03/23/15 – Mike Swanson – The Scott Horton Show

Hey, Al Scott Horton here to tell you about this great new book by Michael Swanson, The War State.
In The War State, Swanson examines how Presidents Truman, Eisenhower, and Kennedy both expanded and fought to limit the rise of the new national security state after World War II.
If this nation is ever to live up to its creed of liberty and prosperity for everyone, we are going to have to abolish the empire.
Know your enemy.
Get The War State by Michael Swanson.
It's available at your local bookstore or at Amazon.com in Kindle or in paperback.
Click the book in the right margin at scotthorton.org or thewarstate.com.
Our second guest today on the show is our friend Mike Swanson.
He's the author of The War State, which is a great history of the early Cold War, the Truman, Eisenhower, and Kennedy administrations, and their dealings with the new military industrial complex that Franklin Roosevelt created to fight for Stalin.
He's also the author of WallStreetWindow.com.
He's a former hedge fund manager and a successful one, who now offers investment advice, WallStreetWindow.com.
As you always hear me say on these spots, follow along on paper for a little while and then see whether his advice pans out the way you'd like, and then maybe throw some real dollars in there.
Welcome back to the show, Mike.
How are you, man?
I'm doing great.
Thanks for having me.
Good, good.
Very happy to have you back on the show here.
Now, I don't have any money invested in anything, but I am very interested in the ups and downs of the economy anyway.
It obviously affects all of us, whether we're investors or not.
But you've got some great advice here for investors, mixed in with kind of a real explanation about what's going on in the markets.
But let's start with the first point you make here is that you've got to diversify.
If you think you're so smart because you invested all your money in this thing that's doing so well, boy, you better look out because comeuppance are come and due.
Make your point there.
Yeah, I mean, that sounds like simple common sense, but it actually isn't something most people do, and it's a mistake I've made at times in my own life.
And what tends to happen to people that are in a financial market is when it goes up, they get very excited about it, and most Americans are simply invested in the U.S. stock market who are invested in anything at all, and they pretty much ignore what's going on in the rest of the world and other markets, too.
And there's all different kinds of asset classes you can invest in, such as gold and silver.
And then on the flip side of that, there are a lot of people that are gold bugs who only invest in gold, and therefore when gold goes up, they're very excited, but then when it goes down, they're not so excited and they feel financial pain, which is what's happened to gold over the past couple of years.
But the big thing, though, that happens when you are just invested in one market is you become so financially dependent upon it that you really lose all objectivity of what's going on.
So when a bear market happens, most people that are invested like that, they tend to just freeze up and lose all their money or take at least big losses on paper, which is what happened to people in 2008 and 2009 when everything crashed.
And the solution to that is to diversify in multiple things.
And I think now it's actually more important to do that than ever before because the stock market has been going up now for several years, and at some point that's all going to come to an end and we're going to have another bear market.
So in other words, if you have too much of one thing, then you have kind of this built-in perverse incentive to stick.
Even when you're losing money, you should be selling.
You can't bear to sell because of the loss, so you end up holding on all the way down to the bottom, and now you're going to have to wait another 10 years for it to get back up to where it was when you could have bugged out.
Yeah, that's exactly right.
And the irony of it is that if you are invested in a mix of different markets and asset classes, it doesn't feel as exciting because if you're all in something and it's going up, that's very exciting.
And people think, well, I won't make as much money then, but actually you tend to make actually more money with less risk because what will happen is, say, if you think back to the 2000 to 2003 bear market in the United States when the stock market was a bubble and the Nasdaq popped and went down for quite some time, gold actually did very well that year or during those years.
And interestingly enough, in the 2008 market crash, gold did fall a little bit, but throughout that bear market, it actually did pretty good.
It didn't fall as much as the U.S. stock market did at all and came back quicker.
And a big part of that was inflation fears because of all of the QE, right?
So what's QE?
Well, is that right?
And explain what QE is, please.
Well, QE stands for quantitative easing.
I laugh at the question because I don't know if anyone has a really simple explanation for what it is.
There's no, like, agreed upon explanation.
I think it's just – isn't it just really, really, really big welfare checks written to bankers?
In effect, that's what it is.
What the Federal Reserve does is it creates money and then buys debt basically from Wall Street banks.
It buys their mortgage securities and their treasury bonds in the hopes that they'll take that money and then, you know, loan it out to people and so forth.
Now, it also buys them direct – treasury bonds directly from the U.S. government, too.
So the Fed was using this QE in the United States to pretty much finance a good part of the United States budget deficit.
If you could remember, like, 10 or 15 years ago, you used to see all these articles about how China was financing our debt and we were in debt to foreigners and so forth.
Well, thanks to the 2008 bank bailouts, which amounted to a trillion dollars, China can no longer afford to do that.
They just didn't have that kind of money.
They're financing it, I think, about half a trillion dollars.
So there's this giant gap and QE kind of bridged that gap because there's no one else out there to buy the treasury bonds.
Right.
And so – but then at that point, the whole thing is just a bookkeeping trick.
So how come we've got to keep paying all this interest on the debt when it's only owed to the central bank?
Well – Well, not only owed, but so much of it is owed.
That's where all this stuff gets really muddled and it's really – there's no real agreed-upon explanation.
Like, there'll be people who will say, well, this isn't really printing money.
There's no physical dollars being printed.
It's just like a computer transfer of a couple symbols in a computer.
So there won't ever be any harmful effects to this.
It doesn't matter and so forth.
And so that's an argument.
People who are very bullish on the stock market and want to believe there's no problems, they kind of say that.
And then, you know, if you listen to, like, Peter Schiff, he'll say all this stuff is going to completely blow up one day.
And really, I think what is completely clear is that this is creating imbalances in the economy and the stock market.
The stock market's become overvalued.
Again, it's actually at a higher valuation than it was in 2007.
And if you look at such things as the cyclically adjusted P.E. ratio, which is the 10-year average P.E. for the S&P 500 adjusted for inflation, it's only been as high as it is now three previous times.
But more importantly, it's inside the bond market itself.
By the Fed keeping rates for as long as they have at zero and buying bonds, they've created this giant bull market in bonds.
And now it's spread over into European countries and all over the world to the point where if you buy bonds overseas, you actually lose money.
You pay a negative interest rate in some countries.
All right, now I'm sorry we've got to stop there and take this break.
It's Mike Swanson from WallStreetWindow.com and get his great book, The War State.
We'll be right back.
Hey y'all, Scott Horton here for WallStreetWindow.com.
Mike Swanson knows his stuff.
He made a killing running his own hedge fund and always gets out of the stock market before the government-generated bubbles pop.
Which is, by the way, what he's doing right now, selling all his stocks and betting on gold and commodities.
Sign up at WallStreetWindow.com and get real-time updates from Mike on all his market moves.
It's hard to know how to protect your savings and earn a good return in an economy like this.
Mike Swanson can help.
Follow along on paper and see for yourself.
WallStreetWindow.com Hey guys, welcome back.
I'm Scott Horton.
It's my show, The Scott Horton Show.
Getting a little investment advice for you from Mike Swanson from WallStreetWindow.com.
Talking about the bubbles in the markets and what it all means and what you ought to do with your money.
So I'm confused about this.
Why would any investor in America or anywhere else pay to hold American debt rather than get paid to hold American debt?
Well, they get paid a little bit.
About less than 2% for a 10-year treasury bond.
Of course, you get a CD.
You don't get hardly that.
But the thing is, if you're an institutional investor running a hedge fund or an endowment, that's really a better example.
These people are often mandated to have to own a certain amount of government debt no matter what.
It's just a part of the rules that their institutions are set to have on here.
You have to invest this money in this and that and allocate it in these certain ways.
That's part of the reason why people do buy these things, even if it doesn't seem to make any sense.
They're just told you have to do it, so they do it.
Well, it makes sense to diversify, but it just seems strange that they would.
Well, if it's 2%, I just read another thing about this a couple of weeks ago where they were trying to explain.
But I didn't understand why they were saying that, yes, even though it's a negative interest rate, this makes sense for us to do for now or something.
Does it make sense for them to do?
I don't think so.
I saw that story, too.
What it was is there's people buying debt in European bonds and getting a negative interest rate.
The reason why they're doing it is because they think there's a bull market in bonds.
What happens with bond prices is they go up in value as rates go down.
If rates go up, bonds go down in value and vice versa.
They're essentially betting that the negative rates are just going to get more negative.
It's like a bubble they're betting on.
It's just going to keep getting bigger and bigger.
Maybe it will, but someday that's going to be a disastrous investment for the person who holds it in the end at these prices.
Let me ask you about the different bubbles in all this.
I brought up Peter Schiff, and I saw him on TV a week or two ago.
He's saying that the reason that oil prices were ever so high was just because of all the new inflation.
Now that bubble has popped, and he says, just wait.
The housing market and the stock market are also both bubbles, and they're both going to pop soon, too.
Any rumors that the Federal Reserve is ever going to raise interest rates is just completely ridiculous.
They can't do it without causing the recession that they've been inflating this whole time to try to prevent.
Any statement that QE is over is also false, that they're going to have to go right back to it, because if the government is not pumping new money into all these markets, they're all destined to crash and crash real low.
He was saying we're in even worse shape because Yellen, the chairman of the Fed, is actually a true believer in this stuff.
Where Alan Greenspan at least knew that he was corrupt and bribed and was doing the wrong thing, he sort of kind of at least knew what the right thing was, whereas this lady is just kind of out of her mind.
I wonder what you make of all that.
One thing funny about her is if you listen to her talk or read the statements that the Federal Reserve now puts out, she always says the committee decided or the committee thinks, the committee does that.
So she never says exactly that this is my opinion.
It's always the committee, which is kind of, I don't know, I guess she wants to rule by consensus or something, but that's a big contrast from Greenspan and Bernanke.
I just think it's kind of funny.
Well, does that mean, is there something real there that means that she really kind of is just a figurehead and there are other people calling the shots for her as opposed to, you know, Bernanke and especially Greenspan were always described as strongmen who use the open market committee just as a prop.
It was always just up to them.
Yeah, I think that's a good description of her role.
I don't really think she personally, I mean, she has, I can't, you can't point to a single, or I don't think anyone can point to a single decision that she has made on her own.
It's all, you know, she was simply continuing her predecessor's policies.
And actually, there's not much she can do or the Fed can do at this point.
I think all they're doing is just hoping that Peter Schiff is wrong, basically.
They ended this QE, or their last QE last fall, and they're just hoping that, yeah, they know the stock market's overvalued, but they just hope that the economy in time will grow enough to catch up with those valuations and everything will somehow be okay.
But I think he is right, Peter Schiff is right in the sense that if the stock market were to decline, again, they would most likely just do another QE experiment.
In fact, in October, there was a little dip of about 9% in the Dow, and they leaked to CNBC that if this continued that they would just bring QE back.
So, you know, it's certainly in the cards.
On the other hand, I do think it's possible, and I think they want to raise rates to at least one or two points, but that doesn't really amount to much in the big picture.
It will probably end in a disaster like he is suggesting.
Yeah, I mean, that's what it sounds like.
It kind of reminds me of, I was reading, and I know he ain't the most popular libertarian or whatever, but, you know, I don't spend as much time on Mises.org as at LewRockwell.com, especially back in 08.
I was reading Gary North, and Gary North, in the fall of 08, well, really ever since 07, but especially in the summer and fall of 08, he was saying, look, they're deflating, they're deflating.
Everybody get your money out of the stock market.
It's about to crash.
And he was citing, you know, Rothbard's lesson that they always try to just prick the bubble a little bit and let the air out of it, but it never works.
It always just pops.
It's always a giant disaster.
And it seems like that's kind of where they're at now, where if they raise the interest rates, blam, you know, at some point coming up soon, everything's going to pop.
Yeah, I think that's a big danger.
And for most Americans, I really think this time, I don't really, I'm not so sure if we have another bear market, if it'll be as bad for the economy as the last one was.
It's kind of hard to imagine.
And most people aren't really invested in the stock market anymore because they don't have any money.
Last year, I was in Las Vegas at this investment conference, and they had 2,000 people there, and everyone there was over 65 years old.
I was the youngest person there.
And I went in this room, and someone was giving a speech to all these people saying the stock market was going to go up for 10 more years, and they all got up on their feet and were just clapping and hollering and going crazy.
And I was like, this is kind of crazy in itself.
So, yeah, you know, I wonder about, I mean, I guess basically the policy is that they'll never listen to the Austrians.
Do you agree with, say, I think I can accurately paraphrase Mark Thornton, that what they ought to do is just let all of the markets crash as low as they feel like crashing, and then we'll have some kind of free-ish market based on prices that reflect reality of what people really value these things at, as opposed to continuing to try to inflate and inflate and prevent the recession from ever taking hold.
I mean, you just said nobody has any money.
Well, but we're, you know, seven years out from the last crash, and yet all the reports come in all the time that still, you know, the middle class is being destroyed, the rich are getting richer, and everyone else is losing on this thing.
And I just wonder, is that what you would recommend, is just abolish the Fed, let every market bottom out, and then let us build a real economy here, or would that be just too catastrophic?
Well, I think if they would have done that in the tech bubble in 2000, 2003, that would have been the right thing to do, and we'd be living in a much better country today.
Probably the same in 2008.
I think this time, though, is worse because it's not so much the stock market.
It's really the bonds, I think, are the danger, and I think they created this bubble there that I don't know if there's any return from it or any way.
You know, I think if that collapses, it's just kind of screwed.
I'm talking like something you see happen in Argentina or Greece or something, even.
But I'm more worried that even if all that were to happen, that I would think the best thing to do is just let things settle out, just like you said, and just go on from there.
But I'm more afraid they'll just—and I kind of always used to think that's what would happen, but now I kind of wonder that they'll just keep doing this over and over again.
It's the only way to keep the government spending like this.
So if they raise interest rates, is that what would pop the bond market bubble in the same way as that's what pops the stock market bubble?
Yeah, that would do it.
But the thing about that last bear market, that 2007-2008 thing, they raised rates about 12 times going into—by the time you read that article in 2007.
I mean, they could raise—I mean, no one knows.
I mean, maybe they can raise rates four times or five times, but possibly.
I see.
But a quarter point here or there isn't going to make the difference anyway, especially not after all the new money they've created, right?
Probably not.
Now, there are some people that—and I think Peter Schiff would be in this camp.
I know others who are.
But I'm not sure this reflects his views.
But there are some people who think that just by stopping this printing of the money that eventually that in itself will make the stock market tip over and just mess everything up.
So I think that's what Schiff means when he says they can't stop it and they'll have to do it again.
But no one knows for sure.
I mean, you just— Well, and you know, okay, so here's the thing.
When it comes to even having a Fed at all, in the early 80s, Paul Volcker, as Harry Brown said, if you've got to have a Fed, Volcker was the best Fed chairman we ever had because he deliberately caused a recession.
He decided he was going to beat inflation to death by raising interest rates up to 23-something percent and choking the economy almost to death.
And then in, I guess, 83 or something, they finally lightened up.
But it's absolutely impossible to do anything like that now because back then the national debt was only a couple of trillion dollars before Reagan was done and left it at four or five, I guess.
But back then it was even maybe in the hundreds of billions.
And so it was okay.
It was possible for the government to pay those interest rates on those bonds.
But right now the national debt is $18 trillion.
And if you raise up interest rates to any kind of reasonable rate, then you absolutely break the budget of the U.S. Congress, that it would be more than what they've got to pay for Social Security or whatever.
It would just be interest on the debt.
And so they've painted themselves all the way into a corner here.
Is that right?
Well, I've got a report.
It was written up last year in January, February by a former board member of the Federal Reserve that says exactly that.
It says they can't let the 10-year Treasury bond, which is under two right now, they can't let it get above five and a quarter or the whole country would go bankrupt and they would just have to hyperinflate the currency.
I mean, that's what it says.
I mean, it's just really remarkable.
But it's also – the reason why he's saying that is he spends 90 percent of the report saying this isn't the Fed's fault, but it's because Congress keeps spending money and it's their fault.
Which, of course, is true, too.
So if something happens, it's not on us.
Right, right.
Well, I think I got two barrels in my shotgun.
I don't know about you, but – All right, well, thanks very much, Mike.
I learned a lot.
Appreciate it.
Thanks, man.
Good talking with you.
Good talking to you, too.
That's the great Mike Swanson, everybody.
He's the author of The War State.
Buy The War State.
It's really good, man.
You'll love it.
And he's working on a new one about the history of the Vietnam War that's going to blow your mind when you get your hands on that.
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