We Study Billionaires - The Investor’s Podcast Network - TIP 081: Jim Rickards - China, Banking, & The New Case for Gold (Part 1 of 2)

Starting point is 00:00:00 We study billionaires, and this is episode 81 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. Hey, hey, hey, how's everybody doing out there?

Starting point is 00:00:29 This is Preston Pish, and I'm your host. for The Investors Podcast. As usual, I'm accompanied by my co-host Stig Broderson out in Denmark. And I'll tell you what, folks, we have waited a really, really long time to get this guest on the show. And we are thrilled, absolutely thrilled to invite Jim Rickards onto our show for the Investors podcast. So, Jim, thank you so much for coming on our show. We were beating up Trace Knappa to have you come on our show for the longest time. And I'm sure Trace sent you a message.

Starting point is 00:00:58 And, man, we're so excited to have you here to talk about your new book and all. all the stuff that you've been working on. So thank you so much for taking time out of your day to come on the show. Thank you, President. Thanks for inviting me. And, you know, Trace from Texas, so I wouldn't mess with him. So if he says they won the show, I'm there. Hey, so if you don't know who Jim Records is, so Jim is the New York Times bestselling author of currency wars, the death of money. Jim is a graduate of Johns Hopkins University, the Paul Knitz School of Advanced International Studies with a degree in international economics. He has a master's in taxation law from New York University and a doctorate in law from Penn University. Jim, it's so impressive your background.

Starting point is 00:01:36 What's even more impressive? If you ever want to see more of Jim Rickards, simply turn on your TV. He'll be on Bloomberg. He'll be on CNBC Squatbox. Jim, thank you again. Let's just go ahead and cut right to the chase. We have a bunch of questions here, and the last thing I want to do is waste any of this time. So, Jim, I've read all four of your books.

Starting point is 00:01:53 And I think probably the thing that's most impressive about reading your books is if you look at the publication, date of when they've been published. And you look at what you said was going to happen within a year or three years or whatever. Every single thing you've written in these books has happened. And for me, that's kind of mind-blowing to have kind of that foresight. But have there have been investors that have helped you to kind of piece this together and the framework that you understand and how the market works. People like maybe Warren Buffett or Ray Dalio, Stanley Drunken Miller. I know you're friends now with Jim Rogers because I just read your recent book where you talk about, Jim. But talk to us about these people that maybe have really influenced the way you think.

Starting point is 00:02:31 Well, it's a great question, Preston. I have definitely benefit and been influenced by other investors, other authors, scientists. No one, you know, works in a vacuum or at least you shouldn't. I should try to learn as much as you can from as many people as you can. The folks you mentioned, you know, Ray Dalio, Warren Buffett, Stanley, Drunk, and Bill, with Jim Rogers. I've met a few of them. I know Jim Rogers pretty well.

Starting point is 00:02:50 All obviously incredibly successful investors. I would say that the people that have influenced me the most, It's a combination of actual billionaires who are very, very successful trader. So there's nothing that speaks for itself. If you make several billion dollars as a trader, you know what you're doing. Whether you can put it in scientific terms or not, that's someone we should pay attention to. And also economists, but also scientists. I bring a lot of very well-grounded scientific theory to my study of economics and capital markets.

Starting point is 00:03:19 It's not widely accepted. My models are not conventional models, but they're good models in other spaces. All I'm doing is I didn't invent them, but I'm a little bit of, of a pioneer in bringing them into the financial space. And that really helps the forecasting ability and leads to some of the results you mentioned. But just in particular, I'll tell you a quick story about Bruce Covener, Bruce's, you know, very well known. He's the head of Cax and Associates, or he was for decades. He recently retired. But he was driving a taxi in New York, took $5,000 on his mastercard, started trading futures, got tutored, if you will, by Commodities Corp, which is down in Princeton,

Starting point is 00:03:54 in New Jersey, turned that into a personal fortune of over $5 billion. I worked for him, at the privilege of working for him for a few years. The group I was working with were heavily, heavily quantitative. They were PhD mathematicians. They were actually former partners in my from long-term capital. So we had a little bit of a rough patch, a little bit of a drawdown. And Brucewood, we were in Greenwich, Connecticut. He drove up from New York, sat down with us in our offices and said, okay, you know,

Starting point is 00:04:19 let's find out what happened here, how are we guys going to bounce back? And my associates who were all brilliant, like 170 IQs, started talking about Delta and Vega and Theta and gamma and all these Greek letters that denote particular terms of capital markets. And Bruce just cut them off. He said, if you guys don't start speaking English in five minutes, I'm shutting down this operation. Preston, I feel like an anthropologist who goes out in the jungle and listens to all the quants and the Wall Street types and then comes back to everyday Americans and translates from the native language. But that was a memorable encounter. But I read a lot of behavioral economics. So obviously Daniel Kahneman, Adam Tversky, Dan Erle,

Starting point is 00:04:57 and in terms of economists, very heavily influenced by Joseph Schumpeter. Wow, so this was really inspiring to hear Jim. And for those of you that might not recognize this, Jim named Long-Term Capital just very briefly. And if you think that it sounds familiar, it's something that we talked about several times during the podcast. And the funny thing is that we talked about how Warren Buffett experienced long-term capital. And we talked about how Michael Lewis looked at long-term capital, but Jim was

Starting point is 00:05:25 actually right there in the middle of a storm when he just came crashing down. So, Jim, I'm just tempted to ask you this. Could you tell us an interesting story from that time, you know, when the world was just looking at you and the company and where the financial world really did know what would happen tomorrow? Sure. There are a lot of stories. Of course, there's a great book on this by Roger Lonestein. And I spent quite a bit of time with Roger. You know, it's funny. He said, he had 120 interviews on the Wall Street side talking to the banks. Bankers left to blab. Nobody at long-term capital would talk to him.

Starting point is 00:05:57 Guys win the Nobel Prize. Two guys win the Nobel Prize. And then the firm loses $4 billion and almost takes down the world. So that's a little embarrassing. So there was an embarrassment factor. There was a shock factor. $2.6 billion was our money. We were in the process of buying out our own investors.

Starting point is 00:06:13 So eventually it would have been like a multifamily office. $1 billion was from UBS. And that was the craziest deal I ever saw. So, as I said, we were buying out our own investor. So we had $2.6 billion. The fund was about $4 billion. So we bought a seven-year-at-the-money-call option on our own performance. We said, we'll buy an option on us, you know, expecting it to do very well.

Starting point is 00:06:34 We paid real money for it. We paid $300 million for the seven-year-at-the-money-call option for a billion of our own performance. And UBS wrote us the option. So we now had $2.6 billion in cash, a $1-billion call option, right? So UBS sits there. They're sitting in Switzerland and they say, well, we just sold a call option for a billion dollars on the performance of long-term capital. How are we going to hedge it?

Starting point is 00:06:55 So they say, well, we better invest a billion dollars in the fund so that when it goes up and up and up, and they call the option, we'll be able to deliver the option because we own the fund. So they put a billion dollars in. It never occurred to anybody that we would lose money. I mean, the billion dollars went to almost a zero. So they lost a billion dollars. But it's not funny. But what it demonstrates is that nobody in the world, not the people there, myself and not UBS, not Wall Street, not the regulars.

Starting point is 00:07:20 Nobody thought that we could lose money. We were just going to make money. The only question was how much. So $3.6 billion was either us or UBS. And then there was about $400 million from a couple other firms. But one of the reasons we weren't tarred and feathered is because most of the money we lost was our own money or our friends at UBS. But on a serious note, what people don't realize, what did not come out of the books,

Starting point is 00:07:42 what did not come out of all the studies that were done on it, was how close the entire world was to shutting down that is capital markets. We were hours away, hours away from every stock and bond market shutting down. And that, that's not about us. That's about the fragility, the system, the interconnectedness of the system, the opacity of derivatives, the leverage involved. You know, people say Wall Street bailed out long-term capital, not really, they bailed out themselves. Because we had $1.3 trillion of trades with Wall Street. And I like to say, if we had gone to zero, we were on our way. We were days away. But if we had gone to zero, I would have just slept in the next day. You know, you start looking for another job. The $1.3 trillion would have

Starting point is 00:08:19 flipped over to Wall Street. It's like, hey, okay, now you guys own it. What are you going to do? And so Wall Street thinks they're hedge, right? They sold us $1.3 trillion of stuff. They buy it from the market. Now they have a hedge position. They're making a little arbitrage profit, right? Well, take one side of the hedge away. What happens? They're just massively long. So they've got to go out and cover that long position, which would have meant massive selling, which would have taken down all the markets. So we got the four billion in, we got the bailout done, we phoned the runways, had the fire engine standing by, came in for a soft landing, the world did not end. But it was that close and that close, just hours away.

Starting point is 00:08:53 What I learned from that, and then what was intriguing in the next couple of years, I watched the policy response, here's what you should have done based on that experience. You should have broken up big banks, banned most derivatives, not all, but most of them, increased transparency, increased margin requirements, etc. Instead, what did the Congress do? In the next three, they repeal Glass-Digel, which let banks be hedge funds, bet they repealed swaps regulation which let everybody bet on everything they repealed the uh broker dealer leverage ratio so you can go from 15 to 1 to 30 to 1 they enacted basal 2 which allowed the banks

Starting point is 00:09:26 to leverage up using these 4 so they did everything they did was the opposite of what you should have learned i'm running around in 0405 06 and look the next crisis is coming it's going to be bigger than the last one it's inevitable i can see it a mile away and of course it happened in 07 and 08 and it's not like I said, okay, August 9th, 2007, the mortgage thing, I wasn't that specific, but within a range, I could absolutely see it coming because I had lived through it. I learned the lessons. I watched policy do the opposite. And I said, this is just going to happen again. Well, so now here we are 2016. And banks are now bigger than they were before. Now, in the U.S., they have different, you know, requirements as far as their cash reserves and stuff.

Starting point is 00:10:08 But where they don't is over in Europe. Look at Deutsche Bank. For me, that's really. scary. Talk to us about present time. So you saw that in 08. Now where are we at right now? And I know you got your new book, the new case for gold where you're talking about this. Just lay it on people. From 2008 to now, what are the differences that you see?

Starting point is 00:10:27 Actually, none of precedent. It keeps getting worse. I mean, if there are differences, they're pointing in the wrong direction. Right now, and this is the reason I wrote my book, The New Case for Gold. I've done all I can. I've knocked on every door in Washington. And the funny thing about Washington, I get the meetings. I mean, I've been in the Treasury, I've been in the Fed, I've been in the

Starting point is 00:10:43 the National Intelligence Community, Homeland Security, the Congress, Senate. I get all the meetings. People are very kind. They listen to you. They hear you out. But then no one does anything. So that's, at some point, you just sort of throw up your hands. So the reason I wrote the new case for Golden, I'll come back to your point about the

Starting point is 00:10:59 differences today, is that having done all I can, and I continue to, and I continue to talk to policymakers and presidential candidates, but I sort of don't see anything changing for the better. So I said, look, I'm going to write a warning to individuals. Okay, I'll still try to influence policy, but it may be too late for that, but at least we can help individuals get some of their assets, not all by any means, get some of their assets and physical gold. That's your fire insurance. When the house burns down, you'll be protected, you'll be well served. So that was part of the motivation for the book. We're going back to your question, candidly, Preston.

Starting point is 00:11:30 I feel right now in 2016 exactly the way I felt in 2006, which is I look back at the last crisis. I see the mistakes. I see that none of them are being fixed. None of them have been addressed the right way. The system is getting more unstable and we're heading for another crash. So look at this tempo. So 1998's long-term capital, Wall Street bails out the hedge fund. 2008, the financial crisis AIG Lehman and the central banks bailout Wall Street, come forward

Starting point is 00:11:56 to 2018, keep up that 10-year tempo, who's going to bail out the central banks? In other words, each bailout is bigger than the one before. And each time you need a bigger, you know, sugar daddy, if you will, to bail out whoever got in trouble. So Wall Street bailed out a hedge fund. The central banks bailed out Wall Street. All that happened in 2008, you cured a private debt crisis with public debt. Now you've created a public debt crisis of even greater magnitude who's going to bail out the central banks when this system crashes, which you can see a mile away. The answer is there's only one clean balance sheet left in the world. There's only one place where that much liquidity can come from, which is the IMF, the International

Starting point is 00:12:32 Monetary Fund. What that means is how does the IMF print money? The SDR, the special drawing rights. And that's the end of the dollar. By the way, there's a meeting in Paris just a couple of days ago where they put this on the table. You know, Christine Lagarde, the head of the People's Bank of China, a few other central bankers and finance ministers. And this SDR train is leaving the station. People think you make this stuff up. I mean, no, it's all there. It's on websites.

Starting point is 00:12:54 It's some papers. There's a lot you can learn about it. Yeah, the IMF is a strange institution, but extremely powerful. Lots of U.S. influence behind the scenes. China's becoming more influential. but they wanted to basically get out of Greece. They have a history of not taking losses. They only lend.

Starting point is 00:13:11 They want to be the senior preferred lender. They want to be the first one paid, the first one to get out. There's supposed to be sort of a bridge lender or swing lender, not the permanent capital, if you will, if you think of it in corporate finance space. Of course, a lot of that is just for show. I mean, they are the most politicized financial institution in the world. All you have to just look at Ukraine, right?

Starting point is 00:13:28 Ukraine's got billions of dollars of IMAF loans, no hope of repayment, completely uncreditworthy, no sustainable program. But they got the money because of the new Cold War, if you will, between the United States and Russia. So we're propping up our side of that. We're propping up Western Ukraine and Kiev, just as the Russians are intervening and propping up Donetsk and Eastern Ukraine. So this is a good example of how finance is used in the battle space. So people are shooting at each other and they're financing each other and one is side by side with the other.

Starting point is 00:13:58 Perfect. And again, really, really interesting. And we actually have to talk about the book now. And that was actually the whole interview, and then we just went all the word. But one of the things Jim, I want to talk to you about today is that on the podcast, we have frequently talked about a shift in the balance of power between US and China. And what Preston and I have done on the podcast is to look at macroeconomic factors. We'll be looking at GDP and the potential for the RIMB as a reserve currency.

Starting point is 00:14:25 But one thing that we really haven't paid attention to is the role of gold. And in your new book, the new case for gold, you say that in the past seven years, you estimate that China has bought as much as 3,000 tons of gold, perhaps even more. And that is in addition to what they already have. So you are estimating it might be at least 4,000 tons. And that would make China the second biggest holder of gold in the world of the U.S. And just to give people some numbers to refer to, U.S., you estimate that to be around 8,000, and the official gold in the world is around 35,000 tons.

Starting point is 00:14:57 And you also say that contrary to popular belief, you argue that it's not to launch a currency backed by gold, but among several reasons, it's a tool of hedging its investments in U.S. Treasuries. Real curious to hear if you can explain why you hold this opinion. Sure, Steg, I'd be glad to. You know, a lot of my book, The New Case for Gold and a lot of what I do in writing and interviews and so forth is explaining to people how gold is money, how gold should be in your portfolio, how it will preserve wealth, etc.

Starting point is 00:15:25 That debate's been going on a long time. There are kinds of arguments pro and con. I talk about them in my book. I take the arguments against gold. shoot them down one by one and we can talk a little bit more about that. Because to me, that's a good starting place because if you raise your hand and say something positive about gold or gold should be in a portfolio, people are just ready to shoot you down there. Like, you're a wing nut, you're a gold nut, you're a Neanderthal, you don't understand money.

Starting point is 00:15:48 And here's why. And they give you all these reasons. None of the reasons hold water. I heard an interview last night with Lord Skodeski, who was the very distinguished economist, author, researcher, wrote the definitive biography of John Maynard Keynes. and he said, well, you know, you can't have a gold standard because there's not enough gold. And I almost fell off my chair of me. It's completely untrue.

Starting point is 00:16:06 There's always enough gold. It's just a question of price. I explained that in my book. But to see really brilliant distinguished individuals repeating the same flawed arguments just shows how embedded they are. So with that as a prelude, it's hard enough to get people to think about gold as money. Try getting people to think about gold as a weapon as a financial warfare weapon as a threat to national security. Because that's what your question really goes to. So what is up with the Chinese?

Starting point is 00:16:30 first of all, where do I get my estimate? The Chinese officially say that they have about 1,700 tons of gold. My estimate is they have at least 3,000 tons, perhaps four, perhaps even more. What do we base though on? Well, we do have some reliable data. The Chinese may lie about their figures, but Hong Kong doesn't. So Hong Kong exports to China of gold. Those are reliably reported. They're about 1,100 tons a year, give or take. And that's been going on for six years. So mark down kind of 7,000 tons from Hong Kong. Geological surveys show that China's the largest gold. producer from their own minds in the world, about 450 tons. So again, take that six years. There's another 2,500 tons. So you put all that together. You've got 10,000 tons of gold,

Starting point is 00:17:10 either being imported into China or produced in China. Chinese gold exports are zero. So there's 10,000 tons there. Now, what we're not as clear on how much of that went to private consumption individuals, because the Chinese love gold. I've been there and seen these gold boutiques. They're open all hours at night. They're lit up like Times Square. You've got gold hostesses and long silk dresses, working around with trays, bars, coins, jewelry. So the Chinese love gold. How much is private? How much is government? It's hard to know, but I would estimate the government's at about 30%. So, and I have that from a Swiss source head of the world's largest gold refinery, and he talks to the Chinese every day. So if you take 30% of 10,000 tons, there's 3,000 tons. So that's my estimate.

Starting point is 00:17:51 But if I'm wrong, I'm probably wrong on the low side. The actual number is a lot higher. So here's the point. Why is China acquiring 4,000 tons of gold in a world where, you know, everyone from Ben Bernanke, Janet Yellen, Christine Lagarde, Jack Liu, every senior elite policymaker you talk to will tell you that gold is worthless. It has no role in the monetary system. We're not on a gold standard. We never will be, et cetera. But the Chinese just acquired, say, three or four thousand tons. Are the Chinese stupid or do they see something most of us don't? Well, guess what? They're not stupid. I've been to Chongqing, Beijing, Xiang, Jiang, Shanghai. I, Wuhan, I've been all over China.

Starting point is 00:18:29 I have a lot of friends there. I go there frequently. I've met with the sovereign wealth fund. Communist Party officials, government officials. They're not dumb. So they see something coming that most people don't. By the way, just to drop a footnote, same thing with the Russians.

Starting point is 00:18:39 The Russians have acquired 1,000 tons of gold in the last six years. And to put that in perspective, and you're exactly right, state, there are about 35,000 tons of official gold. That's the gold owned by central banks and governments. So if China bought, let's say, three, and Russia bought one, That's more than 10% of all the official gold in the world. And again, if I'm wrong, the actual numbers are going to be higher. That's a lot of gold.

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Starting point is 00:23:11 Because one of the things you also talked about is a Britain word. Our new Britain was if some things should go tell be wrong and the monetary system, as we know today, simply need to be looked at again from all the major powers. You're saying that gold, if the new currency will be backed by gold, China will also have an equal say because right now the way it works, for instance, with IMF, that what you point out is also created in the tense of curing the gold standard system. The US has a veto. So you're also saying that if something should go wrong, China would perhaps have an

Starting point is 00:23:42 equal say to the US in the new world with a new currency system. That's part of the dynamic in your exactly right to take. So the way I think about it, imagine a horse race. You know, you've got the Kentucky Derby and all the horses are in the paddock and the trumpet blows and the paddock opens and here come the horses running around the track. And think of them as currencies. There's the dollar. There's the euro.

Starting point is 00:24:00 There's the yen. There's you want. We have two other horses in the race. Gold and special drawing rights. So with the SDR. Just to clarify the special drawing right, the SDR, that's world money. So the Fed can print dollars, Federal Reserve can print dollars, the European Central Bank, can print euros. The International Monetary Fund, the IMF, can print SDRs, just like that.

Starting point is 00:24:20 I mean, they need votes to this governance and process and all that, but they can print SDRs and hand them out to the member nations. So that's the currency. So coming around the track, my view is one by one, those horses are going to stumble and fall and be out of the race. And at the end, when we get to the finish line, there are only going to be two horses, gold and SDRs. Now, just to be clear, there's not one central bank in the world that wants a gold standard. If you were a central banker, would you want a gold standard? If you had control of the money supply. If you had your hand on the printing press, why would you want gold? You'd want all that power. You'd want all the influence that comes from controlling the money. But people have a voice in it because money is

Starting point is 00:24:53 nothing more than the subjective preference of consumers for different types of money. It's like, we're all in the grandstands betting on the horses, right? And some people want to bet on the dollar. That's fine. Bet on the euro. Increasingly, people will look to gold in SDRs. If confidence in all the other money, all the other kinds of money fails, why would you have any more confidence in the SDR? if it works, if it works, it's only because no one understands it. I know international PhD level international monetary economists who cannot give you a straight answer on what an SDR is. So one can hardly expect everyday citizens around the world to understand it.

Starting point is 00:25:28 So if the elites pull it off, it's because nobody gets it. But my guess is in an age of social media and podcasts like this and, you know, Twitter and Facebook and other media channels, YouTube and podcasts and so forth, that people will catch on pretty fast and it will actually fail. Then you'll have to go back to a gold standard. So think of the reset of the international monetary system like a poker game. We're all going to sit around the table. When you're at a poker game, you sit down, what do you want? You want a big pile of chips, right? Gold are your chips. So the U.S. has a big pile. We have 8,000 tons. Europe combined, the members of the European monetary system, the Eurozone, have a big pile. They have 10,000

Starting point is 00:26:05 tons, actually, more than the United States. China's got maybe 4,000 tons, but they still need to buy three or four thousand more tons secretly by the world. the way they use military and intelligence assets to do this. So that when they sit down, they've got, let's say, eight, nine thousand tons. So that'll be an interesting poker game. Jim, and I'm really happy that we actually discussed this because on the podcast, we have discussed a goal as an investment several times. And when reading your book, it's quite evident that that is not how you gold, and that's not what this episode is about, because you're actually saying that goal is money. So we have to think of gold as a kind of money. And when you think of that

Starting point is 00:26:39 in terms of your portfolio. You're not saying go 100% in gold because it will increase tomorrow. You're saying 10% because it helps you to diversify. And for listeners of a podcast, if you think back to our discussion of the Black Sworn, that's Inelab's book, if something should go terribly wrong, which is also some of the things that Jim's talking about, gold might be a way to be diversified. Well, first of all, that's exactly right. I don't recommend going 100% in anything. I learned that the hard way at long-term capital management. So that was a, I tell people, I lost some money in that. I tell people it was my tuition and my financial education. It was very costly education. So first rule, don't go 100% in anything. You definitely want to be diversified. But the problem

Starting point is 00:27:22 is there's real diversification and faux diversification. I run into people and they say, you know, I'm very diversified. I own 100 different stocks in 10 different sectors. I'm very diversified. And I say, no, you're not. You have one asset class. You have one asset class called stocks. I don't care if you got 100 stocks and I don't care if All Street tells you there are in 10 different sectors, et cetera. You're in one asset class. So that's not diversification. I gave a, after my second book, The Death of Money came out. I gave a free lecture at the New York Public Library. I do a lot of paid speaking around the world, but libraries and universities often try to do pro bono well. But when I finished my remarks, we do Q&A and one guy

Starting point is 00:28:00 raised his hand. He said, you know, I listened to everything you said. I'm inclined to agree, but I work for a corporation and I have a 401k and my options for the 401k are all stock funds and a couple of money market funds. What should I do? And I said, well, you should quit your job and get a roll over IRA and then you can buy some gold. It was being a little bit glib, but the point was your rights thing. A lot of people are locked into this system, created by Wall Street, propagated by Wall Street, which is really about them selling you stocks. It's not about your financial well-being. And that's also part of the reason I wrote my book, the new case for gold because it's educational. I'm not a gold salesman. You can't buy a gold for me.

Starting point is 00:28:34 get a commission, but I'm trying to provide some education so people can look out for themselves. 10% gold to me is the right amount. If I am completely wrong and happy days are here again, the stock market goes up and there's no inflation, you've got 10% gold, you're not going to be hurt badly by that. It'll preserve wealth. But if I'm right and everything else melts down, and a lot of your assets drop 30, 50%, which they have time and time again. Just look at 2008, 2000 dot-com meltdown, what almost happened in 1998, 1987, October 1987, the stock market fell 22% in one day, not a week or a month, one day. In today's Dow Jones Index, that would be the equivalent of 4,000 Dow points. Now, if the Dow fell 400 points, it's all you'd read about.

Starting point is 00:29:19 Every website, newspaper, all anyone, anybody would be talking about was a 400 point drop in the Dow. Imagine 4,000 points. That happened in 1987. It wasn't that. long ago. So these things do happen. And in that world, you definitely want the gold. I recommend physical gold. We can get into the whole distinction between paper, gold contracts and physical gold. You definitely want physical gold. And again, it's an analogy, but it's like fire insurance on your house. Nobody wants this house to burn down, heaven forbid. But if it does, you're sure glad you have the insurance. And when you write the check to the insurance company, you don't think you're throwing your money away. You think you're doing something prudent. That's how I think about buying gold.

Starting point is 00:29:56 So it's funny, Jim, back in December of 2015 just a few months ago, I had watched a video with Stanley Drunken Miller and he was talking about his expectation kind of moving forward. And this video was from December of 2015 as well. And Stanley had made the comment that he thought that if you're going to do well in the markets moving forward, you're really going to have to do it in commodities or currencies over the next year to three years, whatever it might be. And it plays right to the point that you're saying. And I love this comment where you said, I'm diversified into 100 stocks. And you're talking about an asset class that's just, in my opinion, that's priced for just total disaster at this point. You know, it could run another year for all I know. But I know one thing.

Starting point is 00:30:39 It's not going to go much higher in a year. If it would go up, it might go up a couple percent. And so then you got to talk about my asymmetrical risk reward portion of that by being completely in stocks. I just, I love the fact that you brought that up. I think it's something that people really need to think about. They need to think about their asset class and how they're diversified in a currency versus an equity or fixed income versus a currency. You know, it's, oh, man, that's such an important thing for people to get as investors. Well, you're exactly right, Preston.

Starting point is 00:31:09 And by the way, you know, when you talk to billionaires, it's really interesting because a lot of the names that get thrown around. These are, you know, billionaire hedge fund managers, billionaire portfolio managers, and they're in the stock market and their bond market. And they'll go on TV like anyone else and talk about, you know, whatever. or Tesla or some pharmaceutical company. But when you talk to them privately, and I do, they have a lot of gold. A lot of them are building gold vaults in their homes. I happen to live in Daryan, Connecticut.

Starting point is 00:31:34 It's a wealthy town, but we're one exit on the highway away from Greenwich, Connecticut, which is an even wealthier town, lots of billionaires there. You'd be amazed how many of them have, you know, not just safe rooms, but you hear about, but also private vaults in their homes. Now, a guy who's a little more public, and, of course, you know, Stan, Stan John Camel, you mentioned, is a multi-billionaire hedge fund manager. He's putting his portfolio into gold. That's very well known.

Starting point is 00:31:57 But one of my favorite stories is Kyle Bass. Kyle lives down in Texas just outside of Dallas. He was one of the participants in the big short. He wasn't in the movie, but he was one of the guys who made billions, you know, shorting the mortgage market in just before the crash in 07. But he's a trustee of Utimco, the University of Texas Investment Management Company.

Starting point is 00:32:15 That's the endowment for the University of Texas, which is a very large endowment. And he persuaded his fellow trustees to allocate some of the portfolio of the gold, not a lot as a percentage, but I think he bought $500 million worth of gold, which is a lot of gold. They bought it from Hong Kong, Shanghai Bank, which is a major dealer, and their vault is at 39th and 5th Avenue. It's right there. It's actually right next to the New York Public Library. I mentioned earlier. So Kyle called them up and said, I dinner with him in Dallas. He told me this story. He said, he called them up. And he said, well, I want to come see my gold,

Starting point is 00:32:45 the gold of Texas, in other words. And they were, well, you're kind of being a pain in the neck. He said, no, I want to see, we paid for it. I want to see the gold. They said, all right. So after some delay, he got into the vault, and he said, where's my goal? And he said, well, some of it's over here and some of it's over there. He said, no, I'm coming back. I want my gold in one place. I want serial numbers on the bars.

Starting point is 00:33:04 I want to manifest. I want to be able to go bar by bar and make sure it's all here. He said, I'll be back. You do it. So they agree. But again, they were like, you're obviously a pain in the neck kind of customer. So he went back the second time. And yeah, the goal was all there.

Starting point is 00:33:18 There was no wrongdoing. But it just goes to show you how cavalier or the bank. Thanks, sorry, about gold and how Adam and Kyle was about actually getting his gold. I loved that story. That's awesome that you had that personal experience with him. That's pretty cool. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why Vanta is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered

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Starting point is 00:36:51 All right. Back to the show. Hey, so I'm curious now that we're talking about Kyle Bass, and we really will get to some of these questions we had typed up, but Kyle's play on the Yuan, shorting the Yuan. I'm curious what your opinion is on that, because he's been getting beaten up, I think, since he put that on. Oh, yeah. The people's bank of China woke up a couple weeks ago and punched him in the nose,

Starting point is 00:37:10 It's just to see, here's the thing. Kyle has got the analysis exactly right, and I can explain why, and he's going to make a ton of money on that trade. But if you, and he's a good guy, if you ask me what mistake did Kyle make, Kyle was way too public. He was on CNBC and Bloomberg and every show you can think of, and this trade got dubbed the new Big Short. Of course, the reference to the Big Short, the movie on the Michael Lewis book,

Starting point is 00:37:35 about guys getting out ahead of the mortgage crisis. So fundamentally, he's right. He will make a ton of money. money. But by being so public, and this is important, Preston, everything in China is about face. It's all about face. You can win or lose in the markets, but don't make people lose face. And what he was doing by being so public, he was causing the People's Bank of China and the Central Committee of the Communist Party of the Power Bureau to lose face. So they just, they went out one day and just arbitrarily increased the value of the yuan. They basically bid up, bid up the yuan by dumping dollars, buying yuan, bid up the price on a mark-to-market basis that caused large losses for Kyle.

Starting point is 00:38:10 in the short run, and they were very public about that. So that was the way of them regaining face. So we think we're talking about fundamental analysis and markets and profit loss, but what we're really talking about is Texas culture versus China. Ego, right. You're talking about Texas culture is in your face, and China is all about not losing face. So you got a Texan and a Chinese. I mean, that's crazy.

Starting point is 00:38:32 I mean, that's what's going on. So I would have, I would have, Kyle just not need any advice from me, but my advice would have been great trade guy, just keep it to yourself. But just to spend a minute on why Kyle's right, because it's a funny story, but he is fundamentally right. There's something in economics called the Impossible Trinity. And this was a theory developed by Mandel and Fleming in the early 1960s, and Robert Mundell later won the Nobel Prize for his work in international economics. And he said that a country, there are three sort of goals you can have in terms of the central bank and foreign exchange policy,

Starting point is 00:39:08 but you can't have all three. and the three are an open capital account, a fixed exchange rate, an independent monetary policy. Everybody wants an open capital account because it shows money can't come in it out, you're an attractive destination, fixed exchange rate is in theory stable, an independent monetary policy dial it up and dial it down. So everybody wants all three, but you cannot have all three. You can have two out of three. And the reason it has to do with the fact that if you're pegging your currency to somebody else, but you move your monetary policy in a different direction, ease when they're tightening.

Starting point is 00:39:40 The money is going to come out of your economy because you have an open capital account. That's exactly what's happening to China. China is trying to have the impossible Trinity. They're trying to have an open capital account because they want to play nice with the IMF because the IMF just included them in the SDR. They want an independent monetary policy because their economy is weakening. So if the Fed tightens, they don't want a tighten, they want to be able to ease. But they want a pegged exchange rate at about, it's floating around right now, but about 6.5 to 1.

Starting point is 00:40:08 because China in the U.S. are the two largest economies in the world, largest trading partners, massive capital flows, and the Chinese like stability. But you can't have all three. That's what Mandel said 50 years ago. And so what's happening is that the capital is flowing out of China. And I mean a lot. 15 months ago, their reserve position was $4 trillion, so a little over $4 trillion. Today, it's down to $3.2 trillion. They've lost $800 billion or 20 percent of their reserves in 15 months. Now, the thing about reserve outflows, seen this in Brazil and Argentina, and we've seen it all around the world. They accelerate. In other words, this is like people running for the exits, right? The theater's on fire. We're all running for the exes trying to get out. Well, maybe the first guy gets out, maybe five people behind him get out,

Starting point is 00:40:50 but at some point, the crowd is just surging for the door. So that's what's happening now. So it accelerates. So at this rate, at this tempo, China will be broke by the end of 2017. It will not be two more years before the last, you know, $3 trillion runs out the door. Now, obviously, that's not going to happen, right? China's not going to let that happen. But, you will not, But it is happening. So what are they going to do to stop it? They have to bust one of those three legs of the stool. You have three legs of the stool. You got to break one of those legs. Well, are they going to close the capital account? No, because they just joined the SDR. The IMF would kick them out of the club, if you will. They have to maintain open capital. Are they going to give up independent monetary

Starting point is 00:41:26 policy? No, the Fed is on a path to tighten. It's an irregular path. But they're not going to raise interest rates at a time when their economy is sinking. So there's only one thing left to value the currency. So it's as close as you get to a short thing in international economics. That's what Kyle has figured out. That's the bet he's placed. He'll be right in the long run, but it doesn't mean he's right in the short run. So China is putting on a brave face, you know, back to the concept of face. They actually strengthened the currency just to send him a message, say, hey, this is not a one side of bed. But at the end of the day, they're going to have to devalue because they cannot do anything else. I'm sorry. I have to ask one more question that is not on the list here, and it's about Japan.

Starting point is 00:42:04 Jim, I see Japan in this situation where this is looking like this is getting really grim, really fast. And I mean like in the next quarter or two that they might have something really devastating happen over there. Do you kind of see it in the same light as far as their equity market and just, I mean, it's getting really bad. Well, I do, Preston, and with a footnote, let me explain. So the basic story on Japan is awful. You know, major developed economy, high tech, et cetera. They have the highest debt to GDP ratio of any developed economy. economy well over 200%. Now, the U.S. looks like a train wreck to me. We're about 100%, right?

Starting point is 00:42:40 They're more than 200%. They're worse than Greece. Greece's debt to do GDP ratio is in the kind of high, mid-100s. They control the in Japan, I'm sorry to interrupt you, but Japan, they control their currency where Greece wasn't in that situation. That's really kind of the thing that led to their, is that correct? That's one difference. They print their own, they print a money that people want, whereas Greece can't print it. People do want euros, but Greece doesn't print euros, the European Central Bank. So they don't have control of their own currency. That's correct. That gives them more degrees of freedom. And also, their bond market, by and large, is owned by domestic institutions. So it's a problem for the United States. A lot of U.S. bonds are owned by foreigners. They're owned by the Chinese, and actually

Starting point is 00:43:17 the Russians have some and institutions around the world. So the U.S. is a little bit vulnerable to a loss of confidence by foreign investors. At Japan, much less so. So the bad news is very high debt to GDP ratio, awful demographics. They have not only an aging population, which is not great for productivity, but a declining population, it's not the birth rate slowing down, they're actually losing people. So declining population, aging population, high-de-density GDP ratio, and a stagnant economy, they've been in a depression for almost 30 years with occasional technical recessions in the middle of that. So that story is a mess. On the other hand, people have been reciting that story for 25 years, and they've been wrong. That is to say, Japan has not collapsed. And this trade,

Starting point is 00:43:59 you're talking about Preston, kind of short Japan, you know, short Japan equity. short Japan debt. It has a nickname. It's called the Widowmaker because so many people have lost so much money short in Japan and being wrong that people get carried off for each person in the trade now. So your question is, okay, but what about right now? Is this thing about to turn? I think it might. I think it might for a couple of reasons. Number one, there is a limit. It hasn't been reached in the last 25, 30 years, but we may be getting closer. We're starting to see signs. The other day, a couple days ago, the volume in 30-year bond trading and Japanese government bonds was zero. The wheels are starting to lock.

Starting point is 00:44:40 This thing is starting to freeze up. But the other big deal is the Shanghai Accord, which was just reached on February 26th, secretly by the G20 central bankers and finance ministers. And this gets back to the currency wars. That was the title of my first book. So just I'll explain it very briefly, which is in a world of, thank you. Stig just held up the book. Stig selling a copy.

Starting point is 00:45:01 I recognize that. Thank you, Steve. So in a world of too much debt and not enough growth, that's the world we live in today. And by the way, that's also the world of 1919, after the Versailles Conference, after World War I, the world of too much debt, not enough growth. That's the world we're in. How do you, as a country, get a little pickup? How do you get your economy moving?

Starting point is 00:45:21 It's a zero-sum game, but you can do it through the currency waste. By cheapening your currency, you import some inflation in the form of higher import prices, you improve your export competitiveness. that creates some jobs. So you get a little bit of a lift, but it comes at the expense of your trading partners. In other words, you may be temporarily better off, but the world is not better off.

Starting point is 00:45:41 And that's what's been going on for the last eight years. So 2009, the era of the cheap Chinese Yuan, 2011, the cheap U.S. dollar. 2012, beginning of Abenomics in 2013. That's the cheap yen. Mid-June 2014, Draghi announced his negative interest rates. January 2015.

Starting point is 00:46:00 Draghi announces Euro QE. That's the cheap Euro. So the Yuan, the dollar, the yen, and the Euro have taken turns being the cheap currency. Meanwhile, the world is still sick. The world is not getting stronger. So my analogy here, this is a good way to understand it. Imagine five soldiers. They're in combat. They're fighting hand to hand. It's a very hot day, and they're thirsty and they catch a break. And they got one canteen. What do you do? Everybody wants to drink the whole canteen, but you don't. You take a sip and hands it to your buddy. He takes a sip, hands it to his buddy. You pass the canteen. That's the currency worse. They're passing the canteen of cheap currencies, knowing that everybody can't get a drink at once, but you can take turns. Now, right now, it's time for a cheap dollar again and a cheap you want. It's China and U.S.'s term. That means Europe and Japan, those currencies have to strengthen the euro and the yen are getting stronger. Strong yen, combined with the illiquidity in the bond market, combined with everything else we're talking about,

Starting point is 00:46:54 this could be the killer for Japan. Yeah, because they can't handle it. That's right. I love that you said that, because you also write about that in your book, and let's just briefly research to your book, which was, again, the whole purpose. Sorry, Jim, for not speaking so much about your book, but a lot of interesting topics to cover. Because one of the things you relate is currencies and gold, and specifically you talk about, I think you have an example with US devaluing and how that would influence Europe and the other way around. And then

Starting point is 00:47:21 you're saying, gold can't fight back, which is like the overall thesis for the gold standard. So what do you mean when you say the gold can't fight back? And why might that be a better system than the one we have? So the currency wars go back and forth the way I described it. When you coordinate it, as they do sometimes, that's passing the canteen. But there's another metaphor, which is two kids on the seesaw, I'm up and you're down. Well, if I go down, you're going to go up. And it can't be any other way.

Starting point is 00:47:48 I remember in 2012 when, you know, Paul Krugman and Joe Stiglis and Norio Rubini, everyone was running around with their hair on fire saying the euro is going to collapse. Greece is going to get kicked out. Spain should quit the Euro, go back to the Peseda, the value, lower the unit labor cause, northern tier, southern tier, and I said nonsense. I said, none of that is going to happen. Nobody's getting kicked out of the Euro. Nobody's leaving the Euro. The Euro will add members, which they have. They were 16 members of the time. Today there are 19 members, several applications pending. The Euro is strong and getting stronger. And I base that on the fact that, well, two things.

Starting point is 00:48:19 Number one, the Eurozone has never been an economic project. It has always been a political project. In 1992, Margaret Thatcher was bitterly opposed to German reunification. And she said, because every time the Germans get together, they take over Europe. Why would we want that? And she was exactly right. They got together. They're taking over Europe, not with a blitzkrieg, but with financial warfare. So this is, I call it the Fourth Reich.

Starting point is 00:48:42 Basically, Germany peacefully, using economic means, is establishing hegemony over Europe. So that zone is not breaking up. But what it means is a practical matter is that the euro is going to get stronger, which means the dollar has to get weaker. That's the seesaw effect where not everybody can weaken at once. But there's one exception to that. If you think of gold as money, you see, how do I fight back? If I want to cheap in the dollar, how do I do it?

Starting point is 00:49:06 I defer interest rate hikes. I print more money. I do QE. I use forward guidance. These are all the tools. Same thing in Europe. If I want it cheap in the euro, how do I do it, print more money, go to negative interest rates, you know, et cetera.

Starting point is 00:49:17 There are tools. So it goes back and forth and back and back and forth. Gold can't fight back. You can't print gold. You can't change the, gold has no yield, so you can't make it negative. You can't talk about the forward value of gold because you don't control it. So all the tools in the central bank toolkit don't apply to gold.

Starting point is 00:49:34 So there is one way, and only one way, for every currency in the world to cheapen at the same time. And that is if they cheapen against gold, which means a higher dollar price for gold, a higher euro price for gold, significantly higher in the long run. So gold wins the currency wars because it basically won't fight back. it's the only way that the whole world can devalue it once, which is against gold. As you can probably hear, we could discuss forever with Jim. So next week, you will hear the second part of the interview.

Starting point is 00:50:06 Here we're actually talking a lot of more about gold than we did in this episode. That was what we had for this weekend, and Preston and I can't wait to share the second part interview with Jim next week. Thanks for listening to The Investors podcast. To listen to more shows or access to the tools discussed on the show, Be sure to visit www.

Starting point is 00:50:25 TheInvesterspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.w.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 081: Jim Rickards - China, Banking, & The New Case for Gold (Part 1 of 2)

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