06/02/15 – Mike Swanson – The Scott Horton Show

Hey, I'm Scott Horton here.
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I do not care about soccer, okay?
I don't care about the worst soccer scandal.
I just don't care.
Please stop talking about soccer, everybody.
I don't...
I don't want to care.
And I know part of it has to do with because of the Israelis and what...
I still don't care.
All right, anyway.
On to our next guest.
It's my good friend and yours, Mike Swanson from WallStreetWindow.com, where he gives you a window view into what he's doing with his money.
So that if you think he's smart and makes good decisions, you can pattern your behavior after his and make money, protect your assets, too.
Also, he's the writer of the great book, The War State, America, yeah.
The War State.
And it's about the early post-war era, Truman, Eisenhower, and Kennedy, how they built up the national security state and also fought to limit it and their successes and failures and all that great history there.
And I think you should read that book.
Okay.
Welcome back to the show, Mike.
How are you?
Oh, I'm doing great.
Thanks for having me.
Well, I'm very happy to have you on.
So you sent out your monthly newsletter here.
It's titled, When Will the Next Bear Market Start?
And I thought that I'm very interested in this, not because I have any money, but just because, well, I blame the central bank for all the booms and busts, and I blame the warfare state for the central bank and vice versa at the same time.
And so this is all about, you know, the price of killing Iraqis, in my eyes.
And I think, well, and I'd like other people to kind of see the connection there as well.
But at the same time, I also would like for, you know, the people in my audience to have a chance to protect what money they do have from the depredations of the central state and their allies.
And so if there's a bear market coming and you think they need a warning, well, then I want to give you a chance to give it to them.
So I guess just how bullish is the stock market now, and what does that portend for the bear?
Well, first of all, I think you're right, what you're saying about the connection of Fed and the wars in the military state and so forth.
And I think evidence of that is if you go way back to the start of Bush's war in Iraq and 9-11 and all these events, the Federal Reserve kept rates really low to try to stimulate the stock market and the real estate market and on and on.
And he had to finance the war, and he didn't want to pay for it, you know, by raising taxes.
So there you go.
But so we're kind of seeing these easy money policies from the Federal Reserve now for quite some time.
I mean, of course, the Fed's always inflationary in a certain sense, but I really think things have taken a new level since probably around the year 2000 and certainly since 9-11.
And I mean, it's just quite amazing.
But one of the things, before I get into the possibility of a bear market, is that at this point, you know, the Federal Reserve started this quantitative easing program of buying Treasury bonds and mortgages from banks a couple of years ago.
And when Bernanke started back in 2009, and he renewed it three times afterwards, he actually said that he wanted to help make the stock market go up, because he was actually coming under some criticism for doing this, especially as the years went on.
I mean, Ron Paul was on TV as just one person, but there were other Republicans and even some Democrats that were having questions about this.
And he answered those criticisms, I think it was around 2010 or 2011, writing in a editorial for the Wall Street Journal, saying this is going to make the stock market go up and that will make people so rich and spend more money and help the recovery.
And, you know, at this day and age, he did accomplish that, I think.
He did help make the stock market go up, but I think it's real questionable how much that's really helped the economy.
I think now it's more like the danger is he's created him and Janet Yellen, his successor, to help create another bubble in the market.
And I say that because the valuations in the stock market are extremely high compared to its history.
There's a measurement called the cyclically adjusted P.E. ratio, and the P.E. ratio simply measures the price that someone is paying for earnings when they make an investment.
So for example, if you were to buy a stock for a dollar and the company earns 50 cents a share a year in profits, that would mean you're paying two times earnings.
Typically, if you go in the private world and buy like a restaurant or a business or something, someone's going to pay three to five times earnings.
In the stock market, historically, it trades 13 to 15 times earnings.
Well, the earnings now are at 27, and the only time it's been higher than this is back in 1999 and 1929.
So that's the testimony of how much the market has gone up.
Right.
It's funny, I hate to pretend I'm so smart about this or whatever, because I really only have been paying attention to Ron Paul all this time.
And I read Jekyll Island back in the day and whatever, but as an economist, I'm a great foreign policy guy.
I don't know.
But it's been apparent enough to me, the bubbles of 99 and the bubble of the George W. Bush years that finally broke in 2000, or I guess late 99 and 2000.
But it seems like as you write in here, people just can't imagine, even though they've lived through the same booms and busts that I've lived through in just pretty short amounts of time, it seems like, right, eight or ten years between crashes.
And yet they think, all right, you know what, man, look, the market's never been higher.
I couldn't possibly sell now.
Now's the time.
I ought to be buying more.
And I just don't understand how that works.
I mean, you refer to CNBC, and I'm sure that they're always looking at Werther or Soda Straw like everybody else.
But it just seems like people would get it, that even if they're not really even exposed to Austrian school economists or anything, that the low interest rates cause, or even if they don't make that connection, that at least there's going to be a really big boom and a really big bust over and over again.
Even if they are not necessarily feeling rich, talking about those price-earning ratios, looking at some of these graphs that you publish here, it's pretty clear that things are way out of whack and due for a major correction.
Well, there's two things going on in what you're saying.
First, I think there's common sense, and most people, you know, if you just talk to a random person, you know, they're not going to believe, oh, the stock market's going up forever, or, you know, their earnings and valuations don't matter.
You know, if you're at a party or something, having a conversation like that with an average person, they're just, you know, they don't, aren't that crazy about the stock market or whatever.
But it's really the people that are in the market that are the, become the true believers.
And I really think it's really just a narrow segment of the population at this point that's fully invested in the stock market that are really the most bullish of people, because, frankly, after 2008, the economy went south, and a lot of people simply had to take money out of the market, regardless of whether it was going to go up or down.
They lost during the bust, or they lost their jobs, or they got to retirement age and just couldn't afford to take any more risks, and they started pulling money out.
And those people, you know, they, some of them have put money back in, but a lot of them haven't, and they're, you know, not necessarily really bullish on the stock market, but it's the people in the market who never got out of it in 2008, never sold, and are convinced that, you know, from that experience, that they learned that, you know, the drop, really, in their minds, just lasted a couple months, and they survived it, and they've been rewarded for that.
And then you have people who are brand new, who just put money in it for the first time, so they didn't experience those drops.
I mean, what I'm trying to suggest is people kind of, these people in the market tend to rationalize their own investment position, just convince themselves that they're right.
Well, in 99, or well, before, like in 97, I was saying, get out, it's a bubble, and then a friend of mine made hundreds of thousands of dollars after I gave that good advice too early, right?
Hang on one second.
He lost it all in the crash, by the way.
All right, guys, welcome back.
I'm me, Scott.
I'm talking with Mike Swanson.
He wrote The War State.
It's really good.
You can get it on audiobook too.
And he does WallStreetWindow.com, where he gives investment advice.
It's a window into what he's doing, and of course, he explains why he's doing what he's doing.
And so, yeah, like I was saying, back in like 1997 or something, I'd read Jekyll Island, so I was going around telling everybody I knew who was in the stock market, oh, man, it's a giant bubble, don't you see?
Look at these price earning ratios and all of this stuff.
It's a giant bubble, don't you get it?
And one guy I knew, I remember him telling me, well, since you told me to get out of the stock market, I've made $200,000.
So what do you got to say for yourself now, smart guy?
And then, of course, it was about six months after that, he lost, I said all before the break because the music was counting down my clock on me, but no, not all, but he lost much of it, pretty much all he'd gained in the bubble, at least, in the crash of 99 and 2000, because, jeez, if you're the one making hundreds and hundreds of thousands of dollars for sitting around watching the numbers move, then who wants to sell out, especially some loud mouth kid telling you what he's so sure, because he read Ed Griffin, you know?
But anyway, so it just goes to show that it's hard to predict, you can't really say when, can you or can you?
Well, that's right, and that's a good lesson right there, and a problem with saying, well, stocks are cheap or they're not cheap and they're really expensive and it's a bubble, is someone that's bullish in the market will say, yeah, so what?
You know, it might go up longer, and they can be right.
And last year, I was watching people in CNBC and financial writers basically say, oh, yeah, the stock market is overvalued, the P is really high, but, you know, it can go up more, and they've been right.
You know, nothing lasts forever, and the thing I put out the other day, I wasn't necessarily trying to predict exactly when a bear market's going to start, but show people how you can tell when it's starting, and not, you know, realize, like, six months later or something, oh, no, you know, I've just lost half my money or something.
But to really tell when is it starting, and that's different than trying to predict the moment it's going to happen, and the specific thing I was trying to tell people to look for is when you reach to kind of like a tipping point, when a bull market ends and a bear market starts, is typically what will happen is fewer stocks are going up and driving the market higher, and more stocks are actually already dropping.
And when you look in the newspaper or look at the television, you see the three market averages, the Dow, the S&P 500, and the NASDAQ, and that's what everyone pays attention to, but there's, you know, literally 5,000, 6,000, 7,000 stocks that trade on the different stock exchanges in the United States, and several hundred, like, different sectors of the market, like, say, utilities or retail companies or cement companies, and these sectors, the stocks that make them up kind of trade together, and what tends to happen is at the very end of a bull market, right as things are tipping over, there's really just a few sectors and a few stocks that are driving those market averages up while everything else is already acting poorly, and then what will happen is those last things that are doing really well, then they all of a sudden stop doing well and get dragged down to everything else, and the averages go down with them, and then that's when people start to lose money in their, you know, the funds that they invest in and so forth.
So where are we now on that cycle, then?
Yeah, well, what's happened is that's actually gotten worse over the past year very slowly, but it's not yet at a point where, you know, I can say, oh, you know, the bear with the bull market's over, the bear market is starting immediately.
So for example, one of the things I look at is the percentage of stock above and below their average price over the past 200 days, and right now that's around 65% on the New York Stock Exchange and the NASDAQ and the S&P 500.
In October, that dipped all the way down to 30% when the market had a drop for a couple weeks, but then it bounced back when the market started going up, but it started to lag, meaning that a year ago, that number was like 80, 90%, and now it's around 65%.
So it's gotten a little bit worse, but what'll typically happens right when a bear market starts is that number of stocks will drop down below 50%, down to 40% or 30%, like it did in October, but the market averages will rebound off of some correction, and that won't really go back up.
So in the thing I wrote, I should have that happen in 2007, and it actually happened a couple years ago before that flash crash thing happened, too.
So if something like that happens over the next couple months, then I would really get really concerned about the stock market possibly entering a bear market for good.
But even ahead of that, I've raised cash positions in my account, made changes, and I see nothing wrong with someone who's investing in the stock market taking 10% of the money out and putting it in cash or doing something like that with it just to be safe, after it's gone up so much.
You can't buy on dips or whatever, even if you're bullish, unless you've got some cash to do it with.
All right, now, so this is just Rothbard for dummies here, because what the hell do I know?
But I thought that I remembered learning from him that, well, they'll just keep inflating and inflating and inflating until they realize that, uh-oh, this is really causing a problem.
We're creating way too much of a bubble here, or we're leading to widespread price inflation across the board now, or we're risking that.
So now we've got to try to dial it back, and how they always try to let the air out slowly, but that never works.
It always pops.
But what they do is, and this is how you can tell that you better run for the hills, is when they start raising the federal funds rate that the banks charge each other for overnight loans.
And I remember in 2007 and 8 that, you know, I'm just not as much of a Mises.org guy, I'm more of a LewRockwell.com guy.
And so I was reading Gary North was saying, hey, look, everybody, they're deflating, they're contracting the monetary base, they're raising the overnight rate, even though it's just a little bit, that means that the bubble is over, it's coming to an end, you know, sooner rather than later, so protect yourself.
But I guess the implication there, as far as my understanding, the point I'm trying to get to is, I guess my understanding is that if they don't do that, and they just keep inflating and inflating and inflating, then they can prolong, they can put off the crash.
But maybe that's not right.
It'll go ahead and crash anyway, just because it's all funny money, it's not really amounting to anything, or how's that work?
Well, that's the $60,000 question, and what's interesting is the way the market is now, we've never experienced this type of thing, but what the Federal Reserve is doing, having created these qualitative easing programs.
So if you look back at the last bear market that started in 2007, they raised rates about 15 times very slowly over the course of a couple years, which is what Gary North would have been pointing out.
This time, interest rates are zero, and there's talk that they might raise rates two or three times over the next year, just really slowly, but that's not really a giant rate increase.
I'd argue, though, that what they've done, they lowered rates to zero in 2008, and they couldn't lower rates anymore, so they started this quantitative easing thing, did it three times, and they let that expire last year.
So I would argue, in a certain sense, that letting that expire was equivalent of raising interest rates, and the two times previous that that program expired, the market had a 10% correction, and then they panicked and created another money printing program.
So that's kind of the argument the bullish people have, is that, oh, if the market falls, they'll just make another program, and in fact, when the stock market had a little dip a few weeks in October, there were rumors that, you know, in a year, if the market continued to drop, they would do this, in fact, someone from CNBC that reports for the Federal Reserve or gets leaks from them, that's what he flat out said.
So there is a belief that, yeah, they'll do that again, but the problem is, at some point, that can still not be very effective, and I think back to the year 2000, or 2008, for that matter, too, because once these bear markets get going, they lowered rates in those last two, and it didn't stop it, it still had to play itself out, and I would argue the same thing would happen in the next bear market, too, is the question I always have for these people that just say, well, they'll just print more money, is how much will it take to make it, to stop a bear market when the next one comes?
Well, that's the thing, you know, I always see Peter Schiff on TV, and he's always basically hollering that they can't stop QE, they're just going to have to QE forever, and it's still not going to work, and they're just, they're completely screwed, they've painted themselves to the edge of the cliff, not just into a corner, but that they just, they don't know how to do anything except keep printing.
Yeah, well, that certainly seems to be the case, and the other thing, too, I was a few minutes ago talking about stock market bulls rationalizing their decisions by believing things can just go up forever, and this and that, well, the people at the Federal Reserve, they do the same thing, if you read their minutes, you can read transcripts of the meetings they had from 2008, 2007, and in 2000, there's a great book called Greenspan's Bubbles that talks about the transcripts from them, and from back then when Greenspan was there, and he never saw all the bubble pumping or popping, and he was putting himself, and, you know, he reacted to it in a panic around, in December 2000, like, almost close to 10 months after the thing really started to unwind, so they don't really see what's coming either, that's what the problem with the stock market is, or financial markets in general, no one can predict what they're going to do, and there's no real economics, I don't really think, of the science either, it pretends to be, but it's just people trying to come up with things to convince themselves they know what's happening, and they don't.
Well, speaking of which, everybody ought to subscribe to WallStreetWindow.com!
That's our friend Mike Swanson, he's the author of The War State, and WallStreetWindow.com, believe me, I learn a lot reading this stuff, and I think all of you guys will too, and we'll really appreciate it, WallStreetWindow.com, thanks again Mike.
Thank you.
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