We Study Billionaires - The Investor’s Podcast Network - TIP137: Jim Rickards - Interest Rates and Central Bankers

Starting point is 00:00:00 You're listening to TIP. All right. It's with great pleasure that we welcome back one of our most popular guests that we've had on the show. And that's James Rickards. For anybody who doesn't know James Rickards, he's a New York Times bestselling author for multiple books. He's written the book Currency Wars. He's written the book The Death of Money, the New Case for Gold. He has a whole bunch of books out there.

Starting point is 00:00:23 In fact, his book Currency Wars, Ray Dalio, the famous billionaire, had personally read this book. and distributed this to all of his employees within his company because he felt it was such an influential read. In this episode, Jim will outline why the Fed will raise rates the next 10 quarters like a clockwork and if and how you can position your portfolio for changes in the interest rate. Finally, we're going to discuss whether or not Ben Ben Ben Ben Ben Anki and Jen Yellen might have had good intentions, but had basically put the U.S. in the same situation as Japan. All right, guys, so hold on to your hats because here we go.

Starting point is 00:01:02 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, so Stig and I are just so excited to have one of our favorite guests here at TIP back on the show. Jim Rickards, thank you for taking time out of your busy day. This is a late one for all of us. Well, not for Stig. It's early morning for Stig, but for Jim and I, it's, it's, It's dark outside and we're sitting down to have this conversation.

Starting point is 00:01:42 So, Jim, thanks for taking time out of your busy day to talk with us. It's great to be with you, President, staying. I'm very happy to be on the show. Thank you. So let's jump right into this, Jim. Let's talk about interest rates in the United States. We recently had a conversation with Raul Powell, who I know you're friends with some of the guys over there at Real Vision. And Raoul threw out this amazing narrative to us.

Starting point is 00:02:05 Everyone around the world saying, you know, interest rates are going to keep climbing. you had people like Jeff Gunlock saying, what number was he saying? Stig, the 3 to 5% or something within a year. It was something really absurd. And Raoul comes on our show and he says, you know what, everyone's got it all wrong.

Starting point is 00:02:21 He said, these rates are going to go lower. And he said this to us about, I don't know, when do we have that conversation? About a month and a half ago, so far he's been dead on. And I'm curious, and his big narrative was when oil rebounded, it made the inflationary numbers look higher

Starting point is 00:02:37 than what they actually were, and it gave the Fed an opportunity to start ratcheting in some interest rates on the federal funds rate. They started bringing that in while they had the opportunity. But his opinion was this 35-year downward trend of the 10-year treasury and all the other interest rates that are running off of it is too much of a pressure to deal with, and it's going to continue this downward pressure. I really want to hear your opinion on this. And then, do you agree with Raoul? Do you agree with the Ray Dalios and all the other people? the world that are saying these rates are going to go up. Where do you stand on all this? Well, it's a great question, Preston. Let's unpack it a little bit because, well,

Starting point is 00:03:16 whenever anyone says interest rates, to me, a little bell goes off in my head. And I say, well, are we talking about nominal rates or real rates? Because there are two very different things. Real rates are really what drive things like commodity prices and investment, et cetera. But nominal rates are the things that everyone talks about all day. So we're sort of talking about the thing that doesn't matter and missing the thing that does matters. That's the first problem. second thing is rates is a little s at the end of it which is plural so you got to talk about the short end of the curve and the long end of the curve and there's a lot of dynamics between them you know there are two to 10 year spreads and of course they steepen and flattening meaning the spread

Starting point is 00:03:53 between two your notes and fiber you knowts can get smaller that's a flattener and they can get larger which is they call a steepener but it gets more complicated than that which is you have bull steepeners and bare steepeners and ball flatteners and bear's flatteners depending on what's driving that dynamic in the yield curve in terms of expectations about inflation and all that. So I put that out as an introduction because you talked about Rawoul's view on, I assume, 10-year treasury notes. It sounds like what he was talking about, but kind of linking that to Fed policy, you segued perfectly into what the Fed did.

Starting point is 00:04:25 And to me, those are two different worlds, not unrelated, not unrelated. So with that as a preface, let's just kind of take that one other time. First of all, I do know Roel, great guy, very smart guy, is not surprised you had him on the program because you've got great guests one after the other. I not only agree with him completely, I've been saying this for a while, and maybe Roe and I, and four or five others are the only ones, but I see tenure notes going down perhaps a low 1% when all of a sudden done. So, you know, 70, 80 basis points. If that sounds extreme, I just remind listeners that yielded maturity on JGB benchmark 10 year notes has been negative for a long time, German Buns, which is the Eurodenominated,

Starting point is 00:05:05 a German issued benchmark has been in and out of negative territory. There are intermediate to long-term bond markets all over the world of major economies. I'm not talking about Zimbabwe here, but negative yields. So what's the United States doing up tonight as we speak about 2.2 percent? That's a huge spread. And you talk to bond traders and they go, well, that's all about inflation expectations. If you think there's going to be more inflation in the U.S. and you want more protection for your money and you want higher yields and all that.

Starting point is 00:05:33 I agree with our rule. I don't see the inflation. I've said, and this goes all the way back to my first book, Currency Wars, which came out in 2011 on like page three, like Roman three little I, like in the introduction before you even got to the book, I talked about the unstable equilibrium between inflation and deflation. I used the metaphor of a tug of war. And I say, when you have a tug of war,

Starting point is 00:05:55 you've got two pretty evenly matched teams. Two teams are really, you know, kind of strong people typically, if you're talking about the competitive version. and when it starts, not much happens. I mean, you have enormous, enormous force being exerted on the rope in opposite directions. And yet because the force is offsetting in opposite direction, it's not much happens. Now, eventually it's a little action. Then one team wears down the other and one team collapses and they get pulled over the line by

Starting point is 00:06:20 the winning team, but that can take a long time. And I saw inflation and deflation in that kind of dynamic. So what are the deflationary forces? Who's on the deflation team? Well, you have demographics, which I think we're all pretty familiar with at this point. You have debt de-leveraging. If I'm over-leveraged, what do I do? Well, I sell some assets and take the money and pay off the debt, reduce my balance sheet.

Starting point is 00:06:44 Well, when I sell assets, what's happening to the price? Probably going down. Other people are doing the same thing. So what does that mean? Well, it means more deflation because asset prices are going down. The third element is technology. And again, I don't need to belabor it. But, you know, when you see, you know, smartphones go from $900 to $200 and some of them

Starting point is 00:07:03 they're given away, that tells you something as well. So demographics, deathly leveraging and technology are all natural deflationary forces. To that, I would add some behavioral, psychological, not just residue, but maybe intergenerational, almost post-traumatic stress syndrome from the financial panic of 2008. You know, when I grew up in the 50s, my grandparents, And even my parents, they would recycle newspapers and save tin cans. And it wasn't out of environmental consciousness. I don't think they minded that.

Starting point is 00:07:35 It was because you could get money for them. I mean, that's how frugal people were. You were not spent through it because they were still 20 years. I didn't live to the Great Depression, but 20 years after the Great Depression, I lived in a society where people remembered that and enacted accordingly. It wasn't until the 60s and 70s when the baby boomers grew up and we just thought we could spend money like there was no tomorrow. But now, because of the 2000.com crash, the 2008 financial panic, we have a generation who have been kind of burned. You know, when you see when you work 35, 40 years and you see half your retirement income go up and smoke, it probably changes how you're going to look at the future and save more and we're kind of in a liquidity trap.

Starting point is 00:08:15 So these are all natural deflationary forces. What are the inflationary forces? Well, in a word, monetary policy, money printing, $4 trillion on the Fed balance sheet. but when you look around the world and you realize that the ECB and the Bank of Japan and the Bank of England and the People's Bank of China, it's not really much of a hard currency, but put them in the mix. This looks more like $20 trillion of money printing, not to count the $100 trillion of debt that's been piled on top of that. So you have this money printing, you know, leveraging up aspect of it as well. So these are the two teams. And what's been happening really the last seven years is they're fighting each other to a standstill.

Starting point is 00:08:58 Inflation has not taken off the way some of the Fed critics expected. We don't have hyperinflation. We can't even get to the Fed's inflation target. Forget about hyperinflation. On the other hand, we haven't fallen into a deflationary spiral and inflation is still low. But to me, that's not a balance. That's not an equilibrium at one and a half, two percent. That's the result of two tectonic plates pushing against each other, creating

Starting point is 00:09:22 energy and the potential for a major earthquake somewhere down the road. So that's the lay of the land. Now, with that said, there's nothing that's causing the deflationary forces to go away. So every now and then you have these little inflation rallies and some of its commodity price driven, some of it's, you know, QE1, QE2, QE3. I do think it's interesting. One question I would ask is, why did the Fed start QE2? Well, the answer is QE1 failed. Why did they start QE3? because QE2 failed. There is no way in 2009 when we were in QE1 that the Fed thought we'd be sitting here in 2017

Starting point is 00:09:57 with first quarter estimated growth below 1%. There's no way. They wouldn't have gone down this road if they thought this is where we would end up. They were pretty sure we'd get some self-sustaining trend growth. And of course, growth is not return to trend. We're in a depression. The way to understand the United States is we are Japan.

Starting point is 00:10:14 You know, the people like Bernanke ran around the early 2000s. They're raiding Japan. telling them they were idiots because of their monetary policy and what was wrong with them. They had a lost decade. Of course, now we're in the third lost decade with Japan, 20-year depression. What's wrong with your people? Why can't you get out of it? And yet, Bernanke and now Yellen have made every single mistake the Japanese made.

Starting point is 00:10:35 We've basically replicated Japan with, you know, below-trend growth, occasional technical recessions, occasional dips into deflation, et cetera. So rates have come down, you know, 15, 10, 5, 4, 3-second countdown. down. No reason they can't go lower. I know so many guys have been carried off feet perished on the short trade where they're like, oh, those rates just can't go any lower, you know, short them. And guys in the bond business 20, 30 years, they can't believe we're talking about low single digits. You know, it's interesting because we were talking with Bill Miller from Lake Mason back in December. And he had told us that he was literally putting

Starting point is 00:11:10 shorts on, you know, the 10-year bond. And when he was telling us this, we're like, oh, bond yields have to start going up. If Bill Miller's putting short, shorts on this. It has to be, you know, getting ready to sell off. And you know what? It is just, it went up to like 2.6, but ever since that, it has been just getting hammered going lower and lower. So I'm curious with this question here, Jim, you know, we went how many years, eight years with a 25 basis interest rate rise from the federal funds rate in eight years one time. And then in December and then in February, we had the Fed move two times for 50 basis points. Do you see a that trend continuing where they're going to continue to try to ratchet it up?

Starting point is 00:11:52 I can tell exactly what the Fed's going to do. And you can do this at home. So if listeners want to take notes, it's really easy. I don't get it. I want to highlight to our audience the last time you came on the show, I want to say it was November. And you told us the Fed is absolutely raising rates in December. And you were 100% right. So I want to throw that out to the audience before you tell us your opinion here. So let's hear it. Well, thank you. But let me just take the story a little bit further. I'll give you another data point, Preston. The reason I'm doing this is not to pat myself on the back, but basically to validate the model, because it's the model that I think the listeners can take away with and have some value. So you're right. I did say that in December,

Starting point is 00:12:30 but beginning in late December, okay, so they raised rates on December 14th. The whole world knew that. In late December, I said they're going to raise rates in March, 2017. And there is a Fed Fund's futures contract, and based on the pricing, you can get an implied probability of a rate hike at a series of forward FMC meetings. And the market was giving it a 28% probability. And I said, I hate to say anything's 100%. That's kind of dumb. So I said, I was giving it 75.

Starting point is 00:12:57 My brain, I was kind of saying 80, but it came out of 75% probability in late December. So the market probability stayed at 28, 30%, the entire month of January, the entire month of February. I went from 75 to 80% in January. So I'm at 80% all January and February. the market's at 28%. What happened? On the last two trading days of February, in the first trading day of

Starting point is 00:13:21 March, the market probability went from 30% to 90%, boom, just like that. In two days, two or three days, the market goes to 90%. Why? So we converged to 90% by March 15th. We were all 100%, and then the Fed race rates. So that whole gap, if you draw two lines on a graph and just go horizontally from the Y axis at 80% and 30% look at that gap and then it closes at the end. I mean, that was the money to be made. made there. Now, here's why. And I'm absolutely not smarter than all the other people who are commenting and all the people on Wall Street. But I'd like to say if you have bad models, you'll get bad results. And if you have good models, you'll get good results. So here's the model. First of all, what is the problem that Faye's trying to solve? Let's take a quick break

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Starting point is 00:18:03 That's Shopify. com slash W-S-B. All right. Back to the show. What is their solution? And then what are the exceptions to that so that we can have a complete predictive analytic model? The problem they're trying to solve is the following.

Starting point is 00:18:21 We know from a long series of experiences, you know, 30 or more business cycle since the end of World War II, that when the U.S. is in a recession, you have to cut interest rates 3 to 4% to get the U.S. out of a recession. You need three to 400 basis points of cuts to get the U.S. It's like a plane heading for the ground. How do you pull it out of a nosedive and get it back up in the sky? The answer is 300 basis points of cuts. How do you cut interest rates 300 basis points when you're only at 75 basis points? The answer is you can't. And forget about negative rates. The evidence is not pretty good that negative rates do not work. In other words, negative rates are not more of the same.

Starting point is 00:18:58 When you go from, let's say, a half of 1%, then you go to a quarter, and then you go to zero, and then you keep going to negative 25, you didn't just ease by another 25 basis points. The evidence from Japan or Europe is that you're through the looking glass and you have very strange effects, really unintended consequences. I'll give you a couple examples. So the conventional theory is, well, the more I cut interest rates, the more stimulus I get, that's a joke, but that's what they think.

Starting point is 00:19:23 But if I go negative, you're absolutely going to. going to go out and spend the money. Because if you don't spend the money, I'm going to take it away. You sit there long enough. You'll have nothing left in your bank account because I'm going to take with these negative interest rates. I'm going to take it always. So people will run out and spend. And the other thing is that it's obviously, you know, from the lending point of view, they'll borrow money, you know, because the bank pays you to be a borrower. But here's what happens in the real world. This is the difference between academics and human beings. When people see negative interest rates, people have goals in mind. They have lifetime goals, right? They want to kids' education,

Starting point is 00:19:53 parents' health care, their own health care, retirement. If you start taking their money away with negative rates, guess what they do? They save more. Like, hey, I got to put my kids through college. You're taking my money, well, I better save more. And then what kind of signal is the central bank sending with negative interest rates? They're sending a deflationary signal. So people go, well, if you think it's going to be deflation, I'm not going to spend money. I'll wait until the price comes down. So you're trying to encourage lending and spending. And what you get is more savings and no spending deferred spending. You get the exact opposite of what you want. So again, another egghead experiment gone awry. But the point being to negative rates don't work.

Starting point is 00:20:28 So zero bound really is zero. It really is a boundary. And, you know, Bernanke has said this in his recent writings and I think he's right about that. So back to the problem. How do you cut interest rates to 300 basis points when you're at 75? Well, the answer is you can't. So you have to raise them to 300 basis points. So the problem the Fed is trying to solve is how do they get rates to three and a quarter percent before the next recession. Now, I'm not saying the Fed sees a recession, and that's easy because the Fed never sees recession. In 102 years, the Fed has never seen a recession, never forecast recession.

Starting point is 00:21:00 But they know their economic history. We are eight years into an expansion. It feels punk. I mean, the growth is anemic, but, you know, labor force participation is low, productivity's dropping. There are a bad things going on. But, in fact, we are in the eighth year actually coming up on soon be entering. the ninth year of an expansion, which began in June 2009.

Starting point is 00:21:22 Which is the second longest in history, which I think of people don't realize is this thing's been running longer than almost any other business cycle we've ever seen. Right. Well, you have a hard time convincing most Americans that we're not still in a recession. Depressions are different than recessions. The technical definition of a recession is two consecutive quarters of declining GDP with rising unemployment, a couple other bells and whistles, little subjective factors, but that's basically it. So people, when you say depression, they're like, huh, depression sounds worse than a

Starting point is 00:21:52 recession. And if recession is two quarters of declining GDP, then a depression must be like 10 quarters of declining GDP because it's got to be worse. But that's not the definition. The definition of a depression, you can have growth in a depression, but it's below trend growth. In other words, if trend is three, three and a half, and you're actually banging out one and a half two, that gap between, let's say, one and a half and three and a half percent growth. That's depressed growth. It's an output gap. It compounds over time and you never get it back. We are losing trillions of dollars of wealth. We are impoverishing future generations on a relative basis because there's inability to get back to trend growth. So the reason American people feel this and don't

Starting point is 00:22:33 listen to the economists and they're right is because we're in a depression. So leaving that aside, The Fed at least understands the business cycle and the fact that the next recession, they say they don't die of old age, but they do die. And we're getting closer to the next one. So they're in a desperate race to get rates up to 3.5% before the next recession hits so they can cut them to get out of the recession. The question is, can you raise rates enough to cure the next recession without causing the recession you're preparing to cure? That's the dilemma.

Starting point is 00:23:03 That's the finesse. My answer is no. They're not going to be able to do it, but they think they can. Why are they in this box? Well, because Bernanke should have raised race in 2010, 2011, in the early stages of the expansion, when the economy would have been much better able to bear it than it is now. Brunachy skipped a whole cycle. He skipped a whole rate increased cycle to pursue these wacky experiments in QE and zero-winterday policy and all that.

Starting point is 00:23:29 I spoke to Bernanke about this. And he used the word experiment. He said, this was an experiment. man. He, you know, Bernanke made his academic reputation by studying the Great Depression, you know, in the wake of Friedman and Anna Schwartz and some others, but he was a great scholar of the Great Depression, and he got his chance to kind of try out his theories. But what he told me was, he said 30 years from now, some new Ben Bernanke, some young scholar will look back and tell us if we did a good job or not. We actually don't know right now. See, the Great

Starting point is 00:24:01 depression was really two technical recessions, 29 to 33 and then 1937, 38. But from 33 to 37, we had an expansion, but the whole thing was a depression because we never got out of it. You know, the stock market recovered the 1929 high in 1954. It was a long time to get back to even. But Bernanke's mantra was doing something is better than doing nothing. I completely disagree. It's better to do nothing if you don't know what you're doing. And this is really the monetary equivalent of the Hippocratic oath. You know, the doctors say, you know, first of all being a doctor is first, do no harm. Anyway, bottom line is by pursuing QE and zero interest rate policy, Bernanke failed to raise rates during the early stages of a cycle of expansion, which he should have done. If he had,

Starting point is 00:24:51 if he had, the economy would have been just fine and we'd be able to cut them today, but he didn't. So Janet Nieland now is to make up for a lost time. So that's the mission. But again, And this is what the market completely does not get. And the Wall Street economists don't get. Nobody gets this because they see the Fed raising rates. And they've done the correlations and the regressions back to World War II. And they go, huh, every time the Fed raises rates, the economy is getting stronger. So if the Fed's raising rates, the economy must be getting stronger.

Starting point is 00:25:20 So bid up stock prices, et cetera. But that's like saying umbrellas cause rain. Because they've got the causality backwards. The Fed never leaves the economy ever. the Fed follows the economy. So a normal business cycle looks like this. So you get a little expansion going and unemployment starts to go down, industrial capacity utilization starts to go up,

Starting point is 00:25:41 and inflation starts to go up, and the Fed's watching, watching, watching. And then it keeps going. They go, oh, it's getting a little hot. We better raise rates than they raise rates, but of course they started too late. The expansion keeps going, inflation keeps going up, unemployment keeps going down.

Starting point is 00:25:54 Then the economy starts to cool down, unemployment goes up and then prices go down and the utilization drops and we get into recession like, huh, we better cut. You know, then they cut and cut and cut and cut and then you hit the bottom and then you come out of it again. So think of that as like a nice pretty signway, right? That's a business expansion, business contraction over and over 30 or so time since the end of World War II, with the Fed always following the economy, never leading the economy.

Starting point is 00:26:19 So all the big brands on Wall Street, they've got all this data and they say, well, every time the Fed raises rates, the economy is getting. stronger. That has absolutely been true for like 30 times since the end of World War II. It is not true today. The reason is not true today is because Bernanke skipped the cycle and they're playing catch up. For the first time since 1937, the Fed is tightening into weakness. That's a key thing to bear in mind. The Fed is tightening into weakness. They are not leading the economy to strength. They are not responding to strength, even though Wall Street thinks they are. And there's a great danger that they're actually going to cause the recession.

Starting point is 00:26:56 They're preparing a cure, as I mentioned. The Fed will raise rates, 25 basis points, four times a year from now until the middle of 2019, until they get them to 3.5%. So like clockwork, every March, June, September, December, for 2017, 2018, into 2019, look for a Fed rate hike until they get to 3.5%. At which point, they'll be able to say, all right, now we're 3 and a quarter if we have a recession tomorrow, we can cut them back down to zero again and get out of it. That'll be mission accomplished. Now, this is why I was sitting there in December like, yep, they're going to raise them in

Starting point is 00:27:30 March. And right now I'll tell your listeners are going to raise them in June. There's your Fed response function. There's your baseline scenario. What are the exceptions to a Fed rate hike? Under what conditions will they not raise rates? Because this, everything I just described to you, they've had in mind since March 2015 when Yellen took patience out of the statement. That was the end of forward guidance. And by the way, if you go back to 2015, you know, I said they're not going to raise rates all year and they weren't going to do the lift off that people were looking for it in March, June, September. And they didn't lift off in September because the Chinese rate exchange evaluation, the stock market fell out of bed August 2015. Finally, they raised them in

Starting point is 00:28:10 December 2015. A Wall Street was ready for March. I said, no, June, no, September, no. It wasn't until December 2016 that they raised them the second time. So obviously, there are conditions. under which they don't raise rates, notwithstanding the baseline scenario. So what are those conditions? There are three. Well, four actually. So if you see job creation below $75,000, that will cause them to pause. By the way, pause is the key word.

Starting point is 00:28:35 If you go home through the speeches, you'll see the word pause in Dudley's recent remarks. Pause is the Fed's jargon for we're not going to raise rates. We got the gym scenario, which I took from the Fed is their scenario, or a technical recession. So, you know, we're going to know Friday what the. the first quarter GDP is it's pretty close to negative, but I'm not saying we're in a recession now. We might be. But if you see a recession, they'll pause.

Starting point is 00:28:59 You see job creation below 75,000, they'll pause. By the way, that's a very low bar. You know, if you see a jobs reports, this is the other thing that confuses Wall Street. You see a jobs with 100,000 jobs. So Wall Street goes, oh, that report's really weak. The Fed's going to think twice. No, 75,000 is the number.

Starting point is 00:29:15 Yellen told us that. It was in one of her speeches. You just have to be a geek like me and read all the speeches. So the third factor would be disinflation. So the Fed has this 2% inflation target. They missed it for six years. They're finally getting close to hitting it. By the way, I think the listeners know,

Starting point is 00:29:34 they use the PCE core deflator year over year. There's PPI and CPI and core, a bunch of inflation indices, but we know what they use. PCE core deflator year over year. That actually has been getting close to 2%. But if you see it turn around, if you see that gap down to like 1.5, 1.4, 1.3, then they will pause. The last condition for the pause is a disorderly decline in stock markets more than 5%.

Starting point is 00:30:06 If you see a 6, 7, 8% decline, so if the S&P went down 100 points, Fed doesn't care. Dow Jones goes down 1,000 points. Fed doesn't care. But beyond that, if you see the S&Ps start to go down 150 or the Dow's start to go down 1,500 points in a disorderly way, it looks a little scary. It looks like there's no bottom. It looks like if you see that, they'll pause. So the Fed is going to raise like clockwork four times a year for the next two and a half years, unless you see geography below 75,000, disinflation, a technical recession. If you don't see one of those things, they're going to raise rates. And so right now, I don't see any of them.

Starting point is 00:30:45 I mean, they could all happen, but it looks like, you know, growth is going to be positive. Job creation's been decent, you know, over 100,000. Disinflation is probably coming, but not quite here yet, and they'll want to see a couple months in a row, and the stock market's not crashing. So none of the past conditions are in place, therefore they will raise rates. Simple. 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 00:34:32 that and by predicting that, you're definitely also invited until the next, let's say the next 10 quarters and follow up on that. And of course, I'm smiling what I'm saying it, but it is true what Preston said before, that you were definitely right in predicting the last hike and your reason was correct. So I'm really curious about what we'll see in the next, if not 10, but the next quarters. I remember that time back in 15 when everybody on Wall Street, everyone's saying the Fed's going to hike, the Fed's going to hike. And here's Jim Rickards on Squawk Box or whatever. Every time you said, they're not going to hike, they're not going to hike.

Starting point is 00:35:09 And I mean, you were one of the only people and all of financial news saying they're not going to hike that entire year and you were dead right. Thank you. And the reason I said that, I didn't just pull it out of the air was because one of the pause conditions was in place. Now, it was deflation. The one that wasn't hitting the note was deflation. Job creation was very strong.

Starting point is 00:35:30 We were banging up 200,000 jobs a month. Now, you did have the two episodes, August 2015 and January 2016, when the stock market dynamic took over, which is why they did not raise in March of 2016. It was why they did not raise in September 2015. So those were two specific FMC meetings when I could say they paused because the stock market was in a disorderly decline. But all the others, I based it on the inflation vector because we did have growth and we did have the job creation. We were hitting two out of four, but we were missing one, which was deflation.

Starting point is 00:36:05 Now, today, I don't think we're missing any, which is why my forecast is they're going to raise in June. I think that will change, by the way. I think if you want to go out a little further, they will raise in June based on the fact that none of the four conditions I described are front and center. But by July or August, what I'm looking for is that finesse I described. How do you tighten when the economy is weak without causing recession? I think they will cause a recession or close to it. Either that or the stock market will fall out of bed because the Trump stimulus is not coming as expected.

Starting point is 00:36:37 But either way, I expect that by the summer, we will see two or more of these pause factors emerge. Could be disinflation and stock market route. Could be recessionary growth and disinflation. Maybe job creation will fall off a cliff. Maybe we'll lose jobs. Maybe it'll be four for four, right? So I don't know, but I expect that one or more of the conditions will kick in by July

Starting point is 00:36:59 they will not raise in September, but right now they are on track to raise in June. I'm sure that everyone out there in the audience, they're super curious to hear about how do I play this myself. If I agree with Jim, if I also think that either the Fed will hike or San September they will not hike, how do I make a position in the market to benefit from a petition like that? Well, it's a great question stick, and it's really, really difficult. One of the most tried and true investing techniques is, and it really works very well, it's just trend following. You know, just find a trend, ride it, keep in tight stops.

Starting point is 00:37:39 You know, the oldest saying investing is let your profits run, cut your losses short. So you get something right, roll with it, and you get something wrong, cut it short, get out, get a good night's sleep, wake up the next day, see how you feel. So that's good trading and it's often the case that companies that have bad earning supports that surprise the market, they'll have like three more in a row. So there's good fundamental securities analysis that Benjamin Graham stuff that they teach at Columbia Business School, I guess elsewhere, all good stuff. But here's the problem.

Starting point is 00:38:11 We are in a very different environment. And I know that when you say that, you get a lot of skepticism on Wall Street, the guy who says, oh, it's different this time. It was always wrong. It turns out to be the same, right? But I'll actually say it is different this time. And I just explain one of the reasons, which is the Fed is tightening into weakness for the first time since 1937. So if nothing else, that's different.

Starting point is 00:38:32 The deflationary forces, you've got to go back to the 1930s. 1929 to 1933 was the last deflationary episode in U.S. history. So we're, you know, it's not different in the scheme of 300 years, but it is different in the scheme of 75, 80 years. we are experiencing things that are outside the living experience of everybody on Wall Street, unless you're 95 years old. You don't remember this stuff and you never live through it. And you can read about it, but that's about it. So there are a number of things that are different.

Starting point is 00:39:02 And one of the reasons hedge funds are closing up shop, good hedge fund managers with good track records of losing money. 2016 was only the third time in the history of the hedge fund industry when they had net outflows. The other two times were 99 and 09 when, you know, one of the first. in the wake of LTCM and one in the wake of Lehman Brothers. So that makes sense. But what's up with 2016? Why are people pulling money out of hedge funds? Because the performance stinks. And these are, you know, these are finalized smart season people. The problem is that you can rip apart the balance sheet, read the income statement, read the footnotes, get on the management call, meet with management, talk to your peers, go to the zone conference, do that all day long. And if Angela Merkel

Starting point is 00:39:45 gets out of the wrong side of bed and picks out a fight with the Greek finance minister, you could get hammered for reasons that they never taught you at Columbia Business School. In other words, the point is there are these big, big macro swings and stock trading has become commoditized. Now, like, the whole stock market rallies when it's risk going on and the whole stock market goes down when it's risk off. So a lot of guys trained in all these fundamental techniques, and I'm not disparaging them. It's hard and it's hard to do right and it's good stuff, but you're just getting whipped around by the macro and that's what I do. I'm not a stock picker. You don't want to take start tips from me, but in terms of the macro analysis, these big picture things,

Starting point is 00:40:22 that's kind of what I do. That's one problem. The second problem is because of that, and because of this Fed, I mean, go back to everything I said about the Fed, where they want to type, they are not neutral. They don't wake up in the morning and say, oh, what do we do? They want to type, but they have these pause factor. So this means they flip-flop. And we've had a flip-flop since May 2013. May 2013 was when Bernanke gave the taper talk. He didn't start the taper. He just said, we're thinking about starting the taper.

Starting point is 00:40:50 That was enough to cause an emerging market's debt crisis. I mean, there was risk off. All the hot money flowed out of South Africa, the Iran crash, left Indonesia, Turkey, Brazil, all came back to the United States. Guys were unwinding the carry trade, paying up the short-term debt, closing out the position. I mean, the whole world came uncomfortably close to a meltdown. Certainly the emerging markets thought it was a meltdown, simply because Bernanke just said he might start the taper.

Starting point is 00:41:14 And then in September, they thought they would, and they didn't. They put it back until December 13. So that was kind of punting. And we saw it again. And the whole world was set for liftoff. Remember liftoff? That was going to be in September, 2015, but they put that back to December. They had to go back to Happy Talk.

Starting point is 00:41:31 You know, I recall the first week of September 2015. So the stock market had crashed 11% from August 10th to August 31st. We looked like there was no bottom. But the Fed had sort of led us to believe that we're going to lift off in September 2015 with the first 25 basis point rate hike. They didn't do it. They went to Happy Talk. If you're a fundamental analysis, there are no fundamentals.

Starting point is 00:41:54 What we have is a totally manipulated system. This is what happens. Eight years, nine years of manipulation, you paint yourself in the corner and you cannot escape the room. The Fed has no way out, no good way out. All the ways out that I see are pretty disastrous. But if you're a trader and you're like, well, what's, what's the way out? trend, there is no trend. So the answer to make money, try to get a couple things right

Starting point is 00:42:16 based along the lines I'm saying. I can use the Fed model I just described. There's an opportunity right now today to buy the Fed Fund features. You know, if they're at 60% probability and I'm giving you an 80% probability, you can make some money there. There are ways to make money, but you have to be nimble. You have to be prepared to just wake up and do a 180 and just get out of the chase of what, you know, in terms of the recommendations I have to readers in my newsletter, You know, the newsletter industry is interesting. It's, I analogize it to the daily racing form. You know, if you're going to go to the racetrack, you know, we're not wealth managers or

Starting point is 00:42:48 or money managers. You know, we do research and we put out ideas. If you're going to the racetrack and you want to bet, a lot of betters will pick up the daily racing form. And it's, you know, informed opinion by four or five experts. And, you know, I think CBS gets going to win in the fourth race. And they tell you what jockey is up and the tracks muddy and, you know, how this horse performed at this distance before.

Starting point is 00:43:09 or maybe he's not so good at long distance, but it's a short race and all that stuff. But you've got to make the bet. You're the better. You know, that person who wrote that form is not going to make the better for you. But lately, I've been advising readers to get out. Maybe we make, you know, 30% or 40% on something.

Starting point is 00:43:26 I say, look, take your money off the table and just kind of wait for the next idea because you don't want to give it back. And in a world, if you had it right and things are going to stay the same, you'd let that one run. You'd say, we're going to make a lot more. but things don't stay the same. We have these Fed flip flops, these 180s,

Starting point is 00:43:42 so my advice would be stay nimble. There are no set of and forget a trade. So I think, first of all, I sympathize with active managers. It's a tough environment out there. But my advice is try to get the ideas right. And when you do get them right, be prepared to take some profits and go to the sidelines because none of these trends last long because of the Fed flip flow.

Starting point is 00:44:04 All right, guys. Preston, I really hope you have learned as much from Jim as we have. Stay tuned for next week's episode where we continue our conversation. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only.

Starting point is 00:44:32 Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network, written, permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP137: Jim Rickards - Interest Rates and Central Bankers

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