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Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - November 2017

Bob Wiedemer and Mike Maroney


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Video Transcript

Mike Maroney: Good Afternoon! My name is Mike Maroney and I am coming to you today from the Monex Precious Metals Studio. We're going to be talking with Bob Wiedemer the author of, Bubble Economy, Aftershock, and Aftershock Investor." Bob has put together a very special index for Monex Deposit Company. At the beginning of the year, he felt that it would be the year of uncertainty and he felt that an Uncertainty Index would be very approachable and usable as far as individual investors were concerned. So, each and every month, we interview Bob and we talk about the things that make up this index and talk about some of the key things that are happening around the world that are creating uncertainty.

Today, Bob, I think what we're going to talk a little bit about to start off, of course, is the current valuations as far as the U.S. stock market is concerned. I found it interesting that Warren Buffett the other day was quoting his feeling as if this stock market was getting a bit over valued based on the current valuation in comparison to GDP. Could you explain that a little bit?

Bob Wiedemer: So, basically what Warren Buffett...let's keep in mind this is generally a... he's a classic value investor. He looks fundamentally at whether the stock market is worth it as a sign as whether to get in. One way he tells whether it's worth it, meaning too highly valued or low valued so you should buy, is by looking at the value of the stock market relative to our entire economy, the GDP. So, he thinks that if the value of the stock market is about 80% of our GDP then that's a pretty good time to buy. At 100% or so, basically when it's the same value as our entire economic output, he's kind of like think about it. When it gets over that like 120%, forget it. Right now, it's about 139%. To put that in a perspective I think we can all understand, at the Dot.com days, when the market was at its highest valuation, it was 143%. So, we're almost at the same valuation by Warren Buffett's metric as we were in the Dot.com days. That's very high and as he says, he thinks stock market investors are playing with fire at this point getting in.

Mike Maroney: Now Bob, do you think some of that is predicated on the fact that everyone has been looking for a corporate tax break and inevitably that corporate tax break would add value and profits as far as the stock market in general is concerned?

Bob Wiedemer: Well, there's no question that when Trump was elected that was part of the idea is that we're going to get a corporate tax break to say 20% and that's going to help earnings and it probably will, but the reality is most corporations don't pay the top tax bracket. As we know, many corporations don't pay much in taxes at all. So, it's not clear how much that's going to add to earnings and again we have to see it get passed. It's only still in the talking stage. It's been a year, we're still talking. We'll see what really gets passed, but I would say that that has to be baked in at this point. You know, the market is already up over 20% since Trump got elected. So, I think that's pretty well baked in. With that said, you know, there is a lot of uncertainty maybe it could go higher. The reality is... I saw a recent poll that showed people, most people I think it was a vast major I think like 65% did not feel that Trump had come true on his economic promises that we were growing as well as Trump had thought. So, there's disappointment out there, but it's sure not showing up in the stock market, which to me leads for a lot of uncertainty as to just what kind of help we're going to get from a tax cut, whatever it may be, on the earnings side... a tax cut on the corporate side that will improve earnings. We'll have to see.

Mike Maroney: Now it's interesting, because you talked about the tax... I mean excuse me... the stock market being up approximately 20% for the year. I looked at gold this morning, which just so happened to be up about $14 an ounce. Overall, so far this year, gold is up well over 10%, even in the face of this incredible rally in stocks. Now, do you feel that investors are starting to make the move as far as diversification into gold, because of the uncertainty and the over valuation or is there some other reasons that you think people are parking money in gold?

Bob Wiedemer: I think it is that underlying uncertainty. You know, if Warren Buffett's worried about market valuations, everybody should be. On the other hand, I think the reason gold hasn't got even higher, although that's a pretty good run as you point out Mike, so far well over 10%, I think the reason it hasn't gone higher is that the market does seem to be pretty impenetrable right now. I mean, it's Teflon coated, it never seems to go down for very long, but all that's got to lead to a lot of uncertainty. So, yeah, I think that's the reason gold has got its gains and rebounding now and also we'll have to see. Normally, at the end of the year, we get a little bit... I mean it might go up, it might go a little bit down, but in January, I should say, we tend to get a real nice upturn and maybe we'll talk more about that in December. Last year, we got a real nice upturn in January. So, maybe some investors are also seeing a little bit of that and trying to get some gold in now for that reason, which would be smart I think.

Mike Maroney: Now, obviously, a lot of people have been talking about the Federal Reserve as far as drawing down in their balance sheet, the $4.5 trillion that currently sits on their balance sheet, but one of the big things that everyone seems to be focused on is who would be the new Chairman as far as the Fed is concerned. What's your view on Trump's choice and how do you think that will inevitably affect the market?

Bob Wiedemer: Well, his choice is clearly going to be Powell and I think that... I think it's a good choice from the stand point of the market. He's indicated he'd support Janet Yellen's policies of continuing to slowly raise interest rates and slowly pull some money out of the economy. So, I think he's the most market friendly by far. Certainly, as opposed to the economist Taylor, who would have been more likely a traditional conservative tight money person. I think Trump's pick is going to be more friendly to the market. One reason, I think that the market certainly hasn't gone down on the new pic, which sometimes it does because it could just fear what a new Fed Chairman will do, but I think in this case, I think, he'll continue to raise interest rates, certainly as long as the market stays in reasonably good shape, which it is...the stock market. I don't think they're really looking at the economy as much as everybody says. I think they're looking at the stock market and he'll continue to raise interest rates until of course that has problems then that policy gets reversed. You know, expect an interest rate hike in December almost for sure.

Mike Maroney: Now, it's interesting Bob, because you talked about the seasonality of gold and one of the things that we were looking for and hoping for is that maybe we would get a little bit of a pull back and it looked like on Friday that potentially we were going to get that opportunity. Then, over the weekend, we had some geopolitical issues pop up and a lot of people seem to be very concerned about what's happening in Saudi Arabia. Could you talk a little bit about that and give us your idea as far as how that may affect the Uncertainty Index?

Bob Wiedemer: Well, it affects it a lot. I think what's happening in Saudi Arabia is a big deal. This is an intra-family fight that really they haven't had since the mid-30's. The House of Saud, the family of Saudi Arabia, the Royal Family that owns sort of everything, has been relatively stable. They've been very good about sort of giving each part of the family some military power, some economic power--they've done a good job of sharing. What a good family often in a sense should do. That's just changed when you run around arresting other members of the family, as they've done. In fact, one of the Princes was apparently shot in the fire fight when he was arrested, maybe it's coincidence. I don't know, but another Prince is also... was killed in a helicopter crash near Yemen, but when you run around arresting Princes, shooting, this sort of thing, you know, this isn't a happy family any more, right? This is Family feud and that's a very unstable situation and this a fairly key investor in our stock market. Obviously, a big player in the economic scene. In fact, one of the people they arrested was a Prince whose one of the largest active investors in the U.S. market. In fact, he's supposedly worth around $30 billion. So, there's a lot of uncertainty in our markets and around the world created by this. It's not over. It looks a little like, you know, kind of the ... what was it... the...Godfather Series and the families fighting with each other instead of when it was one happy family before when they worked out their differences. So, I think this problem is going to continue. It's one reason I like gold, because it does go up when you have these uncertain situations and political situations and it's reacted as I would expect. Again, I don't think the Saudi situation is going to calm down anytime real soon. There's bound to be some aftershocks, so to speak, from what's happening within the Saudi family right now over the next few months.

Mike Maroney: Needless to say, we've been worried about that potential black swan event that we didn't know where it was going to come from. Suddenly, over the weekend, a missile was fired from Yemen, all of this inner family squabbling is taking place, but somehow or another people seem to be connecting Saudi Arabia more with the U.S., Iran more with China and Russia, and there's some hypothesis being thrown out there right now that really end in some bad type of geopolitical problems. I mean, the word, "World War III," was being talked a little bit about this morning.

Bob Wiedemer: Yeah, again, definitely problems. World War III, who knows, but definitely some real instability. It's more than a family squabble going on in Saudi Arabia, it's a big deal. Iran is clearly... in fact, Russia or Rosneft, their oil company just made a deal to invest $30 billion in Iran's oil, drilling, and infrastructure. So, those relations are getting very tight. U.S. is getting kind of left out, frankly, in all of this. We're, you know, backing Saudi. We are backing this change in the Saudi family. We haven't really formally done it, but we're supporting the MBS, the Mohammad bin Salman as the new... you know... he's the one... he's the Prince that's driving all these changes. We're sort of backing that. Again, we'll see. One thing for sure is... this is a tinderbox situation and I would say at least with what's happening in Saudi Arabia it's gotten a lot smokier and where there's smoke there's fire--there's some big issues coming. Yeah, gold is one of the things that people will jump to, especially in Saudi Arabia like where we're at. The Middle East is a big buyer of gold and the government is running around freezing assets of these Princes like Alwaleed who has all these investments in Citibank, Twitter, Apple, and so forth. A lot of these people like gold, because it's easy to hide and keep from having the government of Saudi Arabia take it. So, just the demand from the Middle East would be significant.

Mike Maroney: So, Bob in review, we're looking at a situation where the stock markets at historical valuations. Obviously, no one's quite sure how this tax cut will play out as far as when it finally gets through Congress and maybe if the stock market is overvalued we could start to see sector rotation. One of the things that's been evident over the last few weeks is we've had a break out in the value of the CRB or the commodity index and a lot of that has been predicated on oil hitting a two year high today and normally when oil moves it typically leaves the rest of the commodities higher. So, precious metals could easily join in on this rally and then when you throw in that geopolitical uncertainty things could really heat up in the next six to eight weeks.

Bob Wiedemer: They could. They really could and that's what people forget is even when times look very good... Again, back to January 2000 or February 2000, we were only a month or two away from a big huge correction in the stock market. It doesn't take... especially in times where things are highly valued for anything to really kick it off and what's happening in Saudi is more than just anything. So, there's a lot going on. It could change. It could be a smooth ride to the end of the year, but it could easily change big time as well. So, we know that it is going to change. It is going to get a lot more difficult as you say...matter of timing. Yeah, a lot happening Mike, it could blow up easily in the next few months.

Mike Maroney: Well, 2018 looks like it's going to be a very interesting year and I think investors should be aware of the type of uncertainty that exists out there. So, getting a copy of your report, seeing a copy of your Uncertainty Index would certainly be helpful. Hopefully, people can give us a call. So, we can get something like that to them immediately.

Bob, I look forward to talking with you next month so we can discuss all the things that are taking place that affect the price of gold.

Bob Wiedemer: Sounds very good Mike.

Mike Maroney: Fantastic! Have a great week.

Bob Wiedemer: You too.

Mike Maroney: All right. Bye-bye!