were able to stop the 2008 crisis, we did not fix it we only
stopped it. Now it will be a global issue, and the central banks will be
forced to come in and pay attention to these collateral values. We have a
huge pool of bond ETF's that have exploded in the past few years, somebody
has to sell these bonds but they are not easily transferred. The central
banks will have to intervene in a massive way. I believe many people are
betting on this, and are therefore taking risk adjusted positions.
Rick:
"We are really talking about a quadrillion dollar bubble."
Much of borrowing and leveraging shifted into rehypothecation. It occurred
mostly in London markets that were more unregulated than US markets. So when
we had the real estate bust in 2008 we needed something to pledge as
collateral.
When you look at the entire quadrillion dollar enchilada, somebody may say
the actual size of the bubble is only several hundred trillion dollars. When
in reality the gross amount is something everyone involved in the daisy chain
thinks they have a claim on a particular asset.
Charles:
We must own real assets, and have no debt. Whatever financial wormhole we
are going to go through,we must own the right tools, because the tools will
still exist after we get through the wormhole.
The Indirect Exchange:
Regarding a recent show with Warren Buffet, and Ty Andros, Editor at
Tedbits Newsletter,
Warren Buffet so masterfully utilizes the indirect exchange. He takes
paper, which is his entire insurance side of business and plows it back into
real hard assets that will sustain themselves at a fair price. Buffet has
don't this so consistently for so many years and that is why balances; paper
products (insurances, bonds, and structures against real assets). Buffet has
certainly been a consistent winner without question.
Rick:
Buffet has also resisted the temptation of going after easy money. His
money is not in Uber, Dropbox, and Instagram etc. It's simple to see that it
is not going to end well, not only for the companies but for the whole city,
if I were to short any city in this country it would be San Francisco.
Everything is so pumped up in that city because there are companies that hire
these people that are extremely overvalued.
Buffet has demonstrated amazing restraint and discipline for sticking with
the nuts and bolts, instead of going after the alluring high attraction
companies. He has found real businesses with real products that have a
sustaining capability to survive during good times and bad.
Charles:
Raising the issue of risk, how do we deal with the kind of systemic global
risk that we currently have? Risk is extremely misrepresented to the average
middle class American. We are trying to help people make a realistic
assessment of the global risk they are engaged in by having a 401k that is
involved in these risky financial assets.
Closing Remarks
Rick:
"You can't look at what's in prospect as hypothetical, if you
don't think there is going to be a collapse then you don't understand the
problem."
There is no way we can continue to muddle on, for one its taking a lot
more debt to create the dollars' worth of GDP growth at the margin. We are
really going to face a day of reckoning. The most important thing is for us
to be resourceful and ready for when it comes.
Charles:
"This enormous supernova of debt is going to implode and whatever
is left will not be a financial instrument."
Gordon:
"Crisis is nothing more than change trying to happen."
We have so many global imbalances. We have political, economic, and
financial systems that are not correct, we are still running from a Bretton Woods;
post WWII model. And during this process, mal-investment, lack of price
discovery and mispricing are rampant.
But on the flip side, for those who have prepared themselves for this
storm, I think the world is going to see its greatest years. The advancements
in technology, and so many other endeavors is staggering. 15-25 years out
will be an incredible time for the world but meanwhile we are going to go
through some rough times, but there will be winners and there will be losers,
and the winners are always the ones who prepare.
Abstract written by Karan Singh karan1.singh@ryerson.ca
