01/11/16 – Mike Swanson – The Scott Horton Show

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First up today on the show is Mike Swanson and full disclosure of the conflict of interest here, as you all know, because you hear the ads all the time.
Mike's a sponsor of the show, his great book, The War State, which is a really wonderful history of the rise of the new right military industrial complex after World War Two in the Truman, Eisenhower, and Kennedy years.
And I think you'll learn a lot and I really hope you'll get it and you can get it on audio book and it's really great.
It's The War State by Michael Swanson.
But of course, he also does investment advice.
He's a former very successful hedge fund manager, and now he runs Wall Street Window where he explains step by step everything that he's doing with his investments and his reasoning behind it all and hopes that you can benefit from it and you can go and sign up at wallstreetwindow.com.
So, I mean, all that being said, I don't think this is really an infomercial.
It's actually really an interview because I have a bunch of questions and Mike Swanson, I think, has the answers and that's the way I think of it anyway.
But you all take it however you like.
Mike, welcome to the show.
I'm very happy to have you here.
Oh, thanks for having me.
It's great to talk with you.
All right.
So there's this thing, I guess.
I think it's right.
Sounds right to me.
Never heard it refuted in any way that made any sense anyway.
And Bob Higgs says so, and he's Bob Higgs.
And that is it's the Austrian school theory of the business cycle.
And I'll try to say it real fast and oversimplified and you can correct me if I go off the story or anything.
But this is basically the basis of our conversation today is that when banks are allowed by the government to expand bank credit, that is loan out new money by making the loan in the first place and expanding the amount of money in circulation.
It ends up seeming to businessmen as though there are more resources in the economy to be invested in their projects than really exist.
And then at some point, and maybe you can really get into the some point part of this.
At some point, the music has to stop and there are people left without chairs, right?
In the musical chairs game, it turns out all those resources they thought existed didn't exist.
And so you have whole segments of the economy in error and then are driven into bankruptcy.
And we see this time after time after time.
We saw it with the housing.
We saw with the dot coms before that.
We saw it with the after the first Gulf War, the bubble that they had drummed up for that that popped, I guess, in 1992.
And then there was the 88 crash before that and et cetera, et cetera.
And they keep doing this, they generate the bubble.
And then at some point, it all comes due.
And so if I'm reading you, right, you think more or less what I just said, only, you know, with detail and and real substance.
And you're saying that now is the beginning of the end, the beginning of the downside of the cycle.
Yeah, qualified a little bit of what you're saying.
But I agree with everything you said, because we're both kind of the same age.
And I started investing in the stock market in the late 90s.
And you obviously had this Internet bubble when it crashed and in the real estate bubble when it crashed, like you're saying.
And as an explanation, the Austrian economic theory is the only theory that really explains what happened and why.
And it's obvious that there was a misallocation of capital.
And obviously, bank lending problems, especially in the last bus.
And this time, as we're speaking, I believe there is another bubble that's been generated through the actions of the Federal Reserve.
Once again, I want to qualify a little bit because I'm my interest in, you know, I'm not an economist.
I'm more a stock trader.
And so Austrian economics was, for me, a good explanation of the past.
However, I'm trying to catch up and read some of the original Austrian economics books.
And if you look at what they're saying about the causes of the Great Depression, a lot of the argument was that the Fed artificially manipulated prices and kept them too high.
And that also caused people to make mistakes in capital investment, that they produced too many goods and caused a huge problem when prices eventually dropped.
But the bottom line is, I mean, the simplest way to reduce the theory is that when the Fed, Federal Reserve or the government or whoever manipulates prices and makes artificial price levels, that causes vast problems in the way capital is invested and makes people to cause them to make mistakes that end up biting them.
And if it goes long enough, it creates a bubble and then it bites lots of people.
So just that basic premise, I think, is what's happened over and over again.
And I think it's happening now.
The thing about this time, though, is that we saw the stock market go up tremendously from 2009 to really last July is when it topped out.
And people know the Federal Reserve was doing something to help the stock market.
They obviously made interest rates at zero.
And they did this quantitative easing bond buying program.
But the people that I talk to or read that are bullish on the stock market or have been, they just kind of think, well, the Fed won, the Fed makes it go up and is doing something without any real deep understanding of what it is they've done.
And even I haven't really understood what they were doing until really a couple of months ago.
In my mind, I knew there was a bond bubble, so to speak.
Obviously, everyone knows the national debt is growing and the Congress has reports, the Budget Office, the Congressional Budget Office claims that by 2030 or around 2030, if the budget deficit isn't lowered, then there's going to be a disaster.
And so that's kind of the bubble that everyone knows.
But I think there's a different bubble that is what actually made the stock market go up.
And that's a bubble in the debt that corporations themselves have been taking on.
And so, yeah, I mean, that's kind of the thing is a lot of the Austrian economists, after the last bust and the invention of the zero percent interest rate and all the quantitative easing, were saying, well, man, we're going to have massive inflation here, even with all the deflationary pressures and all the bad debts being cancelled.
Still, you're creating so much money.
And yet the and there has been price inflation in, you know, ask anyone who has to go to the grocery store and to feed anybody else and they can tell you.
But it hasn't been anything like the worst predictions.
And then so the question is, where did all that money go?
It's just sitting in bank vaults and sitting at the Fed.
But you're saying, well, yeah, but also a big part of it just was reinvested back into the market itself.
Yeah, that's the big thing that I don't think that I didn't really understand.
And I don't think most people really know happened.
And that is, yes, the Fed lowered rates to zero.
And then three times they created a bond buying program that caught a quantitative easing.
And what they did is they bought mortgage securities that were underwater and then they bought Treasury bonds from the federal government.
Now, what this did was it made interest rates stay low and remain so low that most people, you know, their CDs come due and they can't make any more money on them and they don't know what to do.
So they would venture into the stock market.
That's just the regular in person.
But the key is that with interest rates at zero, I mean, you can't really make money, lending people money anymore to benefit borrowers to to borrow more money because it's cheap.
So they went on an orgy of borrowing money.
The corporations did by issuing corporate bonds.
Now, what's interesting is.
Hold it to that.
Hold it to the interesting on the other side of the break here.
The bubble in corporate bonds right after this show.
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All right, you guys.
Welcome back to the show.
I'm Scott Horton.
I'm talking with Mike Swanson.
About don't call it the business cycle, it's the government generated boom bust cycle.
And we're talking about how so much of the new money that the government has created since the last crash has.
It hasn't been loaned out to any and everybody, but it has been loaned out to big business to invest in the self-fulfilling stock market bubble, which Mike Swanson is saying one is it's the beginning of the bear now.
And then you're going to say something else is interesting before that, though, at the break there, Mike, go ahead.
Oh, probably the best thing I can give a concrete example of what's going on.
What happened was a lot of companies that obviously the economy was poor and bad, but companies had the ability to borrow money cheaply by issuing debt, which are bonds.
But they had nowhere really.
A lot of times they were to really invest the money that would create jobs or expand their revenue stream.
So they essentially just use the money to buy back their own stock, which would make their stock go up, their shareholders happy and the CEOs and board directors more rich, essentially.
Maybe give you an example of this.
Sirius Radio.
Last year, they had a net income of 493 million dollars, and they bought back 2.5 billion dollars worth of stock.
So they bought back five times, they spent five times as much money on buying stock out of the stock market as they actually made in net income.
Well, how did they finance that?
They issued bonds and they've got 4.4 billion dollars in debt as the last statement I'm looking at.
And back in 2012, they had just about half that much debt.
Now, that's just one example.
You can multiply that probably by about a thousand companies.
And that's essentially why the stock market went up.
And I'm looking as we're speaking at some figures put out by Morgan Stanley of telling you what the money flow data, how much money is coming in our stock market year by year.
And last year, they claim that 205 billion dollars came out of the market from regular people, small investors, households, and corporations bought 542 billion dollars worth of stock.
So they bridged, they were the bulk of the buying that went into the stock market and kept it really from dropping.
Now, they're predicting that this year, the corporations are going to buy 450 billion dollars more stock by going deeper into debt.
Now, my assertion is this is unsustainable and will suddenly come to an end, these buybacks, because when the stock market's declining or even if the economy just slows down a little bit, most of the people running these companies are not going to want to keep doing this.
And also, the rate of interest in the bond market is already rising, meaning that investors are seeing these corporate bonds as being more risky than they did just six months ago.
So what we've seen in the oil stocks is kind of like an example.
This whole fracking trading industry also was financed the same way, and it all kind of blew up.
It started in 2014, and those stocks have all crashed, and all these subpar companies were put into operation, and now the oil prices are lower, they can't finance these.
And some of them are just going to go bankrupt.
So that's kind of, I'm not saying corporate America is all going to go bankrupt or something, but what I'm saying is this fissuring debt just to buy stocks is probably going to end very suddenly.
And if you look at 2007 and 2008, that's basically what happened then, too.
They were doing these buybacks in 2007, and then just overnight, just basically stopped doing it.
So I think that's actually the cause of the stock market starting to drop as we're talking.
And now, do you think the distortion in the economy is today as bad as it was back in 2007, during the entire mortgage bubble and all that?
That's a good question.
On one hand, no, because I don't think banks are going to go bankrupt or anything like that.
To put it to you another way, in 2008, those mortgage securities were worthless.
Those subprime mortgages were worth nothing.
And now, yeah, what's funny about this is a lot of corporations are buying the bonds from each other because they can't make any money in money market funds.
But these bonds aren't going to go to zero or something like Apple bonds.
And Apple's been a company doing this, too, just about all the big companies have been doing this.
These bonds aren't going to go to zero in value or something.
So it's not like subprime in that sense.
But I don't know.
I don't know, really, I mean, if just the stock market declining could affect the economy at some point.
I don't think it will this year.
If you look at 2000 to 2003, there was a terrible bear market then, and it didn't really hurt most of the country as far as the economy went.
But the last one did, but that's more because of what happened with the banks and real estate.
So I don't think it's like it was last time.
If it is, then that would be something down the road that would be bigger problems as a result of all this.
I really had no idea.
I was kind of like looking at a black hole, to tell you the truth.
So in other words, if it's anything like as bad, then right now in 2008, right now is just 2007 in the beginning of the bad times.
But if there's going to be a worse and complete collapse, that would be coming down the road, you're saying.
But that's always interesting because I remember starting in 2007.
And, you know, as an economist, I'm a great anti-war guy, you know, I don't know.
But I remember Gary North and the guys at LewRockwell.com saying, ha ha, look at the fall of Bear Stearns and whatever back in 07.
And I remember, in fact, Gary North specifically in the summer, you know, like in August of 08, saying the big one is coming, everybody out.
And, you know, it came the next month.
So but it took a good year and a half from the start of the fall to the real implosion, right?
Yeah, that's right.
This time, it's a little this is I mean, this is the way I feel about it.
Like, I think the stock market can fall really bad.
But differently, like in 2008, it just crashed in October.
This time, I think it's actually likely just to fall slowly and go on a long time.
This is actually what the oil stocks have done and many other bear markets recently taken place.
So it's probably going to just go on for a while.
Well, what's somebody to do then if they can't get, you know, they put their money in a savings account, they're losing out to inflation, they put their money in any stock market type investments, they're going to lose out to God knows what sort of fraud and, and rigged market.
So what's somebody to do, especially when somebody doesn't have the real expertise to type in the right algorithm to try to beat Goldman or whatever, you know, on these things?
Well, I think the easiest thing someone can do is just have a little sell some to have some cash, and then put some money into gold.
Because one thing gold's been in a long bear market.
And I think it's going to benefit from this because one thing that's going to happen this year is it's actually already starting to happen is the Fed claim they're going to raise rates in December four times this year.
And obviously, the stock market, the clients are not going to do that.
And that should be a positive for gold.
And actually, Bitcoin, funny enough, is going up to study the dollar is going to top out.
And that'll benefit metals and stuff like Bitcoin.
So I do think there's things that will that will go up.
The thing though, about down the road, will this get worse or not?
Is this time?
What I think is different is the Fed really can't do anything.
Because interest rates, they all they can do is lower interest rates one time back to zero.
And the bond buying stuff, if they do it again, it won't force these companies to borrow more money again, because it's just a different environment.
They can do that when everything's going up.
But the stock market's declining, they're not going to it's just it's just that was unsustainable.
So I don't really see anything the Fed can do to stop it.
And that's why you could go on for a long time without this giant rallies like you would see happen in the last two bear markets.
Now, the problem down the road would be possibly the government debt thing.
But you know, it's stuff that everyone's been talking about forever.
So who knows?
Yeah, I don't know, man.
But, but gold, that's, that's the simplest answer.
You're not put everything you own is 10 20%.
You know, there you go.
Yeah.
Alright, well, everybody, I really urge you, if you have any savings, and you want to try to protect it and invest smart, check out WallStreetWindow.com.
The great Mike Swanson and read his book, The War State Two.
Thanks, Mike.
Appreciate it.
Great.
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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.
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Know your enemy.
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