Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up in just a moment you’ll hear the conclusion of our exclusive two part interview with monetary and financial analyst Jim Rickards. Jim has some alarming things to say about where the U.S. economy is heading, just how badly the Fed is handling the whole situation, and what it all means for the gold and silver markets. Stay tuned for the fantastic final segment with Jim Rickards.
Well, the U.S. dollar came roaring back this week. The Dollar Index has gained nearly 2% in the wake of jobs data and the release of meeting notes from the Federal Reserve. More on that in a moment.
In the meantime, let’s take a look at this week’s market action in the precious metals. Dollar strength usually means metals weakness, and that’s what played out in the gold and silver markets through Thursday. Gold prices currently come in at $1,209 an ounce, up slightly now for the week thanks to a nice advance so far this morning. The silver market is typically more volatile, and true to form silver prices got hit harder than gold early in the week. But the while metal is up strongly so far this morning and paring back most of the week’s losses. Silver currently comes in at $16.66, down only 0.9% now week over week thanks to today’s positive action.
Meanwhile both platinum and palladium are bucking dollar strength to some extent. Platinum finished Thursday flat for the week and is up nicely today with all of the other precious metals. Platinum prices currently trade at $1,175 an ounce. Palladium, meanwhile, shows a 3.9% gain this week to trade at $778 as of this Friday morning recording.
On Wednesday the Fed released minutes from the March FOMC meeting. No big surprises emerged from the policy discussions among Fed officials. Some policymakers seem committed to rate hikes as soon as June, while others are more inclined to see the Fed hold off until 2016 or when economic indicators more clearly improve. Many Fed watchers now think the Fed is likely to raise rates in September.
In the first quarter of this year, the economic data came in weak by many measures. GDP has been lackluster, while the Fed’s preferred measures of inflation remain below target. And despite a slight pickup in hiring, low workforce participation rates and anemic wage growth remain areas of concern.
The U.S. central bank, unlike those of some other countries, has a dual mandate: price stability and full employment. Of course, the economy rarely, if ever, reaches what could be described as “full employment.” So the Fed almost always has an excuse to try to stimulate jobs.
And as for price stability, well, the Fed has a peculiar definition. For the Fed, price stability doesn’t mean that the price levels for goods and services in the economy remain level. Instead, it means that prices are rising at a rate that Fed economists deem healthy. Their professed ideal rate of inflation is 2%. In the future some other rate might be deemed to represent “price stability.” This is where the Fed has failed most miserably. Since the Fed’s creation 100 years ago, prices have risen 30-fold as the dollar lost roughly 97% of its purchasing power
There’s a name for the various ways that Federal Reserve officials manipulate language and engage in the art of obfuscation. It’s been dubbed “Fedspeak.” And the universally recognized master of Fedspeak is former Federal Reserve chairman Alan Greenspan.
Lesley Stahl: In public, Greenspan was inscrutable whenever Congress asked about interest rates. He resorted to an indecipherable delphic dialect known as “Fedspeak.”
Alan Greenspan: I would engage in some form of syntax destruction which sounded as though I were answering the question, but in fact had not.
Lesley Stahl: We showed him a tape of him at a hearing.
Alan Greenspan: “Modest preemptive actions can obviate the need of more drastic actions at a later date. That could destabilize the economy. Very profound.”
Lesley Stahl: Very profound.
Alan Greenspan: Evasive.
Lesley Stahl: Impenetrably profound.
Alan Greenspan: In other words.
Lesley Stahl: You worked on these, right?
Alan Greenspan: Oh, of course.
This little exchange with 60 Minutes correspondent Leslie Stahl is one of the many remarkable admissions Greenspan has made since stepping down from power. He’s also acknowledged that gold is money and suggested that it will be a good investment going forward given the pressures on the monetary system to create inflation.
What Greenspan hasn’t admitted is that the Federal Reserve System is fundamentally flawed. He hasn’t admitted that financial markets are more stable and less prone to bubbles under a gold standard. That would be too much for a man who helped blow up the housing bubble with artificially low rates. The biggest financial crisis since the Great Depression soon followed, and neither Greenspan nor his successor Ben Bernanke saw it coming.
With all the tools at their disposal to manipulate markets, the Fed has been able to appear competent at cleaning up after financial disasters – but not actually preventing them. And the Fed’s clean-up measures only lay the foundation for an even bigger crisis the next time around. We’ll hear more about how the Fed is stumbling and bumbling its way through their policy decisions when we hear from Jim Rickards in a little bit.
And speaking of manipulating markets, Deutsche Bank is reportedly about to receive a record penalty of more than $1.5 billion from multiple government regulatory bodies for rigging interest rate markets. In addition, Citibank faces criminal charges in the U.S. for manipulating currency markets. Citi is likely to be hit with a fine of $1 billion or more next month.
So just how much manipulation is the Federal Reserve covering up? Perhaps a full audit of the Fed would reveal some inconvenient truths.
In any event, as the government and the banking sector leverage back up to dangerous levels, another financial crisis is brewing. When it hits, it will inevitably take most experts by surprise – including the monetary central planners at the Fed. Holders of physical precious metals have what amounts to a financial insurance policy. In some ways, you hope things never deteriorate to the point that you actually need your gold and silver. But when all else fails… there is precious metals.
And now, let’s get to the explosive conclusion of our exclusive two-part interview with Jim Rickards – renowned monetary, financial and geopolitical expert and author of two bestselling books The Death of Money and Currency Wars, and now a new book titled The Big Drop: How to Grow Your Wealth During the Coming Collapse.
Mike Gleason: Turning the focus here to some of the current economic issues domestically, I find it quite interesting how the mainstream media, and the President both, continue to trumpet the idea that we're experiencing this great recovery. But you've made the point that governmental, and more importantly Fed policy, hasn't allowed for a real recovery because they never let the market correct itself after the ‘08 collapse. Explain what you mean.
Jim Rickards: Sure, we are not in a normal cycle of recovery. Now, I'm almost the only person in the world who is saying that. Everyone else, certainly the talking heads on television, and financial TV, and the White House, and everywhere else you go say, "Well, we're having this great expansion. We're creating a lot of jobs. The crisis is over. Stock markets are reaching all-time highs." When I come along and say, "Well, we're in a depression" and my view is we are in a depression, people look at me like I have two heads like, "What are you talking about? It is happy days are here again, everything is going up and where are the soup lines? You're supposed to have soup lines in a depression."
So let me explain. A normal cycle of recovery, which we've seen thirty or more times since the end of World War II. The way it works is the economy gets a little overheated, unemployment goes down, job market gets tight, inflation starts to pick up a little bit, and the Fed looks at that and they worry about it getting out of control so they tighten interest rates. That cools things down, unemployment goes up, prices level off, interest rates come down, and then it kind of hits bottom. Then the Fed says, "Okay, time to dial it up again" and then they ease, and then we go back up again. It's a nice sine wave it goes up and down, up and down, over and over.
It's just like the thermostat in your house. If the house is too cold you dial it up, if the house is too warm you dial it down, and somehow you try to keep it on an even keel but you've always got that thermostat if you need to adjust things. The thermostat is the Fed. That's the normal business cycle, the normal credit cycle, bull and bear markets track that with some leaps and lags. That's the environment that everybody is familiar with.
That's not the environment we're in. We are not in a normal self-sustaining cycle of recovery. If we were we would have had much stronger growth by now, and the Fed interest rates would be two, three percent, maybe higher, inflation would be higher, a lot of things would be very different than they are right now. We're in a depression.
Now what is a depression? People say, "Well, gee the technical definition of recession is two consecutive quarters of declining GDP, rising unemployment, and a few other bells and whistles." Their intuition says, "Well if a depression sounds worse than a recession, and if a recession is two quarters of declining GDP, a depression that must be like ten quarters of decline in GDP. That must be really bad.” And we have not experienced that.
The economy has in fact expanded continuously since 2009 but that's not the definition of a depression. You can have growth in a depression. You can have a rising stock market in a depression and indeed we did, you go back to the Great Depression. The Great Depression lasted from 1929 to 1940 and yet in the middle of that from 1933 to 1936, the stock market did great. 1933-34, that was one of the best periods in the stock market in history and the economy was expanding, and unemployment was coming down, exactly the way it is now. But there were structural problems that we never got away from. Then in 1937 the whole thing fell off a cliff again, and it wasn't really until World War II in 1940-41 when the U.S. started getting involved, and retooling, restructuring the economy to go on a war footing that we really escaped from the Great Depression but of course it took the second world war.
Bringing that up today, the definition of depression, it's not that you have declining growth it's that you have a long period of growth below potential. That's the definition of a depression. Potential growth in the United States in the long term is about three, three and a half percent. Short term growth could be four or five percent because you have a lot of factors, a lot of labor factors and underutilized factors, industrial capacity and things that could be brought in to get higher growth in the short run, which is exactly what we saw in the early days of the Reagan administration.
‘83 through ‘86 the U.S. economy grew 16% in three years. That was banging out over five percent during that three year stretch. So we're capable of four or five percent growth in the short run. We're capable of three, three and a half percent growth for a very long period of time. We're actually getting two percent growth. It's the gap between three and half percent and two or between five and two depending on how you want to measure it that is depressed growth. So that's what we're experiencing. We have growth but its way below trend. It's way below potential.
If you think the difference between two and three or two and three and a half doesn't sound like a lot that's not true. One and a half percent difference compounded over thirty five years one economy will be almost double the other. That three and half, four percent economy will be twice as rich, twice as wealthy, twice as well off as the two percent economy after thirty five years, that’s your kids are born, they go to college, they get a job, and thirty five years have gone by. One economy is twice as rich as the other. So that's the difference between trend growth or potential growth on one hand and depressed growth on the other. That's what we're in.
As far as the soup lines, we have soup lines, they're at Whole Foods. In other words we have 51 million Americans on food stamps but when you get food stamps today it's like a debit card. You get an electronic payment card from the government and you can just go swipe it at any cash register and so you can buy your soup at Whole Foods. You don't need to line up at the local soup kitchen. So there's a lot less here than meets the eye in terms of growth, in terms of hardship. Americans are suffering so under these definitions that I'm describing, and by the way that definition of continuous growth below trend, neither collapse nor trend growth, but something below trend for a long period of time, that's Maynard Keynes definition. I think it's a good one. I use it myself and that's what I mean when I say we're in a depression.
By the way the example of this is Japan. Japan has been going through this since 1990, so if you want to understand the United States economy today we are Japan. Japan is now in a twenty five year depression going back to 1990. The United States is in the same depression. Ours started in 2007 so we're eight years into it, maybe we have seventeen to go but we look like Japan.
Mike Gleason: Can the Feds raise rates in this environment? They would have to know what would happen if they did, which would be short term economic pain, something they seem to refuse to stand for, right?
Jim Rickards: No, I wouldn't assume that at all. See, you're assuming Mike that the Fed knows what they're doing but they don't. I've spoken to Fed governors, I've spoken to Regional Reserve presidents, I've spoken to a lot of senior officials at the Federal Reserve, and insiders there. They don't know what they're doing. They won't say it publicly but they do say it privately. This is one big science experiment. They try something if it seems to work they try a little more. If it doesn't work they change it up. We've had 15 different policies since 2008. When you go through interest rate cuts, QE1, QE2, QE3, Operation Twist, Forward Guidance in seven different flavors, currency wars, nominal GDP targeting, Taper, I mean you name it, they change policy every couple of months. They have no idea what they're doing.
So to answer your question, "Could they raise interest rates?" They could. They certainly are signaling that. They have given markets no reason to believe that they're not going to raise rates and they keep talking about it. Recently Janet Yellen, Stan Fischer all gave speeches on this so everything the Fed is doing indicates that they do plan to raise rates later this year. However, they've given up on Forward Guidance when they took out the word patience at the last FOMC meeting. That was the end of Forward Guidance. They're just flying blind. They say they're data dependent, okay, but remember data is, at best, real time and at worst it's very lagged because you get the data on a certain day but it's talking about something that happened two or three months ago. So when you're data dependent at best you're kind of looking in the rear view mirror. You're not really looking ahead at this cement wall you're about to crash into.
Now the way to look ahead is with forecasts, but to do a forecast you need a model and the Fed models are all flawed. The Fed, by the way, has the worst forecasting record of any institution I can think of. Go back over the last six years. Every year the Fed does a one year forward forecast. So in 2009 they have a forecast for 2010. In 2010 they have a forecast for 2011 and so on. And today they have a forecast for 2016. Well guess what? They have been wrong six years in a row by orders of magnitude. They have been wrong a lot. I'm not talking about saying 2.9 and it comes in 2.8. That's fine, I mean, that's a bull's eye as far as I'm concerned. I'm talking about 3.5 and it comes in 1.9 or lowering it to 3 and it comes in at 2.1. Those are errors of large orders of magnitude in terms of what the Fed's doing so data dependent doesn't help you much unless you have good forecasting models and the Fed doesn't so they have no idea what they're doing.
To answer your question, "Could they raise rates?" Sure. Will they? Let's hope not because if they do they're going to crash markets around the world. They're going to crash merging markets, they're going to crash junk bond markets, they’ll probably crash the stock market because the economy is very weak. My models show we're going to have very weak growth in the first quarter, probably continuing into the second quarter, and people talk a lot about job creation, that's fine, I'm glad people are getting jobs but these are not high paying jobs. Real wages are not going up. Household incomes are not going up. All the things you need to drive a consumer economy are not happening.
So the answer is, let's hope that the Fed sees the data in time to avoid a train wreck. Let's hope that they stop looking in the rear view mirror and start looking out the windshield and see what's coming ahead but they may not. You don't want to be massively short at the stock market because they could wake up one day and start to signal QE4 early next year. That wouldn't surprise me. In which case markets could actually rally on that news but they're not there yet. I call that blinking. The Fed hasn't blinked yet. They're still talking. What they're doing, they're trying to have it both ways. They talking tough and doing nothing. Talking tough and doing nothing, which is kind of the worst of both worlds because the tough talk has spooked the markets but doing nothing occasionally causes the markets to rally, so you get this non-directional volatility up one day, down the next.
Again, I think it's a good reason to own gold. I recommend ten percent of your portfolio allocated to gold because it's going to preserve well, it's going to see you through thick and thin. The dollar price of gold fluctuates a little bit. I know gold bugs like to see gold go to the moon. I think it will eventually but not yet, not right away. We've got a lot to work through first but I'm certainly encouraged by the fact that that commodity prices have collapsed. We see oil down, copper down, iron, ore, you know, you look at the commodity index it's completely imploded but gold hasn't.
Beginning late last year gold diverged from the index. Gold is part of the index but normally it'll highly correlate it so when the commodity index is going down gold is going down. But what happened late last year is that the commodity index continued to crash but gold broke away and went up a little bit and then kind of leveled out a little bit but it's not crashing. It's not going up a lot, but why isn't gold at $800-900 an ounce, which is where it would be if it had tracked the commodity index? The answer is people are starting to think of it as money instead of a commodity, which is the right way to think about it. I know the dollar price isn't going up a lot but to me it's showing a lot of strength because the dollar price of everything else is collapsing so given all this uncertainty, given all this volatility, one more reason to old gold.
Mike Gleason: Jim, it has been a tremendous honor to speak with you today and we're huge fans of yours and have been for a long time. Before I go I want to tell our listeners that we have lined up for them a way for them to get a copy of your new book, The Big Drop: How to Grow Your Wealth During the Coming Collapse. It's fantastic stuff and you will not be disappointed if you take advantage of that.
Jim, thanks very much. Thank you for being so generous with your time. It was great speaking with you.
Jim Rickards: Thank you, Mike.
Mike Gleason: Click here for a special offer for our podcast listeners who want to sign up for this book along with a risk free trial of Strategic Intelligence, a newsletter that you do not want to miss. I strongly encourage our Money Metals customers and all podcast listeners to jump on this opportunity right away. You won't be disappointed.
That will do it this week. Thanks again to Jim Rickards, author of Currency Wars, The Death of Money, and now The Big Drop: How to Grow Your Wealth During the Coming Collapse, and editor of the Jim Rickards Strategic Intelligence newsletter.
Check back next Friday for next Weekly Market Wrap podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.