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Fed Warns on Stock Market Dangers but Ignores Bonds

John Rubino Warns of New Attacks on Cash in Exclusive Interview

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear from John Rubino of DollarCollapse.com and author of the book The Money Bubble. Mr. Rubino shares his thoughts on the ramped up war on cash, why it’s so intrusive and damaging to your freedom and the economy as a whole. Plus his take on the precious metals. Don’t miss my fantastic interview with John Rubino coming up later in today’s podcast.

Well, it’s been a bad week to be a holder of conventional financial assets. The U.S. dollar fell. Bonds fell. And the stock market sold off mid-week after the head of the Federal Reserve dropped a bombshell warning to investors. More on that in a moment.

First, as for this week’s price action in the precious metals, they are faring relatively well compared to paper assets, but the metals haven’t yet gathered enough strength to break out of trading ranges. Gold remains mired in a range and seems drawn like a magnet to the $1,200 level, never going more than $25 on either side of it. Gold prices currently trade at $1,186, up 0.6% for the week.

Turning to the white metals, silver made some significant gains earlier in the week, outperforming gold. However, the silver market gave back much of its gains on Thursday. As of this Friday morning, silver comes in at $16.42 an ounce, good for a weekly advance of 1.4%. Meanwhile, platinum is up 0.5% to trade at $1,139. And palladium looks higher by 2.4% to trade at $796 an ounce.

It’s a good time to be diversified in precious metals – or to start getting diversified if you aren’t already. The dollar, bonds, and stocks are each at risk of heading lower. We’ve been reporting on dangerously high valuations in equity markets for some time. And just this week the head of the Fed Janet Yellen issued a surprise warning of her own.

News Anchor: Fed chair Janet Yellen taking the wind out of a morning rally on Wednesday, stocks turning lower on cautious comments made in a conversation with IMF managing director Christine Lagarde in a conference in Washington DC.

Janet Yellen: I guess I would highlight that equity market valuations at this point, generally, are quite high. They're not so high when you compare the returns on equities to the returns on safe assets, like bonds, which are also very low, but there are potential dangers there.

Potential dangers, indeed. Ms. Yellen implied that they were confined to equities, with bonds being supposedly “safe assets.” The fact that virtually nobody sees any downside risk in owning bonds may make them the asset class with the greatest potential hidden danger. In some ways, owning bonds can be riskier than owning stocks or precious metals.

Bonds carry credit risk, of course. The risk of a default is minimal in the case of U.S. Treasuries -- at least as long as the Fed stands ready to backstop the government with its printing press. But the other big risk with bonds is that of the currency itself. Bonds that carry fixed yields are only as safe as the currency they are denominated in. If the dollar loses half its value over the next 10 years, a 2.2% annual yield on a 10-year Treasury note will only partially offset that loss in purchasing power.

In a rising inflation environment, bonds are about the worst asset class you can hold. Stocks at least have the potential to outpace rising inflation. The odds of stocks delivering inflation-beating returns diminish as valuations become extended, which is the situation investors face at present. But still, there’s always a chance that the stock market, or particular sectors within it, could accelerate to the upside.

A bond doesn’t represent real assets or revenues. It’s just an IOU. As such, the most conventional bonds can deliver to investors who hold them to maturity is a fixed quantity of compounded interest. The only way that a 10-year note issued at today’s low rates will deliver positive inflation-beating returns is if inflation stays lower over the next 10 years than it has over any other recent 10-year period. If inflation rates move up to the double-digits, bondholders will get slaughtered. That’s the “potential danger” Janet Yellen isn’t talking about.

The potential safe-haven in such an environment? Physical precious metals. Gold and silver coins you own free and clear carry no counter-party risk and no risk of default or bankruptcy. They do carry market risk – which is to say, the market prices for gold and silver can fall. But as long as we continue to operate within a debt-laden fiat monetary system, the major tendency will be for dollar to lose value versus hard assets. The longer the time period, the more certain you can be that the metals you own will hold their own versus inflation. With bonds, the opposite is true. The longer the time period, the less certain you can be that the yields you receive will keep up with inflation.

No one knows what inflation rates will be 10, 20, or 30 years from now. That’s why it can be very unsafe in the extreme to depend entirely on dollar-denominated financial assets.

And now for more on what all of this money printing, capital controls, and an environment of financial repression is going to mean for all markets, including precious metals, let’s get right to this week’s exclusive interview.

MIKE GLEASON: I'm excited to be joined by John Rubino of DollarCollapse.com. John is a former Wall Street analyst and a writer for CFA Magazine, a featured columnist with TheStreet.com, and has authored several books on financial matters, including The Collapse of the Dollar and How to Profit from It. It's great to have him here to share his insights with us today.

John, thanks for coming on the program.

JOHN RUBINO: Thanks for having me on, Mike. Good to talk to you.

MIKE GLEASON: I'm planning to cover a number of topics with you today, but I'll start off with the money masters at the Federal Reserve. Now, John, you're of the opinion that the Fed simply isn't going to raise rates here despite the fact that they've been telling us for months now that they're going to. So why don't you believe them?

JOHN RUBINO: The concept of the currency war is crucial to understanding what the Fed and all the other central banks are doing and what they can do. Basically, when you borrow too much money, if you're a country, that slows down your economy because so much of your new income has to go to pay interest rather than to invest in productive stuff. So the economy slows down, people get thrown out of work, and if you're a politician, you lose your job. So your normal response to that, historically, has been to depreciate your currency, to make your currency go down in value so that the stuff you're selling to the rest of the world, which is priced in your currency, gets cheaper. You sell more stuff, your economy picks up, you get reelected. That's how it normally works.

We as a global economy right now are so deeply in debt after thirty or forty years of excessive borrowing that all the major countries have this same problem. Their economies are slowing down because of too much debt and they feel like they have no choice but to depreciate their currencies. In the last couple of years, the dollar has gone up, which is to say that the euro and the yen have gone down. Those guys depreciated their currencies versus the dollar, and that made it easy for them to sell stuff to the rest of the world but hard for us, so our economy is slowing down now. We thought we had a little bit of a recovery going, but it's actually kind of petering out because the dollar has been allowed to rise in value.

Now, the logical response to that, historically speaking, is to depreciate the dollar, to devalue it by cutting interest rates and increasing government deficits and doing all the things you normally do to pump up your economy and lower the value of your currency. That's the opposite of what the Fed has been threatening to do for the last six months. They've been saying they're going to raise interest rates, and they almost certainly can't because with the dollar already at an extremely strong level and the U.S. economy already slowing, raising the value of the dollar by increasing U.S. interest rates would accelerate the process of things slowing down just in time for a presidential election, and that's something you never see.

Governments never tighten heading into big national elections because the guys in charge want easy money and more jobs and faster growth in order to get reelected. So we'll see that again this time. If they try to raise interest rates, the markets are going to react really negatively to that and then they'll have to take it back right away, so either no increase in interest rates or a little tentative increase that causes a financial crisis, which is reversed out instantly. That's what I see happening in the next year. I don't see any way around it, really, because we really are slowing down.

After six years of incredibly easy money, huge amounts of new debt being taken on, we don't have the rollicking boom you would expect in normal times from that. We actually are starting to see a downturn that could, if it goes on for even just another couple of quarters, turn into a full-fledged recession. The upshot is that debt works the same way for countries as it does for individuals and for families, which is if you borrow too much money, your life kind of spins out of control. You lose control of your destiny. And that's how all the big countries are right now, especially the U.S. We’ve borrowed way too much money and now we don't have the ability to use the old tried-and-true financial tools to get us out of this hole.

The interesting thing, the interesting point will come when people realize that we don't have any tools left, we don't have anything left to do to save ourselves, and that we're going to have to deal with this debt straight up either by collapsing under the weight of it and have a 1930s-style depression or actively inflating our way out of it, really aggressively depreciating the dollar and in that way making our debts less valuable but at the same time destroying the savings of a whole generation.

That's what we're looking at out there, and we really don't have any middle way between those two options. We have to do one or the other, and we have to do them very aggressively. When people figure that out, then everything changes. That's really good for your business because everybody's going to pile into precious metals as the last safe haven, the only place where you can protect your capital from the craziness that's happening within the financial asset world.

MIKE GLEASON: Switching gears here a bit, I invited you on the show today in particular because you've got some interesting things to say about the unfolding war on cash. It really seems to be picking up speed in recent months. We're seeing a lot of new policies coming out from the Fed, the FDIC, and the Obama Justice Department to punish and/or scrutinize those who simply want to take some cash out of their banks. The central planners are really demonizing cash now, implying only drug dealers and terrorists use it in larger amounts.

Now before we go into some of the ways that they're doing this and the specific measures, first off, what is the real reason the central planners seem to have it out for cash and cash holders?

JOHN RUBINO: Well, you have to understand how we got here to understand why this is happening. Basically, governments have traditionally used lower interest rates and increasing money supply as a way to get their economies out of recessions. So when you borrow too much money and that slows you down and you drop into a recession, you cut interest rates and you increase the money supply and that gets people borrowing again, but at the cost of even more debt for the next cycle.

We've gone through three or four cycles of too much debt causing a slowdown, leading to even more debt and so on. So we've got these booms and busts going since the 1980s. After each boom turns into a bust, we end up with even more debt than before, and so we have to do even more extreme measures in order to get us out. In other words, we have to cut interest rates even further and increase the money supply even more aggressively. So we've taken that to its logical conclusion now where interest rates are zero.

Now, governments, in order to stop the current slowdown and turn it into the next boom, have to cut interest rates even further into negative territory. Something like five trillion dollars of debt is now trading with negative yields out there in the world. In other words, if you want to buy a Swiss bond, you have to pay them in order to own the bond rather than them paying you interest.

There is a thing in economics called the zero-bound, which in theory says that you can't push interest rates much below zero because people with cash in the bank aren't going to pay the bank for the privilege of holding money in a bank account. So what they'll do is just take their money out and they'll put it under the mattress or in a vault or in a coffee can buried in the backyard, whatever, because it's not losing value at that point under those circumstances. So that stops the government from being able to lower interest rates because all the cash gets sucked out of the system.

That's what's happening now. So governments are responding to that by trying to get rid of cash. We're in kind of a twilight zone now where really extreme, crazy policies are being attempted, and one of them is to basically outlaw cash. They're doing that in a variety of ways. They're looking at taxing cash and doing things that in other ways make it really unattractive to hold cash and hoping to herd us back into bank accounts and other forms of electronic capital storage and transactions.

The ultimate goal is to have a completely electronic financial system where nothing is transacted in cash and it's illegal to do that. In a lot of places right now, they're limiting the size of bank withdrawals and they're making it illegal to buy something with cash over a certain limit in value. Eventually, they want us all to transact with plastic or using our cell phones or whatever and in that way allow themselves to lower interest rates even further. See, they have no other policy tools. They can't cut interest rates a negative three percent or four percent or five percent, then the current slowdown, which is gathering steam in parts of Europe, in Japan, in the U.S., and in China, will gain so much momentum that it will roll us over into a depression.

Once a debt crisis happens again, with as much as we've borrowed … We borrowed fifty-seven new trillion dollars in the last five years, so we're even more indebted than we were in 2008 when financial crisis almost destroyed the global financial system. Let another crisis happen, and they know, the guys in charge know that it will be catastrophic and maybe system-ending. We're at the point now where this system can just break down and not be fixable. Something will have to be built in its place, and we don't know what that will be. That terrifies in the guys charge because they'll get blamed for it.

The goal of the war on cash is to literally get rid of cash, make us all transact electronically for the rest of our lives. Besides giving them the power to move interest rates anywhere they want to move it, it also makes our financial lives completely transparent. Everything we do will be visible to the government and the big banks and where we do it. We are creating basically a turnkey totalitarian system with this. This isn't just a financial strategy; it's also political.

With technology being what it is right now, they can track all your movements through your cell phone. They can turn your cell phone on remotely and turn it into a microphone so they can hear everything you're saying. They are now vacuuming up all your texts, the audio of all your phone calls, all your e-mails, and now they're going to be able to see all your transactions. It's all going to be in a very big database that is all accessible to the NSA or to the IRS or to anybody else that wants to mess with you in the power structure.

This should be terrifying to anybody who believes in individual freedom because we're creating basically absolute power, handing it to guys who don't have a very good track record of using it wisely or ethically in the past and basically daring them not to become even more corrupt. Of course, power always corrupts. We know that now. That's the one absolutely inviolable rule of history, that the more powerful a group of people are, the more corrupt they become. We're handing, in effect, unlimited power to the government if we allow the war on cash to succeed and if we don't actively roll back the power of the NSA, et cetera, et cetera.

This is a very scary, very unusual time because we've got technology giving power to the government that it has never had before and basically drawing people in who are attracted to that power. Power both corrupts and it attracts the already corrupted. What we're seeing is a system go from skewed towards individual freedom as it was twenty, thirty, forty, fifty years ago to one that is skewed towards government power at the same time the technology is exponentially increasing that government power. This is a fascinating time from a lot of theoretical standpoints and a terrifying time for anybody who values their freedom and their privacy.

MIKE GLEASON: Yeah, it certainly is scary and also very disturbing, as you mentioned there, from the standpoint of personal liberties and privacies. Now what are some of the dangers here? What would a cashless society look like?

JOHN RUBINO: Well it would be one where you can't transact privately. For instance, right now, if a customer of yours wants to show up with cash, you can sell them gold or silver, or if they want to buy a car, they can hand five thousand dollars of cash to one of their neighbors and buy a used car. In a cashless society, you won't have the cash to do that; it won't exist anymore. All your transactions are going to be electronic and, therefore, visible. Somebody who wants to in the NSA … Edward Snowden, the NSA whistleblower, has already told us that we give him an e-mail address, he could wiretap the president. He could keep track of what Barack Obama talks about and e-mails about and texts about. That power now will exist and apply to you along with all your transactions, so they'll be able basically to track everything you do.

Why is this bad? The reason it's really bad is that if you take a position on a political issue or back a candidate who opposes the people in charge or basically does anything … If you do anything that angers the current power structure, the guys who are currently in charge, they can have the power to literally turn off your bank account. Your money just disappears, and there's nobody to call because the guys you would normally call are the ones who did it. They would have complete control over your livelihood and, therefore, control over your behavior.

This goes way beyond economics, although in the short run, it is a financial issue, too. If cash is going to be made illegal and the governments are doing that at least at first pass as a way of allowing them to lower interest rates to dramatically below zero, then that means your savings, the savings that you were putting away thinking that you would retire and then generate six percent a year from a bank CD and then live off that money, that formerly six percent bank CD is now yielding you negative three or four percent, which means your capital is shrinking rather than being stable and throwing off income.

How do you retire under those circumstances? Well, what the government is telling you is that you want to avoid saving money in safe instruments like bank CDs or short-term government bonds. You want to shift your money out to the stock market, which is going up because of all this new cash coming in, or junk bonds or foreign equities or things that hedge funds normally play in. And they're telling retirees and future retirees and pension funds … If you're a teacher, the guys managing your pension fund that's going to support you when you retire, those guys are also being forced out on the risk spectrum and encouraged by the government basically to buy really risky stuff because that's the only place where there's a return being generated.

So we're creating the conditions for the mother of all financial crises. When everybody who used to be risk-averse and used to own safe stuff is way out there loaded up on junk bonds and foreign equities and tech stocks and other things that go up in good times and then plunge in bad times, you're going to see people who shouldn't be at risk just be wiped out. There will be a financial crisis that hits Main Street big time. That's coming.

The stock market has had an uninterrupted run of six straight up years, which is very rare. Usually, you get a bear market after two or three or four good years. We're due. We’re due for a serious financial crisis, but this one will be different because the government has herded all these formerly risk-averse people out into risky assets, and those are the assets that will go down dramatically. Junk bonds can drop by fifty percent in a year. They do drop by that much in every bear market.

The U.S. stock market, the Dow Jones Industrial Average went from 14,000 to 6,000 in 2009. So if you had your money just in a spectrum of blue chip stocks, you lost more than half your money in one year. That's the kind of thing that's coming again, but this time around it's going to be people who really don't understand this and really don't deserve it. They're there because the government has herded them into these really aggressive risky assets. That's the immediate downside, the immediate risk that flows from negative interest rate policies.

You take away the ability to make money in safe stuff and people who need money, people who need income, have no choice but to go out on the risk spectrum and start buying aggressive stuff and then they get burned. That's why this is so despicable, what's happening. The government, in trying to save itself, in trying to get beyond its poor economic policies in the past that led to way too much debt, the governments of the world are disadvantaging their citizens by turning them into basically hedge funds, which are aggressive investment companies that take all kinds of chances. Now, pension funds are like that and individual retirees are behaving like hedge funds. This is terrible. This is a really bad idea.

MIKE GLEASON: With all that said is there any upside to all of this? What asset classes might this money flow in to?

JOHN RUBINO: The assets that governments can't create in infinite quantities and that don't depend on interest rates tend to do really well. For instance, storing gold in a vault in Switzerland or Hong Kong or wherever or you can do it in the U.S. too, it costs you money per year to store it. You pay one percent, let's say, in storage fees. Back when bank CDs were earning six percent, that wasn't very favorable for gold. Gold was a negative cash flow asset, whereas a financial asset was positive cash flow. But now, the terms of that trade are being flipped on its head where financial assets, especially bonds and bank accounts, are negative cash flow assets. They're costing you one or two percent a year.

Gold, meanwhile, hasn't changed. It still costs about one percent a year to own gold and store it in a safe vault, so all of a sudden it looks way better. I think that if this continues, the gap between the relative attractiveness of gold and (other) financial assets is going to become a chasm and all kinds of money is going to start pouring into precious metals because that's where the safety is and it actually has an advantage in terms of cash flow. We'll see gold be really, really advantaged by what's happening here if it's allowed to continue.

If the war on cash progresses from here, and it looks like it's going to because you're seeing all kinds of trial balloons out there, all kinds of governments trying various things that make cash less and less attractive, people are going to be faced with a choice of, well, do I take my cash and do I put it into a brokerage account and then invest it really aggressively and try to make it grow, which scares the hell out of me, or do I take my cash, this part of my financial life that I want to be completely safe? Since they're not going to let me own it anymore, do I convert it into something like precious metals that at least right now it's legal to own and have a chance of actually going up in value?

They'll definitely hold their value over time because gold and silver have done that for 3,000 years, but they might go up dramatically because so much new capital is going to flow into them when interest rates go very negative. That's really good for precious metals. I think that's going to be one of the stories over the next couple of years is huge amounts of capital fleeing cash but not going where governments want it to, not going into aggressive investments that have already peaked and they're starting to fall, but instead going in the other direction into even safer assets, precious metals that you can store privately or that you can hire a high-quality storage company to store for you and that governments can't create more of.

You can't create gold on a printing press. You can't make electronic gold by pressing a button and creating computer bits that go from the Fed to the banks. You can't do that with gold and silver. They can only be mined and we only get about two percent more of them a year, so their supply grows steadily and predictably and, therefore, they hold their value. That's what's coming, and I think it's a really, really favorable environment for precious metals and an extremely unfavorable environment for almost everything else. There aren't many financial assets that are going to come through this without being knocked down by fifty percent in the next few years.

MIKE GLEASON: This is a story that will continue to develop and we certainly will be covering it as it unfolds, and I know you will as well. John, thanks very much for your insights on this. Before we go, why don't you tell our audience how they can follow your work.

JOHN RUBINO: Sure. I run DollarCollapse.com, which is a continuously updated blog/news aggregation site that covers the stuff you and I talked about today, Mike. Then my newest book is The Money Bubble, co-written with GoldMoney's James Turk, which also talks a lot about this stuff plus having a lot of specific investment advice, how you capitalize on these trends. The book came out about a year ago and is now starting to come true. The predictions made there are starting to work out, so I think the book is more timely now than it was a year ago.

MIKE GLEASON: Outstanding stuff. Thanks, John. We definitely appreciate your time, and I really look forward to catching up with you again down the road.

JOHN RUBINO: Great. Thanks, Mike. I look forward to it.

MIKE GLEASON: That will do it for this week. Thanks again to John Rubino of DollarCollapse.com. Be sure to check it out. John has lots of things to say on these matters and the info there is truly first-rate stuff.

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.

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