Sen. Cruz’s Inflation Tax Bill; Jim Rickards Forecasts New Financial Crisis

Mike Gleason: It is my great privilege now to be joined by James Rickards. Mr. Rickards is Editor of Strategic Intelligence, a monthly newsletter and Director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He’s also the author of several bestselling books including The Death of Money, Currency Wars, The New Case for Gold and The Road to Ruin. In addition to his achievements as a writer and author, Jim is also a portfolio manager, lawyer and renowned economic commentator, having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN, just to name a few. And we’re happy to have him back on the Money Metals Podcast.

Jim, thanks for coming on with us again today. We really appreciate your time as always and how are you?

Jim Rickards: I’m doing great Mike, great to be with you. Thank you.

Mike Gleason: Well Jim, I figure a good place to start here is with one of your most recent books. We want to get your take on the state of the world economy. In your book titled The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, you make some very interesting comments. Now while the financial media is talking about booming stock markets and accelerating GDP growth, you aren’t quite as optimistic. We both know that most of the growth we’ve seen in recent years has been built with huge amounts of central bank stimulus and the fundamental problems that drove the last financial crisis have hardly been resolved. In fact, you think the next financial catastrophe isn’t too far away and many among the elite are getting ready for it. If you can, briefly lay out some of what you’ve been seeing.

Jim Rickards: Sure Mike, you touched on two different threads. One is, let’s call it the short to intermediate term, which is how’s the economy doing? What would the forecast be for the year ahead? What do I think about stocks and so forth? That’s one part of the analysis, but the other one is a little bigger and a little deeper, which is what about another major financial crisis, a liquidity crisis, global financial panic and what would the response function be to that.

Let me separate. They’re related because, I mean the point I always make is that there’s a difference between a business cycle recession and a financial panic. They’re two different things. They can go together, but they don’t have to. For example, October 29, 1987, the Stock Market fell 22% in one day. In today’s Dow terms that would be the equivalent of 5,000 Dow points, so we’re at 26,000 or whatever, as we speak, a 22% drop would take it down about 5,000 points. You and I both know that if the Dow Jones fell 500 points that would be all anybody would hear about or talk about. Well, imagine 5,000 points. Well, that actually happened in percentage terms in October 1987. So, that’s a financial panic, but there was no recession. The economy was fine and we pulled out of that in a couple of days. Actually after the panic, it wasn’t such a bad time to buy and stocks rallied back. Then, for example in 1990, you had a normal business cycle recession. Unemployment went up. There were some defaults and all that, but there was no financial panic.

In 2008, you had both. You had a recession that began in 2007 and lasted until 2009 and you had a financial panic that reached a peak in September-October 2008 with Lehman and AIG, so they’re separate things. They can run together. Let’s separate them and talk about the business cycle. I’m not as optimistic on the economy right now. I know there’s a lot of hoopla. We just had the big Trump Tax Bill and the Stock Market’s reaching all time highs. I mean, I read the tape. I get all that, but there are a lot headwinds in this economy. There’s good evidence that the Fed is over-tightening.

Remember the Fed is doing two things at once that they’ve never done before. They’re raising rates. I mean, they’ve done that many times, but they’re raising rates, but at the same time, they’re reducing their balance sheet. This is the opposite of QE. I’m sure a lot of listeners are familiar with QE, Quantatative Easing, which is money printing. That’s all it is. And they do it by buying bonds. Then when they pay for the bonds from the dealers, they do it with money that comes out of thin air. That’s how they expand the money supply. Well, they did that starting in 2008 all the way through until 2013, and then they tapered it off and the taper was over by the end of 2014, but they were still buying bonds. So, that was six years of bond buying. They expanded their balance sheet from $800 billion to $4.4 trillion.

Well, now they’re putting that in reverse. They grabbed the gear and they shifted it into reverse and they’re actually not dumping bonds. They’re not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It’s the opposite of money printing. So, the Fed’s are actually destroying money, actually reducing the money supply, so they’re raising rates and destroying money at the same time. It’s a double whammy of tightening and I don’t believe the U.S. economy’s nearly as strong as the Fed believes. They rely on what’s called the “Phillips Curve,” which says unemployment’s low, that’s a constraint and wages are going to go up and inflation is right around the corner. And that’s part of the reason they’re tightening, but there are a lot of flaws in that theory.

So, the Fed’s are tightening for the wrong reason. They are tightening at the wrong time and there’s a lot of evidence that a lot of the growth in the fourth quarter was consumption driven, but that was debt driven. People charged up their credit cards, consumer debt spiked. The savings rate is near a very long-term low. It doesn’t look sustainable, so lots of reasons to think that the Fed’s going to overdo it, get it wrong, tighten, throw the economy either into a recession or very low growth with disinflation, so I’m just not buying the inflation “happy days are here again” story.

There’s also good reason to believe that the Tax Bill will not be as stimulative as people expect. All that’s truly going on is the running up the deficit by another trillion dollars and we’re already way into the danger zone and then that’s actually a drag on growth. So, there’s a good reason to think the economy is going to slow, that by itself would take the wind out of the Stock Market and close it at the potentially very serious Stock Market correction, at least 10%, maybe as much as 20%. We’re talking about going down as I say 5,000 or 6,000 points on the Dow before the end of the year, so that’s one scenario.

The scenario I talk about in my book really involves a financial panic. Now, the thing there is that these are not that rare. I already mentioned the one, really two-day panic in 1987, but in 1994 you had the Mexico Tequila Crisis. In 1997, you had the Asian Peninsula Crisis. In 1998, you had the Russia Long-Term Capital Management Crisis. In 2000, you had the dot.com meltdown. In 2007, the mortgage meltdown. In 2008, the financial panic. These things happen every five, six, seven years, not like clockwork, but that’s a typical tempo for these kinds of meltdowns and it’s been nine years since the last one. So, nobody should be surprised if it happens tomorrow. I’m not predicting it will happen tomorrow. I’m just saying nobody should be surprised if it does, whether it’s tomorrow, or next month or next year, or even a year and a half from now, don’t think for one minute that we’re living in a world free of financial panics.

By the way, these two things could happen together. You could have a slowdown that leads to a financial crisis, a replay of 2008. But here’s the difference and this is really the point of your question, Mike. In 1998, we had a financial panic and Wall Street got together and bailed out the Hedge Fund Long Term Capital Management. In 2008, we had a financial panic and the Central Banks got together and bailed out Wall Street, so each bailout gets bigger than the one before it. In the next panic, whether it’s this year or next year, who’s going to bail out the Central Banks. In other words, each panic’s bigger than the one before. Each response is bigger than the one before going down this chronological sequence.

The next one is going to be the biggest of all. It’s going to be bigger than the Central Banks and you’re only going to have one place to turn. If you had to get global liquidity right now, the Fed’s at that one and half percent in terms of the target Fed funds rate, so they most they could cut is one and a half percent to get back to zero. There’s good evidence that to get the U.S. economy out of a recession, you have to cut interest rates three or four percent. Well, how can you cut them three percent when you’re only at one and a quarter, one and a half percent. Well, the answer is you can’t, so then what’d you do? Well, then you go to QE, but they already did that.

They haven’t unwound the QE. They started to and that’s what I mentioned, but they haven’t unwound it. The balance sheet is still around four trillion dollars, so what’d going to go to eight trillion, twelve trillion? I mean, some people would say, “Yeah, what’s the problem.” Those are the modern, monetary theorists, Stephanie Calvin, Paul McCulley, Warren Mosler. There’re a bunch of them that think that there’s no limit in the amount of money the Fed can print, but there is a limit. It’s not a legal limit. Legally the Fed could do it, but there’s a psychological limit. There’s an invisible competence boundary that you cross when people just say “You know what, I’m out of here. Get me out of dollars. Get me into gold, silver, fine art, land. Whatever. Crypto-currencies, if you like. Whatever it might be, but get me into something other than dollars because I’ve lost confidence in the dollar.” And we’ve seen that before also.

So, putting that all together, in the next financial panic and nobody should be surprised if it happens tomorrow, it’s going to be bigger than the Central Banks.

They’re going to have to freeze the system. First, starting with money market funds, then bank accounts, then stock exchanges, they might reprogram the ATMs to let you have $300 a day for gas and groceries. They’ll say, “well, why do you need more than $300 a day to get some food and gas in your car? Why do you need more than that? We can’t let you take all your money out of the bank. We can’t let you take your money out of the money market funds. We can let you sell your stocks.” And I describe all this in the book in detail with a lot of endnotes. You don’t have to read the endnotes unless you want to, but this is all documented. It’s all publicly available. It’s not some science fiction scenario. This plan is actually in place and I describe how.

Just to wrap up, I expect a weaker economy than the mainstream in 2018. Perhaps, a stock market crashing based on that alone. I also expect another financial panic. It’s impossible to say when, but eight years on, nine years on, I would say sooner than later. And this response function is going to be something that people haven’t seen since the 1930s.

Mike Gleason: Now, let’s talk specifically about gold, safe haven assets, including metals are way of vogue these days, at least among the mainstream public. Now, most investors likely will be flatfooted and probably won’t see the next financial crisis coming just like the one in 2008, until it’s too late. Confidence in the U.S. dollar and the financial system is hard to shake without plenty of good evidence that both are in trouble. We’re even seeing some gold bugs beginning to lose faith. They know that there is plenty of risk out there that you just laid out, but they are growing tired of watching just about everything outperform precious metals. What are you saying these days to people who might be thinking about selling gold and say, joining the party in the stock markets?

Jim Rickards: Well, let me spend some time on that, but just to say a kind word about the people you’re describing. Look, gold just finished a four-year plus bear market. It lasted from August 2011 to December 2015. In that bear market, gold went down about 45% peak to trough, and if you use the about $240 price from 1999 and just scale that up to $1,900 and then back down again to $1,050, which is where it was in December 2015, that was a 50% retracement. And by the way, my friend Jim Rogers, one of the greatest commodities traders in history, co-founder of the Quantum Fund with George Soros, a legendary commodities trader, he said to me … and he has a lot of gold. He expects gold to go much higher, as do I, but he said, Jim, “Nothing goes from here to there.” Meaning, he’s reaching way up to the sky up into outer space. He says, “Nothing goes from here to there without a 50% retracement along the way.”

And I think that was very good advice. Well, okay, but we’ve had the 50% retracement. That’s behind us. We’re in a new bull market now. There was a bull market from August 1971 to January 1980 and gold went up over 2,000%. From January 1980 to August 1999, there was a very long, 20-year grind it down bear market, and gold went down about 70%. Then you had a new bull market that lasted from August 1999 to August 2011 and in that 12-year bull market, gold went up over 700%. Then you had another bear market from August 2011 to December 2015 and as I said, gold went down 45%. We’re in a new bull market. It started in December 2015.

Now, here are the facts, gold goes up and down. Lead’s volatile and we know there’s manipulation. People get discouraged and they buy gold and then some hedge fund or China comes along in the gold futures market and slams the price down. “Oh, gee, why did I buy it?” I get all that. I understand the discouragement. I understand how difficult it is to watch stocks go up and Bitcoin go up and I’m sitting here with gold and it just seems to be going sideways, but it’s not true. In 2016, gold went up over 8%. In 2017, gold went up over 13%. So far in 2018, gold is up 3%. You take the entire period from the bottom of the last bear market to the beginning of the bull market, December 2015 to today, gold is up over 25%. It’s been one of the best performing asset classes of all the major asset classes. It’s not crazy like Bitcoin, but Bitcoin’s collapsing, which I also predicted some time ago.

So, the truth of the matter is 2016-2017 are the first back-to-back years of gold gaining since 2011-2012, although at that point, it was already off the top. It’s more a statistical anomaly that gold went up in the year 2011. Yeah, it did, but it was way down, way off the peak in September of that year. But now we have two back-to-back years of gold going up very significantly. We’re in year three, 2018, is year three of this bull market. It’s off to a very nice start. The fundamentals are good. Their technicals are good. The supply and demand situation is good. We haven’t even gotten into other potential catalysts, including War with North Korea, loss of confidence in the dollar, financial panic. Even a normal business cycle recession or if inflation gets out of control, there’s just a whole list of things that are going to drive gold higher.

And the last point I want to make, Mike, is that gold is doing this performance against headwinds. The Fed has been raising rates. When you raise nominal rates and you tighten real rates, that’s normally a very difficult environment for gold and yet, gold’s going up anyway. Can you imagine what’s going to happen when the Fed has to back off… because right now, as I said, they’re over-tightening. When this economy slows, and that data starts rolling in later in the first quarter and early second quarter of 2018, the Fed’s going to do what they call “pause.” It doesn’t mean they’re going cut rates. That’s somewhere down the road, but they pause, which means that they …

Right now, they’re like clockwork. They’re going to raise every March, June, September, December – 25 basis points each time, boom, boom, boom, boom like clockwork. But, every now and then they don’t. They skip. They pause. Well, if your expectation is they’re going to raise and then they don’t, they pause, that’s a form of ease. It’s ease relative to expectations. That’s what’s going to happen later this year. All of a sudden, this headwind’s going to turn into a tailwind and gold’s going to get an even bigger boost. I see it going to $1,400 over the course of this year, perhaps higher. My long-term forecast for gold, of course, is $10,000 an ounce, but that’s … and I’m not backing away from that. That’s just simple math. That’s the implied noninflationary price of gold if you need to use gold to restore confidence in a monetary system in a financial panic or liquidity crisis where people have lost confidence. That’s not some made up number. That number is actually fairly easy to calculate, but you don’t go there overnight. You got to get to $2,000 and $5,000 before you get to $10,000.

I think right now, we’re in a new bull market. It’s going to run for years. We’ve got that momentum. We’re off the bottom, but people are always most discouraged at the bottom, right? Well, that’s the time you should buy. It’s just human nature. I’m not faulting anyone. I’m not criticizing anyone, it’s just human nature to say, “Oh man, I’m so beaten down. I’m so sick of this. I’m so tired of this.” Well, that’s usually the time to buy and guess what, it is.

Mike Gleason: Jim, you’re a very well-traveled individual who has his finger on the pulse of what’s going on, not just here in the states, but around the world. I know you were just in Europe. Is complacency an issue all over the globe or is it just a Western World thing or an American thing? What are people thinking and doing in other parts of the world? I know that’s a pretty broad question, but just speak to complacency and what others are doing here to protect themselves for what may be coming.

Jim Rickards: Well, it’s definitely worse in the United States. I would say that if you go to China … I was in Beijing not long ago and the guy I was with said, “Hey, I want to show you something.” We drove around in almost like a sleazy neighborhood in Beijing, but we turn the corner and there’s this thing. It’s lit up like Time Square. It was a gold emporium – we were there pretty late at night, I don’t know if it was open 24 hours a day – but it was certainly open after normal business hours. It’s lit up like a football stadium and there’s all red carpets and inside they had these gold hostesses and they were wearing these long silk dresses and they were walking around with trays of bars and coins and jewelry and display cases everywhere. And they were doing a huge business, so gold is very much in demand in China, both for personal wealth and officially.

The thing you have to remember about China, they don’t have that many options. They run up huge trade surpluses. Individuals are making money, but they don’t have that many choices to invest in. They can’t invest in foreign stocks. They can’t take the money out of the country, at least not very easily the way we can. Like if Americans want to invest in emerging markets or Turkey or Europe or Japan, it’s easy to do. Whether it’s a good idea or not is a separate issue, but it’s not hard to do. But that’s not true in China. They’re pretty much confined to their own stock market and their own real estate market, both of which have behaved as bubbles and have collapsed from time to time. People look around, what else can I invest in? I think stocks are a bubble. I think real estate’s a bubble. I can’t invest overseas. I don’t want to leave my money in the bank. What can I do? Well, you can buy gold and they do. And the government’s buying gold as well.

By the way, Russia and China have both tripled their gold reserves in the last 10 years. If you use 2006, slightly over 10 years. If you use 2006 as a base line, Russia has gone from 600 tons to almost 2,000 tons. China, same thing, from 600 tons to almost 2,000 tons. Although, China no doubt has more … the 2,000-ton figure is the official number, but they actually have a lot more than that that they keep off the books. The country is officially buying it, but the people are buying it also. I see a lot of interest in Australia and we just spent 10 days in Australia very recently and I see the same interest in Europe. The people who don’t get it are Americans. I don’t know why. Maybe it’s because we have the dollar and the dollar’s the major global reserve currency. Maybe Americans don’t get out enough.

There’s a surprising statistic, only 16% of Americans even have passports, 16%. That’s the percentage who even have passports. Of those, most of them no doubt use them to go to the Caribbean, or Canada, or Mexico, or Bermuda. Maybe they take a trip to London or Paris once a year, Italy or something on a vacation. The number of Americans who have actually been to China or for that matter, Japan, Australia, or Africa, or anywhere else, is very, very few. Look, I don’t blame people if they haven’t been around, but you should understand that it’s a big world out there and there’s an enormous demand for gold, but I don’t see it in America. I think Americans will be the last to catch on.

One of my concerns and one of the things I tell people about is when this financial panic hits and the price of gold starts skyrocketing and, of course, you’ll wish you bought it sooner, but then people will say, “I want to get some.” They’ll actually find they can’t get it, that the dealers will be backordered. The mint will be back ordered. Maybe big hedge funds or institutions will be able to lay their hands on some, but you’ll actually find that it’s physically hard to get. So, that’s one more reason to buy it now independent of the price. I recommend it. I own it. I advise people to own it. I recommend physical gold. Gold mining shares, if they’re selective, they’re a leverage play on gold, but I do recommend physical gold and safe non-bank stores. Don’t put it in a bank, but there’re plenty of reliable insured, bonded, vault operators out there that you can rely on. But get it now while you can, the price is good and it’s available and if you wait, neither one of those things may be true.

Mike Gleason: That’s certainly the world we live in as a national dealer, we’ve seen many times where it has been difficult to come by and what we’ve seen in the past might be just a glimpse of what’s to come when it gets really crazy.

Well, finally Jim, as we begin to close, any thoughts on what’s ahead for gold maybe more specifically throughout the course of the year, some of these headwinds and tailwinds that you’re talking about coming into play? Maybe comment on the cryptocurrencies. You touched on that briefly. I know have an opinion or two about that. Basically, talk about these anti-dollar investments and where you see things headed in those asset classes where you see the most value and so forth as we begin to wrap up.

Jim Rickards: Well, I like gold. I like silver. I talk about gold a lot and I write about it and I give presentations. Usually, the first question, is well, “Thank you Jim. What do you think about silver?” The answer is I love silver. I think silver has a place side by side with gold. There’s no way gold’s going to go to $3,000, $4,000 an ounce without silver chugging its way to $40, $50 an ounce. Silver’s dynamics are a little bit different than gold because there are some industrial applications, but there’s no question that it’s a monetary metal and it’s along for the ride. And I always recommend that people have a “monster box.” A monster box is 500 American Silver Eagles, fine pure silver that comes directly from the Mint. It’s in a nice Treasury green case. It’s sealed. It’s actually wrapped up with a compression strap that United States Mint on it.

The 500 coins at retailer commission will run you about $10,000, but everybody should have one. To me, it’s like battery and flashlights. Hurricane’s coming, you get your batteries, your flashlights, your water. Maybe you take a few other precautions. You ought to have a monster box of silver because the power grid goes down, which could happen for a lot of reasons and not just natural disasters. The ATMs are shut and the credit cards don’t work and the debit cards don’t work and the cryptocurrencies don’t work. You walk in with five or six silver coins, you’ll be able to get groceries for your family. Believe me, that’ll be legal tender when the time comes, so I recommend that, gold and silver.

As far as cryptos are concerned, I have spent a lot of time researching this. I get beaten up on Twitter all the time. The trolls are out. You’re a dinosaur. You don’t understand it. All that stuff. In my more sarcastic modes, I’ll usually say something like, “I was writing computer code before you were born,” which is true in the vast majority of the cases, but my point there, I understand the technology perfectly. I read technical papers. I have the privilege of working with technologists.

I’ve been inside the IBM Idea laboratory. I’ve met the head of their hyper ledger fabric, a version 10 Project that they contributed to The Linux Foundation. Hyper ledger fabric is part of the distributed ledger technology. That’s the successor to the old coin keep Blockchain that IBM is working on. There’re are new coins coming out all the time, so I get the technology. But, my point is a lot of these technologists don’t understand monetary economics. You have to understand both. You have to understand the technology for sure and you have to understand monetary economics. If your goal is to turn digital technology into money, you need to understand both, and I do have a foot in both camps, but a lot of the technologists don’t really understand the money side of it.

So, here’s what I would say. There’s just mass, mass confusion. People are, and I don’t blame people. This is all new. It’s changing by the week. It’s changing by the day, but people don’t separate between the coin and the platform of the technology behind it. They take Bitcoin and the Bitcoin blockchain and they’re like, “Well, they’re the same thing.” Well, no they’re not. The Bitcoin is a token or coin that you can in theory use as currency, but the Blockchain is your foundation. By the way, there’s more than one Blockchain. Somebody’s yelling at me the other day about the Bitcoin Blockchain. I said, “Yeah, there’s a Bitcoin blockchain, but there are a hundred Blockchains. There’re probably a thousand blockchains out there at this point and they’re not all the same.

Not all crypto-currencies are the same. Not all blockchains are the same and there are crypto-currencies that I could even recommend that I like, but not Bitcoin, not Ethereum, not Ripple, not Monero, not all the ones that people are all spun up about. But I make the point if you want to go to the world of fiat currencies, not all fiat currencies are the same. They may all be paper. They may all come off a printing press. They may be in digital form. They may be created by central banks, but there’s a big difference between the U.S. dollar and the Zimbabwe dollar. There’s a big difference between the euro and the Venezuelan bolivar and so forth.

In other words, they’re not all the same and that’s what I say about crypto. Don’t get lured in by the word crypto. Don’t get lured in by the word blockchain. Understand the difference between the currency and the Blockchain, which it uses as a platform. Understand the differences. There’re all different kinds of blockchains. They’re not the same. They use different technologies. There’s everything from a Federated Byzantine agreement to proof of work, proof of space, proof of stake. There’s now, I saw another one today about proof of, proof of work or something like that. Look, it is the wild west, but you can get a handle on it, but my point to listeners is that it’s technical stuff. If you’re going to take advice, get someone you can rely on and I’m not anti all cryptos, I’m just anti some cryptos. I actually have identified a five-factor formula for distinguishing the good, the bad and the ugly, so I’ll be talking more about that in the weeks ahead.

Mike Gleason: Well, Jim, once again, it’s been a real pleasure to speak with you and we greatly appreciate your time, as always. Now before we let you go, please tell our listeners about what you’re working on these days, more about the newsletter. Maybe, how they can get their hands on any of your books or anything else that people may need to know if they want to follow your work more closely.

Jim Rickards: Sure, my most recent book, and thank you for mentioning it earlier, is The Road to Ruin. By the way, all these books are available on Amazon or local book sellers or Barnes & Noble. The Road to Ruin, which is a New York Times bestseller. The book before that, maybe listeners are interested, is called The New Case for Gold. It knocks down all the anti-gold arguments and then gives the reader a lot of pro-gold arguments and a glimpse of the future. I’m working on a new book now. It won’t be out until next November. I’m not really ready to talk to you about that yet, but there’ll be a new book coming out November 2018.

My newsletters, I’m with Agora Financial. Actually, we have a new imprint, part of Agora Financial, called Paradigm Press, but my main newsletter is Strategic Intelligence, but we have a number of other what we call backend publications, Project Prophecy, Currency Wars Alert and Rickards’ Gold Speculators. You can find all that if you just go to Agora Financial website and hunt around a little Bit. You’ll find me and find our publications. I’m very active on Twitter, which is @JamesGRickards. That’s my Twitter handle and one more platform, which is Collide. It’s basically a video sharing platform. I do quite a bit there. So, thanks for asking and I’m out there on all those platforms and hope people enjoy it and get something out of it.

Mike Gleason: Excellent stuff. Well, we’re grateful that you took the time to share your incredible insights with us today. We certainly look forward to our next conversation. I hope you enjoy your weekend. Thanks very much. We appreciate the time, Jim.

Jim Rickards: Thanks Mike.

Mike Gleason: Well, that’ll do it for this week. Thanks again to Jim Rickards, author of Currency Wars, The Death of Money, The New Case for Gold, and now The Road to Ruin, and also editor of the Jim Rickards’ Strategic Intelligence newsletter, be sure to check those out.