Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - July 2014
Bob Wiedemer and Mike Maroney
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Mike Maroney: Good afternoon, It's Tuesday, July 29th and I'm here today with Bob Wiedemer. The author of Bubble Economy, Aftershock, Aftershock Investor, and Aftershock 3. Bob was out here today to speak with the account reps about the current fundamentals that exist in the market place. He's a guest here at Monex maybe every three to six months. It's one of the favorite times as far as our account reps are concerned and I thought it would be something you, the video watcher, would love to hear what Bob has to say about the current conditions that exist in the precious metals markets and in the overall markets in general.
Now, Bob, you've created something that's called the GFI, which is the Gold Fear Index, and you have four or five variables that really give you some insight as far as where gold could be headed. Could you share a little bit about that index and some of these variables?
Bob Wiedemer: Sure. And the basis here is that gold... what drives gold is fear, fear of financial markets, fear in the financial markets. So the five categories are stocks, bonds, real estate, domestic crises, and foreign crises. To the extent that you've got problems in any one of those, that pushes ups the gold fear index. The reality is right now, stocks have been doing okay, bonds have been doing surprisingly well, all of that means your fear index is lower. Real estate-- although it's starting to run into a slowdown-- it's kept its gains from last year and a lot of the slowdown is in sales of new homes, resale prices has been okay. Domestic crises have not been very significant. We don't have any debt ceiling issues. We don't have any huge political issues right now. Interestingly, foreign crises we've got a lot of those. A lot of major issues that could affect the world economy and certainly world confidence and they're having no impact on the stock markets. So, even though there's a reality there the fear level is pretty low.
So on all five factors, the fear level isn't very high right now in terms of being positive for gold, but that said, gold is still the best performing asset this year. DOW's up about 2.5% and even though it's crossed over 17,000 and fighting at that level, but still crossed over, it's only up 2.5%. Gold's up 8% this year. So it's by far in a way the big winner in the asset category this year.
Mike Maroney: It seems like everybody still talks about the stock market and I guess that's inevitable. So, the stock market is making new all time highs. The bond market has recovered nicely and trading near its highs. We have the real estate market and I think you talked about how it hasn't really done much; it's somewhat stagnant.
Domestic issues, do you see the coming election as potentially being an issue or do you really see kind of clear sailing for the rest of the year?
Bob Wiedemer: I'm seeing it as being an issue, but more of a political issue. I'm not sure it's going to be one that affects the stock market too much, it might even be positive. There's a lot of talk now, that the Senate may be captured by the Republicans and that might be a positive for investor's view on the economy, but I don't think it's going to make a big difference either way. In fact, that's part of the fear that I think really is growing out there... is that nothing seems to matter to this market that much... I mean, earnings, economic growth, geopolitical problems. It seems to be very, almost like it's sort of a fake market. I mean, it just doesn't seem to react much. We've gone two years without any 10% correction, that's a long time and that's starting to bother an awful a lot of people.
Mike Maroney: We have GDP numbers tomorrow and it's kind of crazy because in the first quarter of this year we were down 2.9%... that's negative 2.9%.
Bob Wiedemer: That's huge.
Mike Maroney: So, if hypothetically there was a negative GDP for the last quarter, that would be the official definition of a recession, correct?
Bob Wiedemer: That's correct.
Mike Maroney: Is it the same definition if we only have 2.7% growth in this quarter and 2.9% negative in that quarter, add them together and it's negative, does that count as a recession?
Bob Wiedemer: No it doesn't, but it should. It's a very good point. We'd still be for the first half of the year we'd have negative growth if that were true and that's a possibility. I mean to overcome 2.9% negative, obviously, we'll have to have at least 3% or more growth and that's pretty high growth. We haven't seen that kind of level of growth that often each quarter. I think we'll probably get it, but even if you get 3.2% or 3.3%, add the two together, you've got no growth for six months. That's... that's a huge issue right there.
Mike Maroney: Now, Bob we have no growth, but you called the recent growths we've seen as being fake or you used some fancy words and obviously the government continues to borrow a lot of money. So if they're borrowing all this money and spending it, that's not really, real growth is it?
Bob Wiedemer: No, my fancy words are called 100% fake recovery. That's... 100% that's a fancy word and it's true because the government... U.S. government is going to be borrowing $600 to $700 billion dollars this year. Yeah, it's down a bit; I'd hardly say it's a deficit under control, but $600 to $700 billion, yet the economy is only going to grow about $300 to $400 billion. That means we're literally borrowing twice as much as the entire economy is going to grow. That's a fake recovery. You take that borrowed money away, we'd be in a deep recession and you'd also start popping the bubbles making the recession even worse. So, it's a 100% fake recovery. I mean, I understand it's recovering to some degree, people don't have to tell me that, that's what I would expect. What's amazing is how little recovery you're getting from the massive stimulus they're putting in. I'm not, not even talking about... printed money, which is adding more stimulus to the economy.
Mike Maroney: Bob, why is it that it seems that investors have stopped looking at the overall fundamental picture that exists in any market place? Here we have a situation where yes, interest rates are at historic lows, stock market at historic highs, but inevitably interest rates are going to go up, our debt continues to increase, the dollar is very vulnerable as far as the rest of the world is concerned. If interest rates go up, our bonds could get sold off and who’s going to start to buy our bonds? So we have all of these potential storm clouds brewing out on the horizon, but it seems like everybody thinks happy days are here again. Are you hearing that from some of your wealthier clients?
Bob Wiedemer: I am absolutely hearing that. There is an enormous amount of bullishness and it's not just the stock market, you said the bond market, other markets. There's a complete lack of fear for what may be happening anywhere else in the world. I pointed out China, but there are other issues out there that could be a problem. There's no fear and that... "The lack of fear" is starting to get to be the biggest fear from certainly some of the wealthier people I've talked to when I was speaking at some Family Offices conferences in the last month in New York. I noticed that the one thing people kept saying after my presentation was, "You know, we all know-- you're right. Even in a short-term sense that the market is way beyond what's happening in economic growth, what we're seeing in earnings growth, it's way beyond that and we're nervous. We're scared." That doesn't mean they're all selling their stocks or anything like that, but I sense they're ready to in a sense. Right now, they're not selling because their still up and they're not ready to move out, but you're getting a whole group of people who are obviously nervous and these are sort of leading investors. Once it turns, it could turn pretty sharply and you could see everybody starting to try to get out at once. The Fed will react to that of course and I will be very interested in seeing how people react to the Feds reaction, but still you're getting a fear of the lack of fear... is what you're getting among the wealthier people I'm seeing.
Mike Maroney: The Fed is going to potentially taper tomorrow another $10 billion and inevitably they tell us that they will be finished with tapering by October. They've talked about low interest rates for an extended period of time, but inevitably if there are no bond buyers out there the interest rates can't be artificially kept at a low rate based on just talking about them. So, what do you think sits out on the horizon as far as interest rate projections or concerns?
Bob Wiedemer: Well, I think interest rates... as people would say...really have nowhere to go but up. Mark Hulbert from Market Watch was saying based on a lot of the bond newsletters he was reading it could go up to 4% or more this year, or 4% I should say or more, but I'm not sure it could go up that high...that's 4% on a 10-year bond. I clearly think there's going to be an upward push in interest rates and in terms with the Fed controlling it, they can always do that to some extent, but lets keep in mind, how does the Fed control interest rates? They do so by printing money. And I know no body thinks printing money creates inflation any more...that's one of those fears that's gone out the window, right? We never had fear of printing money. We only cheer it, but in reality at some point it does have a big affect. Otherwise, we could have just kept interest rates low for the last 50 years just by constantly printing money and buying bonds and keep the interest rates low. You can't do it though, because ultimately it does create inflation, which forces those rates up because the Fed ultimately loses control of those interest rates, if all it's going to do is print money.
Mike Maroney: One of the things that you've talked about in one of the speeches that we did together was the Wiedemer stimulus plan and I really like that stimulus plan. It made a lot of sense, but it really kind of put things into perspective. If we could continue to print money forever, why don't we just eliminate taxes and just print money, because in essence, that's sort of what we're doing, but at a smaller scale? So inevitably if that seems obscene or crazy, what we're doing now inevitably is also obscene and crazy, am I right?
Bob Wiedemer: You're exactly right. It's inevitably--and I don't think that's inevitably grandchildren's problem--it's a problem that could happen a lot early. People do see the problems with this. Just as you said, when you talk about eliminating taxes, replacing it with just printed money, well, everybody knows that's a problem. They really do kind of know what we're doing now is kind of a problem. Imagine telling people that we're going to print $3 trillion dollars ten years again. They'd say, "You're Crazy! How can you print that much money? It is highly irresponsible." and it is.
What I think you're going to find is that people change and particularly I think the first part of that change in mentality is not necessarily going to be hey we're worried about inflation, but ultimately what's going to be is we're worried that will the Feds money printing be able to keep up the stock market. I really think that is the concern we have. Especially, as this market goes up, it's harder for the Fed to keep it up if it falls. It's like any sort of bubble. You don't want it to go to far or when it falls it can go so fast you can't intervene. So I think the real fear of money printing is at first it's going to be the Fed can't save that market, and it's still going to have to print a lot of money even to keep it from totally collapsing, and that's when that fear of inflation I think starts to grow greatly. It's what I call, "after the market cliff." That's when you see the big problems with inflation.
Mike Maroney: Stock market inevitably rolls over, you have to assume interest rates inevitably go higher, so bond prices go down, stock prices go down and maybe the banks will give you half a percent per annum on your money. Do we see sector rotation out of those specific sectors and could we see some of that money flow back into precious metals?
Bob Wiedemer: Oh! I absolutely think so. I mean, even before then you could see a bit of a sector rotation within the stock market to more defensive stocks, but more importantly those are big sector stocks and bonds. Could you see a movement out of it? Oh! Absolutely. A lot of people... it sounds funny to say, but I think a lot of people have become more familiar and more comfortable with gold. Remember, in the last five or six years major well known investors have gone into gold. Sometimes they've not always done well, but people like John Paulson, David Einhorn, other people who are pretty well respected have gone into gold and made it a more respectable, more reasonable or mainstream investment. I think they're much more willing to go back into gold, especially if stocks and bonds go down. So, there's always the possibility when stocks and bonds go down, gold could go down a little bit with it for awhile, but in 2008 it came back very quickly. This time we might not even see that sort of down turn in gold, because I think people are more willing to get into it. Even though I know on the surface it doesn't look as positive for gold, but I think underneath people are much more comfortable with gold than they've ever been in terms of major investment over the last five years.
Mike Maroney: It's interesting, because they talk about currency intervention and what is intervention? Is it a nice word for manipulation? You know, we've heard of the so called plunge protection team to try to keep the value of the stock market up or at least limit its down swings and I think they've done a good job, especially when you go back to 1987, but gold is somewhat of an anti-government, anti-stock market type of investment. There's been a lot of talk of maybe some manipulation to try to keep it down, but inevitably doesn't the physical market overpower any paper manipulation?
Bob Wiedemer: Well absolutely, if there is intervention and nobody has the smoking gun, but there does seem to be a motive and there seem to be some very unusual trading patterns last year, it all depends on having physical gold to use for manipulation. If you don't have that gold to sell... you don't have that gold to sell into the market and push prices down, ultimately the price soars that manipulation fails. I'm not saying this is because I'm talking about gold here; this is true with any market. I've used the example of the British Pound, as they would try to manipulate the British Pound down and failed, well then you know, I mean... the British Pound Up...excuse me... and it failed and it fell.
Mike Maroney: George Soros manipulated it down.
Bob Wiedemer: We won't say that was his first billion, but yes that was one of the great, great investments that George made.
This type of manipulation or intervention, you're right the kinder term, always fails. To the extent you're getting at, I think that could be one more reason you could see the price of gold ultimately rocket off at a certain point and I think it could also come at a point where people are nervous about the bond and stock markets and are looking for something else, that's a smaller group. Obviously, you don't need 10% of the whole stock and bond market moving into gold, just a small amount would make a big difference in there. There may be other things happening at that time. China, I think, still remains a big issue. If there problems there, well not only are we going to be worried about the world economy and maybe moving towards gold, but so while a lot of Chinese. This could be a bit of a perfect storm down the road in terms of a lot of things happening at once that really push up the price of gold.
Mike Maroney: The sovereign debt crisis. Obviously, it hasn't been solved. They've got issues over in Europe. There was a Portuguese bank that recently almost went under. They were bailed out. Italian debt, Portuguese debt, Spanish debt, Irish debt, all of this debt is still on the books or balance sheets of many of the European banks, which we are some what connected to. Do you see banks solvency as a potential black swan?
Bob Wiedemer: In a way actually, I don't. I see it as a big issue, but in a different way. I think the Europeans will bail out their banks just as I think the Fed will bail out our banks. That isn't necessarily a solution. Ultimately, what's underlying all this is a huge debt problem. I know that the financial crisis didn't end it in any way, shape, or form, we still have a massive amount of debt. I mean...yes... in the U.S. some mortgage debt was reneged on and written off, but for the most part we still have most of that debt that we had before. We've certainly in certain areas, like student loans, we've increased it, obviously in public debt; we've increased it massively and in Europe the same is true. Spain is facing a much higher debt to GDP ratio than it did before. So they're still building up debt, but they don't have a debt crisis on the surface. Underneath it all-- it's kind of what I'm saying about the economy in general-- underneath this, are the fundamentals are not good the debts higher, we're much more vulnerable to problems, and the only reason its not a crisis is that people have faith in the Fed or faith in the European Central Banks that they're going to be able to solve every problem no question. I think that faith is misplaced long-term, maybe not so misplaced short-term, but ultimately that faith will be tested greatly.
Mike Maroney: So in essence, is money printing for the last 3 or 4 years sort of an anesthesiology type of experiment? Where we've taken the anesthesia. We feel good about it. Nothing seems to hurt. So we just keep thinking everything is okay. But the government debt issue... and I've heard some statistical information they talk about GAP, General Accounting Procedures. If we use normal GAP accounting rules, the U.S. government debt based on future obligations would be upwards of $70-$80 trillion in dollars and that's in an economy that's what $15 or $16 trillion dollars. So this aftershock, it's just going to be bigger and bigger as we keep adding on to all of these issues, is that the way you see it?
Bob Wiedemer: I do. Well, I think your anesthesiology or anesthesia analogy is perfect in that it's unfortunately encouraging us to do more of the wrong stuff, because we don't feel the pain. In that sense, you're going to do more, more, and more until it really gets bad. As I think I was mentioning to some of the sales people at Monex today, It's very much a situation where the Fed is being viewed as being the savior of everything--they can save stock markets, bond markets, housing markets, so forth--and that faith in the Fed is so important that if it fails, that's enormous. That's kind of what we're pushing it to. That's why I was saying earlier, I don't think the bank solvency is a big issue, because the Fed can save things and it can even help save European banks as you were mentioning. We are very connected, but ultimately if you lose that faith in the Fed, you're sort of losing faith in that U.S. government economy and that U.S. government finances, which nobody has ever lost faith in before. So it's a huge, huge step to take and we shouldn't be...ever be putting ourselves in a position where that faith can ever be tested, because if it's ever tested and it goes negative that not only has massive short-term consequences, but massive long-term consequences. Yeah, it's positive for gold, but it has big, big, big consequences down the road. I think, much bigger than people believe now. They think it's all sort of fun and games right now. Yeah, sure the Fed prints money that's great, we can have our stock bubble for a little longer, but it's really, really serious and I don't think people see it or don't want to.
Mike Maroney: So the Fed is tapering back on QE. When do they bring QE back to the table?
Bob Wiedemer: Whenever it's needed. Whenever the next crisis comes. That's where in a sense I agree with people who say, "Look the Feds got my back." I agree, I think the Fed will do everything it can to try to keep the stock market from collapsing. I don't think they're interested in building a bubble out of it necessarily. I think what they want to do is maintain a certain financial stability. Kind of like, maintaining financial stability in the banking system now requires maintaining certain financial stability in the stock market. It does make sense. What I'm saying is at a certain point, I don't think they'll be able to do that. I think they will try. I think the Fed will come back in. I think they'll reverse that tapering at the point that they need to try to push the market back up, but a certain point it's not going to work and the market will fall. In any event, that's when you'll start to have big problems.
Mike Maroney: I guess the saying is, "Mathematics is like gravity, it's non-negotiable." If you look at the mathematical equations to calculate where we're headed as far as our financial situation, inevitably we're going to pay the piper...
Bob Wiedemer: Inevitable.
Mike Maroney: ... and is it going to be next week, next month, next year, next decade? But owning precious metals in this type of environment, after you've seen a move from $250 to $1900 and in silver from $4 to $50, it sounds like the next move is really going to be the big one when it finally comes, because the next time is when there is a lack of faith in the Federal Reserve the Central Banks and that's the one that's not going to be pretty.
Bob Wiedemer: That's where the big move comes. I think you're absolutely right. All the rest...it's all been good. I mean, I'm not saying gold hasn't been a very good investment, certainly since 2000, we’re up 300%, but the big move is yet to come, clearly, because the big change is yet to come. We've only had financial crises on a controllable level. We've never had one on sort of an uncontrollable level. That's sort of what you're heading towards.
Mike Maroney: Do you think it's kind of like the old saying, "Everybody wants the go to heaven, but they don't want to go today?" That it's hard for people to want to believe in $3,000 gold or $5,000 gold because they don't also want the other variables that goes along with it.
Bob Wiedemer: Absolutely.
Mike Maroney: Maybe it's easier to just look at what we're dealing with and say, "No that's not going to happen, because I know when that happens it might be a little bit tough out there."
Bob Wiedemer: That's absolutely the biggest reason they don't believe and I can understand it. It makes a lot of sense, because... just because your gold investment is doing well... what about issues with your house or with your business or with your other investments, your stock, your pensions, your kids. It is...It's tough. That's one reason people are a little afraid to invest in gold because it reflects on everything else that they invest in and to some degree other aspects of their life. It is. It's the truth, it's hard truth, but that is one of the reasons. It doesn't make gold a bad investment, but I think it is one of the reasons people are nervous about it, absolutely.
Mike Maroney: How does life insurance do such a good job then, because they sell people life insurance and people buy life insurance and the outcome as far as that situation is pretty really negative?
Bob Wiedemer: Real negative and it does happen and people do buy gold. Some people will do very, very well. Those who do will do extremely well. That's the way investments work. Some people will do very well. Those who buy a life insurance and hold it will do very well at the right time, even if the outcome is very negative. Same thing is true, as they say with, earthquake protection in Southern California. We do it. I'm glad that people do it. It's expensive, but people do it even if the outcome is bad, you don't want an earthquake, but you certainly want your building to survive. That's why you make an earthquake protectant. So, absolutely that's what people should be doing and many people do, but unfortunately it won't be everybody.
Mike Maroney: I think the analogy you used today was that it's not a matter of if, it's only a matter of when. When you live in California, you're going to get an earthquake and we're looking at right now is... it's not a matter of if, it's only a matter of when. We're going to see a major aftershock, based on the things that we've done in order to offset the issues that we face and really all we've done is make the problem a little bit bigger. So the aftershock, probably gets a little bit bigger.
Bob Wiedemer: Correction, a lot bigger.
Mike Maroney: Obviously, gold trading in the $1200's in comparison to $1929 the high looks to offer great value. Silver down in the $19-$20 range after trading almost as high as $50, certainly looks to be a great buy. Both of the PGMs have been in a bull market for the last 12 plus months. We've got some great information on all of these products and we would love to send you out a copy of Aftershock Investor free. It is an absolutely incredible, must read book. Bob has been almost prophetic as far as his other books are concerned and I think this will be something that you find will help save and protect your portfolio for many years to come.
Bob, thank you once again. Great interview. Had a little bit of fun today and I really enjoyed it.
Bob Wiedemer: Sounds good. Thanks Mike.
Mike Maroney: Thank you!