We Study Billionaires - The Investor’s Podcast Network - TIP 113 : Jim Rickards and the Road to Ruin (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 113 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 Stig Broderson. Hey, hey, hey, how's everybody doing out there?

Starting point is 00:00:31 Rustin Pish, I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And today we have renowned author, Dr. Jim Rickards, with us. And if you're not familiar with Jim, he's a graduate of Johns Hopkins University. He's also a graduate of UPenn, New York University Law School. Jim's worked on Wall Street for more than 35 years, and he's probably seen some of the craziest things that have ever happened on Wall Street. And Just to give you an example, he was a principal negotiator for long-term capital management during the bailout with the New York Federal Reserve Bank. So get ready to hear some amazing insights on the whole host of topics today. In addition to all that, he's a two-time New York Times bestselling author for the book's Currency Wars and the Death of Money. Jim, thank you so much for taking time out of your busy schedule to chat with us.

Starting point is 00:01:26 And congrats on the new book, which we want the audience to know about. And the title of the new book is The Road to Ruin, and that hits stores on the 15th of November. So we're honored to receive an advanced copy of that and to have you on the show. Thank you, Preston Stegas. It's great to be with you. So, Jim, last time you were here, we were talking all about gold. Today, we've got some similar conversations, a little bit to do with gold, but more, the conversation is changing a little bit, and you're adding more to this narrative of what we've been talking about for the last year.

Starting point is 00:01:59 stuff that we were talking about in the last show. And that's all in your new book. So in an effort to give people a snapshot of what the new book is about, give them a quick overview and tell them what inspired you to write this new volume. Sure. The new book is called The Road to Ruin. And it's actually volume three of a projected quartet. So currency wars was volume one, the death of money, volume two, the Road to Ruin volume three. And there'll be a volume four a couple years from now. So the way the road to ruin fits in and what's a little bit different about it, the currency wars and the death of money in different ways, warned about the instability of the system,

Starting point is 00:02:35 how we haven't really fixed anything or recovered really since the 2008 panic and warned about a coming collapse in the system. Volume 3, or the Road to Ruin, the current book that we're talking about, really puts you in the crisis. So instead of warning you about the crisis, it says, okay, the crisis is here. How will it play out? how will it be different from 2008?

Starting point is 00:02:57 And then kind of work backwards to what can you do today to prepare for it and preserve your wealth in the crisis. And to illustrate this, I take three crises, 1998, 2008, and then I say 2018. And that's not a hard and fast prediction, you know, January 1st, 2018, everything that's going to fall apart. I don't mean it that way. It's really just taking that 10-year stretch from 1998 to 2008, going out another 10 years to 2018. That's a reasonable estimate of when we may have another panic. But the point I make is it could happen tomorrow. Don't get complacent and think, well, gee, I've got two years to deal with this. You may not. You may not have two days. But as I say, it's just a device to maintain this 10-year tempo. So I go through the history of each

Starting point is 00:03:42 one of these crises and my projections for the next one. Of course, 1998, we all know what happened. Although, candidly, it's a little distant to certainly some younger market participants today. They may have heard of long-term capital management. but it's 18 years ago at this point and a little bit old news, but I go through that. The bottom line there was that Wall Street bailed out a hedge fund. And by the way, we were hours away from closing every market in the world. We were hours away from a complete financial collapse worldwide. That's not an exaggeration. You know, Alan Greenspan and Robert Rubin all testified to that effect.

Starting point is 00:04:18 And I was there. As you mentioned, I was the chief lawyer for long-term capital management. and I negotiated that bailout. I was in the room with Fed officials, Treasury officials, all the leading bankers, you know, a thundering herd of lawyers from all the top New York, Wall Street law firms. And we got it done,

Starting point is 00:04:35 but it was a close-run thing, as Wellington said, about Waterloo. It could have turned out differently. It could have not happened. And if that had been the case, it would have been a very, very calamitous turn of events. 2008, the same thing. We were days away from the sequential collapse

Starting point is 00:04:51 of every major bank in the world. world. Bear Stearns had failed in March 2008, then Fannie Mae and Freddie Mac failed in June and July 2008, then Lehman Brothers in September 2008. They were falling like dominoes. It was very clear that, you know, Morgan Stanley was going to be next, probably a couple days away, then Goldman Sachs, then Bank of America, then Citibank, then J.P. Morgan. They were just falling like dominoes. Of course, what happened is the Federal Reserve truncated that process. They intervened. It's just like dropping a steel wall in a row of falling dominoes. You know, one domino is going to hit the wall and the next one's still going to be

Starting point is 00:05:26 standing. But the way they did that was with tens of trillions of dollars of swaps. And I'm not talking about the money printing on the Fed's balance sheet. We've seen that. They printed $4 trillion or almost $4 trillion over the following eight years. And that's a big intervention and manipulation in and of itself. But not known at the time, we found out later was they did these massive value. It was a $10 trillion of swaps with the.

Starting point is 00:05:51 European Central Bank. And what was going on there was the European banks had dollar loans and they were funding them with dollar liabilities. Those liabilities were mostly short-term bank CDs and IOUs that were held by U.S. money market funds. Now, there was a panic in the U.S. investors were taking their money out of the money market funds. Those money market funds could no longer roll over those liabilities of the European banks. The European banks had a funding crisis, a liquidity crisis. They turned to their own central bank. The European Central Bank is the lender of last resort. But the problem was the European Central Bank can't print dollars. They can only print euros. And these banks needed a dollars. So what they did is the European Central Bank printed up trillions of euros. The Federal

Starting point is 00:06:33 Reserve printed up trillions of dollars. And they swapped the dollars for the euros. So the Federal Reserve actually got 10 trillion euros or thereabouts. The European Central Bank got the 10 trillion dollars. Use that money to bail out their own banking system. In addition, in this country, The Fed and the FDIC guaranteed every bank deposit in America, regardless of size. There was an insurance. There was an FDIC insurance fund that would guarantee up to $250,000. But let's say, you know, you're an auto dealer, you're a successful entrepreneur, and you've got a million dollars in the bank as you're working capital, et cetera.

Starting point is 00:07:07 They guaranteed the whole thing regardless of size. They also guaranteed every money market fund in America, not legally required. They did that to stop this run on the money market funds, which I described earlier. So massive, massive intervention. So you have this sequence. In 1998, Wall Street bails out a hedge fund. In 2008, the central banks bailout Wall Street. In 2018, who's going to bail out the central banks?

Starting point is 00:07:32 In other words, each bailout gets bigger than the one before. Each crisis gets bigger than the one before. And then you have to keep looking, you know, well, who's got a bigger balance sheet? Who's left? In other words, to conduct these bailouts. And the answer points directly to the International Monetary Fund. they have a printing press. They can print world money.

Starting point is 00:07:51 It is world money. They call it special drawing rights or SDRs, a geeky name, but that's no one will understand what it is. It's world money. That's all it is. They can print that in unlimited quantities. Their balance sheet is fairly clean. They're leveraged about three to one.

Starting point is 00:08:05 By the way, the Federal Reserve today is leveraged about 113 to one. I mean, it looks like the worst hedge fund you've ever seen. So the next ballot is going to come from the IMF. It's going to come in the form of this world. money, the SDR, but that will completely and irrevocably change the international monetary system. From then forward, the SDR will be the benchmark global reserve currency. We'll still have dollars. They'll still be around and they'll still be held in reserves, but they will no longer be

Starting point is 00:08:33 the world standard. You won't see oil priced in dollars. It'll be priced in SDRs. It'll be transformative and highly inflationary. So all of this is baked in the pie. You can see it coming. It's not that difficult. I take readers through it in the book.

Starting point is 00:08:44 it's also very well documented, well supported. I don't like to make claims without backing it up. So in a 300-page book, you've got 151 and notes and 30 pages of sources, but there's plenty there for readers to sink their teeth into. So, Jim, in your book, you talk a lot about some of these engagements that you have with some of these Fed officials from time to time. And I know that you're floating this idea with the SDRs past them as being the next step and the thing that's really going to kind of bail out the bailouts, the bailouts.

Starting point is 00:09:17 Are they the ones kind of supplying you with that notion that this is the direction this is going? Or are you basically shooting that idea past them and then kind of seeing how they react? It's a great question, Preston. The answer is it's a little bit about depending on the official you speak to. And it's funny, these individuals, they're not homogeneous. So let me, just for the listeners benefit, let me kind of paint the picture a little bit, just in the course of my consulting and a lot of my clients are government directorates or different affiliations I have, different invitations I receive, whatever, you know, a lot of different

Starting point is 00:09:52 venues, but I have had the opportunity to have one-on-one conversations with, you know, Ben Bernanke, of course, former chairman of the Federal Reserve, members of the board of governors, regional reserve bank presidents, senior treasury officials. I mean, sometimes I'm invited in to consult with them and that's how I meet them. Other times you run into them. You know, you might be at the same dinner table at some small event, you know, a lot of different venues. Regardless of the sources, I have had a lot of encounters. Now, they fall into two categories. There are certain U.S. officials who kind of, I would say don't get it. The kind of thing we're talking about, the international monetary fund, the rise of SDRs, the instability in the system, they just don't

Starting point is 00:10:31 get it. By the way, none of these people are dumb. I mean, they're all smart. I mean, they wouldn't be in the positions they're in if they weren't talented and smart. But you can be very talented, very smart. But if you're trained a certain way, if you're using certain models, if you have not acquainted yourself with the latest kind of, I would say, scientific advances in understanding the statistical properties of risk. And you're just going to think about the world a certain way. It's like thinking the world is flat instead of round. A lot of people did there for a long time. There are a lot of examples. But for example, I was in a war game type of thing. It was a closed door session. There were about 20 of us seated around a table and there were fed officials,

Starting point is 00:11:06 treasury officials, CIA, military, think tank people. And we were doing, you know, doing a war game, financial war game type of scenario. And I said something not different than I just said on this podcast, Preston, about SDRs and world money. And this person sitting to my right, a senior treasury official and he kind of harrumped and said, what are you talking about? He almost didn't know what SDRs were. I mean, he knew, but he didn't really think that it was a very topical subject. He said the dollar has been the global reserve currency. It is today and it will be forever. The worst of that effect. And I said, you know, I feel like I'm sitting in Whitehall in 1913, listening to John Bull, talk about how sterling is the global reserve currency and always will be.

Starting point is 00:11:46 And of course, it was just one year later that the demise of sterling began and it was complete not long after that. So that kind of inability to see dynamic change, to see the dynamic processes underway. You do account, I've had discussions with senior monitoring. monetary officials, research type people with the monetary economics, a branch of the Fed, or monetary research. And I'll introduce or start talking about some of the complexity models and other models that I use. And they literally can't process it.

Starting point is 00:12:16 It's not even that they disagree. Like they're not, okay, I'm going to have an argument or I'm going to disagree with you. I welcome that. I mean, I'm always up for a debate. They don't even do that. They just can't process what you're saying. Having said that, there are other people who are very plugged into this world. And I'm thinking of people like Zhu Min, who just recently left as deputy managing director of the IMF.

Starting point is 00:12:37 So the second or third highest official there, depending on how you want to count. But former deputy governor of the People's Bank of China. So imagine that. Here's a PhD economist. He was deputy governor of the People's Bank of China and deputy managing director of the IMF. So really a foot in both camps, the kind of communist Chinese camp. And someone like that, their understanding is much more subtle, much more sophisticated. They understand what we're talking about here perfectly.

Starting point is 00:13:03 They see it coming, and that's a source. But beyond that, we can a little deeper dive on this. A lot of this stuff is just on the website. I like to say the IMF is transparently, non-transparent. These are, you know, you can call them forecasts, but they're not really forecast. I like to say the future is here today. The future's embedded in the present. You just have to know where to look for it and understand the process.

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Starting point is 00:17:49 we find really amazing about the way Soros sees the economy. And I know a lot of people don't like him for his politics and a bunch of other things. But from an economic standpoint, the guy's brilliant. And one of the things that is really interesting about his approach is that he says the entire system is unstable. That's his fundamental thesis is that the whole thing's unstable. And in college, they teach you the exact, literally the exact opposite of that way of thinking. They tell you that the system's always stable and that it goes together. And so whenever I see some of your writing in your book where you talk about complexity theory and that and you're talking about some of these central bankers that do see the world

Starting point is 00:18:29 through that lens, I find it really interesting to see this rivalry that I think is occurring right now in economics where some people don't see it that way and then you got the traditional way of thinking that everything's stable. Yeah, because I think everyone out there, they're probably thinking right now is that they were talking about two different worlds. Could you try to quantify that? And on one hand, we have the equilibrium models and we call it the stability models. And that is what we teach in colleges all over the world.

Starting point is 00:18:58 And then on the other hand, you also have, there are not that many, but you have people like Jim that are talking about complexity. So Jim, perhaps you would be the best person to explain the difference between the equilibrium models that might be broken. And then another theory or the complexity theory that you advocate. head forward in your book. Complex dynamics, complex phenomena have been around for 14 billion years. The Big Bang was a complex phenomenon.

Starting point is 00:19:26 So, you know, the creation of stars and planets and gases and supernova and things that people have witnessed since the beginning of time or the beginning of civilization are all complex phenomena. There's nothing new about complexity. But it is new as a science. When I say science, meaning you can define it, you can describe it, you can write equations, you can do experiments, you can test it. That's what makes something scientific,

Starting point is 00:19:48 because as I say, you can test hypotheses and get useful information from it and then use that for forecasting. So complexity as a science really goes back to about 1960. Now, Sauros talks about reflexivity, but it's kind of the same thing. What he means is that he's really talking about feedback loops or what a mathematician would call recursive function. So it's a function where the output is the input. So I write the equation, I plug in some variables,

Starting point is 00:20:14 make some assumptions, and I solve the equation, and I get an output, and then I take that and plug it back into the same equation and run it again, and I get a different output and so on, so you do it iteratively for everything about computers. You can do it a million times, and you can plot the output on a graph and actually look at the graph and draw conclusions about the dynamic system itself. There's a kind of collapse on itself. That's called a fixed-point of tractor where you get a certain answer, and then you run it against the same answer, it's the same answer to infinity. That's called a fixed point of tractor where everything converges on a single point. Or you get other variations of that where the answer is different. You run against

Starting point is 00:20:54 different and run against different. And there's no pattern. It's chaotic. And then there are patterns in between recurring patterns. It's fascinating to watch. But that's what source means by reflexivity. What he's saying is that when you pursue a policy or pursue an action, you cannot just understand it in a linear way. You cannot just take it and extrapolate and assume more of the same, more the same. What will happen is that the output of the action becomes the input in the next version, and then it collapses in on itself and produces totally unexpected results. And that is a good understanding, whether Soros, you know, has a working knowledge of the mathematics.

Starting point is 00:21:32 It kind of doesn't matter. I think he's on the right track in terms of the surprise element in the system. Now, where I agree with that, where I part ways with Soros is, I lean the other way, I would say, look, the less government, less regulation we have, we can actually disaggregate and break up these systems and make them less dangerous. So it's not that we're going to be able to control human behavior, but we can make the outcome of human behavior less dangerous to financial stability by doing some smart things like breaking up banks and reducing derivatives and so forth.

Starting point is 00:22:01 So these are policy solutions. We're kind of still running through the theory at this point. But I do talk quite about this in the book. And look, if you want to be a scientist, bring it on. let's describe the science, write the equations, test it, do models, and look at output and look at actual empirical data and see what works. And when you do that, what you discover is that equilibrium models are a really poor description of how market works and complexity models fit extremely well. You don't have to torture the bell curve to get a fat tail, a power

Starting point is 00:22:29 law distribution actually has a fat tail. It's a feature, not a bug, as the saying goes. So you're right. We were, you know, I actually had a lot of difficulty with undergraduate economics. I went to graduate school in economics, and then I've studied quite a bit on my own ever since, and I've had occasion to, you know, I shared an office with Myron Schultz for six years. Myron was the winner of the Nobel Prize in economics in 1997, and along with Robert C. Merton, who was another partner of mine, long-term capital management. So I've had ample exposure to the brightest minds in economics. But when I was studying economics as an undergraduate, I had a really hard time. And I thought that I just wasn't that smart. Like, I didn't get it.

Starting point is 00:23:08 I found out decades later that it didn't make any sense. The reason I didn't get it was because it was nonsense. So I feel better about that because I was failing to comprehend nonsensical theories. But one of them is equilibrium theory. And what they teach you is that the market produces a natural equilibrium. So, you know, prices get too high. Consumption goes down. And then inventories build up and the producers stop producing as much.

Starting point is 00:23:31 And then prices get lower and then people buy more and the whole thing. And it was itself equilibrating. Whenever anything gets a little bit out of whack, it causes a kind of linear reaction, which brings it back into equilibrium. And then when you apply that to policy, you say, okay, the economy hums along in a nice equilibrium, but yeah, every now and then, inflation gets a little too high, or unemployment gets a little too high, or maybe it's too low, and that drives the inflation. All you have to do is, it's like a top that starts to wobble.

Starting point is 00:23:59 And if you just straighten out a little bit, it'll be back on a nice equilibrium. And the role of policy is just to give it that little push to put it back in. equilibrium. In fact, that's not how the world works at all. That's the worst possible model you can have. The economy resembles an equilibrium system most of the time without being an equilibrium system. It is a complex dynamic system capable of producing extreme unexpected results, almost out of nowhere, what scientists call emergent properties. And so this is why policymakers are surprised over and over again. They did not see the 1998 crisis coming. They did not see the 2007 mortgage crisis coming. They did not see the 2008 panic coming, the global liquidity crisis

Starting point is 00:24:40 in 2008. For the last eight years, the IMF and the Federal Reserve, each one of them gives a one year forward forecast. The IMF actually does it twice a year. Fed does it once a year. They have been wrong by orders of magnitude. I don't mean a little bit wrong. Like you say, I think it's going to be 3.2% growth. Then it comes out of 3.1. I would say nice going, guys. That's a really good forecast. No, they say 3.2 and it's 2.1. then they lower it to 2.5 and it's 1.8. You know, then they say 2.2 and it's one point. I mean, it's ridiculous.

Starting point is 00:25:11 They're not even close. Well, if you have the wrong model, you're going to get the wrong output every time. It's no surprise. You can go back to the minutes of the FOMC meetings in the spring of 2007, I think specifically March 2007. And Ben Bernanke is on the record saying, you know, this mortgage stress will blow over. And it will be fine. Or there's never been a time when housing prices declined in the entire United States at the same time.

Starting point is 00:25:34 Like, those housing price declines are regional or local. Maybe they went down in Texas in 1984 because the banks were having problems down there, but they went up nationally. But they've never gone down nationally ever. Well, that's exactly what happened in 2007, 2008. So they never see it coming. It's not a surprise. They've got their own models.

Starting point is 00:25:54 What is interesting is when you get the right models, as I say, there's a lot of data to support this. You get very good results. And that's not perfect. There's always some uncertainty around it. And you need to have a good dose of. humility when you do this kind of forecasting, but once you see the system for what it is, your capacity to forecast goes way up. Amazing, amazing discussion.

Starting point is 00:26:14 And I would actually, Jim like to transition into talking specifically about your book. And because one of the interesting thing in your book is that it starts out with a conversation between you and a high-ranking representative from Black Rock. And surprisingly, you learned that the regulators pressured Black Rock to not sell securities during an upcoming crisis. And this is an event I just want to put that out there that happened very recently. So, that might sound like a good thing to many people since one could argue that it would stabilize the economy, not to solve securities during a crisis.

Starting point is 00:26:50 But could you elaborate on why this seemingly reasonable initiative to protect the financial markets might turn out to be disastrous if put into effect? Sure. The conversation you're referring to stick involves something. called SIFI, SIFI, and that stands for systemically important financial institution. So then there's a G-SIFI, which is a globally systemic important financial institution. And then they have variations on that where financial institutions specifically refers to banks, but they've swept in other kinds of companies, including at the time General Electric,

Starting point is 00:27:25 Credit Corporation, they were in leasing credit cards, consumer finance, etc. Interestingly, in the years since I started writing the book, The Road to Ruin, the regulation of General Electric got so onerous that they actually sold all those divisions. General Electric today is kind of out from under what we're talking about right now because they've returned to their roots as an industrial equipment and electronic technological corporation. They're very happy making jet engines and wind turbines and electric locomotives and a lot of other things. but they took one look at what life was like under the thumb of the Federal Reserve, and they basically sold off all their financial assets. So they're kind of out of that trap. But a lot of others are not, including Metropolitan Life Insurance, Prudential Insurance,

Starting point is 00:28:09 and, of course, the one you mentioned Stig, which is BlackRock. Now, again, for the listeners benefit, BlackRock is the largest asset manager in the world. Most people have heard of them, but if you haven't, I mean, their assets are in the tens of trillions of dollars. they're bigger than most sovereign wealth funds, bigger than any of their competitors. And the question was, the question that came up at this dinner that I described in the book with one of their senior officials. And a lot of times in these things, I don't mention the person by name. I mean, there's no point in that the conversation is what counts.

Starting point is 00:28:43 We were talking about the government's efforts to include Black Rock in this category, in the CIFI category, so they could in effect regulate them. And I'd been in the papers, and I said something to the effect of, well, you know, it's kind of a pain, but they really just want your information and they want to know your positions and it's a little more compliance work for it for you, but it's not, it's something you can't live with. You guys have the resources to do it. And she kind of leaned forward and said, no, that's not it. They want to tell us we can't sell securities. They want to actually stop us from doing that if there's another financial panic. And that hit me right between the eyes. That was a shock. But the reason for it

Starting point is 00:29:17 becomes very clear. Now, Black Rock was pushing back against all this, against the government's efforts to do this. And their argument was, hey, we're not a bank. We don't have liabilities. A run on the bank, a bank is a leveraged institution. It has assets in the form of securities and investments and loans and so forth and then has liabilities, mostly in the form of deposits and there could be bonds and notes and other things on the liability side. But a run on the bank is when all the depositors want their money back and they line up in the bank and the bank can't sell the assets fast enough to get the money. They owe the money short term, but the assets are long. term and they start dumping them and that sends security prices down and that causes a market

Starting point is 00:29:58 panic and this is kind of a typical bank run and the phenomenon is pretty well known and there's some precautions against that but black rock saying we don't have those liabilities we're an asset manager we take assets under management from clients we charge a fee we manage them but those assets belong to the clients and there are no liabilities we're not funding this with debt and deposits there's just there's just things that people own and we manage the for them so why on earth should we be included in this? That was the argument. Well, it makes pretty good sense on its face. You're not going to have a run on BlackRock. There's nothing to run. They don't have liabilities. But what this conversation revealed is that that was not the government's agenda.

Starting point is 00:30:36 The government wanted to basically freeze BlackRock, tell them that they couldn't sell in a panic. Now, who are the clients of BlackRock? Well, it's China Investment Corporation. It's CalPERS, the California employee retirement system. These are some of the biggest, counts in the world. So when you control BlackRock, you indirectly control China. If you tell BlackRock they can't sell client assets, you're effectively locking down China. The United States has no jurisdiction to tell China what they can do with their money. But if you put Black Rock in the middle and assert some regulatory control over them, then you can. And this is part of a much larger effort. And I have a whole chapter in my new book The Road to Ruin on this called Ice 9. And for those not familiar,

Starting point is 00:31:21 ice 9 is an idea. I lifted from Kurt Vonnegut, famous author, novelist of the 20th century. And the plot device of ice 9 in the book was there was sort of a brilliant physicist who invented this doomsday machine. And he called it Ice 9. It was a polymorph for molecular variation of the H2O molecule for water. But it had two differences from water. One is that it had a melting point of 114 degrees Fahrenheit, which meant that it was frozen at room temperature. And the other characteristic was if a molecule of ice nine came in contact with a molecule of water, the water turned to ice nine. And so you had it in a vial, I had it in a couple of vials. And the plot was, you know, if you opened the vial and poured the ice nine into any stream,

Starting point is 00:32:05 then that stream and the river and the oceans and the lakes and all the water in the world would freeze and the planet would freeze and life on Earth would die. That was the doomsday machine. And I bring that into the financial sector as a way of describing how the elites will freeze the monetary system, freeze the financial system in the next panic because it'll start somewhere. Let's say it starts in the money market funds and you lock down the money market funds. The money market funds suspend redemptions. They say, we won't give you your money back. Well, then everyone will just go to the bank and take the money out of the banks. Then you're going to have to close the banks and reprogram the ATM so you can only get maybe $300 a day for gas and groceries.

Starting point is 00:32:43 Well, if you close the money market funds and close the banks, everyone will sell stocks. So you have to close the stock exchange, et cetera. And the same way that ice nine molecules spread exponentially, geometrically from molecule to molecule until all the water in the world is frozen, by the same token, you're going to go institution to institution, market to market and lock down the entire system so nobody can get their money back. So I call it ICE nine as a shorthand for this plan to basically close all the markets and freeze everything. They'll say it's temporary. We'll see how soon they reopen it, but it will basically be to buy time in a panic until the IMF can convene a meeting get the rack together and relinquify the world with these SDRs. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:36:53 this seems too much out there are really going to freeze the system. But I also know there will be a lot of Europeans listening and saying, well, look at what happened in Cyprus in 2012 and in Greece just a year ago. Could you tell us, Jim, what actually happened in those two countries? And is it really true that we might see this on a much grander scale and how those situations compare? That's a great question, Stig. And it kind of goes back to the point I made earlier. You know, in the last segment, I was talking about, you know, closing the banks, closing the money market funds, closing the exchanges, freezing the system. And I can just picture a listener rolling their eyes and go, boy, this guy's really out there, you know, this sounds like extreme. And that would never happen.

Starting point is 00:37:37 It can't happen here. And I said earlier that I never make any claims without providing the backup. And the point is every single thing I described, the legal authority is there. many of these legal authorities have recently been changed specifically to allow what I'm describing, and everything I'm talking about has happened before elsewhere in the world and in the United States. So there's nothing unprecedented and nothing for which the elites are not prepared along the lines I just described. Now, let me give you specifics on that. Until very recently, really just in the past couple months, money market funds were not allowed to suspend redemptions.

Starting point is 00:38:12 By the way, money market funds is one of the great misnomer of all time. people go, I have my money in a money market fund. Like, no, you don't. It's not money. If it's in a money market fund, you're a unit in a particular form of mutual fund. And people go, oh, yeah, but I can call up my broker and sell my units and they'll wire the money to the bank. That money will be in the bank that tomorrow so I can pay my kids a tuition or buy a house or whatever I need that money for. Well, what if the money market fund spends redemptions? What if the bank is closed, et cetera? It's not, you may not be able to get it. But the point being, in 2008, there was a run on the money market funds.

Starting point is 00:38:48 Everybody was pulling the money. Like moving it to the banks doing exactly what I just described. Whatever they can sell the assets for, that's what you get, number one. But more importantly, and this is what's going to happen, they have the ability to suspend redemptions, which means they don't have to give you your money back. They can issue an announcement saying, sorry, house closed. We've pulled up the drawbridge, close the gates, and you cannot get your money back until further notice. this is very new.

Starting point is 00:39:12 And it was done specifically to prevent a repeat of 2008, because they don't want to guarantee all these money market funds again. They don't want to watch the system be bled dry. They're just going to freeze those accounts. And people don't realize this. I mean, they might have, you know, you get your monthly brokerage account statement from Merrill Lynch or Charles Schwab or whatever.

Starting point is 00:39:29 You know, they get a paper statement. They put these little flyers in there. I usually take them and throw them in the trash. I'm sure a lot of other people do likewise. But if you read them, what they say in the fine print is that we can do this. Now, this has always been true with hedge funds. I've read hundreds of hedge fund offering documents. I've never seen one that didn't have the ability to suspend redemptions.

Starting point is 00:39:48 But investors know that. I mean, you know, sophisticated investors know that. They know what they're getting into. But this is brand new in money market funds, and it is the law today. There are other legal authorities that go all the way back to the Trading with the Enemy Act of 1917. That allows the U.S. to freeze assets. Something called the International Emergency Economic Powers Act of 1977, gives the president dictatorial powers to basically do anything, closed banks, closed stock exchanges.

Starting point is 00:40:14 In 1933, President Roosevelt, by executive order, closed every bank. Just closed, imagine that, by executive order on his first day in office said all the banks are closed. He did not say when they would reopen. Turns out it was about eight days later, but nobody knew that at the time. Nobody knew when those banks were going to reopen. In 1914, the New York Stock Exchange was closed for five months from July to December, 1914. And you're right.

Starting point is 00:40:38 what we saw in Cyprus and Greece. In Greece in 2015, people were flying from Athens to Frankfurt with empty luggage, filling it up with euros, flying back to Athens so they could spend some euros. The ATMs were closed. The banks were closed. The debit cards didn't work. The credit cards didn't work. People were resorting to barter. As I say, leaving the country coming back with notes. So don't tell me this can't happen. It has happened. And just to wrap up this bit stick, but again, to make the point, in November 2014, Brisbane, Australia, G20 meeting. leader summit. So who's there? Angela Merkel, President Xi of China,

Starting point is 00:41:12 President Obama of the United States. They issued a final communique. And in that communique, we're working papers, one of which is the bail-in plan. This is the ICE-9 plan. And they lay it out. They said, you know, we're not going to use taxpayer money to bail out the banks anymore.

Starting point is 00:41:26 We're going to use the depositors' money, the stockholders' money, the bondholders' money. You still have a hole on the balance sheet. You still have to seize somebody's money. But it's not going to be the taxpayers. It's going to be people with investments, stocks, bonds, and deposits. that's what I mean by ICE nine.

Starting point is 00:41:41 Yeah, that's what I think a lot of these people that are potentially buying some of these really scary banks over in Europe, call it Deutsche Bank or whatever, that own the debt, own those bonds. I don't know if they aren't aware of what bail-ins are, but that would be my biggest concern with some of these banks. I can't imagine buying some of this debt on some of these banks over there. The other thing I wanted to highlight, Jim, that I think really goes well with this. So we listen to a lot of things that Ray Dalio says, and one of the things that we We love that he talks about is the focus that the typical investor has, the span of what they're

Starting point is 00:42:14 referencing, their reference point or their baseline is usually like a couple years, a decade at most of what they think is in the realm of possible because of what they've actually seen in their lifetime or what they've participated in. And when you take and you widen that scope and you open up that aperture to within a lifespan or you even go a lifespan and a half, how much more could potentially happen in the future, which you could potentially be aware of, it just goes exponential.

Starting point is 00:42:44 So you're talking a lot about things that happened in the United States back in the 1920s, 30s, and 40s. And for most people, A, they have no idea what some of those events are. And B, they have this frame of reference. Oh, that could never happen. That was 100 years ago. That could never happen in my lifetime. And that's where I think people really don't place enough respect for what the realm of possibilities might actually occur.

Starting point is 00:43:09 And I mean, like you said, 2015, Greece, people couldn't even go to an ATM and pull money out. This was last year. Right. This is last year. It's the developed economy. It's a member of the euro. We're not talking about Zimbabwe here. And you're absolutely right, Preston.

Starting point is 00:43:22 I mean, I'll give you a personal anecdote along those lines. But, you know, I was at long-term capital management from start to finish. I was there in early 94 before the fund had its money before the fund closed. And then I was there through the panic in 1998 and stayed a year after that to kind of clean up the mess and start the wind down. And I remember talking to one of the partners after the crisis. So we all stayed in place. I mean, the bailout was September 28th, 1998, but I stayed around to August 99. But that year, late 98, early 99, we were unwinding the positions.

Starting point is 00:43:56 We had new ownership at Walsh. Street had taken over, the 14 families, as I call them, had taken over the balance sheet. But I was talking to one of the quants. You know, in my job, I was the lawyer, you know, so I, again, I negotiated the bailout, negotiated a lot of the contract. I was around. I knew everything that was going on. But I wasn't, at the time, I wasn't highly trained in risk management.

Starting point is 00:44:16 I have been, I spent the 16 years or 18 years since then doing exactly that. So I'm a lot more conversant with it today. But I said to one of these guys, I said, you know, I have. How could this go so wrong? You know, we had all these models, you had all these computers, you had all these covariance matrix and regressions and present value calculations, and I know how much time and effort everyone put into it. How could it go so wrong?

Starting point is 00:44:41 And the guy shook his head, he goes, I don't know, I don't know. So we had these, we took these relationships, you know, all the way back to 1985. 1985, but what he meant was 1985 was approximately the invention of the swaps markets. Those were the earliest days in swaps. So if you had the entire price history of the swaps market, and it would have gone back to about 1985. But I thought, well, there are always substitutes. I mean, you can look at the spread between government bonds and railroad bonds, right?

Starting point is 00:45:07 That's a, in 1885, in 1885, railroads were the best industrial credits out there, and their bonds were gild edged, and they were doing a spread to treasuries, and that would have been some indication of what credit risk looked like. And I thought to myself, you know, but this is a complete lack of imagination. By the way, this guy had like a 160.

Starting point is 00:45:26 IQ, you know, MIT train. He knew the numbers, but he didn't know history. He didn't have the ability to do exactly what he described Preston and that Ray Dalio said, which is, you know, widen the aperture, get a longer perspective. Okay, so the swap market doesn't go back to beyond 1985. Credit goes back to like 5,000 BC. I mean, there's a famous book, A History of Interest Race that goes back to Mesopotamia in like 2000 BC. So you can work this up.

Starting point is 00:45:53 And by the way, one of the, often the nicest compliments. I get on my books, hopefully the road to ruin, but also, you know, currents awards and the death of money from younger readers who like the historical parts. Because they just haven't been taught it or they haven't had time to acquaint themselves with it. And maybe they got a good modern education and economics or some applied mathematics. But for some reason, they never got the history. And when you take them through the economic history and just make the point that all these things have happened before, and there's no reason to think they won't happen again, the idea that somehow we're twice as smart as, you know, people 50 years ago, we're not. I mean, we're about to say, you know, we know a little more,

Starting point is 00:46:30 maybe some scientific advances have been made, but we're not smarter than people 100 years ago. We have the same cognitive biases. We have the same prejudices. We're prone to the same mistakes. No reason these things won't happen again. Hey, Jim, thank you so much for joining us for this first part of the episode. For everybody listening, next week, we have the second part of our interview with Jim. But before we hang up here and finish this first part of the show. I want to give Jim a chance to give a hand off to his websites, his books, and just kind of tell people where they can learn more information about you, Jim. Thank you, Preston. I really appreciate that. My new book is The Road to Ruin. It's available on

Starting point is 00:47:09 Amazon, also at Barnes & Noble. At independent bookstores, I have a website, www. James Rickardsproject.com, Twitter handle at James G. Rickards. And I put out a pretty steady stream of comment about the international monetary system. So look forward to welcoming all the listeners to those venues. In this part of time in the show, we would like to say a special thank you to a person in the TIP community, Christoph Wolfe. Christoph is now on his third year of posting on a forum and the quality of the posts are always top quality. As a small token of gratitude, We'd like to give you access to our chapter-by-chapter video course of the Intelligent Investor and also our new course, How to Vest in ETFs.

Starting point is 00:47:53 I do want to stress that this is nothing compared to what you have done for the TIP community and we still hope we can continue to repay you for all your hard work. And for anyone that would like to check out our courses, we have also free investing courses in there as well. You can check out TIP Academy, which you can find on the navigation bar on our website. That was all that we had for this week's episode. Stay tuned for the second part of the interview with Jim Ricketts next week. Thanks for listening to The Investors Podcast.

Starting point is 00:48:24 To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www. www.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

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We Study Billionaires - The Investor’s Podcast Network - TIP 113 : Jim Rickards and the Road to Ruin (Business Podcast)

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