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Interconnected Markets Pushed to Extremes, Increasing Risks

Dr. Chris Martenson: Next Crisis to Be Global, Getting Gold & Silver Difficult

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

Later in today’s program Dr. Chris Martenson joins me. And he’ll tell you why the central planners DON’T want you to own gold – and issues a chilling warning to those who are caught unprepared before the next major financial crisis. Be sure to stick around for a tremendous interview with Chris Martenson, coming up after this week’s market update.

Well in this final podcast for 2016, we’ll review the year that was in precious metals markets and look ahead to the year that might be in 2017.

Gold and silver each got off to a rip-roaring start this past year, posting stellar gains through the first half of the 2016 – only to give back much of those gains in the second half. Gold entered January trading at around $1,060 per ounce. Prices got as high as $1,380 in the summer. But it was all downhill in the fall.

Donald Trump’s election win over Hillary Clinton shocked the establishment media and their lineup of pollsters and pundits. However, independent analysts who appeared on the Money Metals podcast, including Michael Rivero and Gerald Celente, correctly predicted a Trump win. Traders initially went into panic mode after the election was called for Trump. Global equity markets plunged and gold futures surged. But by the time U.S. markets opened on November the 9th, that all reversed.

Gold prices proceeded to put in seven straight weeks of declines, taking us into this – the final trading week of the year. However, it looks like the metals complex will end the year on a somewhat positive note. As of this Friday, gold shows a 2.1% gain for the week to bring spot prices to $1,158 an ounce.

The gold market will finish out the year with an annual gain of about 9%. Not bad in an environment where cash still yields less than 1% and bond investors suffered through a roller coaster ride that left them with a return of essentially zero for the year.

Silver will finish 2016 having quietly outperformed both gold and the S&P 500. Yes, despite all the hype surrounding the Trump surge on Wall Street, stocks didn’t quite catch up to the white metal. Even though silver fell sharply from its high in August, it will still post a healthy advance of close to 17% for the year after this week’s up move. Silver prices have gained by 1.8% this week to trade at $16.13 an ounce.

Turning to the Platinum Group Metals, it looks like platinum prices will end 2016 in slightly positive territory. The platinum market began the week essentially flat for the year after giving back all of its first half gains. Platinum is up 1.5% this week to bring prices to $909 per ounce.

Faring better in 2016 was palladium. Palladium currently trades at $684 after advancing 3.3% this week and is now up just over 20% for the year, as of this Friday morning recording – with just a few hours left in trading for the year.

So what can we expect in the precious metals markets for 2017? It could be a year for investors to expect the unexpected.

The conventional wisdom projects a continuation of post-election trends – higher stock prices, faster economic growth, a strong dollar, additional Federal Reserve rate hikes, and more downward pressure on metals. That’s one scenario. But given that just about every Wall Street establishment analyst buys into it, perhaps the groupthink has already been fully priced in to the markets.

Given the overwhelmingly bullish sentiment toward stocks and bearish sentiment toward metals, the first quarter of 2017 could see some snapbacks toward more neutral levels at the least. Gold and silver prices saw a bounce this week but have a lot further to run before the technical indicators lift from oversold territory.

The big question for metals investors is whether a relief rally turns into something bigger and more sustained. There’s certainly a long-term bullish case that can be made, especially in the silver market with mining output on the decline and supply deficits projected to rise next year.

If President Trump and the Republicans in Congress grow the deficits and their fiscal policies help stimulate higher rates of inflation, that could be quite favorable for metals. The Fed’s projected rate hikes would still leave real interest rates negative. Inflation could easily rise by more than the Fed lifts rates, pushing rates deeper into negative territory in real terms. When investors seek a safe haven from negative real returns and risks in interest rate sensitive financial assets, that’s a very bullish environment for precious metals markets.

Of course, we can only speculate at this point as to how the new government will govern and what Trumponomics will look like. With so many wild cards on the table for 2017, we would again urge investors to expect the unexpected and prepare for gyrations in all markets. We’ll continue to have top guest experts on this program week after week throughout the year. They’ll offer their unique insights based on the latest political, economic, and market happenings.

Well now for more on what’s ahead in geopolitics and in the financial markets and for gold and silver, let’s get right to this week’s exclusive interview.

Chris Martenson

Mike Gleason: It is my privilege now to welcome in Dr. Chris of PeakProsperity.com, and author of the book Prosper: How to Prepare for the Future and Create a World Worth Inheriting. Chris is a commentator on a range of important topics such as global economics, financial markets, governmental policy, precious metals and the importance of preparedness among other things. And it's always great to have him with us.

Chris, welcome back and thanks so much for joining us again.

Chris Martenson: Mike, it's a real pleasure to be back with you and all your listeners.

Mike Gleason: Well there's so much to talk about her but to start out, Chris, I want to get your comments on the dollar and the Fed because clearly one of the biggest headwinds for metals in recent months has been the strong U.S. dollar. Is this reflective of fundamental strength or something else? And do you expect that at some point the dollar will finally weaken versus other fiat currencies?

Chris Martenson: I'm going to call the dollar the roach motel of currencies. What I mean by that is that the central banks across the world have printed in north of I think 16 trillion dollars of thin air money and they've injected into the markets. The ECB is injecting 85 billion euros a month mostly into bonds at this point in time a lot of in corporate bonds. The Bank of Japan is busy buying everything under the sun, their Japanese government bonds. ETFs with the Bank of Japan being the largest share purchaser through ETFs of the Japanese stock market on and on.

So, what I'm getting at here Mike is that when there's this much money floating around the world, it's very hard to understand the value of anything through its price. Now what we've seen is that speculators have run amok. We have a globalized financial system at this point in time. You can't possibly understand what's happening in any one market without understanding what's happening in all the markets. Often, I see gold taking a hit and the first thing I do is I go look at the Japanese yen-dollar cross because there are a lot of algorithms with access to a lot of money who play games.

I'm sure they make money at it which is why they continue to play these games, but it tells me less about the perceived value of gold for example, as well as many other asset classes we could talk about, as much as it tells me about how much money is out there and what it's trying to do which is seek relative advantage. So, this gets us to the dollar. Right now, on a relative basis if you have a choice as a let's say you're big money… you're Norway Sovereign Wealth Fund and you have a choice of buying Italian ten-year debt or U.S. ten-year debt but you're getting many more basis points of yield off of U.S. ten-year debt. Ah, that's a no brainer, right?

You're going to want to buy U.S. treasuries over Italian treasuries, right, because you're going to not be exposed to Italy's sovereign risk for example or its 20% of GDP in nonperforming loans on and on. So, there's all these reasons to be buying U.S. assets at this point including the fact that now the interest rate spread even on the short end because the Fed ‘s now hiked twice where everybody else is at zero or even below in the case of Japan.

So, it's drawing a lot of that sloshing money around the world. It's being drawn into and towards U.S. assets which means the dollar goes up. Now I called it the roach motel and here's why. There's going to be this relative advantage. Everybody's going to at some point pile out of, I believe, European assets, out of Japanese assets because those are both broken, defunct systems. People get that. The breakage has just started. As it accelerates people pile into the dollar and then eventually they discovery, "Oh, hey that's a broken too."

It really is. The United States like all the other major economies at this point at a fundamental level is insolvent. Not bankrupt, different term, that's legal term. (It’s) insolvent meaning the liabilities vastly exceed the assets in this story.

Mike Gleason: In the weeks following the presidential election we've seen the stock market move higher for seven straight weeks and precious metals have been pummeled. It looks like the mood is risk on because if the U.S. economy is expected to pick up steam then why bother buying safe-haven assets, right? But the structural problems that you've been studying and talking about there for quite some time at Peak Prosperity and in your books haven't simply disappeared with Trump's election here Chris.

We still have unpayable debt and entitlement burdens and we can expect bureaucrats at the Fed to continue to backstop those programs with more money printing. Energy may get much more expensive in the years ahead. It seems to us the reckoning is still ahead of us somewhere regardless of who becomes president. That said, timing is important. Are the markets getting it right, Chris? Should investors be moving into risk assets and out of safe havens – at least in the short term?

Chris Martenson: I don't think it's possible to analyze what the markets are "saying" without really understanding the context of what's happened. Look, the central banks are scared and they've said as much of any down tick in the financial markets. Equities being the headlines signaling market that everybody sees about and reads about in the newspaper and on TV, but it's also the bond markets that they're caring about.

So, the central banks have inflated the asset markets to nosebleed territory and they are afraid of what will happen with any correction. If we just dial back, January of 2016 we saw the world beginning to correct and it was pretty scary. Emerging markets started to sell off. Bonds started to sell off. Equities started to sell off and then all of a sudden, there was this instant U-turn. No, not even U-turn that's too gentle. It was a nipple bottom V-turn we went the other direction.

Brexit happens and same behavior. This should have been a very scary moment and somehow "investors" suddenly decided oh no this is the buying opportunity we've all been looking for. Same thing with Trump. You know the presidency was pretty much a lock for Hilary up until about 10:30 on Tuesday night. By 11 it sort of turned around. By 1:30 that morning the "markets" had somehow decided that this was the greatest thing ever and the Dow had an almost 1,000 point reversal in that early morning hours where you and I were all asleep.

So, I'm looking at this and I'm saying, "Look, one way to interpret this is these investors are starting to really become very buoyant and very optimistic." The other thing is to ask the question, "Well who exactly is in the markets at 1:30 in the morning buying everything hand over fist?" And I'm highly skeptical of what we're seeing. I don't think we're seeing functioning markets. I don't think we're seeing markets that are free, fair. They're clearly manipulated. We know this by Japan.

The Wall Street Journal last year did a great study that showed that of the ETFs that Japan was buying, preferentially they were buying on the days when the markets were selling off. So any time the Japanese markets started to sell off you had the central Bank of Japan printing money out of thin air, stepping into those markets and buying them on down days to help drive them higher. This behavior I don't believe is in any way isolated to the Bank of Japan or the Swiss National Bank which is also engaged in the same behaviors.

I think that we just live in a world now where the central planners are terrified of a falling market at this point in time. Maybe investors are starting to take that to the bank. I think that confidence such as being expressed badly misplaced at this point in time because history is clear. There has to be a relationship between the price of the assets and the underlying structural health of the things those assets are supposed to represent. None of the structural things that I've been talking about for years now, you have as well. None of it's been fixed. The structural problems still exist.

Mike Gleason: Expanding on the point there, is it possible for them to manage these markets forever meaning keeping equities propped up, suppressing metals prices or will their tactics eventually lose their effectiveness?

Chris Martenson: Well they should eventually lose their effectiveness but we're at the state now, Mike, where I believe that when they finally do lose their effectiveness, it's going to be a real blood bath. It's going to be over very rapidly. These markets are all interlinked to such an extent that we saw one of my favorite events in 2016 and 2015 was watching these mini-flash crashes happen in markets as large as the British pound, the U.S. dollar, the U.S. treasury market. We saw movements in those markets that were six, seven, eight, nine sigma moves. Meaning that if these were normal everyday moves that happened in the context of history, they should happen once every million years to billion years.

Just like these really unusual events. Those are now part of the landscape and those happen because we have these very highly interconnected markets and that market structure is new and many people are looking at that and saying, "Well that's more robust because a more interconnected, interlinked market gives the authorities better tools to intervene in those markets," which is absolutely true.

At the same time, it also means that they can push those markets further and further away from what we might call equilibrium or a true rate. Nothing can go up forever. Unless we're willing to believe the four most dangerous words in investing which are, "This time is different." Unless we're willing to believe those, we have to allow for the fact that all the central planners have really done is pushed us away from fair pricing and the snap back is going to happen but because of the structure of the markets now it's going to be very, very rapid when it happens.

Mike Gleason: Speaking of not being able to go up forever, that leads me right in my next question. You wrote a great piece a couple of weeks ago on your Peak Prosperity site about how ridiculously high our debt as a percentage of GDP has gotten and made the point that that debt number simply can't keep growing forever. Eventually it comes crashing down.

Talk about this year for a minute, Chris, because you're calling it a mathematical certainty that a poor ending to all of this is in our future. Give us your thoughts there.

Chris Martenson: It's absolutely a certainty. So, when you say debt a lot of people think of federal debt. Okay, the U.S. government owes a lot on treasuries. The number is approaching 20 trillion dollars now. It's just south of that number but that's just the federal debt. We also have corporate debt and we've got state debt and household debt – which includes auto loans, student loans, things like that.

And we also have the liabilities which are things like in Illinois where they have a teacher’s and a fireman’s and a police pension fund that is so underfunded that it's going to require tens of billions of dollars from the taxpayers of Illinois to just pay those obligations off. We can almost count that like debt. If we take the liabilities of places like Illinois, California, Connecticut, as well as the federal government underfunded entitlement programs which is Social Security, Medicare, stuff like that.

Put all of that into a pile and say, "Hey how big is that pile compared to our GDP?" The number is an astonishing 1100% debt and liability to GDP ratio. Meaning we would need to have 11 full years of GDP output with not doing anything else but just taking the total output of the country to pay that down so it's at a zero number. So, I just look at that and I say, "Look it's a mathematical certainly that can't be paid." It won't be paid.

So, the only question that needs to be asked by people is, "Who's going to eat the losses in this story?" And that's a scary question because we've seen what the authorities are doing. They're trying to take away our cash so we have to be fully housed in the banking system where they recently rewrote the rules so that when the banking system next has a big crisis that depositors are the ones who are absorbing those losses.

We've seen that they don't want us to have any way of escaping the ravages of the inflation that they're going to try and ignite because inflation is one way to spread the pain. Not many people can detect it. We all just think, "Oh gosh, darn our luck, bad inflation." Inflation ignited on purpose is a way of taking purchasing power from everybody and transferring it into this hole of debt and liabilities so that that becomes smaller by relative comparison.

That's what's happening right now and it's as simple as this. Who's going to eat the losses? This suppression of gold and silver as well as other tangible forms of wealth is really, I think and from my view, it's just another expression of the keepers of the system saying, "We can't allow anybody to see any daylight in the story because as soon as one person finds daylight, there'll be this flood of people saying 'I want that safety as well'". They need everybody without any safety, no means of defending themselves so that we can all share in this pain.

What's missing in this story and the reason I think Trump got elected is, it's a deeply unfair story because at the same time that we're all being corralled into this pit of economic misery, the people who are running that system are also handily and coincidentally and conveniently enriching themselves massively in the process. It's no accident that the Federal Reserve is now the largest landlord in America through their ownership of mortgage-backed securities which they bought with money printed out of thin air.

Who's the second largest? Well that would be BlackRock, a company that is heavily involved in managing these portfolios for the Federal Reserve is first in line for as much liquidity as many as they want. They are a quasi-private entity at this point that's able to go out and secure extraordinary advantages in terms of cost of capital, information flow, has access to things that you and I would never have access to and as a consequence has been able to go out and use thin air money leveraged up to become the owners of the real property of this country. This story has been written over and over again in history.

It's the same old story which is governments get in trouble. They print too much. They get too far in debt and then in that last scurrying of ... I think a quote I heard best is, "The last official act of any government is to loot the treasury." That's kind of a stage we're in right now.

Mike Gleason: You touched on it briefly there in that last answer but what will the beneficiary assets to own be in this scenario, Chris? Talk about the importance of not waiting too long to establish a position in those assets because I know you've been warning folks that the time to move into these particular asset classes is before this all happens otherwise you might find that it's too late. Talk about your thinking there.

Chris Martenson: Well absolutely, I hinted on it which is that I do think that when the eventual adjustment comes it's not going to be like your grandfather's bear market where there's sort of lots of time to figure out this is all happening. It will be a fairly explosive crisis. There will be capital controls imposed because the markets are all interlinked as I mentioned. This isn't a U.S. market, a European market. It's all globally interconnected. It's one giant capital market but if the trouble starts in Italy and the Italian banks go down and people are scrambling to get their cash out of the Italian banks into some other banking structure in Europe, they're going to discover they can't do that because the walls have been put up and the capital controls are in place and they're trapped.

So, the time to get yourself out of that trap is before it's sprung. For the average person, you have to be in real assets, real tangible assets. I'm going to include cash in that at this point in time. Having cash out of the bank is important. Having precious metals in your hot little hands, very important. Owning your real assets as much as possible, very important.

I'm eschewing staying away from debt at this point in time, nonproductive debt in particular. High interest bearing debt. Just keep it out of there as much as possible because, look we've seen this story, it's playing out in Venezuela right now, right? There's an extraordinary amount of pain, suffering and destruction and it's eating its way up that social ladder. The very, very wealthy in Venezuela are still reasonably okay. The ones that can have moved out of the country and gone somewhere else.

But in this next crisis it's going to be global. There's really nowhere to go so you're going to have to hunker down and make the best of it you can. Again, by the time when the very wealthy in the story suddenly decide it's time to own gold and silver, you will not be able to get any is my prediction. It will be very, very hard to come by because those doors are tiny. It only takes a few hundred billion dollars to sort of slam them shut. We've seen this before with rapid moves in metals prices in this country where silver became unavailable for six to eight weeks just with little moves.

And that was only with silver bugs out there doing the buying and selling. This is a fractional percentage of the society. Once 50% of the people in a country decide they want to own something, good luck finding it, right? Yes, the best time to prepare for a crisis is before it arrives. Good luck when it's arrived. Good luck buying the plywood when the hurricane's already on short. It's just tough, right?

That's how I view it. I think we've got to be patient here. And the big risk in this story which we have to talk about is they might win, right? By which I mean they're going to say, "Oh we have to move to these digital currencies. We want to make sure that everything is just all in the electronic sphere. We love that because we get to track everything you do. We get to control everything. We can force negative interest rates on you at any time. We get to control you with levers and dials."

That's the world they're heading towards and I don't think they make it there personally which is why I'm hedged heavily into the world of real tangible things, but that's clearly where they want to go. And the risk in this story is they get there somehow. I don't think they will but they might so people need to be aware of that too.

Mike Gleason: Well 2016 was certainly an eventful year. We had Brexit and then we had quite a spectacle in terms of the presidential election here in the U.S. Markets wrestled for a time with the possibility of collapse of one of the major European banks, Deutsche Bank and Credit Suisse both looked feeble. The Italian government is working on a bailout for its third largest bank right now. You sort of alluded to that a moment ago.

Much of that seems to have been forgotten now and the Dow is on the cusp of breaking 20,000. So, as we begin to close here and as we approach year end and start looking forward to 2017, what would you guess people will be talking about at this time next year, Chris?

Chris Martenson: We're going to be talking about the good old days I think. Here's why. The stories that are out there to try and explain the market rise I think are just that. I think they're stories. I think they're post facto attempts to explain something and make sense of it. It doesn't really hold water. So, let me be clear. I don't think the president, no matter who it is, has really all that much sway over the economy.

I don't like it when people say, "Oh look unemployment is here. That was due to Obama." He didn't have anything to do with that. The president has very little to do with these things. I think Trump will be able to do some things at the margin but even if he threw a trillion dollars at infrastructure, infrastructure's great, you know you spend that money once but let's be clear.

If we take an old bridge and we replace it with a new bridge, we still have one bridge where there used to be one bridge. The knock on overall growth impact of that is zero in essence, right? It's just a replacement function. And we have a lot of replacing we need to do in the U.S. don't get me wrong. I'm a fan of it but the idea that that replacement function is going to lead to this new sustained round of growth, I don't see it.

The things that normally lead to sustained economic growth are things like cheap energy and increased capital expenditures in research and development. I see all of those as missing in action in 2017. I think people wake up and they realize that Trump is a divisive figure. He's going to have to fight to get any tax benefits through. He's going to have to fight to change anything really from a trade standpoint. These fights are going to be protracted. He doesn't wave a magic Trump wand and get it done. That's how I see it. I think that politics is a big messy game and things always move slower than people anticipate and I think that will prove to be true again.

What we're also going to be talking about I think before 2017 is out is the outbreak of more hostilities, war of some kind in the world. The tensions are extremely high right now and I think that this is going to also lead to very high oil prices in the future.

Mike Gleason: Well Chris, thanks so much for your time and your wonderful insights. And we wish you continued success with the book. Now before we let you go, please talk a little bit about the Peak Prosperity site and then obviously let people know how they can get their hands on Prosper, the book that you and Adam Taggart wrote so they can learn more about that if they haven't already read it.

Chris Martenson: I'd love to, Mike, and just to be clear. Even after everything I said I'm still optimistic but I'm realistic. So, at PeakProsperity.com you'll find a community of people there who are realistically sort of parsing through what can we do. And I no longer try and impact what we can do at the big political level but you personally. Prosper is that book. It's a solutions-based book. It says, "Hey given all these things, these risks, what can I do?"

We talk about eight different forms of capital in there. You can find Prosper on Amazon. You can buy it through the web site as well. I would invite people to come by particularly to experience the community of like-minded souls who are talking about what they're doing, what can be done at Peak Prosperity and as well we have a subscription newsletter there for people who like to go a little deeper into these topics.

Mike Gleason: One thing that I've always loved about all your stuff, whether it's the site or the books or the Crash Course that you did a number of years ago that really enlightened me when I first began this journey, is just the way that you arm people with fantastic information and also practical steps. It's been a great honor to speak with you once again and have you enlighten our audience and we certainly appreciate you being so generous with your time today during this holiday shortened week.

On that note I hope you have a wonderful New Year's and all the best to you in 2017 and we'll look forward to catching up with you again before long. Take care.

Chris Martenson: Thank you.

Mike Gleason: Well that will do it for this week. Thanks again to Dr. Chris Martenson of PeakProsperity.com and author of the book Prosper: How To Prepare for the Future and Create a World Worth Inheriting. For more information just go to PeakProsperity.com. Check out the extensive site there and the great online community or check out the book which is also available on Amazon. You definitely will not be disappointed.

And don't forget to check back here next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange. Thanks for listening and Happy New Year everybody.

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