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Chris Martenson: Welcome to this Peak Prosperity podcast, I am your host Chris Martenson. We talk a lot about how the markets are defining things for us in some way, shape or form. They do for me, I track the markets very closely and I will know that we are about to get onto the next stage of the story when the markets begin to signal what they did back in 2000, what they did again in 2008. I know we have another one of those moments coming and I think this will be a bigger, larger, more conclusive moment than those other ones, as traumatic as those were. Here we are though; we are in the midst of the world’s largest set of nested bubbles. This is going to probably carry on longer than anybody cares for it to, but here we are. By nested bubbles I mean the bond markets; the stock markets; derivative markets; sovereign debt markets, everything I care to look at is pretty much overpriced at this point in time, but that is what you get when your leading monetary institutions decide to pervert the price of money itself. Guess what you get perversions all over the place. To help us understand that and talk about it some more, a really great guy who we have had on the show before, cannot wait to have this conversation, John Rubino, author of The Collapse of the Dollar and How to Profit from It and more recently The Money Bubble with James Turk. Very good to have you back John.
John Rubino: Thank you Chris it is great to be back.
Chris Martenson: The Money Bubble it has been out for a while, maybe we start there. How has the reception been?
John Rubino: Real good so far I think we are up to about ten thousand copies sold, which is generally defined as commercially successful by the publishing industry. That is without the markets really going our way. When gold is going is up and we have financial crisis headlines everywhere, then you think the book would be more accessible and more interesting to people, so I am looking forward to a really good 2015 for this book.
Chris Martenson: Excellent, excellent, it is a great book so we will certainly let people know about it here. We have been watching—you and I and everybody that has been listening to this—we have been watching the markets for a while waiting for something approaching sanity to return. Here is how insane it has gotten—and I am sure you have seen the same things. The bankers themselves, not the Federal Reserve of course, but central bankers like the Bank of International Settlements, the BIS, ex-central bankers, retired folks. You had people like Kevin Warsh former FOMC member come out with his big op-ed in the Wall Street Journal. People who are either the banker’s bank or just left the marbled halls of the central banks are all saying the same kind of thing and I am wondering if you are hearing the same kind of thing. What I hear them saying is: "Wow this is getting crazy."
John Rubino: Well, yeah especially the guys who leave office come out with a lot of worried comments. Part of that is that even though they were the architects of today’s problems, they want to make sure that everybody knows that they were the voice of sanity at some point in the process. They see it coming and the guys on the inside see the same numbers you and I do and probably come to the same conclusions that we are doing a lot of unsustainable things. They have such a stake in the status quo that it is very hard for the insiders to make any substantive changes. So they leave and they express concerns, but we should never lose sight of the fact that these are the guys who created the problems in the first place, or at least participated in the creation of the problems. The problems are real and myriad, and we have been talking about them—as we said before we went live—we have been talking about this stuff for ten years now. Things just keep getting worse under the surface, even though to most people now based on government headline numbers things seem to be getting better, but they are actually not. Most of what is going on under the surface in terms of bank derivatives, books and government debt and now consumer debt and just about any other real financial statistic that you would like to look at, they are all getting worse. This means we are heading for some kind of replay of 2008/2009 only with more debt to deal with, bigger derivatives books, more landlines out there. This one could be much worse than the one we just lived through a few years ago.
Chris Martenson: Well it has to be a lot worse because it is a lot bigger and the general arc of this whole story for me is there was a little hiccup in 1994, we had just come off a double dip recession, which scared everybody off, and there were political ramifications, we had Greenspan in office. He says "not on my watch." And it was a little hiccup in the corporate bond market, and it was tiny by the numbers we talk about today routinely. He freaks out and gives us unlimited reserve ratios, in the sense that he did this sweep program thing, which we talked about before, I will not go into it now. That blew up the money supply. There was Y2K so they pumped some more in, yay, we get this whole NASDAQ and other stock bubbles, tech bubbles all of that stuff, that crashes. We get the housing bubble as a response. So the general theme here is that the Fed seems very content with this idea that they are, A.) Want to blow the bubbles and then ride into the rescue. And of course why not? They get feted and lauded. You can create the bubble and then clean up the damage afterwards and retire and get two hundred and fifty thousand dollars a pop to speak, and I am sure your card is full and you have to turn away opportunities.
What is amazing to me John is that we as a nation have allowed these people to create the bubbles, ride in after the fact, clean them up and nobody really seems to be—at least in the main press and mainstream culture—saying, "wait a minute weren’t you the people who caused the accident?" Is it like we have serial arsonists on our volunteer fire department and everybody is happy with that. I just do not understand it and it seems to me like the Fed really does not get it that their behavior is ultimately more destructive than helpful.
John Rubino: That is one of the things historians are going to have a ball with when they look at these times. The same guys who caused the problems are the ones who are then tasked with fixing the problems. There is not any kind of allocation of blame here. In most of the world if you are the coach of a football team or something like that and your team loses because you make bad decisions, you get fired. Same thing with the CEO of a corporation, but the people who are in charge of the economy seem to be able to escape blame. I cannot explain that. It probably goes back to general ignorance on the part of the population. We just do not understand what is happening so we do not know who to blame for it. You see somebody like Greenspan who is still taken seriously in the world, he writes bestselling books, he charges huge amounts of money for speaking engagements, and yet he is the guy who was the architect of the beginning of the biggest financial bubble in human history.
The same thing with the people running investment banks. By any rational legal definition of what the banks have done in the last ten or fifteen years, they are criminal enterprises and the guys in charge should be put in jail, they should be treated accordingly. As were the guys who ran the S&Ls back during the savings and loan crisis in 1990. Something like eight hundred S&L executives ended up being prosecuted and sent to prison after that relatively small hiccup in the financial markets, and what has gone on lately is so much worse and nobody has gone to jail for it. In fact, hardly anybody even loses their jobs, they continue working and making huge amounts of money and living really prestigious lives after basically blowing up the economy, and now putting us in danger of another 2008/2009 times two or three in the near future. I do not know, it really is shocking that these guys are getting away with what they are getting away with. I think it comes back to financial education. We are not able to separate normal market fluctuations from financial crime and so the crimes are being kind of subsumed within bear markets and bond market fluctuations and things like that and they are not seen as the crimes that they should be seen as.
Chris Martenson: These are not just financial crimes in my mind John. HSBC was laundering drug money, massive quantities of cash, drug money. Got caught and nobody went to jail and of course there were people who specifically oversaw that program it was not like, "oh somehow we just lost track of who was overseeing these cash disbursements and their laundering through the system." Those all had names associated with them, not one of those people as far as I am aware has lost their job, been demoted or fired or let alone gone to prison. We have really horrible cases too coming out of other U.S. banks where they do things like put people into the home owners mortgage modification program, homeowners assistance, the HAMP thing, and shove them into that whole thing. Then maneuver to make sure that those people get lost in the system so that the checks that they are sending in to it do not clear in time. So now, they are technically in default and then seize their property after knowingly putting people into default situations. Whether there is a law against that—which I hope there is—the lack of moral compass in that story is extraordinary. So when you say our banks are too big to jail and are doing some funky things, I am detecting a severe lack of espirit de corps that we are all on the same team in this particular story.
John Rubino: Yeah, I mean you nailed it basically, there are actual people doing these things. Corporations do not do things, they are just a place where people do things. Individuals have done each one of these things and presumably, they knew they were illegal. Because it is pretty clear in retrospect that this stuff was at a minimum unethical, and usually, overtly breaking the law. Where is the media in all of this? You would think you could win a Pulitzer Prize pretty easily by just naming names, going in and spelling out exactly what was being done in these big banks and the government institutions that support them and then coming up with the list of people who did those things. You do not see that anywhere except to an extent in Rolling Stone, of all places, Matt Taibbi is doing some really good investigative work. But you would think this would be something that the New York Times and The Washington Post and pretty much every big newspaper otherwise anywhere else would be all over because this is how you make a name for yourself. You can get famous, win awards, increase your circulation and make more money by breaking, big important stories. This is arguably one of the biggest, most important story of our time, the financial system devolving into basically a branch of the mafia and taking the government with it. Yet you do not see it, I cannot explain that either except to the extent that a lot of big newspapers and magazines are owned by corporations now who might not see it as in their interest because a lot of it will come back to bite them at some point. However, man, you know it seems like there is a wide open door here for some enterprising reported to win a Pulitzer.
Chris Martenson: I feel like that wide open door is where you have your nose and I have my nose. It does create opportunities, which is that for people who want to—are a little bit curious and want to start piecing the story together for themselves—there is plenty of opportunity to do that. And by the way, you have to because for the most part the big mainstream media outfits are not telling the story that needs to be told. Not on any dimension I can possibly tell. The context necessary to understand what is going on in the Ukraine is not that hard. Go back to about 1989 and you can figure out what the story is. Mostly I had to piece together really the United States' involvement in Ukraine from alternative media sources, from foreign news sources, even Putin’s own four and a half hour long press conference where he gave this entire history of Crimea going back to the 1700s with the central context, all of that. So we live in this context free environment where things just sort of happen and you just have to accept that banks are too big to jail and it is all too complicated and all that. Yet at the same time, I know you have a series of articles out right now, articulating that the markets are potentially not what they seem. If this all feels a little bit like we are all unknowing participants in the Truman Show, like we are all Truman, I do not know if you saw that movie with Jim Carey where he is this guy in a movie set and he does not know it. That is how I kind of look at the markets now that they tell me almost nothing useful anymore which is a problem for me because I have always relied on markets as being my personal canaries. I would carry them around with me and if the canary died I would know that something was happening. I do not really trust the markets to tell me much anymore. Most recently the biggest piece for that was looking at the Portugal Bank, Banko Espirito Santo.
John Rubino: Yes.
Chris Martenson: This thing goes belly up; it defaults on some of its bonds just for humor. Goldman had a Buy rating on that stock until this morning, it is destroyed; "Alright we are going to take the Buy rating on that off…" None of the rating agencies were out there picking this thing up. The credit default swap spreads on this were only a hundred and seventy three basis points a month ago, those shot up to three hundred and seventy basis points after they defaulted. I was like, "What are you talking about?" That should be fourteen, fifteen hundred basis points minimum for a defaulted company. Minimum. That is the world we live in.
John Rubino: Yeah, one of the tricky things about Espirito Santo is that it is part of a series of interlocking corporations where one owns twenty percent of the other and a third owns a bunch of both. When one piece of that interlocking chain of different financial companies gets into trouble, it reverberates through the rest of the system so that is what happened here. One of the companies defaulted on some debt, which caused the other company to run into trouble. You have the system that is so opaque that no analyst can really get in there and figure out who owns what and what the impact of something over here is going to be… You just cannot do that when something reaches a certain level of complexity. One piece of this thing blew up and took the rest of it with it.
Now you can argue that the whole global financial system is in basically the same boat. Even an entity like Goldman Sachs which owns all the different pieces, or JPMorgan Chase—they have derivatives books and they have securitization operations and they have prop trading desks. These are all within the same corporate umbrella but they are all separate operations and any one of which can blow up and take the rest of the system down with it. Then you have cross ownership among all these big banks. And you have loans from one big bank to another big bank, and we cannot as individual human beings manage the complexity of a system like this. We cannot dig in there. The best banking analysts in the world cannot make sense of all of this. We are always going to be surprised by what the system does now because it is at a level of complexity that is beyond the comprehension of an individual human brain. We should expect more stuff like this to happen. I mean, that is what happened in 2009 when the derivatives system blew up. You had insurance companies getting into trouble and threatening to take down the whole global financial system. And we are, if anything, more complex and more financially fragile now then we were, and more opaque. Nobody can figure out what is going on here, not the regulators, not bank analysts, certainly not the government bureaucrats and the politicians that have to make rules governing all this stuff. We had a chance after any of the last few financial crises—whether it was junk bonds or tech stocks or housing—to simplify the system. We could have gone back instead of forward in terms of imposing regulations and separating out different kinds of banking functions, and we did not. We went the other way, we deregulated everything. Now we have a system that is so intertwined that you cannot pull the pieces apart and make any sense of it. We will only, as with so many other things now, understand what is going on in retrospect when historians sort through the rubble of this system and try to figure out exactly who did what to whom and what the effects were. All we can do now is just live through it and know there is going to be a huge amount of complexity leading to a huge amount of volatility, leading to some kind of a crisis out there, whether it is a debt collapse like in the 1930s or hyperinflation like Weimer, Germany or some new hybrid that is based on all of the derivatives that we do not understand but are totaling like a quadrillion dollars now in notional value. We do not know what it is going to be, but we know some kind of a crisis has to come from this kind of complexity and fragility and instability.
Chris Martenson: Now I think the Espirito Santo story tells the tale in microcosm. I am not as familiar with all the holding companies and their formulations, but just the way you described it, it sounds a little bit like Enron. The reason a lot of corporations go into complex corporate structures and shells is so that they can hide stuff and do stuff. Company A makes a loan to Company B, it gets swapped out as an asset on the books of Company A so they take a financial snapshot and say "hey was have this asset" and they do not incur the liability as being a consolidated liability funneling back through. There are games like that. That is what Lehmann was doing, there are all sorts of games being played all the time. As you mentioned regulation has actually softened, not gotten any harder across this. We have the Mark to Fantasy rules now so financial institutions can guess what they think their assets are worth and call that the true number. When you get right down to it with all of these derivative products that are sitting out there, everybody has this sense of safety. Because if my Greek bonds that I bought go bad, that is okay I bought credit default swap insurance. If the stock market really starts to go down it is okay because the Fed will provide the support and come in and not allow that to happen. That type of thinking seems to be about as prevalent as I have ever seen it. And again, there is a lot of opportunities to curl my toes and make my hair stand up straight, but this last week's article was the one about how junk bonds are now at record low yields, record high issuance rates, and the number of them that have covenant light loan agreement attachments to them is now over fifty-one percent. So people are just so hungry for yield they are in junk trading with a four handle. "I will take 4.9% on this junk bond; I do not need any covenance ,that is okay. I am sure that Flighty McSpeedy’s company is going to be good for it." It is insane and here we are.
John Rubino: This is by design Chris. The government is actively trying to force people further and further out on the risk spectrum by lowering interest rates to the point where you flat-out cannot live if you are a retiree; you have a bunch of cash that once yielded six, seven or eight percent and was enough to live on. Now it yields 0.2% in a six month CD and so you basically starve if you have to live off the income from your savings. Two choices: One is you eat your capital, you start spending the money that you saved. Or you find something that yields a little bit more and so you have all this supposedly safe capital pouring into riskier and riskier assets like junk bonds, because the people feel like they have no choice. Pension funds are doing the same thing; that money is supposed to be managed very conservatively but it is going more and more to equities and junk bonds and real estate. The reason for that is that is the only way to make their targets. We are creating fragility at every level. These retirees who thought they had enough to have to live on now have a portfolio of junk bonds and equities with probably some global bond funds thrown in for good measure. Those are very volatile instruments. Eventually, even in normal times, those kinds of things have big corrections.
So you are going to see a lot of people who cannot afford to lose anything of their capital, losing thirty, forty, fifty percent in the next market correction. That is if we just have a normal correction in junk bonds, so you could see sixty, seventy, eighty percent losses on a lot of these things. The pension funds of the world cannot afford that. Retirees cannot afford that. But that is the world we have created.
You really have to wonder about the policymakers who are doing this right now. Because do they not understand this? Or is there some later stage in the plan in which they want this to happen and they are going to do something at that point that is in their best interests, as opposed to the best interests of the people that they are impoverishing? I do not know. I am not sure which one scares me more, whether these guys are clueless or whether they have a plan and the plan is in some way to harvest us. I do not completely understand how they want to do it but if they are attempting to do it then they must see some benefit out there in the future.
Chris Martenson: Yeah so it is a choice: Do you want your ship that is being charted through unchartered waters—do you want the clueless idiot for the captain or the evil genus? Who is piloting this ship? I vacillate, John, between those and I am convinced more and more that these are just normal people with egos. I am sure they have plans; most plans do not survive first contact with the enemy. We have never been in a situation this complex, this intertwined. Most of it though—this is the part I do not understand how so many co-called "investors" (I have to put air quotes up when I say that word now, “investors” they are all speculators) have thrown all caution to the wind because one of the things that is really required—there are a lot of things that are required to keep this particular set of inflated asset bubbles fully inflated, right? Oil cannot get any more expensive, probably. That is not going to help anything out. Wnd we need to have continued access to growth; if that growth genie does not return and bestow his magic on our land a lot of these numbers do not work out. There really cannot be any series of defaults, we cannot go down a deflationary path at all or all the junk bond things we are talking about will just come roaring up as one of many heads of the hydra to tear this thing apart. But mostly what is really, really required is that we do not have any geopolitical fracturing. Europe and U.S. and Japan all have to be singing from the same hymn book, we cannot really have any further devolution in the relationship between China and the U.S., Russia and the U.S. Yet this past month has been extraordinary and I would love to get your observations on this because you have been tracking things around the dollar. The number of countries that have been openly calling for an end to the petrodollar, including France—France is in that club now, right? Those stunning announcements by China’s president about how chaotic and bad it would be if there was an actually conflict with the United States. That is a harsh sort of thing to hear from the President of China. Russia obviously not happy with us at this point in time. And now recently Germany, not one, not two, but three spying scandals now and they really started to distance themselves and they are very unhappy with the U.S. I put all that together and I say "hey maybe somebody might want to say there is a risk here somewhere." I cannot detect that risk if it is being perceived by these so-called investors; I cannot detect it in the markets anywhere.
John Rubino: Yeah, the markets are behaving as if we are in the best of all possible worlds. The reason that is happening is that these are not free markets anymore, they are all manipulated. The U.S. stock market is the perfect case study here where we have lowered interest rates to a point where corporations can now borrow very cheaply and buy back their stock and they are doing it on a vast scale. Gordon Long over at Macro-Analytics ran the numbers the other day and found that if you have a two or three percent dividend on your stock, it actually makes you money to borrow at a slightly lower rate than that and then buy back your stock, collect some tax breaks along the way, and it is a cash flow positive strategy. A lot of these companies are now buying back their own stock without any regard to the price of the stock other than the fact that it is low enough to give them this tax break, free cash flow strategy when they borrow money to buy it back.
So you have all this indiscriminant buying going on which is pushing up equity prices. At the same time, you have the world central banks suddenly intervening in the equity markets, which is something that they probably did all along but secretly and on a fairly small targeted scale. Now they are doing it indiscriminately. Three percent of a given country’s stock market, they just go in and buy each stock, three percent. It looks like it is spreading and the scale is growing really dramatically lately so you basically have an unlimited amount of money—because these global printing presses are effectively unlimited—with which to buy equities. So the supply of equities are dropping because corporations are buying them back in.
At the same time the world central banks are creating new currency and buying the remaining equities indiscriminately. It should not be a surprise that equity prices are going up, but you still do not want to see that. It is still not a good thing because it destroys the prices signaling mechanism of the equity markets. It used to be that when a given stock went up it told you something; it told you that whatever that company is selling you should make more of it or you should use less of it. It does not tell us that anymore. Stocks are going up fairly indiscriminately. So that is yet another pricing signal that we used to be able to use. As you said, markets used to tell us things. Well they do not tell us anything anymore, other than the fact that they are being manipulated so we should be really leery of anything they do tell us. Obviously this cannot end well.
The fact that a printing press, a modern printing press—which is basically an electronic system now in which governments can just press Send and increase bank reserves around the world—when that is fully operational as it is today it is basically unlimited. So you really do not know how far this can go because these guys do not have any technical limits to how much money they can pump into the stock market or the bond market or use it to manipulate foreign exchange or depress the gold market or whatever; name your market it is all being manipulated. They have unlimited ammo right now. We do not know—because this is unchartered territory—how far the imbalances can go. How big these bubbles can eventually reach before they eventually blow up. This is completely uncharted territory and all you can say with certainty is that the bigger these imbalances become, the more extreme the correction has to be to bring them back into balance. You cannot say anything about the timing because we do not know how far the process can do.
Chris Martenson: Well, it can go further than anybody expects. I think bubbles get as large as the gap between reality and hope. We have a huge gap right now. I think reality is very clearly saying "hey world, you are facing some real limits." There is only so much blue fin tuna the ocean is going to offer; this is only so much oil that will come out of the ground; there is only so much fresh water, particularly in certain regions; there is only so much earth that can be plowed and planted. We are facing for the first time real limits and I think those are going to obviously have to put a cap on the percentage growth we can expect. In times past, when the limitation was—it is a function; tell me how many people you have, tell me how much money is floating around and how much resources you have and I will tell you how fast your economy is going to grow. By the way, it is sort of constrained by things like productivity and technology and the workforce and all that stuff.
You could just sort of count on that happening. You cannot anymore because obviously to grow three percent per year is easier when you are smaller than when you are larger. We have a very, very large world economy at this point so adding a global three percent gets trickier every year. More importantly, growth requires resources, real stuff. And the Fed is over there in Fantasy World thinking that it is money that creates—you create enough money and real stuff follows. I hold the opposite view; money is an expression of and needs to be in relation to real stuff. I do not think that the main architects of this system have yet caught on to the idea that the system needs to run at a rate that it cannot run at anymore, and how are we going to get around that? There is just a big issue lurking there which I think—the stock market might look forward a quarter or two, maybe four quarters, maybe a little further, but the kinds of things that are really facing us—you have to have a ten year vision, twenty year vision to really hold. Theoretically the body politic is supposed to have that longer view and boy it does not.
John Rubino: Yeah. Chris, you are doing especially interesting work on energy right now. I think it is fascinating that the U.S. is in the middle of an oil and gas boom right now. We are now producing more oil than we produced at any time in the past fifteen or twenty years I think. Yet the price of oil is still over a hundred dollars a barrel. So we are clearly at the end of the cheap oil era. We can produce as much as we want to now but we cannot do it cheaply anymore. The internal structure of the fracking boom and everything makes it look like even today’s price is probably is not sustainable. Maybe we can produce a lot more in the future, but it is going to be at a hundred and twenty, a hundred and thirty, a hundred and forty, whatever dollars a barrel without any global geopolitical issues going on. Clearly we have hit the limit to cheap energy and we are going to have more and more expensive energy in the future, which is on one hand great for clean tech. That means kind of an open market for solar now, just this huge vacuum that will suck in solar panels for the next twenty or thirty years and make the best solar companies very profitable investments.
On the other hand, that is not going to lower the average cost of energy because we are still so dependent on fossil fuels. That is going to act like this huge tax increase, going forward, on a system that is already struggling. We already have overwhelming amounts of debt and now we are going to have increasing energy costs going forward, irregularly bu