Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - December 2016
Bob Wiedemer and Mike Maroney
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Mike Maroney: Good Afternoon, my name is Mike Maroney and I am coming to you today from the Monex Precious Metals studio. I'm very honored to have a special guest with us today. His name is Bob Wiedemer. Bob was the author of Bubble Economy, which was written back in 2006, and basically predicted all of the things that took place that caused the financial crisis in 2008. Bob wrote a follow up book Aftershock and Aftershock Investor, which was absolutely incredible about his additional predictions as far as what sits out on the horizon.
Today, what we are going to talk about is the numerous variables that exist out on that horizon that are causing a lot of uncertainties in the minds of investors. Before we get into that, let's talk about what basically is in place as we woke up this morning.
Now Bob, if you look at today and you think about what's happening, the stock market just recently made an all-time high, and I looked at the P/E ratios today, it looks like the DOW was at about 23 to 1 the S&P about 27 to 1. A lot of the activity in the stock market has been caused by Corporate buybacks and what we saw right during the election, we saw the Dow Jones sell off about 600 or 700 points, but since then we've seen approximately a 1200 point rally and their calling that the "Trump Bump." Obviously, investors are saying, "Can this stock market continue to go higher?" What do you think?
Bob Wiedemer: Well, you can always push valuations higher, and let's be clear, that's what you're doing. It's not because earnings are going up. We've come from an earnings recession and we didn't really adjust for that. Stock market was flat the last couple of years. You can push valuations up, but it is a pure valuation increase right now. I might add, let's be a little careful about the "Trump Bump." In fact, that first week of the election 450 points of the bump on Monday and Tuesday came because Wall street thought that Hillary was going to win. Then on Wednesday and Thursday 450 points came because Trump won. So, I'm not sure I can make sense of that, to be honest, but that's the reality. So, there's a "Trump Bump," but obviously, there's just a kind of an election rally as well, which means I'm not sure it’s as sensibly based on great analysis. Again, we haven't really in any way adjusted for that earnings recession. So, you're coming into this election with stocks, by any valuation, P/E, but by almost any valuation metric, at a very high level. Could they go higher? Of course they can, but I think you're always getting on more fragile territory when you do that.
Mike Maroney: Now it's interesting, because we've rallied 1200 points, and if you break it down and you look, and you’ll find that three stocks provided about 50% of that rally--that's Goldman & Sachs, United Healthcare, and Caterpillar. Now, I find that interesting, because obviously, the banks very positive, United Healthcare maybe because of the drug programs or the medical insurance--Obamacare, and Caterpillar, which is usually a very strong sign as far as commodities are concerned. So, what do you think about that?
Bob Wiedemer: Well, I think it's first by stand point of the stock market, I think it's important to recognize just what you're saying is that certain sectors are driving the averages up. It's not all sectors are benefiting. I think clearly, no question, that Caterpillar is up because we think we're going to have a lot of infrastructure. As you said, the financials are up because of lower regulation. I'm not sure I would read too much into that more than... that's where people are hoping things to go up. I honestly would say, with Caterpillar I'm not sure we're going to get quite the boom in infrastructure that we thought or what people are thinking. It always takes time to get this stuff through Congress and I'm not sure exactly what is going to happen. Commodities though have done well and they've done well going in to the elections and they still did well afterwards. So, maybe you're right, Caterpillar is to some degree a sign that they expect more coal mining or other quantities, but I would say commodities have been going up on their own even before the election and not as much of just the "Trump Bump." I think it's... it's kind of like interest rates have been going up before the election too and went up even more.
Mike Maroney: Now, a lot of the stock movement and I've listened to you speak many times in the past was predicated on quantitative easing. One of the things a lot of people have talked about is the fact that the money supply here in the United States has grown substantially. If I'm not mistaken, one of the things you did speak about was the fact that the Fed alone, as far as their balance sheet is concerned, has increased by five times and you also spoke about how corporate debt has more than doubled. What do you think that means for the future?
Bob Wiedemer: Well, I think those are trends that are probably going to continue. We are at a pause right now in that we've only quintupled, and that's right...not just doubled or tripled our money supply, but quintupled it. I think there's every reason to believe, even though I know the Fed is trying to raise interest rates, I think there is every reason to believe that if the stock market goes down 20 or 25 percent that indeed the Fed will come in with QE again, that massive bond buying to the tune of $50 billion, $100 billion a month. So, I don't think that's over. I think that's still going to grow. Corporate debt, of course, interest rates have been low, they've been borrowing a lot partly to finance the buybacks you just talked about. It's certainly not to do a lot of investing so far. It's mostly been for buybacks and even to pay dividends in the case of energy companies. So, there has been a lot of borrowing with low interest rates, even if they go up a bit, I would expect that borrowing to continue... because it's still cheap, whether it's 2% or 3%, it's still pretty cheap for corporations to borrow. I expect some of that to continue.
Mike Maroney: Now, they say the purest definition, as far as inflation is concerned, is an increase in the money supply...
Bob Wiedemer: Yes.
Mike Maroney: ...but one of the things I remember you speaking about was the fact that the money multiplier has dropped precipitously and in order for the economy to really start moving and the potential for inflation to kick in, we're going to have to see that money multiplier increase. Can you talk a little bit more about that?
Bob Wiedemer: Yeah, you're going to have to see that increase, because that basically is a sign of more lending. I mean, lending... when that multiplier increases you're getting more lending. Right now, lending is actually pretty low. In fact, lending to small businesses is almost lower than it was before we went into the financial crisis. So, it's encouraged some non-bank lenders to go into the market, but overall lending has not been a bright spot for the economy in terms of basic small business lending. That doesn't mean corporations going out on the markets and borrowing money to do buybacks, but bank lending to smaller business. I think you're going to see that... hopefully will change, but it’s got to change if you're going to get the economy back on track. When it does, yeah, you'll get a higher multiplier and that's going to, of course, increase inflation faster.
Mike Maroney: Interesting. Now, obviously, what you're saying then is earnings are basically slowing, the P/E ratios are extraordinarily high, and the stock valuations are not correlated directly with something that you spoke about and that's GDP growth, what are we going to do to get the GDP number to increase? How does Trump fit in with this overall plan?
Bob Wiedemer: Well, that's an interesting point. I was actually at a high net worth or family office conference and somebody pointed that out very clearly is that the market is simply not following economic growth and hasn't been for a few years. Hence, it might continue to do that, but that's the stock market. I'm not so sure. I think, again, the Fed and money printing is more important and that's going to be an issue. I think the market falls without money printing.
In terms of GDP growth, I would hope that lower taxes will help GDP growth, certainly lower corporate taxes would help earnings...corporate earnings. Real GDP growth is tough to get. We've been in a slower growth environment and certainly this has been the worst recovery from a financial crisis or a recession that we've ever had. It's been very slow and I suspect that there's more to it than simply cutting taxes to get that going. We'll see. I'm not alone, many people are not predicating much stronger growth next year even with Trump as President than they were before and that's still all around 2.2%, not very good. I understand they're looking for 3 and 4%, but let's be real...we've been looking for 3 or 4% growth for years now. Maybe Trump can pull it off, but real GDP growth is tough to get going.
Mike Maroney: Now, it looks like the stock market might be priced to perfection and now we have the potential for higher interest rates. It's interesting, because if you think about it, a lot of people that look at the 10 year bond and say, "Okay, the historic low yield on the 10 year was just recently down around 1.6, the high is up around 15%, the Fed is talking about raising interest rates, Dudley came out yesterday and spoke a little bit more dovish than expected, but he also threw in a kicker that said if we start to raise interest rates, we may have to use additional stimulus." Do you see that as a potential action?
Bob Wiedemer: Well, I think the hope here is...yeah... they raise interest rates, no question... I think they're going to raise interest rates, this month. In December, I think, they're going to continue to raise interest rates, but I agree if it gets to be a real problem with the stock market or the economy, they'll slow down. I think what Dudley is talking about more stimulus is... basically what the Feds' hoping is that Congress and the President will spend more and I think they will. Now, I have some problems with that long term, because I'm not that borrowing your way to prosperity is the right way to go. So, higher deficits are certainly I think what we're heading for, but... whether or not that's exactly what the Fed wants, I guess it is to some extent. I want to point out in the deficits as much as people think that's great for growth, let's face it, our deficits gone up 15% this year almost. We're borrowing a lot more than we were last year and is anybody cheering about all the economic growth from it? Not really. So, just adding another...sounds funny...another couple hundred billion dollars to the deficit may or may not have that much impact on growth. We'll have to see.
Mike Maroney: So hypothetically, they raise rates and what we've experienced over the last few years may be some sort of artificial growth. Now, we have an issue because of what you just spoke about was the fact that we are literally right on the brink of breaking through the infamous $20 trillion debt number. Mr. Trump is talking about stimulus, he's talking about infrastructure, he's talking about cutting taxes, when you cut taxes and spend money, what does that mean? We could see a trillion dollar deficit in 2017 or 2018 quite easily.
Bob Wiedemer: Well, even the Congressional Budget Office said we were going to see trillion dollar deficits within the next six or seven years any ways just based on increasing Medicare, Social Security, and so forth. Let's face it, it went up $200 billion this year. You're absolutely right, we're going to see some big deficits coming. Trump, Clinton, anybody being in office, we were expecting big increases. You're right, more spending and less taxes, you're going to get there even faster. I don't know if we'll hit a trillion by 2018, but you're going to be way up there. Ultimately, if you don't print money, that's going to have a crowding out effect and raise interest rates. The Feds in a tough spot, in the sense that they're going to have to raise interest rates to accommodate, excuse me-- I mean-- they're going to have to print more money to accommodate that deficit, but yet they want to get more toward a normalization of interest rates and raise them higher. So how that plays out exactly, I can't say for sure, but a lot of uncertainty and a lot of real issues, I think, for investors to be concerned about going forward.
Mike Maroney: That's interesting, because you did talk about Social Security, you talked about Medicare, so our debt is right around $20 trillion, but there are a lot of things that exist that aren't on the balance sheet and those are those unfunded liabilities. I've heard numbers tossed about whether it's $25 trillion to as high as $100 trillion, as far as Medicare, Medicaid, the Drug program, Social Security, where is that money going to come from?
Bob Wiedemer: I don't think it is. We already know how most politicians attack this issue is... they ignore it. This was not an issue during the campaign. Nobody talked about reducing these... Medicare or Social Security. In fact, just the opposite, it was said we're not going to touch it. That's a real problem. As you see things go, you will have massive, not just unfunded liabilities, but that's where you're going to have massive deficits. So, that basic problem hasn't really been addressed. I didn't see it addressed in this campaign from either side. So, I think that's going to be a huge problem. I don't think in the end... Well, in the end, we are going to have to reduce costs or come to some sort of financial crisis, but it's not simply a matter of just borrowing more. That's not going to work.
Mike Maroney: Now, the debt continues to grow, the unfunded liabilities are still a major problem, but the thing that is kind of perplexing many investors is the fact that the dollar index just hit a 13-year high. We were down as low as 70 on the DXY and now we're back above 100. We tested that 102 high that we last saw back in March 2002. Where do you think the dollar is headed? Could that continue to go higher? Or is the only reason that is going higher is because the Euro and everything else is in just as bad of shape as we are, if not worse?
Bob Wiedemer: In fact, The Euro may be heading to what they call, parity, meaning it's only worth $1, when not too many years ago it was worth $1.35. So, that's part of it, absolutely, people are going to the dollar, but I've also said that the dollar is not going to go down unless stock and bond markets get hit hard--and they haven't. Let's face it, the way your dollar moves up is because European, or Asian, Japanese investors want to buy our stocks and bonds and they buy them with U.S. dollars. That keeps the price up and it pushes up further. The dollar is really going to be a reflection of stock and bond markets and right now, they're good. Bonds, obviously, got hit, but stock kind of made up for it. So overall, people look at the U.S. as a good place to invest right now and that's going to keep the dollar strong. I don't think that's going to change, honestly, in the next year or two. I think we are still going to see a strong dollar. Not sure I'd go with strengthening that much further. Might depend certainly on the Euro, on whether this Italian crisis gets to be a bigger European crisis, which I think it certainly could. So, it may strengthen, but I don't think it's going to get weaker. I think it's going to be as strong or strengthen. That's a big issue.
Mike Maroney: That's interesting, because a lot of people look at what's happening around the world and they talk about ZIRP, the zero-interest rate policy, and they cannot figure out why $10 trillion has been invested in bonds that you get charged money for. Can you answer that question?
Bob Wiedemer: Yeah, it's a stunning delusion that they always talk about, delusions, mass delusions, and this has got to be the biggest one. Is that you can have... and you're right... if it was maybe even a half trillion or a $100 billion of negative interest rate bonds, okay, I wouldn't worry about it, but it's $10 trillion going on $12 trillion of negative interest rate bonds that people are holding. I think it's just part of a mass delusion, especially in Europe and other European countries, that somehow this is all going to work out and there's a great deal of certainty about it. That's what also concerns me is that these zero interest rate bonds are 10 to 20 years. That means you've got to be pretty certain that nothing is going to change for 10 or 20 years. How can you be that certain about anything? It's obviously, going to hit a reality test here pretty soon, but it's just basically a big delusion.
Mike Maroney: It's Crazy!
Bob Wiedemer: Crazy!
Mike Maroney: Yeah, the interesting thing now is a lot of people look at it and say, "We normally see sector rotation." So, the stock market is trading at all-time highs, they're talking about potentially raising interest rates, which inevitably pushes the value of the bond market down. A matter of fact, the value of U.S. bonds has dropped by literally trillions of dollars and if they raise rates one of the other sectors that a lot of people have made money in again because the real estate market is retesting those 2006 and 2007 highs and a matter of fact in a lot of sectors here in the United States the real estate market is making new all-time highs. Now, I know most people don't buy price, they buy payment, so if interest rates start to go up, and you said it looks like we could see one, two, or at least three increases, that's going to cause mortgage rates to go up. What does that do to the price of real estate?
Bob Wiedemer: It's awful, basically almost every percentage point you go up right now you're losing about 10% of your ability to buy a home. So, you have to reduce the price of your home by about 10%. This is a really unusual period, in that we've got these low interest rates and you've got high real estate prices, if the interest rates go up, the high real estate prices can't stay there. It's just that simple. In fact, one of the biggest concerns I was running into at this conference was a lot of real estate investors, a lot of commercial and some residential, was that interest rates are going up. Even a small increase is a big problem right now for the value of real estate. It can easily go down. So, the kind of money people are expecting out of their retirement homes, I'll call it, which is frankly the house or most people's homes or where their retirement money is kept, they could be in for a big shock. As you normalize interest rates, you will also normalize housing. When you said prices have gone up to where they were in 2007, what did we call that? The housing bubble. Right? Well, it's not a bubble now, right? Well, you'll find out differently if those interest rates go up. Yeah, those prices are too high for anybody to make payments on real estate that high when interest rates just become normalized or even very low interest rates, mortgage rates of just 5 or 6%, that's a big problem. I might add, even before the Fed begins raising interest rates, mortgage rates have already jumped up almost a percent just in the last few months. So, it's happening and it's a big issue.
Mike Maroney: As we head into the Trump Presidency, as we head into 2017, stock markets at all-time highs, P/E ratios extraordinary, bonds are coming down in price, because... interest rates are going up, real estate looks like it may be peaking, where does the investor park some of his capital for safety?
Bob Wiedemer::I'll get to that in one second, because you brought up a real interesting point. A lot of people would say with Trump coming in it's kind of like when Reagan came in in 1980, but he came in a very different environment where, frankly, stocks hadn't moved up for a decade, interest rates were extremely high, which means real estate prices were not that high. It also made for some room to lower rates more instead of raising rates. So we are at a very different situation now than the 1980's, where people would say, "well now is maybe the time to put my money in stocks or maybe now is the time to buy bonds, because I get a great rate and as the interest rates fall the value of my bond goes up or real estate," and it was a wonderful time. It was really well done, well time for investors. Right now, there's a lot of uncertainty about all those because they are at all-time high valuations. This is not 1980 or 1981. They're all all-time high valuations. So even if they can go higher, I'd be the first to admit, of course, it could go higher. I think to have all your eggs in that uncertain basket of real estate, stocks, bonds, would bother me a lot. I think that you're going to have to diversify into other assets which do have a proven track record of going up in uncertain times and have a proven track record of doing well when I think the uncertainty that I'm seeing starts to be more pervasive throughout the markets and precious metals are a great, great way of diversifying your portfolio. It doesn't mean sell all your gold...I mean... sell all your stocks, sell all your bonds, so they don't sell your house, but recognize that there are some uncertainties here with these very, very high levels of valuation. Gold has become, obviously, less expensive and more of a bargain. I think it's a good way and timing to diversify your asset base. That's important, because this isn't just this year, it's the next 10 years or 15 years for most people.
Mike Maroney: Now Mr. Trump talks a lot about populous propaganda and people have heard him talk about possibly renegotiating debt, possibly implementing tariffs, and obviously, a lot of our debt is held by foreign holders--China being one of them. So, hypothetically, if we were to throw tariffs on China imports, could they potentially decide to start to liquidate our bonds?
Bob Wiedemer: They could and that's an issue. Of course, I've also said the Fed can buy bonds, but just the Feds act of going back in and buying a lot of bonds is going to bother people--another round of QE, QE4? That could be one reason that the market goes down and the Fed comes in, and the Chinese aren't as interested. There's a lot of issues with China that aren't just bond related. I mean...Just trade wars, just the threat of military in some sort of military problems comes up recently. I think we forget, at this point, how fragile world trade is. World trade for the first time in 25 years has really just gone to no growth at all. That's a fragile environment. Hate China, Love China, all that's been part of the economic growth story of the U.S. and the world and trade has been very important. I think Trump is, I don't think he is necessarily going to re-negotiate bonds, but I think he is going to do things that are clearly what he has already said is he's going to get upset at the Chinese, hold a tougher line with them, and that could involve certainly tariffs or other things that could start to cause a lot of problems with China and U.S. relations and the Chinese economy. We now actually do need the Chinese economy to do well. I understand the populous movement. I understand the jobs issue, it's very important, but if the Chinese economy starts having problems because they're in a big bubble too--if they weren't in a bubble, I wouldn't worry as much--but China is in a massive debt fueled bubble. You pop their bubble and that has reverberations everywhere. Ultimately, it should all be popped. In one sense, if Trump pops it, great. That means not good for stock markets, real estate and actually it'd be good for things like precious metals.
Mike Maroney: So, with all of these uncertainties being almost certain and some of these actually starting to escalate, what do you think about the European situation? The Italian referendum, they just voted now. We've already dealt with BREXIT and obviously, the long-term implications of that situation really haven't been felt yet, but the banking institutions over in Europe are teetering on the edge and if Italy or France or maybe a whole sector of Europe decides to leave, what happens to that currency and could we see massive demand in dollars or in precious metals coming out of the continent?
Bob Wiedemer: It's a mess. Yes, you could see big problems. I don't think it's just one off like BREXIT or Italy. It's starting to get to be a trend, because you're seeing polls in France that are indicating people who might get elected that would want to pull out of the European Union. If France pulled out, that's it right there. You're seeing a lot of basically, kind of what you're seeing in the U.S, that same issue that people want to be a little more protectionist. They don't want to be aligned that close with other countries. That may not be the best free market decision in terms of boosting your economy, but that's what people are feeling. So, I don't think it's any more uncertain where Europe is going. I think it's actually pretty certain that they're moving towards more and more of that. I think that could ultimately result in a huge problem for the European economy that it could move a lot of money. People are already saying at conferences that I've been attending, that they're not interested in European stocks, merging market stocks, or anything. It might be a benefit for a while for the U.S. stocks, but a really unstable European economy, Chinese economy, also means a lot of uncertainties for them and they're going to want to buy gold too. I think as a way of diversifying their assets from their own European or Japanese or Chinese stocks and bonds.
Mike Maroney: It's interesting, because the World Central Banks continue to print money and for some reason the perception of investors hasn't changed so dramatically where we've seen a massive movement out of certain cash and into something that's a little bit safer, but if you go back in history, just about every paper currency that has ever been created fiat currency has become worthless. What you just said is almost a certainty that the European situation is potentially going to blow up. Why are we not seeing more movement of capital into safer assets?
Bob Wiedemer: I don't think people want to see it right now. In other words, there's a tendency to say, "Well, you know if I agree with you and even move a little bit over to safer assets or diversify my portfolio, I'm saying you might be right and I've still got a lot of money in stocks and bonds and real estate." That's not a smart move. That's not a smart investment move, but it's kind of a psychological that if I agree with a little bit of a down side then maybe it's hurting my whole portfolio. Of course, it's not, it's just simple diversification, which any money manager would recommend over decades. It's one of the key ways to maintain your wealth. I think right now there's sort of... everybody wants to be part of that delusion and be part of that delusion is that I don't let any little bit of doubt enter my mind that there is uncertainty, but believe me all those people or many of those people do have a certain amount of doubt and what happens, of course, when the doubt meets a certain amount of reality is things change very quickly. That's sort of like 1929, the market was going up and going up and ... it goes down. You find the reality and that simmering doubt grows and that's part of the reason people don't want to at least for right now maybe diversify like they should. They should diversify, but maybe that gives a little doubt about the rest of their assets. It shouldn't, it should be viewed as very smart. I think some people will do it. I think more and more will. It's absolutely the smart way to go--diversify.
Mike Maroney: Now, I remember you talked about modern portfolio theory, where you want to have a certain percentage of assets that are non-correlated to the stock market, and gold was the ultimate balancing act as far as a portfolio. Could you explain a little bit more about that?
Bob Wiedemer: Sure, even the biggest money managers or fund managers will also look for some non-correlated assets and often called alternative assets or alternative investments at higher levels it could be like managed futures or so forth, which interestingly are trading commodities often. So, there's ways to get a zero correlation or uncorrelated assets into your portfolio, most smart money managers or fund managers try and do that. On a more individual level, it's hard to do that kind of advanced type of uncorrelated assets. That's why gold for many people is a great, easy way to add kind of what the money managers do at a very high level, you can also do pretty well. It tends to be an uncorrelated asset. Just for, as you said, a good portfolio, you should have it. The smart guys do it, so to speak or at least the more sophisticated guys, we'll see how smart they are, but more sophisticated guys do it because it does make sense. Everybody should do it and it's not that hard to have a portfolio with some allocation to uncorrelated assets, when you have precious metals.
Mike Maroney: No, it makes perfect sense. Now, obviously, if the Fed is going to raise rates, they're trying to fight inflation, right? Isn't that why they would raise rates?
Bob Wiedemer: That's the theory, but or actually they'll say they're trying to create inflation now. It's a little nuts.
Mike Maroney: Right, it is crazy! Once the enemy, now the cure almost. Where inflation was the enemy and now it's the cure. So, If the Federal Reserve wants to create inflation, they have the capacity to do so, wouldn't you agree?
Bob Wiedemer: Yep.
Mike Maroney: Now, one of the key catalysts that has always been tremendous boom as far as precious metals is inflation. So now we have the Fed trying to create some inflation and Mr. Trump potentially trying to create inflation, do you see that as something that's reasonable or feasible here in the short and near term?
Bob Wiedemer: Whether they want to create it or not, you're certainly seeing inflation expectations rise around the globe, in a lot of areas. Has there been enough to crush markets? No, but as you pointed out long-term bonds, if you look at a long-term bond fund like TLT it's down 15% since September, that's a big drop for something that's supposed to be AAA safe. So, even the little bit of change in expectations for inflation, I'll tell you, it's still a rather modest change has had a big impact and I think it will continue in that direction. Yes, we'll have more increasing inflation expectations and interest rates to follow and you're going to find that absolutely it has huge effects on fixed interest...I mean fixed income securities. Of course, precious do tend to benefit. I will say let’s not right off the entire year. We're still... gold's up almost 10% for the year. Certainly, we'll probably end up the year being competitive with stocks. So, it certainly has reacted poorly towards the end of this year, but overall let's just see. I'm not even writing it off for this year and I think next year certainly looks even better with what's happening.
Mike Maroney: Now you typically don't like to give us numbers as far as where you think precious metals are headed, but I want to try and get to one here in the near future here. What I want to talk a little bit about now is the geopolitical uncertainty that's being created by all these issues and the fact that we now have a politician that is in place or about to take power that has never really had the opportunity to negotiate and deal with foreign governments. What do you think about that and do you see any problems with that in the future?
Bob Wiedemer: Well, I'll give Donald Trump his due. He has negotiated things and so he is a negotiator. In fact, I think Fortune magazine called him Negotiator in Chief, but I think he also throws his weight around, which you can and should do in a New York Real Estate Market. It's a tough market and you've got to kind of punch and push back and so forth and maybe you can say the same thing in the world. I think what we will also find is that you can also shake things up a lot in negative ways with your allies, with China, with others. The reality is that the world is... we do have a lot of trade and a lot of good things going on in the world. I think that Trump brings a real uncertainty in terms of how it's going to continue. I think, bottom line, I think the negotiating skills are great, but they may be more suited for New York Real Estate than they are suited for international negotiations. I think he's raring for some fights, but again I saw a presentation that says basically expect a lot more little geopolitical problems. The problem with a lot more little geopolitical problems is you never know which one is going to grow into a big geopolitical problem.
Mike Maroney: Well, they are saying that Trump is the more "Ready, Fire, Aim" type of guy. Now an example of this is just the other day, he got on the phone and called the President of Taiwan and that's kind of a little bit of a "No, No" as far as a typical protocol. What other types of events do you see out there that could be affected by that type of strategy?
Bob Wiedemer: Well, I think that's probably one of the biggest ones is problems with Asia and problems with China. So, he's already kicked that one off even early, which is kind of not surprising in a way, but that's where we are most sensitive. Again, more because China's economy itself is in a bubble and yeah, in a sense, Trump is not going to cry any tears for China as he shouldn't if their bubbles pop, but believe me that's going to have a destabilizing effect on the country. Just like, nobody cried when Russia basically went bankrupt in 1998, but that had a huge impact on our markets, long-term capital and the big hedge fund that was invested in that and went down and almost took down a good part of our financial industry. Again, no body crying any tears for Russia, but it had a big impact on us. So, I think China is certainly an issue. Obviously, Europe it's got its own problems and not hard to make them worse and they've got their own bubble in a certain way with this delusion of negative interest rates. Those are clearly big issues and obviously in the Middle East no matter who gets in the Middle East is always going to be a hot potato. I think economically, in terms of gold and silver, in terms of stocks, bonds, I think China is the big issue. You're already seeing that's been one of the first flash points.
Mike Maroney: The three largest economies: the United States, The Europeans, and China, and we know the European Union is literally teetering on the edge. We know that China is in the midst of a bubble and we're going to be in some hardcore negotiations. We've seen very slow growth here in the United States based on massive amounts of money being printed and thrown at the marketplace and now we're heading into a situation where all of this is starting to come to a head and any one of these variables could cause things to deviate in the wrong direction very quickly. What's the good news right now?
Bob Wiedemer: The good news is on a personal level you can diversify. You can protect yourself against this. I'm not exactly certain what's going to happen and you're not certain what's going to happen. What you do know is in that situation you can diversify yourself and protect yourself against what's to come. Obviously, thinking that everything goes up all the time, stocks, bonds, real estate, we know is not true. People in California thought their houses would go up for decades practically at 10 to 15% a year back in 2004. It didn't happen. So, I think that just recognizing that there are uncertainties now and there are more uncertainties maybe of a different sort with a new President, but still a lot of uncertainties especially with the high valuations and what we've done since 2008. That's certainly not President Trump's fault or President Elect Trump's fault, but he inherits that situation. We did a lot of things that I think long-term are going to be very destabilizing. I think the way you deal with it and the good news is you can protect yourself by diversification. Don't think everything is just going up straight in a straight line. Diversify. Get some non-correlated assets like precious metals.
Mike Maroney: Now I know Bob, you're a big believer in silver and I think a lot of people in the precious metals markets they have a tendency to invest in gold, but they seem to speculate in silver. Silver has pulled all the way back from $50 an ounce all the way down to $16.50 and yeah it could go a little bit lower, but obviously, that's one metal that's very interesting. What do you think about the silver market?
Bob Wiedemer: Yes, silver is... you're absolutely right in terms of it's more of a trading precious metal. I certainly believe long-term it's going to go up. It's going to go up with gold, but it presents unique opportunities for a quicker run. Clearly, when metals move, it tends to move up very quickly. I'm certainly very bullish on silver long-term. You're right, short-term it's a little bit trickier to play, but it also has the upside in a shorter term that gold doesn't have.
Mike Maroney: Now silver has obviously been a currency in the past. The Central Banks are just printing money very quickly and not only here, but all around the world. Obviously, back in 1980 when silver went to $50 if you equate that as far as what it would have to go to… to equate to $50 in 1980, a lot of people were talking triple digits as far as silver is concerned. So silver is probably one of those plays where there could be some extreme profit.
Bob Wiedemer: Oh yeah, there's no question it’s sort of like gold on leverage. It will move much faster than gold when precious metals move. I'll be honest, I don't think silver is going to go up and gold go down. I think they're going to be in the same place, but it's clearly the one that moves the most and the greatest potential of profit, certainly short-term and maybe long-term as well.
Mike Maroney: In review, stock market at all-time highs. Bond markets are getting beat up pretty badly, because interest rates are going up. Real estate is teetering on the edge, because as interest rates go up, price goes down,...
Bob Wiedemer: ...values at all-time highs...
Mike Maroney: ... yeah, and payments go up. Back in 2006, you predicted that bubble and obviously, you hit that one right on the head. You're talking a lot about, in a lot of the speeches that you do, the Chinese bubble as far as the Chinese economy. So, the three largest economies in the world are obviously facing issues different in scope and now we have a new President coming in that has never been in the political game before potentially throwing his weight around as far as geopolitical is concerned. Wow! There's a lot of potential uncertainties out there.
Bob Wiedemer: There's a lot of uncertainty out there.
Mike Maroney: So, I guess, really the only thing that’s certain right now is uncertainty. It certainly makes sense, I think, to own precious metals in this environment, right?
Bob Wiedemer: Uncorrelated asset a good part of your portfolio, no question.
Mike Maroney: I love the fact that you're so conservative Bob and I know you don't like to throw out numbers, but I'm going to ask any way. Let's say in the next three to five years, where could you see gold headed?
Bob Wiedemer: I think gold could easily go back to where it was before 1900 and beyond. I think it's going to go in the $2,000 and $3,000 no problem. You're going to have to a big financial crisis to push it beyond that, but there's a lot of little shocks to the system that you can get that scare people and it's not just in the U.S. as you pointed out. China, Middle East, Europe, all these places cause uncertainty and cause people to move into it. So, certainly a big move early and a really big move later.
Mike Maroney: Now what's interesting, many years ago, Milton Friedman was at a conference and gold, I think, was trading at about $250 or $300 and somebody asked him if gold could go back to $1,000. He pondered it for a second and then he said, "Absolutely, gold could trade at $1,000, but I don't know if I want to live in a world that it has to." When you live in the world that we live in today and you think about the uncertainties that exist in the market, it almost is something that you have to have in your portfolio. Obviously, those percentages, I guess, are based on your individual beliefs, but do you have a minimum percentage that you think investors should have in precious metals and maybe a percentage that they should have for speculating in precious metals?
Bob Wiedemer: Well, again, that all does depend on your situation, but I've heard people from Merrill Lynch brokers to others that will say even 5 to 10% would seem to be reasonable and if you're going to diversify your portfolio anything less than that isn't going to have a huge impact. So, that would certainly seem to be that starting point. When you're looking to diversify. As things move in that direction and as you say you're moving towards more of an environment where it's positive for gold and maybe negative for everything else then that's not good, you'll want to move it higher, but certainly just for a reasonable little bit for diversification is the smart way to start. If you haven't gotten that, that's a good way to start. I think as we see this play out in the next year, we'll be talking more, as these uncertainties, I think, continue and we see it actually having more of an impact on precious metals, continue to add.
Mike Maroney: So you like gold for the uncertainty and maybe every once in awhile when you see something happening you might want to speculate a little bit in the silver market.
Bob Wiedemer: That's clearly the one that's going to move the most. It's kind of within your levels of ability to handle speculation and loss and so forth. Absolutely, silver is the way that you're going to make the shorter term profits.
Mike Maroney: Bob, fantastic! It was great speaking with you today. I hope that I get to see you again in the not so distant future and obviously we'll continue to converse.Well, I want to thank everyone for watching today. Hopefully you received enough information to where you're going to get on the phone and give us a call here at Monex, because we can help you diversify with precious metals for the uncertain times that exist out on the horizon. Thank you!