Mike Maroney Interviews Aftershock Investor co-author Bob Wiedemer - September 2017
Mike Maroney: Good Afternoon! It's Thursday, September 7. My name is Mike Maroney and I am here with you today with Bob Wiedemer. The author of Aftershock, Bubble Economy, and Aftershock Investor. Approximately a year ago, Bob came to us and said that he would like to put together a very special index that he felt would be pertinent as far as investors were concerned. It was an index on Uncertainty and this index has been extraordinarily well received by investors. What we try and do is each month we will sit down with Bob and discuss some of the variables that he uses to actually determine the number of this index.
Bob, I think we're in a very high state of uncertainty based on the current situation as far as geopolitical situation. What's your feeling about North Korea and do you think that situation could potentially escalate?
Bob Wiedemer: Well, I think it already has escalated. In fact, it's almost escalating weekly. Again, Kim Jong-un loves to shoot off fireworks, test a bomb, throw off a missile, he's big on that. So, I think that's going to continue. The recent test of a nuclear bomb that was almost five times bigger than anything they've done before, over 100 kilotons, that may have been a hydrogen bomb, but either way much bigger. It is certainly an escalation. People are expecting that he may even test his missile by shooting one near Guam. I don't think it means on Guam or on our military base there, but he seems to like to do this. I think it's going to escalate. It's a serious threat. I'm not making light of it. At the same time, the stock market is kind of making light of it now, but I think that could easily change. They're a little worried, not too much, but it is a tremendous source of uncertainty, and also, reactions of President Trump's like trying to maybe get into a trade war with China or getting out of trade agreements with South Korea all of this stuff can have obvious economic impacts and adds to uncertainty in addition to the military uncertainty.
Mike Maroney: Now, obviously, geopolitical uncertainty is important, but we're also dealing with a lot of currency valuation uncertainty. A matter of fact, the U.S. dollar today made a new multi-year low. We were talking a little bit earlier about how in the past when you were printing money and actually using quantitative easing it was thought that that would be negative for your currency, but suddenly now the Europeans continue to buy $60 billion worth of bonds and they're talking about extending it or potentially at least running through December. Yet, the euro rallies and the dollar actually sells off. What's your feelings as far as the currency markets are concerned and what sits out on the horizon as far as the U.S. dollar?
Bob Wiedemer: Well, Mike, I'd love to give you a really rational reason for that, but it's kind of irrational. In reality you're right. In the past, and that was correct, when the country did bad things to its currency it should be bad, but it's not. I'll tell you right now, that's just spin and it's not going to last forever. People are worried that we are in a fragile situation. Marketwise, I think less so economically, but possibly there. Particularly, in the markets. So, I think there's a tendency right now to ignore as much bad news, whether it be money printing, or North Korea, or very high valuations in the stock market and react instead positively. It's kind of a group thing, a bubble thing, we know it's bad and we don't want to get too worried about money printing. This is what's been happening for a while. We don't want to get too worried about it now. We don't want to get too worried about high valuations in the stock market. There was a recent merger deal done where a big aerospace firm, United Technologies, bought another aerospace firm, Rockwell Collins, a biggest aerospace merger in history and that's fine, except that they did it at four times revenues, $23 billion purchase price. Revenues for Rockwell are about $5 billion. So, there's a lot of things we know that are a little bit crazy, but we're ignoring. You've hit one related to currencies and they're all over. I think, investors are reacting by trying to be as calm as possible.
Mike Maroney: Now, Bob, we do have the Fed next week and couple of months back they were talking about potentially starting a quantitative tightening program in September, but over the last few days we've heard a couple of the Fed Governors come out and speak about the fact that maybe the interest rate increases that have already taken place are having a negative effect on the economy. Now, you've been one that believes that the Fed will probably use more quantitative easing, maybe even potentially before they quantitatively tightening, but what's your take on what's happening with the Fed right now?
Bob Wiedemer: Well, one thing we should mention is that one Fed Governor has left--he resigned. So, we've lost one, Mr. Fischer, and that was the Vice Chairman. We've also lost a potential candidate, which who was going to be Cohn and he is a candidate for Fed Chairman. He's out of the running. So, there's also some issues just with the Fed governance, but in terms of policies, even if they were to tighten, which I know they'd like to do to sort of say everything is normal. I think it's going to be very minimal and the Feds already said that. Not sure they're going to do it. Again, absolutely, what's really key here is they stand ready to print to boost the stock market if need be. So, no I'm not that worried about tightening, but it's clearly something they're going... the Feds are going to try and pitch is the return to normalcy, but the fact that it's been so hard to return to normal should tell you...well, it's not normal. There are big underlying problems out there that frankly, could pop. I'd say at almost any moment now. It doesn't mean it will happen today or tomorrow, but what's happening with what the Fed is doing and has done is just part of what's leading to uncertainty. It's been hard for us to get back to the normal path that's for sure--the unstimulated economy and we haven't done it.
Mike Maroney: Now, Bob, in many of your speeches that I've had the opportunity to attend, you talk about how... when Central Banks print money, they look at it as if it's a medicine for the economy, but you have a very interesting theory on that. Could you maybe extrapolate a little bit on that please?
Bob Wiedemer: I wouldn't call it a theory. It's historical. This is what's happen is when you print money, initially it has a positive effect. Otherwise, no one would print money, right? It has a positive effect. It is medicine initially, but always it ultimately becomes poison. It does become some... it becomes inflation, even if it's slow to happen, even if it doesn't happen right away. In fact, that's when it's even worse, is if you have a big delay in getting inflation. The tendency is to print more money because it's medicine, but it will turn to poison and the more medicine you print the more poison you’re going to get in the end. It may take a while. Certainly, what's happening now in the U.S. is unusual. Normally, you would get more inflation by now, but people fundamentally, probably I mean, businesses aren't raising prices. That ultimately changes. If it just encourages you to print more money, it's just encouraging you to have a much bigger problem when it does pop.
Mike Maroney: Now, it's interesting because the World Central Banks approximately seven, eight years ago had about $6 trillion on their balance sheet. Recently, they broke above $20 trillion. Is it even feasible to believe that these Central Banks have any plan whatsoever in order to eliminate that additional $13 trillion or is that just going to be money that now exists and will continue to exist and the likelihood is they're going to continue to print more?
Bob Wiedemer: Let's see. Let's take it to something else we've had a longer history on our government debt, which is over $20 trillion, nearing over $20 trillion. What's our plan to pay it off? Do we have one? Don't think so. Is there talk about reducing the amount? Yes, but what really happens... I mean the reducing amount but we're adding to it. What really happens is we add a lot to it. This year almost $600 billion is going to be added to that debt. So, that's history. That's an analogy that is very relevant, because again it's just another type of stimulus on the economy and any time you take it away you're going to have economical problems. Same with printed money. Same with borrowed money. So, given our experience with the debt, I would say that's about the same way that money printing is going to go. No, we're not going to be able to pull it out and we're not even going to be able to not increase the amount of printed money. It's going to go up a lot. When we need it. They're not going to just do it willy-nilly, but when we need it... it will come. It's still just as much poison in the end as whether you do it willy-nilly or you do it when you need it. Ultimately, the medicine will become poison.
Mike Maroney: So, here we are Bob, we have severe geopolitical uncertainty. We have issues throughout the world as far as the currency markets are concerned. The dollar is making new multi-year lows. Gold just so happens to be testing multi-year highs and really we haven't seen any sort of major correction in what many people believe to be an overvalued stock market. So, if the theory is right, that the medicine inevitably becomes poison, in that type of environment precious metals could really start to shine.
Bob Wiedemer: Oh, well, ha, ha, but yes absolutely. I would say they already have and the fact that gold has gone over $1,300 it really didn't get scared or turn back, which has happened before and it just kind of powering forward, I think it is an indication for a positive for gold. Also, a very strong indication that that nervousness and uncertainty that I've talked about more recently is out there. It may not be talked about all the time. Although, Wall Street Journal did recently say that we've got a bull market in uncertainty, which is leading to a bull market in gold. So, it's clearly out there and you clearly got a stock market that is sort of ignoring and sleeping and could easily fall out of bed in the middle of its sleep. That would be very positive, I think, for precious metals. Absolutely.
Mike Maroney: So, even though gold is rallied from the low $1200s to well over $1340 in the last few months, the long-term potential for gold based on all of these uncertain events that sit out on the horizon, could be much, much higher. Now, I know I can never pin you down as far as price is concerned, but based on everything that you see, do you believe that gold over the next three to five years could be an integral piece to everyone's portfolio?
Bob Wiedemer: Oh, absolutely it should be. I'm afraid there's going to be a number of people who are going to miss out and are worried because of gold having problems for over the last five years, but I think in reality it should be a piece of the portfolio. There's no question there's uncertainty near-term, but I think there's certainty long-term that ultimately the medicine, whether it become debt or whether it become printed money, does become poison. I don't think there's uncertainty about that. There might be uncertainty on the timing, but there's not a lot of uncertainty on the outcome.
Mike Maroney: Well, Bob, as usual you were right on at the beginning of this year when you thought that the Uncertainty Index would be something that could be utilized by investors. As that index has increased, so has the price of precious metals. I thought in the beginning of the year that you might be hard pressed to find things to talk about, but needless to say, that hasn't been the case. So, I guess next month, we'll be looking forward to talking about some new events that are causing uncertainty.
Bob Wiedemer: Which are certainly going to happen. I would agree. Look forward to it Mike.
Mike Maroney: Right Bob. Have a great afternoon and we'll talk to you soon.
Bob Wiedemer: Sounds good.
Mike Maroney: All right. Bye, bye now.