11/05/14 – Mike Swanson – The Scott Horton Show

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Hey, I'm Scott.
Welcome back to the show.
This is the Scott Horton Show.
This is Libertarian Foreign Policy, mostly.
Right now, I got my friend Mike Swanson on the phone.
Hey, Mike, how are you doing?
Oh, I'm doing great, Scott.
How are you?
I'm doing real good.
Happy to have you back on the show.
Everybody, you know, Mike, he wrote The War State, which is all about Harry Truman, Ike Eisenhower and John Kennedy.
Everything that they did for the national security state and all the ways they tried to fight to constrain it, too.
And a very interesting story there.
He's working now.
Am I allowed to say about this?
Oh, sure.
Go ahead.
Yeah, yeah.
He's working now on the definitive history of the war in Vietnam.
It's going to be awesome.
It's going to it's going to change things.
It's going to be great.
I can't wait to read it.
And so also, as you hear from time to time during the commercial breaks on this show, Mike runs Wall Street Window.
And what he does there is he explains what the hell is going on in the economy to people who want to know.
And then he brings Austrian school understanding.
That is, you know, an actual to the cycles of the market and gives out advice.
So for those of you who have money, pay attention.
And, you know, it's cool about this thing, the Wall Street Window.
I don't know if anybody else does this, but I think it's a great thing that you've set up here, Mike, where and the way it works, everybody is.
He just lets you know all of his trades in his own main account.
Here it is.
This is what I'm doing.
And here's why I'm doing it.
You follow along on a piece of paper and just see whether it's making sense or not.
If you want before you play along in real life, that makes a lot of sense to me.
And, you know, his great success speaks to how well he knows what he's talking about.
So check it out.
Wall Street Window dot com.
Now, I got a bunch of questions for you here.
And unfortunately, I don't know enough about what's going on because I don't have any money.
So I don't keep up with this stuff as well as I should.
But I know a little bit about what's going on in the economy right now beyond just it sucks.
And hopefully you can help straighten me out on a few things.
Now, the quantitative easing.
That's just a fancy name for creating tons of new money in order to buy up bad old debts.
Right.
And they've done this QE one, two, and they said no more.
And then three, four, five.
I don't know how many.
But now they say they finally have ended the quantitative easing.
So does that mean that they've stopped inflating or they're starting to raise interest rates, too?
And now it's time for whatever bubbles they've engendered since 2009 for them to pop.
And then we start the cycle again.
Or where are we on this thing?
Well, what the quantitative easing actually does is they print money out of thin air and they buy bonds with it.
And these bonds could be mortgage bonds that banks own or U.S. Treasury bonds.
So they were using this the last time to also finance about half the federal deficit.
When it was about a trillion dollars, now it's 500 billion.
So if you can remember back, oh, 10 or 15 years ago, people used to talk about how China was financing her deficit and all these foreigners in other countries were doing it.
Well, over the past couple of years, it's mostly the Fed doing it, stepping in because it was so big.
There just simply wasn't enough money.
The deficit's come down a little bit because the costs of fighting the wars in Afghanistan have gone down, I guess, until recently, this ISIS business.
But one of the things this quantitative easing, when they did it, also would do is because these banks had extra liquidity from these bonds being bought, it put more money into the financial system, which worked its way, of course, into the stock market.
And Ben Bernanke, when he started this thing the last time, I think it was 2010 or 11, he actually wrote an article in the Wall Street Journal saying that this was going to be one of the positive benefits, was it would make the market go up and supposedly that would make the people in it feel like they had more money and they would spend their money and help the economy.
There's no real, I don't know if there's any real hard evidence that that actually helps the economy out.
I mean, rising stock markets don't create jobs or cause anyone to start any real businesses unless it's just a scan to float a stock or something.
So, in other words, they create all this money and even though they say on TV all day, well, there's really low inflation and a real strong dollar, that's, I mean, I don't know, it seems like the grocery store prices are out of control to me.
But I don't know, maybe they say with all their algorithms and all their market baskets and all this crap that the across the board price inflation rate is low.
But you're saying that's all right because they just inflated the price of stocks, they inflated the price of the value of the biggest companies in America for the benefit of the people who own those stocks.
But otherwise then it hasn't necessarily caused widespread inflation across the board like it was in the 70s.
No, I don't think so.
It's more just like the last decade again, right?
Is it a housing bubble too or is it just a stock market bubble?
I think it's just the stock market.
The problem with the housing bubble is it just, it was such a disaster that it's just hard to recreate that all over again.
Well, they never really allowed it to hit bottom though either, did they?
I mean, I remember Ron Paul saying there's still 16 million unoccupied homes while they're sitting here inflating again and trying to get new housing starts up.
And in some of the same places in Florida and California where you needed the correction the most.
Yeah, I think that's true.
I mean, if you go to Las Vegas or some of the bubble places, Myrtle Beach was one of them, you still see places for sale everywhere.
But it's hard.
I don't know if that's indicative of the prices not being low enough or just the economy being crappy or too many properties out there, not enough supply.
It's just a sign of a bad economy to me.
But one of the things you asked in the beginning was where we're heading now or is this all going to blow up?
And to me, the real danger now is the U.S. stock market being overvalued.
And one of the valuation metrics investors use is something called a cyclically adjusted P.E. ratio.
And a P.E. ratio just tells you what the price you're paying for earnings for a company is.
So if the P.E. ratio is 10, then for every dollar that you're paying for, say, Walmart stock or something, it's generating a tenth of that.
And in the real world, if you, say, buy a house with the idea of renting it, usually you pay seven times earnings, and the stock market at 15 isn't unusual.
But the stock market now is like 60% higher than the historic norm.
And what the cyclically adjusted P.E. ratio does, it smooths out this P.E. ratio for 10 years.
It just makes it a more reliable gauge.
And it's at the same level as it was at 2007 and historically at tops.
And the only two times it got substantially higher was in 1999 and in 1929.
So that suggests to me that the market's overvalued, and people who are really bullish on it and betting it up are essentially hoping for a repeat of those two bubbles.
And that's tough to—for me, that's tough to want to bet on.
It's like a once-in-a-lifetime thing that happened, and you're hoping it's going to happen again.
And that doesn't mean the market's going to immediately go down the toilet tomorrow, but, you know, I think it's a sign that it is increasingly risky.
And I think what we're seeing this month is a sign that it is getting more risky.
The Dow had a sharp pullback in the first half of this month.
It fell something like 1,500 points in five days, and it has bounced back up quickly.
But that kind of volatility is something you usually see towards the end of a bull market, and I think it's a dangerous sign.
And one reason the market can get more risky is because they've ended this last round of quantitative easing.
They're not printing as much money.
All right, well, we've got to stop right there and take this break.
We'll be back with Mike Swanson from wallstreetwindow.com, more about the state of the economy in just a second.
Hey, y'all, Scott here.
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All right, y'all, welcome back to the show.
I'm Scott Horton.
This is my show, The Scott Horton Show.
I'm talking with my buddy Mike Swanson from wallstreetwindow.com and author of The War State.
And so now we're talking about I was going to ask you, but then you brought it up yourself there, Mike, about how there was just a massive, I thought, massive TV thought.
It was a massive correction in the stock market the other day, but I guess that was just a blip and it's right back up again.
Is that right?
There's just a small correction at the top of a bubble.
Yeah, well, it actually concerns me because the last two bull markets, they ended with a move similar to that.
If someone is interested, go back and look at August of 2007 and the market dipped just like that and then rallied through October or something and basically went into a bear market.
And I think something similar happened.
And what kind of causes that is that you look at the S&P 500, the Dow, the NASDAQ.
You see that on television if you turn on the financial channels, but inside the stock market, there are thousands of stocks and sectors and so forth.
And when you start to get towards the end of a bull market, what ends up happening is fewer and fewer stocks continue to go up and the market becomes led by a few stocks.
And that's essentially what's been happening since the beginning of September.
And you can get bouts of panic selling as you seem to make some sort of transition into a bear market.
Now, I don't know if that's going to last a couple more months or a couple weeks or whatever the case is, but that's something that is concerning to me.
And also, when you're in a bear market or towards the end of a bull market, you start to see these more extreme type swings happen very quickly.
So this move back up, I've never really seen anything like it actually in the U.S. stock market.
I mean it's gone straight up at quite an incredible rate over the past two weeks.
Well, you know, so I'm remembering my Rothbard and I didn't read all of Man Economy and State and all that.
I'm more on the junior level, like say the bubble chapters of For a New Liberty.
But – or actually I read What Has Government Done to Our Money and the Case Against the Fed as well.
Anyway, so I'm thinking what Rothbard says is basically, in a sense, they know what they're doing.
And they always get afraid of the inflation that they create, whether in certain sectors or across the board.
I guess when it's across the board, the numbers start going up, prices start going up all over the places when they really start panicking.
And he says, so what they always try to do is sort of take a needle and prick the bubble and let the air out slowly a little bit.
And let's have a kind of gentle sort of adjustment, but it never works.
It always pops.
And so – and then I kind of always conflate that in my mind with a story that a friend of mine told me.
He owns a construction company.
And he said his thing was he just waits – he just reads the Wall Street Journal every morning.
This is how he was in 07, 08.
Read the Wall Street Journal every morning.
And as soon as Ben Bernanke raised the federal funds rate a quarter of a point, that to him was this attempt to – ooh, just barely start letting air out of the bubble and all that, which means the massive collapse is coming, so run like hell.
So he sold this entire business and then watched it be somebody else's problem when the market fell completely out from under real estate.
And so obviously that sounds like it's overly simple.
So I was wondering if you can make it a little more complicated for me.
Well, I think there's a lot of truth to that.
And if you look at the last two bubbles that popped – and each bubble, by the way, has gotten bigger in size than the last one, at least over the past 15 years.
So in 2000, they – in 1999, they started raising rates, and the stock market blew up in March 2000.
But they were saying – Greenspan was saying that we're going to create – the word used was soft landing.
And then Bernanke did the same thing in 2005 and 2006 and 2007.
And he said it was going to be something like, well, geez, it was new normal or moderation or something, claiming that housing prices would just have a small adjustment and so forth.
But the response when Greenspan did it, raised rates, is the market fell and the technology sector investment there just crumbled.
And he just ignored it, thinking, you know, we need a correction and so forth, which we did.
But then in January of 2001 or December 2000, he totally panicked and started lowering rates and trying to make everything go back up again.
Now, the last time they really started lowering rates before the market even started to drop, they did it in October – in September 2007.
And they were doing it in response to real estate prices crumbling.
And they knew everything was going down the toilet, and they really couldn't stop it.
And their hope was that if we simply lower rates to zero very rapidly, the subsequent recession and fallout would not be as bad.
And it's hard to say if that's actually what they accomplished or not.
You could argue that if they let things sink out and make a real bottom, then we would be booming right now instead of having this languishing economy.
But the thing is, the lowering of rates and this quantitative easing and all the stimulus and the bank bailouts and all this stuff, they haven't created a real estate bubble again, I don't believe.
But what they created is a stock market bubble and a potential bubble in the bond market, which is more dangerous than the stock market or any of these other bubbles we've had because it's the government bubble.
But I don't really think the stock market actually is that big of a deal to the economy if it does go into a bear market.
I think it would be more like the 2000 bear market.
It didn't cause a horrible recession or anything.
Well, and especially considering they would just keep printing money anyway, right?
Yeah.
Rather than ever letting it hit bottom.
Well, that's the real danger is that they do that and then somehow that gets out of control and just creates inflation.
To me, it's the response at this point that's more dangerous than the stock market falling.
And when we had this correction the other week, the Federal Reserve leaked stuff to one of the CNBC reporters to the effect that if the market falls, they'll just start doing it again, the quantitative easing.
You know, in six months or next year.
Well, you know what I wonder about too?
Like when Rothbard and Higgs talk about the 1920s and say that prices should have been falling from the vast improvements of productivity going on in the roaring 20s and all the new inventions and technologies and everything else.
And yet prices were more or less holding steady, which told the bankers that, yeah, you guys are doing the right thing.
But really prices should have been falling.
So the fact that they were holding steady was the bubble.
I wonder if that's what's going on in the American economy right now too.
You mean, yeah, that the money that they're printing isn't going to productivity but simply to commodities.
Yeah, to prop up prices all across the board in all different sectors, you know, where they would have fallen.
I think so.
The other thing too about that is they – I think they have a theory that deflation, negative price, you know, if prices drop, they actually think that's a disaster or would be.
They think that would send the country into a depression or reassign it or going into one.
And I don't know if any of that's true or that's just simply irrational fears on their part.
But that's – I think that's what they truly are really afraid of.
And there's a few statements carried over the years where Bernanke and Greenspan have said that kind of stuff.
All right.
Well, we're over time, and I better let you go.
This won't cheat the live listeners out of too much of the show here.
But thanks for coming on.
We ought to do this more often, Mike.
I appreciate it.
Thank you.
All right.
Have a good day.
That's the great Mike Swanson.
He's at WallStreetWindow.com.
WallStreetWindow.com and read his great book, The War State, on the early history of the post-war military-industrial complex.
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