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Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - October 2015

Bob Wiedemer and Mike Maroney


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Video Transcript

Mike Maroney: Good afternoon! It's Tuesday, October 6. My name is Mike Maroney. I'm coming to you today from the Monex Precious Metals Studio. We have a very special guest today, but before we kick into Bob Wiedemer's answers on some of the questions I've put together, let's talk a little bit about where the metals were and what happened over the last week.

We saw silver bottom at approximately $14.30, and in the last three or four days since the jobs report announced that jobs were not growing as quickly as many people expected, they actually went back and revised the two previous jobs reports, we've seen silver rally all the way from that $14.30 low up to $16.19 today and we saw gold rally from the lows down around that $1115-$1120 area to an inner day high today of $1152. Are we in the midst of a short squeeze? Many people believe that could be the case. As many investors thought metals were headed lower, because the Fed continues to tell us that they're going to raise interest rates, even though they seem to be putting it off each and every time they speak, but we'll get to the final end of that whole mystery this year. Before we talk about anything else, let me introduce to you Bob Wiedemer.

Bob is one of the authors of Bubble Economy written in 2006. Many people believe that may be one of the best financial books written in it's era, as far as predicting the financial crisis, predicting what was happening as far as the real estate markets were concerned, and predicting the financial strife that would take place as far as the stock market is concerned. Bob did come out with a new book called Aftershock, which talked about what would happen after we went through and tried to fix these financial problems and now he's come out with a new book Aftershock Investor.

So, Bob how are you today?

Bob Wiedemer: Doing great Mike.

Mike Maroney: Great to see you. We have an opportunity once every three or four months. Bob comes into Monex and he visits with the account reps to give them an update as far as what's happening in the market and I want to give Bob some credit. Hopefully, many of you may have seen the last video. The last time he was here, Bob predicted that there was no way that the Fed would raise rates in September and he also predicted that the Chinese market was getting very frothy and look for that market to roll over. He felt that that could cause some financial fear and he has something called the "Fear Index" that he believes dictates where gold could be headed. I'm going to have Bob talk a little bit about the variables that exist within that index.

Bob could you tell our viewers today a little bit about your "Fear Index."

Bob Wiedemer: Sure, and let me explain why it's relevant to gold is... people tend to buy precious metals when they are fearful of the regular stock and bond markets. They buy more. They're worried. It might be a fundamental lack of confidence in our financial markets, in the government, on top of a declining stock and bond market, and when that happens they tend to look for things like gold as a safe haven or insurance. So, that's why I look at the "Fear Index" and it's composed of really four parts. One is Domestic crises, other is Foreign crises, obviously if you have either you're going to have higher levels of fear. Another is real estate, that's very important because people count on that real estate for their retirement. That's where most people's really good investment or returns have come from, and of course, the stock market.

We look each one and to the extent that we see a higher level of fear. I think the pressure is for gold to go up. Right now, fear is actually relatively low in terms of Domestic or Foreign crises. We have one obvious potential one brewing in Syria. It hasn't blown up into a full crises, but clearly with Russian involved and on the ground with troops, with air strikes, all sorts of things could happen in that area. Domestic crises--nothing yet, although coming up will be a debt ceiling issue, but that's not affecting us quite yet. On real estate, frankly, the fear is pretty low. Real estate prices are increasing in most cities, although only a few cities have actually returned to their pre-financial crisis peak. Finally, stock market is where the fear is. There's a lot of concern of the stock market--what the Feds doing, there's a lot of uncertainty there. Obviously as you mentioned, China and the collapse of China stock market and most importantly their economy, as well, it’s going down is causing a lot of fear in the stock market. I think that's one of the reasons you're seeing more interest in silver and gold. Again, without massive money printing, I think that stock market is heading down. So, I think the fear is well warranted on the market, even if day-to-day we may see some ups or downs. Long-term--without money printing--I think we're in big trouble on the stock market.

Mike Maroney: Now last time that we met, you talked about the fact that we wouldn't see a rate increase. Matter of fact, I think you predicted that we wouldn't see one in 2015 and that you felt fairly confident that before we saw the Fed raise interest rates we might see a new round of money printing. One of the things you showed us was a chart that gave us an idea of what happened after each quantitative easing, as far as, the increase in value in the stock market. It looked as if quantitative easing was the fuel that drove the stock market higher and now that that fuel is gone, if the market is topping, maybe the Feds going to have to come in and support it again. Is that your feeling?

Bob Wiedemer: Very much so. When I say that the market doesn't grow without printed money or will fall without printed money, it's exactly what I mean. If you look at a chart, you can see that with each round of money printing we've seen the market go up. When that money printing stops, the market either goes down, or flat, and ultimately they print money to bring it up again. We're certainly seeing that right now. Since they've stopped money printing in October, this has not been the kind of market we saw in 2013, needless to say. That market was just going straight up, very nicely. This market is not and we've had some big corrections along the way. So, I think it's absolutely crucial for the market ultimately to continue a rise... to print money. More importantly, with the Feds more worried about the recent... I think they'll print more money to help this market. If it falls 20% or so, I think the Fed will want to step in and stop that because it could easily go from a correction to a full-scale crash of 30%, 40%, 50%, if the Fed doesn't jump in with a QE4.

Mike Maroney: Now in the old days, we used to use something called "growth" and "profits" to actually increase the value of stocks and if you look at the over all growth in the United States just barely at 2% according to government figures, and we're not seeing massive economic expansion, and if China is starting to slow down, that's going to affect a lot of other stocks here in the United States because everything is tied in internationally. So, if we're not seeing the economy grow, we're not seeing an increase as far as wages are concerned, the only way we're really going to keep that stock market propped up is to continue to print money?

Bob Wiedemer: Yes it is and I think it will work this time. With all the fear and questioning you're saying, it's true. I think it will work, but people will be nervous when you go to another round of money printing. So very few talk about it much, very few people are talking about that. I've heard a few, but for the most part, people don't really want to think about it because, just what you said, it's quite the realization that "Wow... money printing is the only thing keeping this market up" and that's why I think when it does happen it will work, but it will be a nervous bull. There will be a lot of concern over that.

You're absolutely right. I'll put a couple of figures--you mentioned slow growth--S&P 500 revenues, negative or flat, so they're not growing at all. For one of the first times in decades, the first half of this year saw no growth in global trade. No growth in global trade for the first time in almost 25 years. So, you're certainly seeing a slowing economy around the world and that's certainly affecting our companies’ earnings and of course it should be affecting their stock prices. That's why I think we'll need money printing, but until then those will certainly pressure stocks for a while.

Mike Maroney: Now one of the things that the government depends on is... one, if we experience growth then inevitably we get higher taxation, because growth is good for taxes. I guess 2014 was a good year as far as taxes are concerned, but if you continue to spend more than you take in and you're dependent on money printing, the world or the population here in the United States one day will wake up and realize... and I think you used the analogy, "Where the medicine becomes poison." Explain a little bit about that.

Bob Wiedemer: That's important because right now there's a tremendous faith in the Feds ability to maintain stock prices. Clearly they've done a good job since 2008 of making price recovery with their massive money printing and people are very happy about that. That's a faith in the Fed that could ultimately fail and that's what we have to be worried about. Again, I think we can print money and I think it will work one more time, but it gets to a point where people say just what you say is... "It doesn't," and their faith changes. It's not just entirely that... a technical matter of how much we print or give a number. It's kind of like, well, the Internet bubble or housing. I mean, was there a given number where people kind of lost faith that Internet companies could just keep going up, up, up, no matter what their profits were, or earnings, or lack of earnings? Could housing prices just keep going up, up, up, even though incomes were not going up nearly as fast? There's a point at which people start to question it and once they question it, it's over. With Internet stocks or with housing, well the Internet stocks aren't such a big deal, but with housing it was a very big deal, but if that's true of the Fed...it's a huge deal.

Mike Maroney: When you look at money printing and the fact that prices go higher, how do we get out from under all the printing that has already taken place? Is there an exit strategy in place or inevitably we're going to see some major problems based on the cure?

Bob Wiedemer: Well, they actually talked about an exit strategy years ago. You notice you haven't heard much talk about it now have you?

Mike Maroney: No.

Bob Wiedemer: There's really no exit strategy, because the exit strategy is very simple. It's pull that money back out, but that would have a very devastating affect on the economy--interest rates would rise, you don't have the support for the stock market. I mean, we're only talking about with the Fed a .25% interest rate increase. We saw a ton of interest rate increases, but it's meaningless. It's a minimal interest rate increase and that's the beginning of an exit strategy. If this .25% is so hard to do right now, it's very clear there's no real exit strategy from having not just double or triple our money supply, but quintuple our money supply and again I think they'll even go a bit further.

Mike Maroney: Now we've seen an absolute, exponential increase in money supply and everyone talks about an increase in money supply is the purest definition of inflation. A lot of people think inflation is good for precious metals. Is the fear situation really what drives the price of precious metals? Is it faith in the system itself and once that faith starts to wane, people look for that alternative that's somewhat outside of the box?

Bob Wiedemer: I think that it is. I think that's part of it. That's what starts that look is that faith starts to wane, but it's ultimately and fairly when it's backed up by a decline in stock prices or bond prices, when it's accompanied by signs in growing inflation that fear starts to feed on itself and because it's as I say in the book it's something called, "A rational panic," it might be a panic, but it might be rational. Meaning, there's a real problem there and people want to get out of traditional markets as fast as they can and move it to whatever is going up or put the money under a mattress, which will have problems in inflationary environment. So, they're looking for something that goes up. Obviously, precious metals will be one of those things that do very well, during that period. Again, at first it's kind of a fear, then a loss of faith, but when that fear and loss of faith is confirmed by the numbers, so to speak, then it gets to be quite a big move at that point.

Mike Maroney: So is this one of those situations where inevitably you’re going to have some sort of sector rotation? If you're not making money in real estate, you're not making money in the stock market, you're not making money in bonds, then the bonds have been in a 40 year bull market and look very toppy, inevitably that money has to rotate somewhere else and that fear causes that rotation to take place?

Bob Wiedemer: At the start, but reality is not just... you’re not making money. You're losing money. When you start losing money, people get real worried real fast. When you start losing money in stocks, bonds, or real estate, yeah people rotate out. It's called a flight to safety. They absolutely rotate out and that's because... again, it's not just because they're not making money. They're losing money. So, they move pretty quick.

Mike Maroney: It's interesting, because a lot of people look at precious metals and think, "Oh geez... they've done so poorly," but if you look at the beginning of this century in the year 2000 and you examine the overall returns of all the different investments out there, gold and silver have done very well.

Bob Wiedemer: Well, precious metals have crushed stocks. Remember people are not... There are not a lot of cheerleaders for gold. Certainly, the brokerage firms obviously want to cheer stocks and bonds, that's what they sell. So, when NASDAQ simply gets back to where it was in 2000 that's a huge deal-- "Oh my God we're back to where we were 15 years ago!" Not pointing out that silver and gold are up 100's of percent, they're far higher than they were in 2000. Clearly, people forget that, miss that, gold has crushed stocks. Of course, there are dividends to stocks that offset some of that, but nonetheless there's no question at what's been the better long-term investment since we've started our first bubble pop, in a sense, with the Internet bubble. It's very clearly that it's been precious metals.

Mike Maroney: I know you talk to a lot of very wealthy people and everyone seems to be happy if inevitably we start to print more money, but haven't some of these individuals spoken to you and said, "This can't continue." Aren't they deep down inside fearful of what sits out on the horizon?

Bob Wiedemer: I would say you almost have two groups. Obviously, you have the group that they're just happy the stock prices are up and that's great. Then you have the fearful group, which is a much smaller percentage. Within that, you've got the guys that are really worried and think it's a huge problem. Then you've got the guys that are a little bit fearful, but hope it's not a problem. There may be some overlap between those and the guys that say they're happy, but they just hope this works. A lot of people have privately or publicly in my presentations expressed a concern that... "I just don't see how this is going to work out and I'm worried." They may not see exactly what I say in the Aftershock, although many of them do and would rather not, but they have a lot of concern. In fact, even the people who might be on the happy side. I had one guy at one presentation in Florida, a very nice man, simply stood up and said, "You're no fun." I couldn't disagree, but you could see, he didn't say I was wrong either. I think he actually hit it. He was right. He didn't say I was wrong. He didn't say that I didn't have it right. He just said it's not fun.

Mike Maroney: So people understand, deep down inside, that this cannot continue on the path that we're on?

Bob Wiedemer: They do.

Mike Maroney: One of the problems that we're going to deal with, inevitably, is obviously we continue to hit the debt ceiling. As a matter of fact, the government has kind of kicked that down the road again. Some say we can get through to December, some say maybe November. If you look at the numbers, we're going to equips $20 trillion in the next couple of years, as far as, debt is concerned, when does that become an issue?

Bob Wiedemer: Well, it's interesting, I'd say it becomes an issue right away and it's one of the things that are making that group of people who are worried about... "How's this really going to work, $20 trillion that we have no plans or no interest in paying off...how is this really going to work?" I think it bothers them. Technically, let's face it; as long as the Fed can buy those bonds with printed money and it doesn't make people worried, it could go on for a long time--$20 trillion, $25 trillion or more. Now, we've really hit the end of the line in terms of borrowing. In the sense of... would you have to do that money printing to make that borrowing feasible? You kind of lit the fuse for the final bomb.

So, you could continue it longer. It's just at some point people are going to fear that the Fed has to print a lot of money to buy those bonds to enable it to continue for a while.

Mike Maroney: So the Fed, inevitably, we have to roll over a lot of short-term debt. I'm not sure what the actual number is, but potentially it's in the trillions, I would imagine, in the course of any given year.

Bob Wiedemer: Yeah, about 40% would be under 10 years.

Mike Maroney: So obviously, maybe a trillion or two trillion dollars a year. Then potentially, we have to raise another $500 billion to $1 trillion. So, if the rest of the world starts to lose faith and if you look at the government and see that they can't even get this debt ceiling right and then they start to wonder why I should be buying, if the Fed is the only one buying, doesn't things start to get dicey?

Bob Wiedemer: Well, they get dicey before that. I mean, ultimately that's where you end up is... the only buyer is the Fed and they just have to print a lot of money. To do that, but that will obviously cause inflation and a lot of fear. You're sort of to the end of the line. Like we've seen in South America or other places, you're in trouble, but you get in trouble long before that. From an investor’s standpoint, long before the Feds are the only buyer you've seen the values of stocks and bonds, they don't just all collapse. So, yeah but in the end that is kind of where you end up. That's sort of the end game.

Mike Maroney: Is one of the things that's protected us a little bit over the last four or five years the fact is we've seen a little bit of growth here and so many other nations are just as bad off, if not worse, than we are? Is it because all governments are screwed up that this thing continues to move forward in this fashion?

Bob Wiedemer: We didn't invent money printing. There are other governments who can do that. Europe, Japan, Bank of England, they could all print money. Does it help us? Not really, in a fundamental sense. It did help us that in the depression lots of other governments and other economies fell. Well, ask the guys in the bread lines, they didn't think it was all that great. So if we go down because other people go down, doesn't really make it any better. Yes, it helps a little bit in the sense that we're given a little more credibility. You might say a little more rope to hang ourselves. A longer credit limit, because I think we are given a bit more credibility, but in the end, just because everyone else is making the same mistake it's not going to prevent the pain from hitting us as well.

Mike Maroney: Now, Europe is printing and obviously Japan has been printing and one of the things Japan is fortunate for is the fact that a lot of their debt is internally held debt. Now, there's been rumors out there that there is $15 to $20 trillion in a lot of retirement funds. Do you see somewhere down the road, that the U.S. government will require a certain percentage of all retirement funds to be held in U.S. debt, as a way to offset the fact that they're going to have to have the Fed buy and if they use some of that money and force it into U.S. paper?

Bob Wiedemer: Well, in fact that's what happens with inflation. In other words, when the Fed ultimately prints a lot of money, the value of those savings and the retirement accounts goes down, dramatically. So, its inflation is sort of another form of taxation of your retirement, be it a life insurance policy, or your retirement account, stocks, or anything. So essentially, that's what's going to happen, even if it may not happen directly as what you're saying. In fact, the same thing is going to happen... is that the government is taking that money that is in retirement savings and using it for inflation, essentially.

Mike Maroney: So, when they monetize it's a form of silent taxation or a secret taxation?

Bob Wiedemer: It is and ultimately the value of the debt becomes less and less, but that also means the value of the debt that the people hold, which is a lot of what's in a savings accounts, retirement accounts, or government bonds, becomes a whole lot less. Some people call it the inflating weight of the debt, so to speak.

Mike Maroney: Now, in this type of market environment, when you look around and you say we had a financial crisis, obviously we came out with the cure for the debt problem. We created a lot more debt. What we've seen is the stock market skyrocket in price, we've seen real estate prices come back to close to 2007, 2008 highs, yet the price of precious metals have gone through what I like to call a "correction," some people say a major butt kicking or a major sell off, and why do you think that has happened? Is it just because people have a hard time seeing the forest through the trees or why aren't more people looking at this situation and saying, "Man, precious metals look to be fairly undervalued?"

Bob Wiedemer: Well, if you were on Wall Street selling stocks and bonds, would you be all that excited about precious metals?

Mike Maroney: No.

Bob Wiedemer: Don't think so. So, most of the investment world is run by people that sell stocks and bonds, you can expect them to take that point of view. Also, fundamentally, I don't think that people really, in a sense, want to see gold do all that well, because it does mean you got a problem. One of the ways we deal with problems is not so much as we don't see them, as much as we don't want to see them. So, rather than look at what I think is going to be one obvious way to help yourself in this situation, precious metals, they'd rather walk away and say, "I'd rather just think that problem doesn't exist." They hope that the Fed succeeds. They hope that something will work out. They don't know what, but that's that part of the group I was telling you that they may worry about it's not going to work out, but they hope it works out. They're going to bet their money on it. Which I think is a mistake, but...

Mike Maroney: So there's this saying I guess..."The human mind will not believe what it is afraid to see." So if they look at it and say, "The reason I want to own that is because things can get real bad, but I don't want to even think about that, so why would I own that?"

Bob Wiedemer: Right.

Mike Maroney: So, What we're seeing now though is we're seeing a market that's peaked, we don't have a lot of growth, and inevitably we'll probably see some sort of correction that induces this quantitative easing to take place. So, now might be a great time to own some of the precious metals and which ones do you like the most?

Bob Wiedemer: Well, I think clearly silver is poised for quite a rebound. We've already just seen that recently, but I think a lot of people are very focuses on it. I think a lot of people like silver because it certainly has been repriced downward, a nice way of putting it, a lot. I think it could be a nice play, certainly during that period when there's that correction coming. Now with that said, when they print more money, you could see that people lose their fear and they're a little less interested, but it also could be offset by that fundamental unease... "Why are we printing QE4?" Everybody doesn't have to buy precious metals for them to go up. There's going to be a group that says, "I'm getting more worried. I agree the stock market is up, my fear levels are down a little bit too on the stock market, but my fear levels have been raised on a more fundamental level about our financial system. The fact that we have to print again, worries me." That could also be a pressure to push precious metals up.

Mike Maroney: Now, one of the things you said is, "International Geopolitics or Geopolitical situations seems to be some what muted," but when you look at the Syrian crisis, obviously, Russia has moved in--supposedly boots on the ground. We have this immigration problem over in Europe, which it's already pretty bad over there, but then you add this variable into play. It could get a lot worse, as far as, borders closing and everything else. Then what do you think about this Volkswagen issue, as far as, Germany is concerned--huge manufacturing company. Could this be a black swan event that nobody even saw coming? Could this cause some real problems? What do you think about it?

Bob Wiedemer: Well, I honestly, in the case of Volkswagen, I think it's a black swan event for Volkswagen stock. It certainly puts a black eye in Germany's manufacturing prowess. It might be an opportunity for the palladium and platinum markets, certainly, but I'm not sure if it's a black swan that’s going to really take down the economy or Europe in that broader fashion. Again, I think the fundamental factors hurting Europe's and Europe's manufacturing exports again are China and emerging market countries. They're slowing. German manufacturing exports have already slowed to near zero growth, that's probably because emerging markets and China, they're slowing down. So, I think that's the bigger issue, that's the bigger black swan, is thinking that the China problem is over, when it's not. Syria, we'll have to see. That's one of those things that could turn out to be a much bigger issue over night—kind of hard to predict. It's clearly not on people's radar screen right now, but that could change dramatically.

Mike Maroney: One of the things that was brought up the other day I was watching the financial news station was they were talking about the massive loans that the Fed put out. Now that the dollar has increased in value so much, in terms to the Brazilian currency and some of the other currencies, that the Fed can't even allow the dollar to move any higher, because that could cause systemic problems, as far as the trillions of carry trade, as far as the carry loans that have been made with dollars?

Bob Wiedemer: Yeah, I think that is going to be an issue. You know, the Fed can certainly control the dollar to some degree, but these are traded on open markets every day, it can intervene in the markets and it does, but that's really another risk. It's all part of a fragile economy that we now have to worry so much about that kind of problem. These markets--emerging markets--are fragile and they're big and they will affect the rest of the world. So, you're right, we have an incentive to not see the dollar go too much farther and destabilize some of these other countries. It has been a huge move. I mean, against the Turkish they're almost 40% in the last year.

Mike Maroney: I think the Brazilian currency has dropped by 60%.

Bob Wiedemer: Yes.

Mike Maroney: Amazing, as far as, the increase in value of the dollar. Now, one of the toughest things to do... a lot of us can predict what's happening out on the horizon, but it's hard as far as timing is concerned. Obviously, we're going to deal with the Fed, will they increase rates or will they potentially use additional quantitative easing? Timeline wise, do you see monetary expansion, quantitative easing some time in the next three to six months? Or do you think that that's probably a little bit further out on the horizon?

Bob Wiedemer: I'll take the easy way out, Mike. I'll tell you, whether than put a time on it, I'd say if you see the stock market decline 20% from it's most recent peak, that's when I think the Feds are likely to move. Is that likely to happen in the next three to six months? Yeah, I think it is, but it's not going to be driven by the calendar. It will be driven more by the stock market's movement in terms of how far does it go down from it's recent peak. So, timing is tough, but let me add something on timing that I think is important. In any real investment, it's hard to time, but if it's a fundamentally good investment, it really doesn't matter. You know when you invest in something, if your timing is off and assuming there's not a huge cost involved in holding this investment, as long as it's fundamentally right, that's what really matters in the end. Nobody is really going to care if you're maybe early, late, or whatever. That's what makes a good investment good. Sure if you're flipping stock or something like that, but most true fundamental long-term good investments really depend on their long-term performance, not on the timing. It's always good to get the timing right, I'm not saying that, but fundamentally what really matters is long-term performance.

Mike Maroney: So based on the current conditions that exist in the market place today, do you think gold trading at $1150 or under and silver trading very close to $15, do you think those two investments are good long-term investments?

Bob Wiedemer: I think they are very good long-term investments.

Mike Maroney: I think that's what it's all about.

Bob Wiedemer: True.

Mike Maroney: Bob, thank you very much! Always love to hear you speak, enjoy your perspective, and I think the viewers do too.

Well, thank you very much everyone. If you're interested in hearing more about the markets, please give us a call. Or if you would like to receive a copy of Bob's book, Aftershock Investor, please give us a call so we can get your name and get one of those out to you A.S.A.P.

Thank you very much and have a great day.