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Inflation Rising; Current Stock Valuations Rely on Infinite Growth
Chris Martenson Warns: Markets Are Making Faulty Assumptions about Growth & Resources
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up Dr. Chris Martenson, of PeakProsperity.com and well-known author of the Crash Course and the book Prosper! joins me for a sensational interview on the recent volatility in stocks and what he thinks it means. Chris also reveals some new facts about depleting global oil supply and when exactly he sees the crisis there finally coming to a head. Stick around for a must hear conversation with Chris Martenson, coming up after this week’s market update.
Precious metals markets got off to a hot start for the month of November. On Thursday, gold gained $20, silver surged to its biggest single day advance of the year, and platinum broke out to a four-month high. The metals erased losses that had occurred earlier in the week.
As of this Friday recording, gold prices come in unchanged on the week at $1,235 an ounce. The silver market shows a 0.7% weekly gain to bring spot prices to $14.86. Platinum is up 4.2% to trade at $873. And finally, palladium prices are now up slightly, or 0.3% for the week and currently settle at $1,114 per ounce.
Perhaps investors are starting to wake up to the threat of inflation. A Wall Street Journal article this week documented a broad range of price hikes consumers now face on everything from food to clothing to travel. In many cases, the cost increases are running significantly higher than the “core” inflation rate the government cites of 2.2%.
Alternative inflation gauges that more fully account for food, energy, healthcare, and housing costs are running substantially higher. The Big Mac indicator – which simply reflects price trends for the famous McDonald’s hamburger – shows prices rising at an annual rate of 4.7%.
Products on grocery store shelves are also showing symptoms of rising inflation. Kellogg’s CEO is warning that 2019 will be more inflationary.
Shoppers can look forward to more expensive cereal and more expensive candy. Hershey’s chocolate bars will be repackaged and sell for a higher price per ounce next year.
Packaging itself is becoming more expensive. Rising costs for the pigment ingredient titanium dioxide is forcing paint makers to slap higher price tags on their products.
It is also costing more to ship products to stores. Trucking costs are up 7% annually, according to the Wall Street Journal. The U.S. Post Office is eyeing a 10% increase in postage prices.
Even though copper and precious metals prices have been slumping most of the year, other metals are on the upswing. For example, manufacturers got hit with a 38% jump in steel prices this year, largely as a consequence of new tariffs imposed by the Trump administration.
Looking ahead to next week, investors will be anxiously awaiting the election results. It’s one of the tightest and most hotly contested mid-term battles for control of Congress in history. And while it’s not our place to tell people how they should vote, we do urge all precious metals investors to learn about the candidates on the ballot in their Congressional district and where they stand on the issues, including monetary issues.
Unfortunately, neither campaign ads nor mainstream media coverage of campaigns do much to foster an informed electorate. These days voters who want to be well-informed turn to the internet. In 2016, the Trump campaign successfully mobilized internet-based alternative media outlets and social media activists to deliver an improbable Election Day victory.
Over the past two years, however, social media sites and giant internet curators Apple and Google have been aggressively silencing alternative political voices on the right. Some voices have been demoted in search results. Others have been outright banned from all the major platforms for having opinions Silicon Valley censors disapprove of.
The man heading up President Donald Trump's 2020 re-election campaign, Brad Parscale, blasted what he called the “Palo Alto mafia”:
CBS This Morning: What about how Facebook is now altering its algorithms?
Brad Parscale: Yeah, so I get asked this a lot. Social media is definitely changing. I think when the left found out that Facebook in a tool built by Silicon Valley helped elect President Trump, they weren't very happy, and so they want to do everything they can to try to prevent conservative voices, and I think that you have multiple platforms that I call the Palo Alto Mafia...
Longtime GOP operative Roger Stone, who has himself been kicked off multiple internet platforms, warns that online repression of political speech could tilt the election results in favor of Democrats:
Roger Stone: We are in the final days before the election, and I don't want to underestimate the role that internet censorship is playing in the Democrat's campaign. What we've seen, without any objection from the mainstream media, is the wholesale censorship of libertarians, conservatives, Trump supporters, Republicans and anyone who isn't a Democrat, seemingly.
After Roger Stone got kicked off Twitter last year for tweeting insults at CNN reporters, he took to posting his thoughts on an alternative social media platform known as Gab. Gab declared itself committed to free speech. This week it got shut down by web host and domain registration companies. Yes, an entire platform de-platformed by faceless internet overlords just ahead of an important election.
Institutional attacks on the free dissemination of information and opinions hurt both voters and investors. Yes, there are bad individuals who push bad ideas on the internet. But the far bigger threat is that of centrally rigged markets and rigged elections.
We urge all precious metals investors to get informed through independent, unfiltered sources that are still available…and to make their voices heard on Election Day.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome in Dr. Chris Martenson 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, it's been too long, but welcome back and thanks for joining us again.
Chris Martenson: Hey Mike. Thank you so much. It's great to be back with you.
Mike Gleason: Well Chris, we continue to follow your work closely, and your Crash Course video remains in our opinion, a must watch for people who are concerned about the road we are all on. You have summarized the problems we face as “expecting infinite growth in an infinite world.” No amount of money printing and Wall Street wizardry can change the fact that resources and energy in particular are limited. Unfortunately people are not always ready to listen, lots of folks tuned in following the 2008 financial crisis, but years have passed, and many Americans have forgotten about those darker times. Home prices and stock prices have been rising and few people are worried, at least with regards to the markets.
It isn't fashionable to be preaching caution, but the need for it is, we think, greater than ever. What are you saying to people who might think 2008 was just another bump in the road and now is not the time to be bearish, Chris?
Chris Martenson: Well, they have a point. They've got 10 years under their belt of the most expansive monetary policy ever, and I got dinged because I saw a lot of bearishness in 2011, and called it at the time, and of course, things just bottomed a little bit and then went up. Same thing in 2016, beautiful head and shoulders top, there was emerging market trouble everywhere, bonds were exploding overseas, and the dollar was spiking, as carry trades unwound, called that too, said, "Uh oh, this looks bad" and then was 50-degree rocket ride of monthly gains on U.S. equities after that.
Well, now we have the data, Mike. We look back, we say, "Oh, the central banks just printed more, then even more, and then even more." Most people mistakenly think the crisis was in 2008, they did a few extraordinary things on the fiscal side, they had TARP on the monetary side, there was all this quantitative easing, and then that's in the rear view.
But the truth is, the largest ever amount of printing happened in 2015, '16, and '17. Those in '16 and '17 in particular. Those were the years. If you want to understand why things denominated in freshly printed money go up in price, you don't need a PhD in economics. It's just how it works. And the central banks printed like crazy, tens of trillions, shoved it into the markets and guess what happened? Exactly what we predicted in the Crash Course in 2008.
The rich got richer, the people who had exposure and who could take out lots of leverage to ride that gravy train did great. 300+ foot yacht sales are through the roof, Gulfstream 6s look good, in pricing terms. Art, high end wines, large gems, you name it. All the things that rich people covet, of course those have gone up hugely in price because what the central banks did is they redistributed wealth from everybody, stole from the future as well, not contentious to take from people today, and handed it to a very few rich people.
Hey, it's good gig if you can get it. They love you at Davos when you go there. Janet Yellen shows up, Bernanke. Hey, they get fed by people who are thrilled with all the money they've gotten, but for people who understand monetary mechanisms, here's all you need to understand. The central banks cannot print prosperity. They can redistribute it, they can take purchasing power from A and give it to B, and they did that.
So, if you look into the story, again, the data's all there. It's depressing as all get out. The middle class has gotten destroyed, eviscerated, the entire generation of Millennials is struggling, they can't buy homes and they're under loads of debt and all this stuff. This is what happened to our country. So, when I look at that, started to make a long answer endless, but Mike, when somebody says, "Hey, why isn't it different this time?" I just pull up a 20 year chart of the Dow, you see this big bump in 2000, you see this bigger bump in 2007, and now we're on this monster bump here in 2018.
Each of those was because the Federal Reserve decided they were geniuses, they could replace business cycles with credit cycles, they've crammed credit into every possible crevice of every economy and every balance sheet they could find, and now we're supposed to believe that this all works out. I'm not a believer in that.
Mike Gleason: Your readers and people listening to the show aren't among those likely to be totally blindsided by the next crash. People can accuse us of being early, but that is very different than being wrong. Now, you wrote a great piece last week titled, Is The Long Anticipated Crash Now Upon Us? You like many of the people here, and among our client base, have been wondering when the reckoning might be coming. In that article, Chris, you make note of some very alarming data points, the recent selling in U.S. stocks is just one of them. Can you summarize for our listeners the kinds of developments you're watching around the world and why the selling we've seen in the last few weeks might be a bit more ominous than most people think?
Chris Martenson: Well sure. Bubble tops are always impossible to predict and they're very confusing at the top, and the bigger they are, the more confusing they are. So, this isn't even really just a bubble that's been going on for 10 years. This one, Mike, is for all the marbles. We look at this as a giant credit experiment that began in the late 1970s, early 1980s, and the experiment was this. Can we constantly increase debt at about twice the rate of the underlying economic growth?
2008 said no, they said, "Wait a minute, we'll try that again" and here we are. So, when we're looking for clear signs of a bubble top, they're hard to come by. Just this week, as we're recording this here on Halloween, what we're seeing this past week is all sorts of mishmash of risk on and risk off signs. Risk on, like we're seeing equities really rally here strongly in these last couple of days.
There wasn't a big move into treasuries which is usually telling you that risk is coming off. We haven't seen gold spike. That's saying again, risk off. The junk bonds have not really sold off. So, that's risk on. But oil is really weakening, so we might say, "Oh, contraction, risk off." It's a real mix of stuff.
To cut through that, what we do is we employ a model we call outside-in. It operates under the very simple principle that when the printing finally slows down and stops, what you get is you get the edges are where you detect the trouble first, right? You don't find out if billionaires are spending as much on jet fuel. That's not where you look. You look at the Dollar Store and how they're doing. You don't look at Germany first, you would look at say Greece or Turkey or Argentina first.
Looking at that outside-in, what we see here at this part of 2018, there's bear markets and equities all across the emerging markets space. There's all kinds of difficulties in bond yields and dollar flows in those emerging markets, and so that says, "Okay, early liquidity trouble out there." But it hasn't quite made it back to the core yet. So, the summary of that piece was, "Well no, probably hasn't quite arrived yet, because yeah, we saw some nice volatility in stocks but the junk created debt didn't move at all.”
So, when I don't see a confirming signal like that, I know we're not quite there yet, but I know it's coming.
Mike Gleason: Chris, as we're talking here on Wednesday afternoon as you noted, it's another big day of wild price moves in the stock market. I'm trying to remember the last time we didn't have a three digit move up or down. In the Dow, for instance, I think it's just the other day we had something like an 800+ point price swing from high to low intraday on the Dow. Are these big price swings indicative of an unstable market in your view? Because our thought is that healthy markets generally don't look like this.
Chris Martenson: Well002C that's true. There's a lot of back and forth and scrambling around, and of course, there's just an absolute legion of dip buyers out there who are ready to pounce on this. This feels like to me a lot like what we saw in 2007 in the markets. Not exactly the same, but close enough that in 2007, we saw a lot of these violent swings again, and these are, in many cases, just distributive swings.
Wall Street has a real insight edge on this stuff. One company alone, Citadel Securities, is responsible for about 20% of all the order flow in terms of placing quotes. Really heavy concentrated players out there who see the book of trade very differently from everybody else. They can easily see what the long/short balances are, they know where all the options leverage is, they know all that stuff.
Plus you have central banks winging around in here right now. The Swiss National Bank just came out a few minutes ago and said, "Oh, the balance sheet should be used to control shocks" which hint, hint, means buy more equities. We know we've got all these big players in there, but this game can't really turnaround until all the dumb money's been sucked in.
I'm convinced that there's an entire generation now practically, of people who've been trained to buy the dips, and they're just going to throw their money in on this thing, and Lucy will pull the football away again, Charlie Brown will take a swing and miss, and Wall Street will say, "Want to play again?"
Really, as far as I'm seeing this right now, this kind of volatility is what you see at regime change moments. Now, the caution I have here, which I always have to have, especially after 2011 and '16 is, I don't know what the central banks are doing behind the scenes. I don't know how much money they're printing and throwing into these markets right now, and I don't know if they're going to blink and decide to just go forward with more QE or extend whatever they're doing.
They could do that, I don't think they will politically, it's going to be hard, you have to get into the politics of each region, but let's be clear. This whole market environment, bonds and stocks, and real estate as an ancillary effect, have been completely driven by central bank printing. They've decided they can't print anymore for whatever reasons, and that's currently where we are, but that could change at any time.
Mike Gleason: In the precious metals business, we have learned that is one thing to have solid arguments to make, the federal government borrows too much, central bankers make one policy error after another, fiat currencies are inevitably corrupted and die. We can make a pretty good case for things like that, but it turns out timing matters a great deal. It is good to carefully evaluate fundamentals, but it would be nice to be able to predict with just a little accuracy when to expect major developments as we travel through this road of national insolvency. What are your thoughts about timing? Can a person know enough to make decent predictions, or is timing events largely unknowable and therefore something we shouldn't waste too much time on?
Chris Martenson: Well, they're largely unknowable, but the backside of that is this. The longer these shenanigans continue, the worse the eventual fall's going to be. Now, people will take the other side of that and say, "Hey, that hasn't happened" but here's what different in this story. This is where we have to wander out of just economics and finance into a second E, which is energy.
If you follow this space as closely as I do, you know that worldwide discoveries have been not just low, but the lowest in the past four years now, Mike. The lowest in the past four years that they've been in the entire data series since the 1920s. We're just not finding it. And if you don't find it, you can't pump it. There's about a five year to seven-year lag between a discovery and its maximum production, so we know that the past four years of low finds will translate about five to seven years downline, into low production at that point in time. That's part one.
Part two, the shale miracle. Please dig into that. Take a look. These companies have already drilled through most of the sweet spots, they're already seeing what are called child well interruptions that are interrupting the parent wells, meaning there's a main well in the formation. You start trying to sneak other ones in, those are the children, and they're stealing from the parents. So, that tells you that we're closer to the end than the beginning of this story, by the time they're already starting to snake those child wells in.
And as well, those companies, the shale companies, bless their hearts, very good people, I know a bunch who work in that industry, great technology, hardworking people, but they haven't figured out how to make money at it yet. Just negative cash flows, year after year after year, that's going to bite at some point in time. As we look forward, where's the hard end of this? When you ask about timing, to me, oil is the master resource, barring some geopolitical event. I don't know, Iran decides to shut down the Strait of Hormuz and has success at that.
Leaving something like that aside, I'm looking at somewhere between the year 2020 to 2022 is where that oil monster rears its head, and that's where I think the wheels really fall off of all of this. It's why I tell people, you've got to start getting prepared now. It's a long road to get really truly prepared. I mean, emotionally, physically, spiritually, financially, materially, all that stuff.
Because once the oil monster really rears its head, that's where all the hopes and dreams that we're going to have growth into the future, infinite growth, we're always going to have growth, that falls apart. When that falls apart, is Netflix really worth the price earnings of 200 or Twitter price earnings of 100, or Amazon a price earnings of 200-300, whatever it happens to be at? The answer's no. You can only justify these really high earnings multiples on the stock side if you have a long uninterrupted future of growth that you can stare down and believe in.
Likewise, a world with 250 trillion in debt and three to four times that much in related associated derivatives, those only deserve the prices they have if you believe they're going to be paid back in the future. Where do you pay back things in the future from, with interest? Well, from growth. Those two areas, stocks and bonds, are both absolutely not looking at anything other than at least another 50 to 75 years of uninterrupted growth, and Mike, I for the life of me, I can't tell you where they find that. Because it's not there in the resource data, no way.
Mike Gleason: Now, interest rate policy is certainly driving a lot of markets and maybe some of the volatility in equities as a result of the market maybe coming to grips with the fact that The Fed appears as though they will continue to hike and fears over those rate increases perhaps going too far to the detriment of the economy. Let's get your thoughts on The Fed, this pickle that they're in, and where you see monetary policy headed as we close the year and turn the calendar to 2019, and then what effect you think it will have on the markets, and also gold and silver specifically.
Chris Martenson: Well, right now we can't just look at The Fed in isolation. You have to see what it's doing in relation to all the other central banks. The Federal Reserve stopped expanding its balance sheet late 2014, early 2015. It's flatlined for a while and now it's actively reducing it by a non-insignificant amount, up to 50 billion a month, allowing the mortgage backed securities primarily to roll off the balance sheet, great.
That sounds like 50 billion in reduction, but in the meantime, the European Central Bank has continued to print through all of that. This I think is a key turning point because just this past week for the first time since I've been watching in the past three or four years, the European Central Bank balance sheet actually went into reverse. Not a lot, just a few billion, but it's a first.
That's interesting and it's really flattened out and they are committed to going to zero additional QE purchases by the end of 2018. In 2019, we should be in a negative monetary environment. That's going to really start to pinch liquidity, I think we're going to continue to see rising interest rates, and that's something that as your listeners know better than anybody, the US Federal Government's now printing some of its largest deficits ever.
I think there's a recession coming that will be publicly recognized in the first maybe second half of 2019, but probably the first half, and with that, we will see the deficit spending of the United States government blow out even further. That'll probably result in even higher interest rates, and this leaves out the idea that China doesn't somehow get completely annoyed with the US and decide to unwind its sizable treasury holdings.
So, with interest rates rising, we should see more volatility in the stock market, people have a real choice now. Would I rather get 2.33% on three months US T-Bills, or would I rather get less than that in dividend yields from the S&P 500? To me, easy choice to make.
People have a choice now, and this all gets back to the precious metals which at some point I think either rising interest rates or rising price of oil, or both, will come together and will really start to slam into the financial system. It'll create systemic shocks, we might see sovereign failures at some point in the future. We'll certainly see corporate failures. Those have already started in China and with those sorts of failures, that's when the precious metals tend to do well.
Because as your listeners know, gold is the only monetary asset I know about, that's not simultaneously somebody else's liability, unless we want to start talking cryptocurrencies.
Mike Gleason: Yeah, it's the ultimate safe haven, and yeah, maybe some of those events will provide the catalysts. Switching gears here a little bit, over the last several years, there appears to be lots of momentum building on the anti-globalism front. Trump here in the US one a surprise election a couple of years ago, Le Pen in France had a very strong showing in their election last year, Angela Merkel in Germany has seen her opponents galvanized as immigration continues to be a major concern of many and there are other examples of that, and a call for a return of nationalism throughout many European countries.
Brazil just this week elected a new president who is being dubbed by some as an agent of change, similar to Trump was here. What are your thoughts as you witness this movement, Chris, and what might it mean going forward?
Chris Martenson: Well, this is something that we've been chronicling for a long time. I actually put a video out called Rats In A Cage, which seeks to explain at least some of this. I don't see the politics in terms of left versus right. I see it in terms of average people who are being absolutely crushed by circumstances. Those economic circumstances of course, are a mix of bad policy, worse monetary policies, and things like that.
Yeah, Brexit, the Catalonia breakaway, what we're seeing in the Merkel elections, Brazil, Trump, all of those fit into the same pattern for me, which you're pulling up, which is that people are increasingly really unhappy with the circumstances, because primarily as I mentioned, when a central bank prints, it takes purchasing power that has to come from somewhere.
They're not magicians making stuff out of thin air. All they really can do is steal somebody's purchasing power and give it to somebody else. As they do that, they're sucking the economic oxygen away from all of the broad swath of people in the middle classes, and they're getting unhappy, so they vote in new people. This happened in Italy as well, so watching that, my prediction is we're going to see more of that, we're going to see people increasingly voice this displeasure, they're increasingly unhappy.
The media's trying to get people to pretend as if the problem they have is with each other, and look at all the rallies you've had, like anti-Trump and anti-Nazis, and pro this or pro that. And how many have you seen against a predatory sick care system that sees my insurance premiums go up 20% in a year? Where's that rally, right? Where's the rally against the absolute oversights and sins of omission and commission being committed by the mainstream media on a daily basis, right?
Where's the outrage over considering Saudi Arabia our very best friends, who are busy doing horrible crimes in Yemen at this point in time? Those are surprisingly missing, because the media's doing a great job keeping people thinking that the other people they see around them are their sources of their troubles, and they're not. Fortunately people are catching on. The only thing I think we could do at the voting booth would really be to send any incumbent packing. I don't care how much you think they're on your side, and start over.
But that's such a long road. I think we've got a crash coming way before we can fix any of this politically, but that political unrest you just pointed out is going to be creating its own market shocks before too much longer.
Mike Gleason: Yeah, it's certainly an upset for the status quo and obviously the markets like the status quo, so we'll see how that all plays out. Well, as we begin to wrap up Chris, any final comments for our audience today? Anything that you're focused on that maybe we haven't covered already? Do you have any advice for folks out there who are watching these recent events unfold and perhaps feeling some level of uncertainty about the future of the things? Anything you care to share with us on any of those fronts as we close?
Chris Martenson: Absolutely. The book that Adam Taggart and I wrote, we coauthored a book called Prosper! It covers eight forms of capital, it's a great starting point. If somebody's anxious about circumstances right now, Mike, that's because what they know and what they're doing, there's a gap between those two things. Well, you can't unknow what you've already learned, so you've got to do different things and Prosper!'s all about the actions people can and should be taking to make themselves resilient for this really uncertain future that's coming.
Not about greed, not about fear, it's just very practical, prudent, adult sized things, which say, "Yep, it's time. This story's a little closer to the end than the beginning, there's a lot of volatility coming, and there's things that everybody can do to be prepared and to reduce any anxiety they happen to be feeling."
Mike Gleason: Yeah, well that's very good advice, and hope people take you up on that, and get prepared. You're not going to be upset if you did that, but you certainly will be in a tight spot if you don't, and something happens like we're expecting. Well Chris, thanks very much for your time. It was great having you back on. Before we sign off here, please tell our listeners about the Peak Prosperity site, what it is they'll find there, and anything else that they ought to know about you, your books, or maybe the crash course and so on.
Chris Martenson: All right. Well Mike, first thanks for the opportunity to come on and talk with your listeners. At PeakProsperity.com, you will find all this commentary about the three Es, the economy, energy, the environment. We have regular articles going up all the time. We also have a subscription newsletter service for people who want to go a little deeper into the data, into the understanding, because we think that understanding and education are your most powerful tools today if you couple that with action.
We like to give actionable advice and insights, and that's what we're all about. So thanks for letting me talk to your listeners about that.
Mike Gleason: Well, excellent stuff as always, Chris. It's been great to talk to you again and thanks for being so generous with your time today. Enjoy the fall and I look forward to catching up with you again before long. Thanks very much.
Chris Martenson: Likewise, Mike.
Mike Gleason: Well, that will do it this week. Thanks again to Dr. Chris Martenson of PeakProsperity.com and co-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 get a copy of the book which is available there and also 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 have great weekend everybody.