Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - May 2017
Mike Maroney: Good afternoon! My name is Mike Maroney and I am coming to you today from the Monex Precious Metals Studio. It's May 2, Tuesday, and we had an amazing opportunity today to have Bob Wiedemer, the author of both Bubble Economy, Aftershock, and then of course, Aftershock Investor, do a speech for the sales force to really go over some of the key fundamentals and features of the market that really dictate price. Today, Bob also gave us a quick glimpse of a new Index that he's putting together. It's called, The Uncertainty Index, that will really give investors an under-the-hood view of the engines that move the overall markets and basically allow you maybe to get a little bit of lead time as far as your investments are concerned. Let's talk a little bit with Bob today about what we discussed as far as general concepts that exist in the market place and what could affect precious metals here in the near term.
Bob, first of all, it's great to see you. Now, Bob, you're in Washington, so you really have your finger on the pulse. Obviously, the markets priced in tax reform, they priced in infrastructure spending, they priced in the replacement of Obamacare, and it seems like none of this has come to fruition, yet the stock market is still trading at extraordinarily high levels. What's your opinion on this?
Bob Wiedemer: Well, in Washington, the word is called, "Spin." Yes, and they do a lot of spinning and as we know in the stock market and business reporting as well. Absolutely Mike, you're right! So much of the rally in November and December after President Trump got elected was due to hope for tax cuts and infrastructure spending, but now, in fact, I was just on an interview on a major business channel and one of the other people speaking with me indicated that tax cuts... they're not part of his plan any more. He thinks the market is just going to go up even without tax cuts. He said that earnings or whatever have driven the current rally. Well, that's nonsense, because clearly back in November and December, we didn't have earnings. We just had Trump's election and the hope for tax cuts, which I think are the biggest part and the most important part of President Trump's plan to invigorate the economy. That's clearly dragging on for a while. I mean, if they can't get the Obamacare repeal done, tax cuts are a lot harder. As I've said on television shows and elsewhere, you're going to have to have Democratic support for this to work. Ronald Regan got Democratic support for his tax reform to work. I think they're going to have to do the same here and I don't see the same ability that Ronald Regan had to get it done this time, but we'll see. I think something will happen, but I think it's not going to happen quickly and it may not be anything like what the market had anticipated in November or December. So, some big changes, some big uncertainty at this point as to what really is going to get done and when.
Mike Maroney: Now, it's interesting, because I think people thought that Donald Trump's political acumen was going to be tested and he's a rookie. So, things are a little bit tougher, but when you have all of the things lined up the way he did--you have the House, you have the Senate--you thought that the Republicans would put this thing together, but it seems as if that's not going to happen. Now, if the stock market is overvalued based on maybe pricing of all these things almost to perfection and the bonds are definitely looking a little bit top heavy, doesn't it make sense in this type of environment for investors to look for key ways to diversify?
Bob Wiedemer: Yeah, I think so, because so many people are looking at the market right now and it looks good, but it's sort of scary. It's clearly highly valued. It's near valuations that we hit in the Dot Com Era and we're seeing some Dot Com type companies, companies that have made no profits at all for years, but... well like Tesla is still highly valued, valued more than General Motors. So, people are worried. Do I jump in right now? What I'd say is most importantly diversify. You're absolutely right. You need to have not just stocks, not just bonds, those are getting a little more correlated. Certainly, stocks themselves are very correlated. Even around the world, if U.S. stocks go up, European stocks go up. So, I think some diversification now when we've got this tax cut uncertainty especially, would be really important. Diversity into precious metals, gold, silver, because they're not correlated with stocks and that's a good offset. So, if you have stocks, I'm not saying to run out and sell them, but add to that some diversity in what's clearly a highly valued stock market and clearly some uncertain times, because so much of our rally was based on tax cuts and maybe some infrastructure as well, that may not happen this year. We'll see in the next, even when it does it could be an issue. I might add one last thing, remember Congress is up for re-election next year and if the Senate goes Democratic it changes a lot for Trump, which as you said, had really everything lined up for him with a fully Republican Congress. It may change.
Mike Maroney: Now, it's interesting, because you had a statement about diversification and I thought that was very pertinent as far as investors in general. What was it? It was.. "Don't wait to diversify, diversify..." share it with us again.
Bob Wiedemer: Right, for one thing it's hard to time. When I say there's uncertainty, well that means it's uncertain. It doesn't mean I know exactly when something may go wrong, right? Just like part of the reason you buy life insurance is you don't know exactly when bad things might happen to you. You can't just buy life insurance a week before you die and that way save all the premiums--you don't know when. So, you need to diversify and then wait. It's hard, but especially in a time when we're very uncertain about when timing may happen, when timing of bad things may happen. We kind of know they will. Just like... you know... death. We kind of know it will happen and we do know. We don't really think about it, but we've got a market that's clearly highly valued, we know there's some problems out there it's just a matter of uncertainty as to timing. So, you're going to have to diversify and then wait, rather than waiting and diversifying at just the right time. Nobody knows just the right time and there's really no need, better just to diversify now and maybe stay diversified or get a little more diversified if uncertainty increases, but do it now. Diversify now and wait, rather than wait and diversify.
Mike Maroney: Now, when you look at historic norms as far as pricing is concerned, what I found interesting today in your presentation, you were talking about the overall valuations as far as the GDP was concerned, but one of the things that popped up was how we suddenly went into a major sell off in the Dot Com and you questioned the crowd and said, "Do you remember what caused that?" No one really had an answer to the question where suddenly perception just changes. Based on the current valuations, it would make sense to diversify into undervalued assets like gold and silver.
Bob Wiedemer: In fact, counter intuitively, a time to diversify is when everybody is pretty giddy. Exactly, my point was that in March of 2000 the Dot Com bubble burst. In January, you would have no idea. Yeah, believe me, everybody kind of knew in their gut that...oooh this internet thing has probably gone a little far. Certainly, certain companies aren't going to succeed, some will fail, but very few people knew when there's going to be a big correction or that it would be so big. I mean, it took in not just Dot Com, but big companies like Microsoft, Cisco. So, you're absolutely right, it's hard to get the timing. To your point and to people listening to this, think about it. What trigger did kick off the Dot Com burst of March 2000? Ask your stock broker. Ask investment banking friends you know. Ask any internet high tech friends you know. I bet you, they won't know and that's a key point. You don't always get a news trigger. It isn't that some bad event comes to the Fed or China that kicks off everything, psychology can just change. Oh, my God, we think it's too highly valued and some sort of social viral interaction happens and "Boom!" it changes quickly.
Mike Maroney: It's interesting, I'm going to steal one of the lines from your book. I think Mark Twain said it when he was talking about bankruptcy. They asked him how he went bankrupt. He said, "Very slowly and then suddenly." That's how prices change as far as markets are concerned. So, interestingly enough, we're talking about uncertainty. Obviously, the political situation here in the United States has a lot of uncertainty. Based on the fact, that we haven't seen the overall efficiency that we would have expected from a President that has control of both the House and the Senate and there's some things going on overseas. People are a little bit fearful of the inevitable result, as far as, what could happen in Germany with Merkel. Obviously, this coming weekend, we have the French elections with Le Pen, and in the original or the first run off she didn't do quite as well as expected. But, if we're dealing with BREXIT and add in FREXIT it could get a little bit crazy. What do you think about what's happening in Europe and how do you see the outcome of those elections?
Bob Wiedemer: As we all know, predicting the outcome to elections is a bad idea. You know, lately we've seen BREXIT, we've seen Trump. So, in predicting the outcome of what exactly the markets will do is also uncertain--lots of uncertainty. I don't know exactly what's going to happen. What I can say is Europe is a wonderful source of uncertainties and problems. The problems aren't solved, just like us they've kicked the debt problem down the road, they have problems with the Euro, there's problems within the EU, there's still problems with Greece, at any time things could happen. I would just say... just keep Europe in mind as a general problem, but also flip to the other side. North Korea, which wasn't much of a problem, more kind of a nuisance or something for late night talk shows, has now become a real problem. When you've got a nation like that led by a bit of a nut case that has nuclear bombs and... longer range nuclear missiles that could ultimately become intercontinental missiles, that's a big issue. Very destabilizing where the world depends on for its growth--China. It's very destabilizing in that whole region. It puts China under a lot of pressure. I don't think they really want to see North Korea with lots of nuclear missiles either. So, there are a lot of destabilizing factors and absolutely, Europe is one of them. I can't tell you whether it's going to be Le Pen or Merkel or back to Britain where somebody says, "Oh, I thought the BREXIT was a fake." Now, we're all thinking it's for real and the market goes down. It can happen. Europe is a hot bed of uncertainty as is North Korea and other issues... other areas.
Mike Maroney: Now, it's interesting, because a lot of people look at what's going on in North Korea. I guess, our President met with the Chinese President and suddenly it seems as if his story has changed a bit, as far as, his perception of the North Korean leader. Now, a lot of the political pundits are saying maybe he's slow playing the situation and maybe getting ready for some sort of military action. But, I don't think a lot of people realize what an industrial center South Korea actually is and how that would affect the world economy in a way that is somewhat mind boggling if we see some sort of action. So, that's a much bigger problem than a lot of people are reading into it, wouldn't you say?
Bob Wiedemer: Yeah, you don't have to have a nuclear bomb to go off to cause economic issues and problems. Korea is a massive economy. It's not as big as China, but it's very important. One of the biggest economies in the world itself, so... that's South Korea and China too. So again, just uncertainties and issues there because there already are some and that's kind of the general rule here. There's already like the internet bubble sort of a... you know... markets priced for perfection and we all kind of know that it's not going to happen. Markets ignoring the massive debt the government has and ignoring the massive money printing it's done. We all kind of known in our guts something is going to go wrong there. So, it doesn't take a nuclear bomb by North Korea to kickoff problems or concerns about China, which has its credit bubble or other issues. It takes just more of a destabilizing moment before psychology can change quickly if anything starts to really go wrong in North Korea. Man, if there's one country I wouldn't want to count on knowing exactly what they’re going to do...it's North Korea.
Mike Maroney: Yeah, it's pretty crazy over there. Now, the interesting thing when we think of geopolitical instability, suddenly we're not even talking about the Middle East here today. Obviously, we have the Syrian issue. A lot of people haven't talked about what's happen in Yemen and the revolution that's going on over there. A matter of fact, it came out, I think, yesterday, how Al Qaeda is actually fighting with the United States in Yemen, whereas, in Syria we're fighting against them. We can't even find out who Al Qaeda and who ISIS is. I can't imagine what's going on. That whole situation could get even crazier. So, with everything that is going on, your uncertainty index, I think, would be such an amazing tool for investors. What other things are you looking at, as far as, this index is concerned?
Bob Wiedemer: So, it looks at four factors--two which are political. As you said, the international political, the domestic political, which we've talked about Trump and tax cuts, but it looks at two economic factors. One of them is commodities. That might seem strange, because it seems like a narrow part of the broader investment market, but the reason I look at that is because China. China is the key to economic growth since the financial crisis. It's really been the growth engine of the world. If it slows down or it has a credit problem, and I think it will, a certain amount... a fair amount of that growth was driven by a credit boom, it's not going to show up necessarily in Chinese economic statistics. They have a tendency like any government, more so in China, to cover things up, problems especially, but the commodity prices are sort of a real indicator. If iron ore prices go down, copper prices go down, oil prices go down, that's an indicator that probably China is having trouble. Remember, not longer than a year ago, January 2016, the price of oil falling basically collapsed the market. It went down to $15,700, that's almost 5,000 points below where it is today and it was only 1,000 points above its peak in 2007, 10 years earlier. So, the reason it went down so much wasn't so much oil and oil commandeering, but when oil price went down, everybody kind of knew China might be slowing. It’s true. People know it, I know it, commodities are just a great way to look at China and how it's doing. So, that's the third factor and again one of two economic factors.
The other economic factor is the stock market. Kind of goes without saying that's a great way to try and get a feel for how the investment community is looking at the world--whether they're happy or sad, right? It's not just a simple matter of looking at the stock market whether it's high or low, it's also looking at has it been increasing for a while and longevity is first key. If it's been increasing for a week, I don't care. It doesn't affect the index as much, but if it's been increasing for a year, that's different or if it's been decreasing for a week or a year, that also can talk about uncertainty. If it's very short durations, that's more uncertain. Second thing in the stock market, volatility--the VIX. If the volatility is high, that means that the stock market is more uncertain. Then third, fundamentally what we were talking about earlier, valuation. Valuation of the stock market is high. Right now, it could get higher, but to put it in perspective as you said I mentioned earlier that the market... the value of the market right now is equivalent to about 130% of our GDP, our entire economy, economic output for a year. Not too far away from... the records in the Dot Com days. So, those three factors: valuation, longevity with increase, and volatility are what comprise that stock section. So, it's commodities, stock, domestic political uncertainty, and international political uncertainty.
Mike Maroney: I get it! I think it's interesting, because when I've spoken with you in the past, you look at different things. I think, as an economist you look at key things or variables that affect pricing. I remember you talking about looking at the amount of electricity that China uses and you can't fudge that factor. Then, I remember you talking about driving around and looking at about how many cranes are in any one given city to really get a feel for what's happening with the economy. Now this Chinese situation, the investors in China were hurt somewhat in the real estate market. They've been a little bit fearful as far as the stock market, a lot of volatility. Supposedly, a lot of money in Asia is moving into precious metals, because they're not as trustworthy as Americans may be as far as the overall currencies are concerned. Do you see that situation continuing as this whole economic situation really plays through in China?
Bob Wiedemer: China is obviously a huge buyer of gold, the biggest buyer of gold, not just the government, but I mean the entire country, the people. So, all these uncertainties, whether it's Korea or the credit bubble or what we're tracking... commodities, couldn't happen to a more happier group of people to buy gold. They have a long history of buying gold. Certainly, more so than the U.S. or even Europe. They like it, it's that they don't trust stock markets as much for good reason. They don't trust their own government as much for some obvious reasons. So, gold is a natural fit for the Chinese buyer who is seeing a lot of uncertainty around them. So, I think, that's only going to grow. Obviously, there's ups and downs, but fundamentally, that's got to be a driver for demand for gold going forward given their normal inclinations towards gold, I think, it will be amplified by all these Chinese centric uncertainties.
Mike Maroney: So, it's interesting. The rest of the world seems to be aware a little bit more of the uncertainties that exist. We're somewhat anesthetized here in the United States it seems. I'm not sure what specifically we're using, but you talked about debt today and I found some interesting statistics when you made the presentation as far as debt to revenue and overall perception there. Talk a little bit about the debt to revenue and something that you've always done when we've made presentations. You'll ask the crowd, "How high can we go?" and then people say, "We'll just print money, " but then you always throw out, "Let's just eliminate taxes." Give us some insight on why you do that.
Bob Wiedemer: Sure. Because I think people know more than what they say. You said we're anesthetized. That's true and I'd say we're also trying to fool ourselves. That's why I try to shake them out of that. Shake them out of their anesthesia. Shake them out of trying to fool themselves. Then in some way, we've got the problem solved. We've had a massively growing debt, but you don't have to worry about it because we can always print money. Again, let me point out how massive that is and this should be a figure every investor should know. Once our government's debt to revenue ratio, our revenues are taxes and of course our debt is our national debt about $20 trillion, that ratio right now is about 6 to 1. Would you or anybody else lend to a company or an individual that had 6 times much debt as they have an entire income or knowing that that person or company has other expenses to pay than just you? That's the government. That's the situation we're in. Whenever I mention that, people... and I say the government can still borrow money no problem though, unlike you or me or a company. Every time, people go the reason it can happen... I always ask and they sort of go... it's because we can print money. So, what we believe now, how we're fooling ourselves, is that printing money won't create inflation and of course it will and that's why I use the tax analogy. Because people who say, "You know Bob, they've been saying that for years. We've printed money, as you say, we've quintupled the money supply, yet we don't have a lot of inflation. We have some inflation, but not a lot, not like quintupled." I always say, "Well, if you really think that. Again, I think we're trying to fool ourselves. If you really think that and you don't think printing money will create inflation, let's print a lot more of it. Let's get rid of taxes. They're a burden on us, they're a burden on everybody to pay taxes. If we didn't have to pay it, you know what, this economy would boom. Let's just print money, get rid of taxes, and that's done. In fact, why you're at it, let's increase spending. Let's start building stuff. Let's start doing whatever we want. If we can print money and not get inflation, we've got our problem solved. People sort a know, you're right Bob. Printing money will lead to inflation and we all know it. It's true.
Mike Maroney: It's really interesting. I think what we've talked about is perception and who knows what will change the overall situation as far as perception is concerned. So, in review, we have domestic political situations developing. Unfortunately, the market is priced things in perfection, we're not seeing that. Internationally, we have elections in Europe, we have uncertainty in the Middle East, and we have a very interesting fellow running North Korea causing some serious issues with some toys that are called intercontinental ballistic missiles, nuclear issues there, and obviously, the debt situation that we've developed over the last 20 years isn't going away--it's only getting worse, and we're not fixing it...
Bob Wiedemer: Not even interested.
Mike Maroney: ...that's the one thing we're talking about infrastructure spending trillions of dollars. We're not increasing revenue; we're only increasing debt. So, one of these days, the reality sets in, perception changes and that's why you shouldn't wait to buy, you should buy to wait and that makes so much sense. I'm really glad you brought that up today. I think it made a lot of sense to all the guys out there and I think we're really looking forward to following this new Index and really honing in on maybe individual opportunities to buy and sell. What do you think about silver, gold, platinum, and palladium right now? Do you have any specific opinions about the position of the markets?
Bob Wiedemer: Obviously, after the original French elections came out and it looked like Le Pen is likely to lose this coming run off and she was the anti-EU and anti-Euro candidate the gold markets fell. The stock markets rose. They all felt everything is less uncertain. I think these are temporary moods. I think the fact is that the gold didn't fall that much. It had been on a rise. I think that fundamental rising uncertainty hasn't changed at all. I think that they got a little reprieve, but fundamentally there's just a lot of issues that are increasing the amount of risk in the markets, not decreasing. So, no. I think gold showed its strength. It didn't fall back below $1,000, remember there was people worried about that. We're way beyond that. So, I think gold, again day-to-day that's your area, but I think in general right now, this year, the uncertainty is rising and the problems are rising. I think it's definitely the tailwinds are behind gold this year for all the reasons we just discussed.
Mike Maroney: Great! Now, do you love silver?
Bob Wiedemer: I do!
Mike Maroney: Because I know you like to get some for yourself sometimes. Has a little bit more volatility than gold.
Bob Wiedemer: Yeah, oh yeah.
Mike Maroney: So, some people look at silver as the speculative tool, not the investment opportunity. But we've had a nice little pull back in silver, but owning a little bit of silver and putting that away could really pay big dividends. Don't you think, down the road?
Bob Wiedemer: I think silver will do very well down the road. In fact, for a lot of reasons silver could do better down the road. My guess, it's more guess, is that gold will do very well or best, but who knows. I could give you 10 reasons that silver could actually out pace gold. They're both going to do well. I like silver. I think it's good to diversify between the two. I have always said diversification is important, but silver is also… it’ll give you an opportunity to trade, which I think is a little harder with gold. So, you could use it two ways: long-term hold, it's good stuff, and trading, if you're a trader. It's also, I think an area to make some money in. That is a trading issue.
Mike Maroney: Fantastic! Well, we had an opportunity to meet with Bob today. Quite frankly, I think when you listen to Bob speak you realize he's a man of reason. He uses economic theory, simplifies it so everybody can understand and really look at the things that are taking place and figure out why it might be a great time to diversify into precious metals. I think if you're interested in safety, if you're interested in protection, and you're also looking for profit, now may be one of the best times to own precious metals. Now is probably one of the greatest times to give us a call. So, we can get you out some of these special reports so you can look at all of the reasons that exist out there. And quite frankly, I think that once you do, you'll see why so many people are in investing in precious metals today. Give us a call!
Bob, great seeing you again. Obviously, we'll be watching that index very closely. Thank you very much.
Bob Wiedemer: Thank you.