Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - April 2017
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. It's Thursday, April 6, and today I have an opportunity to speak with the author of both Bubble Economy and Aftershock about something that he came to me six months ago and said, "Mike, 2017 is going to be the year of uncertainty and I truly believe that uncertainty will probably be the key catalyst, as far as market price and market movement is concerned." If you think about what's happened over the last six to seven months, once again Bob, you were right on the button, as far as that situation is concerned. Now, interestingly enough, over the last week, we had some issues based on domestic politics. When President Trump was elected, he spoke about three things: repealing Obamacare, he talked about tax reform, and he talked about economic stimulus. Last week, it looks like the healthcare bill may have fallen off the table, and if that falls off the table the ease at which tax reform takes place suddenly changes, and does that potentially also affect the stimulus plan? Well, we've got a lot of uncertainty, but Bob, let me get your view on what took place last week and how that affects the markets.
Bob Wiedemer: Yeah, I think what took place last week was a huge uptick in uncertainty. We did expect Obamacare to get repealed and replaced. We expected that to go fairly easy in a Republican Congress. It didn't even make it out of the House. Tax reform is even tougher. Allen Murray, the Editor in Chief of Fortune Magazine, who covered the 1986 Regan Tax Reform very closely, said very simply, "If tax reform in 1986 was unlikely, he feels that tax reform in 2017 is inconceivable." So, it's a very, very, very different situation that I think we expected even a couple months ago. A lot of uncertainty popping up now. It seems like we're just having a hard time getting the basics of government done. In fact, this month, we're going to be focusing heavily on keeping the government open at the end of April. So, you're absolutely right Mike. We've had a big upsurge in uncertainty and you're seeing the market react at some degree in that it's having unusual movements. Just a few days ago, it rallied up almost 200 points on the DOW and closed for the day down 40. So, you're getting these… very unusual movements, not necessarily based on any particular real news. I think it just starts to show us, well, there's some underlying concern and uncertainty from what's happened the last couple of weeks in Congress.
Mike Maroney: Now, after President Trump was elected, you felt comfortably that the stock market was going to move higher and when we spoke last you believed that the stock market is somewhat priced for perfection, which obviously means that they expected Obamacare to be repealed, they expected tax reform, and they expected potentially some stimulus. Does this mean that we're sitting in a situation now where stocks are even more over valued than many people originally thought last week?
Bob Wiedemer: Well, I think that's exactly the point. It's not that... the fact that the President has problems early on or anything. We've actually had many successful Presidencies do well, even with problems starting off. What's different is...you're seeing the market is priced for perfection. It expected no problems, it expected Trump to good or bad at least get things done, and the market expected more things good than bad. So, certainly we were priced for perfection and we haven't come down off that. Let's keep in mind that reality is… by the end of last year we we're priced pretty high already and we've had some of the highest valuations in history. So, that's the big issue, not so much as the Presidency, but that price for perfection, stocks are certainly there. Whereas, I might add, silver and gold are not priced for perfection now and I think, quite potentially a better buy, but you might have some comments on that.
Mike Maroney: Well, it's interesting, because when you look at the first quarter, we had the DOW up 4.6%, we had the S&P up 5.5%, people were very excited about that, but if you look over at our sector, which is well below all-time highs, gold was up 8.6% in the first quarter, silver was up 14% in the first quarter, and palladium was up 18% in the first quarter. Are we starting to see more and more money maybe starting to come out of the stock market and into the precious metals as a way to insure portfolios against these potential uncertainty types of events?
Bob Wiedemer: Well, that would be a normal pattern. It would be normal for... silver, and gold, and platinum, and precious metals to move up in an environment where the stock markets having trouble. What's interesting, Mike, and I think very positive for gold and silver is that it did go up in the first quarter, even more than stocks. That seems to be a very bullish sign, but I think going forward we're going to continue to see that movement into gold and silver for more typical reasons of just growing uncertainty, growing unease with a stock market that is highly valued. Remember, just because the market is highly valued and rising, doesn't mean there isn't uncertainty underneath. I mean, .com 2000, the market was going up and rising. We had a great trailing 12 months to march and then… Kaboom!... the bottom fell out. So, high valuations may feel good when they're up, but they really also usually mask a lot of uncertainty and instability underneath that could kick off at any time. I think that's one reason gold and silver are doing well now.
Mike Maroney: Bob, you're working on a new market uncertainty index for us here at Monex, because you felt that it would be the perfect tool for prospects and investors to utilize as a way to determine what potential products should be in their portfolio. Now, I know you're thinking about domestic politics. You're also thinking about foreign politics and geopolitical issues. Obviously, we have the French election sitting right out on the horizon. Then before I walked in to tape today, I noticed that they said North Korea just fired off another missile now that they know that President Trump and the Chinese President are together here in Florida. How do you think all of this ties in? Can you give us a little bit more insight, as far as this new index you're creating for investors?
Bob Wiedemer: Sure, I'm creating a market uncertainty index to help investors navigate the waters of uncertainty. Uncertainty is not like a light switch...that's not "ON" or "OFF." Uncertainty will vary. It can rise dramatically and fall and those are going to mark points for investment or for times to pull back, and I might add, it's not just for silver and gold, it's for all investments: stocks, bonds. Uncertainty affects all of these. So, I think it's a good tool... I think it's a great tool for investors to use in 2017, in this age of uncertainty. It certainly does incorporate exactly what you're saying-- two key elements are: domestic policy uncertainty, international policy uncertainty and two economic elements: stock market uncertainty, commodities uncertainty. I think these are going to be very, very important in 2017. A lot going on there. I talk about it more in my write-up and description of the index, but certainly you hit on one key point, Mike, international uncertainty, not just domestic political uncertainty, but international political uncertainty is rising with the thought that we may... as President Trump said, "Go in on our own and deal with North Korea." At the same time, we already have a lot of strains with China and China would not like us going in on our own and dealing with North Korea, even if they have their own concerns about North Korea kind of their problem step-child. Bottom line here-- lots of uncertainty, as you said... submarine launched ballistic missiles going off... or underwater launched ballistic missiles going off from North Korea, French elections, absolutely, all part of the index, and all rising greatly right now, in terms of the uncertainties surrounding all these.
Mike Maroney: Now, as usual Bob, at the beginning of this year you called it. You felt that both gold and silver would start to move higher. Needless to say, we've already seen some very positive movement in both of those metals. The PGM's platinum and palladium were also starting to heat up a little bit. A lot of people seem to be focused in on the Fed and it almost seems as if everyone thinks that if interest rates go up, then precious metals go straight down. But if you look at the historic precedent of those events, that really isn't the case. Do you feel that even if the Federal Reserve continues to raise rates that gold and silver is a quality addition to individual investor's portfolios?
Bob Wiedemer: No, I think that the interest rate increase will be a very positive for gold, contrary to conventional wisdom, simply because they will be negative for bonds, for stocks, and a little bit for economic outlook. It's going to affect mortgage rates and housing has been a big part of our recent recovery in our economy. So, it's going to affect housing markets, it's going to affect to some degree the car markets. So, there's a lot of uncertainty created by rising rates, that I think that more than offset any negatives to gold, because gold is not an interest-bearing asset. So, I think, that it's absolutely an issue that will lead to more uncertainty, which will push up gold... and I might add, the Fed is not only talking about raising rates in the recent minutes released on their Fed meetings, they're talking about reducing the balance sheet, which means essentially they're going to start selling bonds rather than buying them. Not sure that they'll do that, but the fact that they're talking about it and so forth, I think is raising uncertainty and raising concern over the stock and bond markets, which I think will be positive for the precious metals markets.
Mike Maroney: Now, obviously, if the Fed is talking about selling some of the paper that's on their balance sheet, they still have to find buyers. If we reach a situation where potentially they want to sell, in essence, isn't that almost somewhat of a covert way of raising rates?
Bob Wiedemer: Oh Absolutely and it will effectively raise rates. Also, the reason the Fed is buying is we don't have a lot of other buyers for stocks at current interest rates. Now, higher interest rates, you may find them, but that's just the point. It will raise interest rates, if the Fed starts selling bonds. So... this will be a very unusual situation since the financial crisis, to have the Fed selling bonds, as opposed to buying them. So, instead of back stopping the market, it's kind of coming up hurting the market. Not sure how... Well I'm sure... I suspect how stock and bond markets will react is negative, but again all this is part of the uncertainty. It's exactly what are they going to do and when. Again, it will be a big change for the Fed to do something like that, even to talk about it as they are now.
Mike Maroney: How interesting. Back in 2008, Bob, you called the top of the real estate market. You were right on point, as far as what was about to take place with the financial crisis. You know, recently you've talked about how the bond market after 40 years of being in a bull market, it was starting to roll over and potentially could be ending. That precious metals would be a key player in 2017, because of uncertainty. Are you still a believer, that even with the recent price increase in precious metals, that right now, it makes sense for individual investors to add metal to their portfolio?
Bob Wiedemer: Well, absolutely! I think it makes sense that you don't necessarily buy the assets that are priced for perfection, but you buy the assets that have come down and have a good chance for rebounding. So, just like if you bought stocks in 2009, you certainly would have done better than if you bought them in 2007. So, the point being, yeah, it's good to... buy low sell high and I think that case can be made much more strongly for precious metals now than stocks. Not that everybody should abandon stocks or bonds, but I think hedging more and adding some precious metals to your portfolio is a good thing in general, and I think in particular right now the timing is quite good.
Mike Maroney: Fantastic! Well, when Bob puts something together like this uncertainty index, individual investors, institutional investors, and even perspective investors, have an opportunity to utilize a tool provided by somebody that has been able to call the markets over the last 10-15 years, almost in a spooky way as far as being right. We believe that we would love to provide this index to you: the prospect, the individual investor. So, it will allow you to feel more comfortable in making investment decisions, as far as your individual portfolio. We'll also be speaking with Bob in the future about the things that are taking place and how he feels they'll affect the market.
Bob, it was great speaking with you today and we'll chat again soon.
Bob Wiedemer: Thank you Mike. Great speaking with you too.