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

Bob Wiedemer and Mike Maroney

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Video Transcript

Mike Maroney: Good Afternoon! It's Wednesday, May 6th and my name is Mike Maroney. I'm coming to you today from the Monex studios and we have a great guest today. We're very privileged to have Bob Wiedemer. The author of Bubble Economy, the author of Aftershock, Aftershock Investor, and he has a new version of Aftershock that just came out and I think everybody should have an opportunity to read.

Bob did a presentation today for the account reps here at Monex and I'm going to ask him some questions about that presentation. Hopefully, it will be an enlightening experience for those of you who are interested in understanding what is happening in today's market and what could be happening in the future.

First of all...great to see you again Bob.

Bob Wiedemer: Great to see you Mike.

Mike Maroney: Now today, you talked about something that you've spoken about before and I think it's a fabulous indicator and you call it the "fear index." Will you give everyone a little synopsis of how this works?

Bob Wiedemer: Sure. The gold fear index basically looks at the four main drivers of financial fear. We have a high financial fear--I think the interest in gold will be higher and when you have a lower financial fear--interest in gold is lower, because it's something that people move to when they're nervous about markets of the financial system.

So the first aspect of it--first and always--is stocks. How are people viewing stocks? Right now, the stock fear is growing. It's growing because--in my mind--lack of money printing. Some people will say that, but in addition, we've had poor economics statistics, we've had bad corporate earnings growth. I would say that wouldn't matter as much, as long as we're printing money, but we're not. I think this is all weighing on the market and you can see a lot more volatility. That stock market is the number one part of the "fear index." If that's going up, that's a big deal, because that really colors the rest of the "fear index" and it certainly is the most important driver of the fear for gold--fear of the financial markets driving interest in gold.

Second aspect would be real estate; the other big asset that people hold. Right now actually, that "fear index" is pretty low. Fear of that is pretty low. We've had some nice rebounds in Southern California, Florida--I call them the "Stocks that ease Boston"-- San Francisco, New York are all doing well.

Domestic crisis is a third element. There's no real domestic crisis that's making people get real worried about the financial markets. I mean by that...a government shut down, inability to raise the credit ceiling or whatever. We've certainly got domestic issues, but not that are shaking up the financial markets.

Frankly, same is true for the fourth element--foreign crisis. There's not a foreign crisis out there yet, that's shaking up the financial markets. Might be something that happens in the Middle East or Yemen, but right now, nothing that's really bothering people. Maybe it should, but it's not. I'd still say that stock is the number one element of the "fear index" and the fear on that is rising and I think that is very important.

Mike Maroney: Now Bob, we saw the stock market back in 2008, the Dow was trading at 6,500. Recently, it traded at about 18,500 an approximate high. The S&P was at 666; it hit an approximate high of 2125. So we've seen the Dow triple, the S&P almost quadruple in price, and obviously people were starting to think, "Maybe we're getting a little over-valued." Now, something happened that really allowed this to take place and you talked about it today. We saw QE1, QE2, QE3 and we saw the stock market move straight up, but you said something today that Quantitative Easing (QE) ended in October. So they've kind of pulled the punch bowl away from the party. What do you think is going to happen because of that?

Bob Wiedemer: Well, as you said, since 2009, something has happened that's different and that's the Fed has intervened with the QEs, in fact, almost a perfect correlation between when the Fed prints money and when the market goes up. When the Fed doesn't print money the market goes down. Hence, an obvious prediction, now that we're not printing money, since we've stopped in October, this market will go down. I think that's very clear from our recent history. I think it's very clear from what's really driving this market--it is printed money. It's not earnings and earnings are poor. It's not an economic growth, it hasn't been that good. Even when earnings were up 4% or 5% in 2013, markets up 30%. It's all about printed money and that printed money has gone away. This market will go down. Doesn't mean that the Fed won't come back in and print money to push it back up, but there comes a point where that starts to make people very nervous.

Mike Maroney: Now, you talked a little bit today about a Fed Governor that actually came out and said, "We could see additional quantitative easing as early as December." Wouldn't that be a shocking event, to the American population, that we're going to have to go back and print more money after increasing the money supply by five times?

Bob Wiedemer: I think it would be, but let's look at that comment. The reaction to that, which was made in last October in referring to the December 2014, pushed the market up. So I think right now, the initial reaction is going to be, "Halleluiah! The Feds going to come in and save us and push the stock market back up. We're happy!" On the other hand, I think there's a lot of people who are, at least underneath, saying exactly what you're saying is, "Holy Cow! Fourth time we're doing this. Every other country, Europe, Japan, China's doing this. I thought this was temporary. I thought this was just to boost the economy, but it seems to be almost like we're addicted to it. I'm worried." Yes, underneath, I think you're going to see a current of worry with a bit of an on top, hey the market goes up, but ultimately this is going to be a real negative thing for, I think, for investor psychology.

Mike Maroney: Now, today you used the analogy where if the L.A. school system were to build $50 billion worth of new schools and the Fed was to come out and say, "Not a problem, we'll just buy up all those bonds." People would look and say, "Well, that can't be right." How can we continue to believe that continuing to buy mortgage backed securities or government bonds will inevitably not cause inflation?

Bob Wiedemer: Because we want to. Basically, people...if you're using money printing to support a stock bubble or a real estate bubble, people will just look the other way. They're not going to see what's obvious. As you said, "Even though it's very obvious," and $50 billion isn't much, remember that's literally how much in just mortgage bonds alone we were buying during QE3. That doesn't even mention the other almost $50 billion we were buying in U.S. treasury bonds. So $50 billion for high schools or schools in L.A. would be huge, but people know instantly...something's funny about we're just going to get all this money to build all these schools, create all these jobs, and it's all going to come from the Fed print money to buy our school bonds? Yeah, they know instantly that's going to create inflation. These are people that don't know anything about QE, they may not know anything about how anything the Fed prints money, but they'll know intuitively that that's not going to work. That's not the way you really create real growth in the economy and it's certainly not the way you fund schools or anything else, but when it's being used to support bubbles...I think they know it, but they're looking the other way right now.

Mike Maroney: So I guess it's kind of like...a lot of people say, “markets are manipulated only when the markets are going against them, but when the markets are going in their favor they never use that word ‘manipulation.’" So they're more than happy to seek quantitative easing as long as they're on the right side of the stock market or on the right side of the real estate market.

Bob Wiedemer: Exactly.

Mike Maroney: Now, in the precious metals markets, unfortunately, the quantitative easing did it wonders up until the 2011, but since then we've seen a dramatic pull back. A lot of that is based on--is it sector rotation, where money is just moved out of the precious metals sector and the commodities sector and moved into stocks, moved into real estate? Is that one of the causes that's pushed the price down?

Bob Wiedemer: A little bit, but I think all of that is part of a broader issue the "fear index." The amount of fear for the financial system has gone down. Each year, in a sense, you sort of go forward where the market does okay, doesn't have a big drop and people get more comfortable; complacency is very high right now. That doesn't mean that everything is perfect and that we're not very vulnerable to ultimately a big collapse, but at least for awhile...I think people are less fearful, more complacent, and I think that's been what's really been negative on precious metals. It's just been a stock market and real estate market that been generally been good.

Mike Maroney: Now we talked a little bit about this today, the fact that the dollar was going up and the price of precious metal was also going up along the way, a little bit. Then we saw the Euro drop precipitously. Do you see international problems like the Greek issue or some of the issues that are taking place in the Middle East propping up and maybe supporting the price of precious metal?

Bob Wiedemer: Well, I think there are international issues certainly in Greece, but Europe is not as much a buyer of gold. So for looking at what international issues are going to effect gold, I think you have to look at the regions where they buy gold--China, Middle East. So yeah, any issue in the Middle East certainly, I think will be a positive for gold, but I'm really looking at China right now because they are the number one buyer of gold in the world. They have a massive retail frenzy in their stock market. They're literally opening up a million brokerage accounts a week in China--brokerage, stock brokerage accounts. The markets been flying. People have sort of moved out of housing in China because it's...the price is not going up. They moved into real estate...I mean into stocks. I think they're moving a bit out of gold. But you see that market collapse, if that market has a big pop, I think you'll see a big movement into gold in China. They're already a big buyer. They're already attuned to gold as being a safe haven. So, if I was to look at any country's internal problems or foreign problems, China's stock market would be one that could easily kick off a nice move...upward move for gold.

Mike Maroney: Now, we're seeing Europeans print money. We're seeing the Japanese print money. Obviously, we're not sure exactly, but we're assuming that the Chinese are printing money--money that was leaving Europe, leaving Japan, and maybe even coming here to the U.S. market. If this stock market does start to rollover and we start to see a move up in precious metals, could there be something that happens that stalls that move and we see another issue as far as additional money printed?

Bob Wiedemer: Yeah, I think that's exactly what will happen, but not until it's needed. I don't think the Feds going to jump to print money. I don't think their goal in life is to actually pump up bubbles. I think their goal is to try to keep the stock market from collapsing, but I think if the market goes down 15% that's what they're going to be worried about. This market starts heading down I think they know like I's fragile. Then at that point, they'll want to print money, but not until you see a nice drop in stocks and quite likely a nice pop in precious metals, but yeah...then the Fed will most certainly move in, print the money, try to pump it back up.

Mike Maroney: So in the short-term, we've seen gold trade as low as $1,130, silver trade as low as $15.00. We may be putting in a little bit of a bottom here and we may see an opportunity, as far as, a short-term bounce.

Bob Wiedemer: There could be, absolutely. There could be a short-term bounce in that period there when the market starts to go down and the Fed doesn't react for money printing. We don't know exactly what kind of downturn we're going to see in precious metals when the Fed prints money, but my guess it's... anything that's really positive in the stock market, which that probably would's not going to be as positive for precious metals. So, short-term opportunity, but that could be over a few months even.

Mike Maroney: Okay. Now the Feds said that they were going to end quantitative easing, which they did. Now, they've kind of backed themselves into a corner because they said they're going to raise interest rates. Do you see the Fed raising interest rates sometime in 2015?

Bob Wiedemer: I think they'd like to, to show that we're returning to normalcy, right? Just like they'd like to stop money printing to show to show a returning to normalcy because they also know it's going to create inflation. So, I think "like to" is the key word, but if it hurts the market, I think the Feds can be reluctant. That might come after they raise interest rates, say a quarter percent, and then it hurts the market and they say well that's the last interest rate increase you guys will see for a long time. It might even come before. They might feel the market is too fragile to even raise in the first place. They said they'd like to, but doesn't mean they will or they have to. One other thing, again I might say, I have complete conviction that the Feds primary goal here is to boost that stock market, but by that time you might find QEs hot and running. I mean let's say... we have a downturn in the stock market in June, it goes down in July. Fed comes on in July and saves it. By September, you're already in QE territory and I don't think we'll have to worry about interest rate increases at that point. So, the Feds primary interest I think is keeping up that market. If interest rate increases hurt the market, don't expect them or certainly don't expect them to last.

Mike Maroney: Now domestic, here in the United States everybody was talking about our debt crisis, everyone was talking about the fact that, you know, we had a debt ceiling. Do you see that variable coming in to play in the next 6 to 12 months, or is that an issue that's been put on the back burner?

Bob Wiedemer: It's on the back burner for now. Certainly, in investor's minds, but it certainly will come in to play again. We'll hit the debt ceiling again. Could easily be a fight on raising it, but I think there's still a big "kick the can down the road" mentality, which I say isn't kicking the can down the're not kicking anything, you're basically just putting more gun powder under the house. The more you build up that debt, the more you print money, it just makes a whole lot bigger problem down the road. But I think for now, its kind of back burner in investor's minds. It'll come back up, but I think they'll kick the can down the road.

Mike Maroney: Now, this issue isn't a domestic issue, this is a worldwide issue.

Bob Wiedemer: Yeah.

Mike Maroney: I mean, we're seeing Europe and obviously they have their issues printing a trillion Euros, Japan printing trillions of Yen, the U.S. potentially starting to print again, and China printing. What is going to happen inevitably when this cure becomes the poison?

Bob Wiedemer: Well, it is a world's bubble economy, just like we had a world Great Depression. We may be in fact in all of this, the best horse in the glue factory. It sure didn't make us feel any better in the Great Depression and it's not going to make any difference in the future. It's just like if you and all your neighbors on the street all went out on a big credit binge and went bankrupt, it doesn't make you feel any better that everybody else went that way. We didn't invent money printing. We didn't invent fiscalary responsibility. Other countries can and are doing it, but just because that doesn't mean we're in better shape. It just means they're all going to be suffering as well. So, not going to help us. It just means that you've got a bigger worldwide issue. That's also going to be beneficial for gold, I might add, because the whole world is worried and a lot of people out there will run to gold as a safety. Gold is great in a crisis.

Mike Maroney: So the fear issue as far as the central banks are concerned. When people finally come to the realization that they've lost control and by printing and printing, might push the market up short-term, but inevitably that cure will be a poison, that will be the ultimate event as far as precious metals are concerned. When suddenly the realization of the world says this can't continue, we got to get out...when do you think that could happen?

Bob Wiedemer: I don't think it will happen with QE4. In other words, ...I think QE4 will work. So if we have a downturn in the stock market, I do think money will work now. As we're into QE4, somewhere in there, my guess is that we're going to have to increase the amount to try and keep the market up and more importantly what you're going to see is we increase the amount at a point and it doesn't have a positive impact on the market. That sort of defines the Aftershock. When you see the Fed running hard, and when the Fed is pushing hard to push the market up with a lot of money printing, and it's not working, that's basically when the precious metals go up. They might actually pre-date that because I think precious metals are good indicator of sort of confidence in central banks, confidence in government finance, confidence in the financial system. I think obviously, before you see the Fed having to print a lot of money with no good response, I think people's concerns will be going up and that'll be expressed in very likely a spike in gold prices before you actually see the stock market go way down.

Mike Maroney: Now, over in China obviously everyone was investing in real estate and that market looks like it's peaked and it's starting to rollover. Now, like you said, a million stock accounts every week are being opened up. So, that bubble is being created. What happens when that bubble blows?

Bob Wiedemer: Well, that's going to be interesting. Again, the government over there will work hard to try to keep it pumped up in a number of ways. China is going to be different from the U.S. Just like, when they print money it's more to give to their banks to loan out for construction projects and they're going to work to try to save that stock market to some extent. Ultimately, it's like the Chinese jugglers, right? You're trying to juggle too many things. I'm not saying they can't help cushion the blow of a big drop in the Chinese stock market, but ultimately you're stressing things over there and you're going to stress the system, even if the government comes in and tries to save it. That's why I think the market could go down and keep heading down. I think people in China will be scared. Certainly, they'll turn to gold and it could also have an impact on the U.S. stock market.

Our response to a Chinese stock market crash will be the same thing. We'll try to print more money to push it back up, but again you're starting to run balancing acts that inevitably at some point somebody is going to drop the plate.

Mike Maroney: So, Chinese stock market corrects, U.S. stock market corrects inevitably, and we start to see more money move into the precious metals markets. Now, we've seen the precious metals markets go through a three or four year correction and one of the forces obviously that exists in the market place is... it's hard for investors to get excited about gold and silver even though it’s done tremendously well over the last 15 years, because the last 4 years it's been somewhat negative. Just solely based on once it starts to go up and starts to catch momentum, things could start to heat up very quickly just based on that alone.

Bob Wiedemer: Absolutely, I mean, recency biases are huge. The recency bias right now is stocks up and precious metals are down. When that changes, it can go very quickly. It doesn't mean it just falls off a cliff, it could, but think of the Internet bubble. It popped very quickly. Housing a little bit slower, but when it did start to really tank in 2007, 2008, it went very quickly as well. So absolutely, because there's no real underlying economic support for what's going on, it's really all about psychology, and as we know that can change very dramatically. Even if the Fed is an actor in this, it still needs positive psychology. When it changes, I don't care how much the Fed does, in the end it's going to fail. It's that psychology that changes and that's what will overpower the Fed and it can change very quickly.

Mike Maroney: Now, everybody was extraordinarily excited about the oil patch here in the United States and tons of money was being lent out to the oil producers, the fracking states: Texas, North Dakota, Pennsylvania were doing incredible business, great growth. Matter of fact, a lot of people said that those fracking states actually created most of the job growth over the last five or six years. Now oil has bounced a little bit from $46 back up to $60, but what happens if oil stays in the $70-$80 range as far as U.S. oil is concerned?

Bob Wiedemer: Well, the bottom line is that they're not making money at $60 or $70. I grew up in Texas. So, I know how oil people are and I'm an oil person myself and my family. So, I know they have to be positive, they have to be optimistic, well, they can push things a lot and say things that aren't quite true. I'm not sure if anybody's making any money at $70 or $80. So if it stays anywhere in that range, I'm not sure if it'll get up there, I think you're going to find that drilling continues to be low. It's already dropped 55% in the U.S. So, drilling and exploration is way down--that's at $60 a barrel. I'm not sure if it's going to go up to $70 or $80. I remember in 1981, oil prices after five years when they peaked in 1981, they actually fell by 1986. It went from $37 peak to $10 in 1986. They didn't even get back up to $20 until about...well 2001 they were at $20. So, prices for oil don't have to go back up. So now that it's down, certainly that's going to discourage exploration and that's certainly going to discourage job growth in Texas. In fact, I think Texas lost about 25,000 in jobs last month and you're right this had been one of the states that had created 25% plus of all the growth since 2009. In fact, California I think is the number one job growing state in the country. So, it's a big change. I think it's a big change for our country. One other thing about the oil industry, I know it well, that's so important, is that everything they buy is made in the USA. So it's a really great industry for our country. I mean everything manufactured, frack fluids, everything tends to be made right here. So when it goes up, it's a huge plus, but visa versa when it goes down it has a big impact.

Mike Maroney: So that could have a major impact as far as the U.S. stock market is concerned.

Bob Wiedemer: I think it does, because I think it worries people. I mean, so many people thought oil price would just keep going up or staying up forever. People on Wall Street, people in the industry, entrepreneurs, the frackers, everybody thought it would stay up. Nobody saw that it might go down. They were blindsided and that's got to make you worry about things. I think one reason there wasn't so much optimism for a while on Wall Street was because they got to cover up their mistake. They didn't see that China's growth was slowing. They didn't see that we're producing more, they saw that, but what does that mean for prices? Higher productions, price is going to be pushed down. Iraq's production is up. Saudi Arabia has increased their petroleum by 50% over the last couple of years. Come on guys. Take a look. Pressure on oil was obvious, but they didn't see it because they didn't want to see it. I think that's got to bother anybody who trusts these same people who say well the stock market is always going to go up, right? Maybe they're looking the other way on the stock market too. They want to see one thing and that's what they see and it's not going to change until it hits them in the face, whether it's oil or ultimately when Fed money printing stops working. Boom! It's going to go down and people I think see it. They don't talk about it, but it does cause you to have a little loss of confidence that they missed the oil market so badly.

Mike Maroney: Okay. Now, right before the Great Depression, the stock market went way up and there was something called leverage--people use other people's money margin. Today, you talked a little bit about what's happening as far as leverage in the stock market, based on today's prices. What were you talking about today?

Bob Wiedemer: Leverage is at an all time high right now. I think that's probably due to that complacency we talked about. Well, same was true in the 20's, right? Stocks only go up one way, I mean, they go up. Irving Fisher had said that stocks at the time had reached a new plateau, a new normal. They're going to be high and stay high. I think that's what people are kind of feeling right now. So there's a lot of leverage, but because they're feeling good and feeling great doesn't mean that it's going to stay up. As the Great Depression showed, after they were feeling great...'27, '28, what happened? The '29 crash. There's a lot more fragility to this market, just like that market than it may seem. The leverage isn't really a sign of confidence. I think it's a sign of an overheated market ultimately and especially one that is so dependent on money printing. It's ultimately just an explosion waiting to happen even worse than '29, but again more importantly the leverage is part of the reason it could move fairly quickly. Psychology changes just like '29. Don't view leverage as an expression of confidence, view it as just another part of an explosive combination.

Mike Maroney: So Dows tripled, S&Ps quadrupled...

Bob Wiedemer: From it's lows.

Mike Maroney: ...from it's lows. From 6500 and 666 based on the S&P and we're seeing a massive increase in investment leverage, we're seeing the oil sector hammered based on the current prices, but the stock prices continue to remain high, but if those start to rollover... you truly believe that gold and silver could be the benefactor of that situation?

Bob Wiedemer: They will rollover. When you don't have money printing, they will rollover, and if they rollover I think that the precious metals--gold and silver--will be a big beneficiary.

Mike Maroney: Today, you talked a little bit more about silver than you typically do. Tell us what you thought about silver.

Bob Wiedemer: Well, when you've got a short-term trading opportunity silver is usually the one that is going to do the best. It kind of has a higher beta than gold. It's really the classic trading of the precious metals. So if you've got an opportunity like this. Where I think there is one with our own lack of money printing, stock market going down, and a secondary one with that Chinese stock market that could also provide a nice trading opportunity, silver is really the mechanism to work that with. So I like silver in that sort of short-term trading opportunity.

Mike Maroney: Well, silver was trading at $50, it's dropped $35 an ounce approximately 70%, whereas, gold $1900 pulled back to about $1200. So gold hasn't dropped as quickly and silver typically overshoots to the down side, but when it starts to catch a little bit of a bid this thing could really get going. So you think in the short-term it might be a good play?

Bob Wiedemer: Yeah and that's kind of conventional wisdom when we're looking at precious metals and I think it will follow conventional wisdom. Yeah, when it starts to turn silver is going to be the biggest beneficiary.

Mike Maroney: Great. Well, hopefully you enjoyed the question and answer period we had an opportunity to do today, but I think every single person who watches this video absolutely has to read Bob's book. If you're interested in receiving a copy, please give us a call. Talk to one of our account reps, we'll get you out one of his newest additions of Aftershock. It's an absolute, must read! Thank you.

Bob Wiedemer: Thank you Mike!

Mike Maroney: Thank you!