08/25/15 – Michael 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.
Poor Mike Swanson, man.
Here during the break, I'm telling him what I really think about Rand.
He probably never heard that many cuss words in one time in his life.
All right.
Welcome back to the show.
I'm Scott Horton, and our first guest is Mike Swanson.
Mike is the author of The War State, about how Truman, Ike, and JFK all empowered and fought to limit the rise of the national security state.
You've got to read it.
It's really great.
Also, he does Wall Street Window, where he gives good investment advice like for months and months and months now, maybe more than a year, he's been saying, get out of the stock market bubble before it explodes.
Welcome back to the show.
How are you doing, Mike?
Oh, I'm doing great.
How are you?
I'm doing real good.
I guess it imploded more than exploded, but just how bad is it?
Well, I was listening to your discussion about the Fed Reserve and Rand Paul, and actually, I think it's not bad yet, but I think it's going to get bad, and maybe the best way to understand why is what the Fed's doing.
I'll tell a little story.
Back in 2008, January, New Year, I traded the markets, and I was in cash.
I knew the market was falling.
That was the start of that bear market, but it had gotten very, very oversold.
It fell days and days in a row.
Normally, it would bounce in such a situation.
If you look at historical charts and statistics, when something falls that many points that quickly, normally it bounces.
This was a Friday before Martin Luther King Day, and I bought, and I put all my money into a fund that invested in the S&P 500.
I'm thinking to myself, well, the market can bounce.
Maybe I'll make 5%, and the stock market doesn't really drop that much when it does in a single day.
Maybe I'm risking 2% or a percent or something.
To make a long story short, it was Martin Luther King weekend, and so the market was closed Monday, but everything overseas crashed about 10%.
Sunday, then overnight here, Sunday, Monday over there, it was crashing 10%.
Then the next day, their market was down 10%, and I looked, and overnight, I woke up like three or four in the morning, and the Dow closed the gap down 1,000 points.
I was thinking to myself, well, it's going to crash.
I'm going to lose half my money, possibly.
I never experienced something like that before, thinking, well, I'm going to lose half my money, and this is really the big one, and so forth.
What happened was, before the stock market opened up the next day, the Federal Reserve lowered interest rates by 75 points and forced the stock market back up.
I got out even, or I may have actually been a little bit.
I don't really remember, but I didn't lose anything.
What happened was, the Fed bailed me out, just like you're talking about it bails out banks.
It bailed me out that day, and the problem is, what they've done over the past couple of years by keeping interest rates at zero, and they created a couple of these so-called quantitative easing programs that bought bonds and tried to put liquidity into the system.
They created another stock market bubble boom, and the valuations got as high on S&P 500 as they had gotten only two previous times, and that was 2000 and 1929.
If you use something called the cyclically adjusted P ratio, which looks at the average price earnings ratio for 10 years adjusted for inflation, it became a serious bubble, and the people, if you watch CNBC or the financial media, they would justify this by saying, well, interest rates are zero, so therefore, stocks that you can get any dividend for should be worth this price.
The economy is good, and they'd also say, look, the Fed Reserve has kind of made it so the stock market won't drop, and they'll create another quantitative easing program or do whatever to keep it going up, and people bullish on the stock market, and that's basically what they believe and have come to believe.
The problem is that I think the market became unsustainable in starting a bear market, and if that is the case, we're really in a situation where the Fed Reserve cannot do anything, which the stock market declines now.
There's nothing the Fed Reserve can do because interest rates are zero, and the past couple months, they've been saying they're going to raise rates, actually, before the end of the year.
They were kidding a couple months ago they'd raise rates in September.
They're claiming that the economy's growing and it's time to get off the zero interest rate policy, and interestingly enough, Tuesday last week, these Fed Minutes came out where they basically said, well, we're not going to raise rates in September.
Maybe we'll do it in December because of China.
They said there's signs that the economy may not be growing as fast as they wanted it to grow, and they've been saying, preparing people for rate hikes basically all year, so they're making a sudden change in their Fed policy, which is kind of alarming because it makes people in the stock market wonder, well, is something wrong, or maybe the economy's not as good as they claim, which it probably isn't.
That's one reason for the stock market to drop like it has recently, but in the end, the real problem, though, is that there really is nothing they can do if the market continues to decline, and last night, to show you where we are, which is pretty amazing, on CNBC, they have their head economics reporter, his name's Steve Leisman.
He basically gets leaks from the Federal Reserve and reports them on television.
That's his reporting.
There's a couple people in the Wall Street Journal who kind of did the same thing, but anyway, after the stock market fell quite a bit, he, to reassure people, he said that the Federal Reserve is not going to raise rates in September, and then he said that they are going to do, this is the word he used, which is kind of ironic from what you're saying about Rand Paul, the quote he said is effective easing.
He said that the Federal Reserve is engaged in effective easing by doing nothing.
Like, if they don't raise rates, that's as good as easing, which is, in other words, that there's nothing they can do, and by doing nothing, that's going to help the stock market, which is pretty amazing.
This is a situation I don't think most people really understand, that the Fed's kind of trapped like that and trapped the stock market, but I believe that if the market continues lower, which I think it will, that this will become the real driver of lower stock prices and the realization of this reality.
Yeah.
Well, now, yeah, I know that I've seen Peter shift from time to time.
I don't follow him that closely, really, but I've seen from time to time on TV basically screaming and yelling over the past couple of years that they can't stop quantitative easing.
They can't raise interest rates ever.
Everything is on such a bubble now.
I mean, as much as the bad bets are still kind of being canceled out from the last time, there's still all this deflation going on, that whatever does seem like prosperity at all is all just bubbles, and that if they quit with the quantitative easing, then, well, you said we see the collapse of the fuel prices, and then housing and bonds and this, that, and the other thing are all next, too, unless they go back to inflating again.
Like you're saying, maybe now that isn't even good enough, but the music's playing, so I got to stop and try to come up with a question in the next four minutes.
We'll be back with Mike Swanson from Wall Street Window right after this.
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Hey, Al 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.
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All right, y'all.
Welcome back.
I'm Scott Horton.
I'm talking with Mike Swanson from WallStreetWindow.com about the Dow, the big stock market collapse.
So if I got you right, what you're saying is that they can keep inflating, but at this point it's not working.
It's time for a bear market, and they're not going to be able to prop it up by just expanding bank credit at this point.
But they're going to keep trying, right?
It's not like they're going to go ahead and shrug and allow a recession to take hold.
Although I wonder, if they just quit inflating and let markets clear, how long would that really take if they just let capitalism work for a minute, let the bankrupt go bankrupt and let prices find where they belong, you know?
Well, I mean, I wish they would have done that 10 years ago or 15 years ago.
We probably wouldn't be talking about this kind of thing at all.
We'd be living in a real economic boom that's sustainable and a time of prosperity.
In fact, if you look, after World War I in the early 1920s, the Fed did exactly that.
There was a very bad recession, but it was short-lived.
I don't think it was like six months or eight months.
Then, of course, you had the 1920s, but people forget about that.
What the Fed to fix things for them, or they've come to believe they have to.
And I don't know.
It could be that maybe they do have to try to keep – maybe we can't face that type of situation because of the size of the national debt.
I mean, I don't know if that's the case.
They certainly seem to be scared of something.
And one thing that's interesting to do, there's a book called Greenspan Bubbles by a fellow named William Fleckenstein, and it's based on Fed transcripts in the 1990s.
And if you read that, and then also you can get the transcripts of the meeting from 2008.
I think if you read it between the lines, it does seem like they're frightened of something.
I don't really know what it is.
It's not ever really articulated, but it seems as if they're afraid if the system could just collapse and collapse for good or something.
But, I mean, I'm not saying that's the case.
I don't really believe – I don't believe that is the case in the sense that, you know, the economy is going to disappear, people are going to stop doing things or something.
You know, I mean, if we had to go on the gold standard or not be able to run limitless deficits, it would certainly mean a different society and a different type of government.
We wouldn't be able to engage in endless wars, that's for sure.
Well, and this is the joke, right, is this is the argument for the Fed, is that we have to have people who are elected to these basically – or, you know, appointed to these basically indefinite terms at this separate central bank, because if Congress was in charge, which is supposedly the only other alternative you're allowed to consider, well, and they would have only their short-term selfish political interests at heart, and they would always do nothing but inflate, and they would never allow correction.
Whereas at the Fed, they're independent so that they can go ahead and weather the criticism and take away the punch bowl at the party so people don't get too plastered.
And then that's exactly what they do not do ever.
Yeah, it's certainly – the only time that has happened is under Paul Volcker and after World War II, and in the early 1920s, as I mentioned before.
That is the only three times that I know of in history where the Fed really did take away the punch bowl, and both times, you know, you had prosperity afterwards.
The problem is that by bailing things out, they – you know, if they hadn't bailed – I think of 1998, because that's when I started doing this stuff and following it, and that's when there was that long-term capital crisis linked to the default in Russia, and that would have been a recession there, but Greenspan lowered rates, and you had the internet bubble, and then that blew up.
They bailed that out, cutting rates.
You got the real estate bubble, and you get 2008, and now they lowered rates to zero and quantitative easing, and now we have this new bubble, which I think is in the stock market, which I think is over, but there's also a bond bubble, which I don't think has popped.
I think it's probably topped out, but it may take a year or two for that to even start to really decline, because at first, at least, falling stock prices make some people buy bonds as a safe haven, that should help bonds out, but that's the real potentially dangerous true bubble that would really hurt the economy, is if the bond market goes into bear market and Fed really can't do anything but print money to keep those prices up, which would really be a disaster.
So that's an argument that they really can't do this forever, and they're just trapped in the Fed.
All they really can do is just hope that things somehow work out, and really they haven't yet.
I mean, the economy has not been able to grow at a sustainable rate, and I think they were hoping maybe that we had reached that point and that they could raise rates and return to a more normal situation, because the best example that there is a problem is that interest rates are zero, and just the mere talk of raising them to a point slowly over what would be a year, which is what they were suggesting, they can't even do that.
I mean, the people in the financial media have actually, some of them, have blamed the idea of the Fed raising rates as the cause of the market dropping down.
They're basically screaming for them not to do it, and now they won't do it.
That's a horrible summary of where we are.
I mean, that's what the Federal Reserve has achieved all these years of quantitative easing and the zero rate policies.
They've just created a stock market bubble in this dangerous situation, and there's no real economic growth in most parts of the United States.
I mean, there is around Washington, D.C., but not where I live.
I think not in most cities and places.
Maybe there is where you live in Texas, but not here.
Well, now, so if the bad stock market is driving people into bonds, and you're saying that the bond market is in a bubble, I don't know what percentage of investors really understand that or what have you, but if the stock market keeps doing worse, then that keeps propping up the bond market.
But then so the question is, where else do they have to go but the bond market when it comes to that kind of thing?
In other words, will that be successful?
Will the crisis in the stock market really help the bond market, or it will just put off the inevitable and make it that much worse?
Well, that's the big unknown.
When I look at the stock, the financial markets, we talk about trying to figure out what's going on in the background of it like we're talking, but I really look at charts and use what they call technical analysis, which is basically looking at trends on charts to figure out what's going on in the market.
But that only really works looking about six months out.
It's really not useful.
It doesn't really do well for figuring out what's going to go on years down the road.
I really don't know what things will look like a year from now, but I think there are alternatives.
They don't look attractive to people now, and the main alternative would be gold and silver and precious metals, which I do own positions in those things, but they haven't done well so far this year, and they've been in the bear markets.
2011, so not many people are interested in it, but I own positions in them because I do think eventually they're going to go into a real bull market, and if the bond market situation unravels in a couple years, they would be the things that would go up in benefit.
So I actually think just about anyone that has investments or whatever should have some sort of position in gold and silver, like 10% or something, just to protect themselves from that type of thing.
But I think if the stock market declines, it goes into a bear market.
I don't really think it will hurt the real economy that much because it's just really a small segment of people in the stock market now.
A lot of people got out in the last bear market, and it's really not so many people are dependent on it as they were before, and a lot of people got out because they needed the money because of the recession, the poor economy, and younger people don't have hardly anything in the stock market.
So I think the more potential danger is this bond situation if that happens, but I can't point to any evidence that it is.
I just know it's a potential problem that could happen, and if it does, it probably would happen after the stock market has a big decline.
All right, well, we're out of time, but thanks very much for yours.
Good to talk to you again, Mike.
Yeah, good to talk with you too.
All right, Shell, that's Mike Swanson at wallstreetwindow.com.
Hey, you own a business?
Maybe we should consider advertising on the show.
See if we can make a little bit of money.
My email address is scott at scotthorton.org.
Hey, I'll check out the audio book of Lou Rockwell's Fascism vs.
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Fascism vs.
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Find it at Audible, Amazon, iTunes, or just click in the right margin of my website at scotthorton.org.