Sorry, I'm late.
I had to stop by the Wax Museum again and give the finger to FDR.
We know Al-Qaeda, Zawahiri, is supporting the opposition in Syria.
Are we supporting Al-Qaeda in Syria?
It's a proud day for America.
And by God, we've kicked Vietnam syndrome once and for all.
Thank you very, very much.
I say it, I say it again, you've been had.
You've been took.
You've been hoodwinked.
These witnesses are trying to simply deny things that just about everybody else accepts as fact.
He came, he saw, he died.
We ain't killing they army, but we killing them.
We be on CNN like, say our name, bitch, say it, say it three times.
The meeting of the largest armies in the history of the world.
Then there's going to be an invasion.
All right, you guys, on the line, I got the great Mike Swanson, and he wrote the book, The War State, which is this wonderful history of the rise of the military-industrial complex in the Truman, Eisenhower, and Kennedy years.
And I think you'll really enjoy it.
It's The War State.
And yeah, he does pay me to say that, but also, I mean it at the same time.
He also does investment advice at wallstreetwindow.com.
He's a former hedge fund manager up there in the New York City.
And now what he does is, he still invests, but he specializes in showing you what he's doing and why he's doing it, so that you can protect your assets and maybe grow them too.
How about that?
Welcome back to the show, Mike.
How are you?
Oh, it's great to talk to you.
It's been an interesting couple of months.
I think we last spoke maybe in July when the Federal Reserve lowered interest rates, and the stock market dumped a little bit in August.
And they actually lowered rates again this week, and not much happened, at least in regards to the stock market.
It's kind of funny.
It seems like every year now, once you get to August and July, the volume and the movements of the market just kind of slow down, and people kind of fall asleep, and not much seems to be happening.
At the moment, that's how the stock market action kind of feels.
There's more excitement in gold and silver.
But man, the headlines are really crazy, you know.
We had the Iran, or the attack on the Saudi oil refineries, whether Iran did it, or Yemen did it, or whoever.
And that just spiked the price of oil up, and it kind of faded back down.
And so that's kind of the headline of this week.
And then last week, the bond market made a wild move with the Treasury bond yields collapsing, pricing in a coming recession, and then they bounced back.
Then that move reversed a little bit.
And so that's kind of – it's like the stock market itself isn't really doing much interesting, but the background is getting more interesting, I guess you could say.
All right, so I'm always trying to look for my historical parallel-type understanding thingies, because I don't know too much about this stuff, really.
But I look at, say, the crash of – I always forget, was it 87 or 88?
It was 87, right?
87.
Yeah, so there's this crash in 1987 where the stock market crashed, but otherwise the economy seemed to pretty much keep going.
I think the collapse of the housing market in Texas had happened from the oil crash earlier than that, and was beside the point of that.
But anyway, so it kept going.
They didn't have the real recession until after Iraq War I, if I remember that right.
And then they had – a lot of people got wiped out pretty bad in the stock market crash and the NASDAQ crash of 99 and 2000.
But then they kept humming right along and reduced interest rates after September 11th to virtually zero in order to continue inflating and inflate the giant bubble.
But when that crash in 2008, boy, it took the entire global economy down with it, too.
That wasn't just a stock market crash, that was a global catastrophe.
So, I guess, if I can oversimplify this ignorantly, what kind of crash are we facing next?
Not a big stock market crash like 87, 99 kind of thing, or more like 2008 where severe distortions must be accounted for across the globe and at the result of huge write-downs of bad debts and so forth?
Well, that's an interesting question.
I think it's actually a little bit of a paradox, because on one hand, I would say it's going to be like the 1999-2000 scenario, because in 2008, really what happened was real estate fell first.
Real estate prices actually peaked out around 2006.
And by the summer of 2007, the value of mortgage assets, these mortgage securities, went to zero.
The market for that just locked up.
And there's a hedge fund, the Bear Stearns hedge fund, blew up that summer.
And the stock market just ignored it, but these problems were there.
And the market tipped into a bear market by the end of 2007.
But really, the economy, I would say, drug the stock market down, because this whole mortgage security thing and the real estate prices impacted the banking system and that's what really created the economic slowdown.
And the stock market prices were just kind of drawn into that, although they were already high to start with before they tipped over.
But that's what happened in 1999.
They were high, it was a bubble in the NASDAQ, and you had a bear market.
But what I'm trying to suggest is that the stock market in 1999-2000 probably led the economy down, whereas in that 2008 crash, the opposite happened.
The economy slowdown impacted the stock market more than the stock market impacted the economy.
So right now, I don't really believe there's anything like 2008 in the sense of a banking crisis ahead of us or a problem with mortgages or anything like that, like a systemic risk of that sort.
But the stock market is highly valued.
And in my view, most Austrian economists or people like Ron Paul have been saying, and I agree with them, that this thing has been propped up for years, it's a giant bubble, and it's just going to blow up one day.
And in some ways...
The currency itself, you mean?
No, I mean the stock market.
And in many ways, the stock market is more highly valued than it was even in 2000, because Dow was an internet tech bubble primarily, but now it's almost every single stock.
So for example, if you picked up a book in the 1990s, you could read about buy stocks or cheap PEs or a price-to-sales ratio of 1 or under, and you're getting a value stock.
Well now, almost every stock in the Dow has got a PE over 20, a price-to-sales ratio over 3, or at least over 2.
So it's like the whole market's overvalued, not just internet stocks or something like that.
So I think at first, at some point, and I don't know when, and it's something I'll just look at month by month to see if we're at that point yet, but at some point I think the market will tip into a bear market and drive things down.
I'm looking at the chart of the S&P 500 as we're speaking, and the way it works, it's got a low of $2,750 about in June, it fell to $2,800 in August, and as long as these lows hold, people can buy and not worry.
But if those lows break, then it'll probably tip over into a bear market.
We'll probably at some point test those lows and have one final bounce, and that'll be it.
I mean, that could happen by the end of the year, first half of next year or something.
But the real bubble, though, is what I think is going to come later, maybe after the stock market has a significant decline.
And I think the real bubble is the bond market itself, not just mortgage securities or something.
In fact, I think this is the biggest bubble perhaps in human history, because we're seeing interest rates in many parts of the world negative.
The Central Bank of Europe just a week ago lowered their discount rate to below zero, something that's never been done below in history, meaning that if you borrow money, you pay the government to do it, which makes absolutely no sense.
But I think it's a function of this massive bubble created by central banks keeping interest rates so low and doing these quantitative easing programs since 2008.
And this is something that really accelerated around 2012 when the Federal Reserve did a new quantitative easing program that year.
They drove the interest rates for corporate bonds down to record lows.
That enabled corporations to borrow money at record rates, which they did.
So there's a record of junk bond debt.
And many companies have used that to buy back shares, meaning they borrow money from the bond market and then buy shares back.
And that's one reason the stock market is so overvalued and holds up and in a way acts funny because it feels like it just doesn't move that much in a certain sense.
It just kind of floats around.
And I've been doing this for 20 years, and you feel like there's fewer and fewer real people trading stocks or doing anything.
And it's one of these computer programs and share buybacks.
But if the stock market goes into a bear market, and it will at some point, I think that will cause some economic slowdown just in itself, kind of like that 1999-2000 scenario.
And I'd expect the Federal Reserve to lower rates even more.
They've already done it twice.
But it's sometime in the future after that is when I worry that the big bubble, the real bubble, which is the Treasury bond market and these corporate bonds, whenever that tops out, that's when I think we'll have the real crisis that everyone is always predicting.
And then, so what would that look like?
Hyperinflation, total destruction of all savings in dollars everywhere or what?
I don't think it's like 1920s in Germany, but something like the 1970s in the United States or maybe worst case, Argentina.
You know, that's happened several times.
So what does that mean?
20-30%.
I was only born in 76 and yeah, I know all about what you mean, but a lot of people don't know what you mean.
So tell us about the 70s.
In the 1970s, basically what happened was on average every year there's about 5% inflation.
In 1974, there was a bear market in the stock market and inflation slowed down a little bit to like 2 or 3% that year.
And then after that, it really accelerated.
So, you know, most people, most Americans saw the cost of living go up.
But in the stock market, it did really nothing.
It lost money relative to the value of money.
And this was all in the aftermath of Nixon taking us off of the gold standard in the aftermath of the Great Society War in Vietnam, right?
Yeah, exactly.
The David Stockman book, The Great… Deformation.
Deformation, yeah.
That's, I think, the best source on this.
But yeah, so he took the U.S. off the gold standard around 72, 73, or was it 71?
Okay.
And then there's a… the stock market actually went up a little bit afterwards and peaked out like 73 and had a bear market 74, 75.
But it was after that bear market ended is when inflation really took off.
So I really think that's the similarity that we face, that there'll be a bear market and a slowdown in the economy.
And after that bear market is over, I think that's when inflation will really pick up.
But in the 70s, you had, like I said, about 5% growth in prices, CPI, every single year to Paul Volcker jammed interest rates up and made everything come back down.
Right.
Something like that.
Which, by the way, I mean, what that meant was he forced a recession.
Exactly.
That was long overdue, but that was incredibly painful.
And it wasn't the market clearing out bad debts.
It was command and control the other way.
So now instead of artificially low interest rates, we're going to raise them to what he thinks is the right rate.
Which means we don't know how many businesses went under that might not have if the market itself had been allowed to work this stuff out.
But that means that then, pretty safe bet, that's what we're heading for in the future at some point, is another kind of right winger like Volcker to come in and say, nope, to lick inflation, we're going to have to force this recession, jack up interest rates into the millions and whatever.
I mean, that could be 10 years from now or something.
That's a long time from now.
But if you have 5% inflation, and I'm just guessing when I say that, but if you had 5% inflation for 10 years, compound that, it's making money worth less than half what it is now.
So where we're at now with all the quantitative easing and everything, is it that the widespread price inflation is disguised because it's just going into bubbles in certain markets.
And of course, their chosen basket of prices that they reference to measure price inflation, broad based price inflation is pretty rigged anyway.
But it seems like it's relatively low compared to a lot of predictions from the aftermath of 2008.
But it sounds like you're talking about a whole different animal.
You're talking about when the currency bubble itself collapses.
Yeah, that's what I'm speaking of.
I mean, today, inflation is a funny thing, because if you talk to just folks, anybody at a bar, wherever you go, party, whatever, friends, whatever, a lot of people feel like there's inflation.
They say there's inflation in their day to day life.
But for me, someone that is watching these financial markets, I don't see it, except in the stock market, of course, because commodity prices have been in a bear market.
Well, you see it at the grocery store, though, right?
Or not?
Well, just a little bit.
But commodity prices have been falling for six, seven years.
The price of oil is really acting bearish.
It's down for the year.
And then we had these strikes against these Saudi oil refineries, and it goes up a day and kind of gives up the gains.
So – and the government's CPI number is below 2%.
They say 2% is their target, and it's very low.
Of course, that number is created in a funny way.
They'll claim that if you buy a computer, it's got more power to it now than it did before.
So even if it costs more, they count it as a negative component to their inflation gauge.
They do that with phones and stuff.
It's just kind of crazy.
But I think when people talk about experiencing inflation and a higher cost of living, they're primarily feeling it from the rent they pay or their mortgage payments.
The rent is too damn high, I've got to say.
Because what's happened is even though the housing prices crashed in – or they fell from 2006 to 2009, they've gone back up and made new highs, just as the stock market has done the same, thanks to zero rates, quantitative easing.
So that's where the real – and what you can see, that's where the inflation, I believe, is.
It's not in regular buying clothes or even buying – I don't see that much, personally, inflation at the grocery store.
But I think it's – people get it from the real estate market more than anything else and healthcare too.
Yeah, for sure.
And education.
Oh, yeah.
All the places where government intervenes in the economy the most, coincidentally.
I don't know.
I mean, I would like to – now that I think about it, the education would be – it would be interesting to see a study of that.
Everyone knows education costs have skyrocketed.
I mean, I looked – at one time, I went to college, university, in the 90s, and it's like four times the cost today.
I wonder if that's also like real estate, a function of interest rates being so low that, hey, we can make you pay more for it.
I don't know.
But also, you know, just whatever the government will provide, the maximum they'll spend will be the required cost, according to the university, you know, at all times.
So it just – it incentivizes them to keep raising their prices.
And, of course, the government doesn't care because it's not their money, so they go along with it.
In fact, one time, Ron Paul had said something like this during one of his presidential campaigns.
I think this would have been back in 07 or 08.
And then they interviewed these liberal women on MSNBC who were all college professors and administrators.
And they were saying, well, I don't know anything about that Paul guy, but what he said is right.
I mean, at the end of the year, the beginning of the year, in the middle of the summer, whenever it is, we get an announcement of how much they're willing to pay.
And we then immediately raise our prices to exactly that level, of course.
You know, what are we going to do, charge less than we can?
Yeah, well, it makes sense.
Talk about the great deformation.
There's a huge one right there.
But, all right, anyway, so Mike, you sent me this thing this morning about ETFs, the big risk lurking in ETF markets, reads one headline and the other a lot like that.
So what the hell is that and why should I be afraid of it?
Well, for the person in the stock market, I think this is actually the greatest danger they face.
And I own ETFs in some of my accounts, you know, when I say this myself.
But it's kind of the article, I think, kind of gives a good idea of what is different in the stock market now than, say, 20 years ago or even before 2008.
20 years ago, most people owned mutual funds and individual stocks.
And these ETFs came on the scene right before 2008.
And what they were, they're called exchange traded funds, and they all own a basket of individual stocks.
And they charge a very tiny fee, like a mutual fund will charge you 2% a year, let's say.
These things will charge you a half a percent or even a tenth of a percent.
So people have flocked into these things.
And many people, this is all they own, like SPY is an ETF that's the S&P 500.
And you can buy one for bonds, TLT.
I own one for gold stocks, GDX.
You can buy one for gold itself, too, and so forth.
So for the individual investor, more people are buying these than buying individual stocks and so forth.
But what they don't understand or realize is it's so easy, right, to just press a button and you buy one thing of all your money and press another button and sell it all just like that, it seems like.
But these things aren't as liquid as they appear to people.
So, for example, that GDX ETF, which I own, two of the stocks in it make up 20% of the entire fund.
And that's par for the course for a lot of these things.
So I actually started getting concerned about this a year or two ago, thinking about the bond market, which we were talking about.
And there's ETFs for corporate bonds that are hugely popular.
And they've been doing great this year.
But the way the bond market works, it's easy to buy a bond.
You can open up your brokerage account, hit a button, buy a bond or a CD for that matter.
But if you go try to sell these things, it's not that easy.
And most people, if they buy a CD or a bond, they never think, oh, I'm going to sell it one day.
They just hold it to the duration.
But these ETFs, they don't think like that.
They think, I'm going to trade the ETF and it's easy to get out.
But if the bond market ever goes into a bear market, it's going to be very difficult to sell those ETFs.
Because if everyone tries to do it at once, those ETFs are going to be forced to sell illiquid bonds.
And if you read the prospectus for it, there's even a warning that says we could halt this thing if there's too many sell orders.
So I think one day something like that could happen, not just for bond ETFs, but even some of these real popular stock ETFs.
So I'll just give you one quick example.
And this is what this article is warning people about.
But one ETF is for the Russell 2000, 2,000 stocks.
And its symbol is IWM.
And again, it's probably one of the top 20 traded ETFs every single day.
Now, it's got 2,000 stocks in it.
But if you look at all these stocks, today as we're speaking, it's close to 4 o'clock on the close.
Two of these stocks haven't done a share of volume.
And 500 of them haven't even done 100,000 shares of volume.
So that's, let's say 25% of this ETF is very illiquid.
So if there was a stock market crash or some big selling one day were to happen and everyone hits the sell button on these ETFs, just something like this is going to be very difficult to sell.
What it would do is probably have to halt the exchange or halt trading in this.
And it'd just scare people.
But I think something like this is going to actually easily could happen one day.
So I just put that out there that people think the stock market is safe.
It's just what people invested in it are trained to think.
And with not just television and call it whatever you want, your investment advisor, Wall Street propaganda, but the market itself has trained people not to be that worried because it's gone up now for 10 years.
But that's what I think is just a good metaphor for the whole situation.
Hang on just one second.
Hey guys, did I ever tell you about LibertyStickers.com?
It's just nothing but anti-government propaganda for the back of your truck.
I invented most of them, the good ones anyway.
Anti-war stuff, anti-cops, making fun of all the candidates in the upcoming election.
LibertyStickers.com.
Hey guys, check out the great lineup of podcasts we've got going on over at the Libertarian Institute.
There's me, Foreign Policy in Focus with Kyle Anzalone.
Free Man Beyond the Wall with Pete Quinonez, a.k.a.
Mance Rayder.
The Liberty Weekly Podcast with Patrick McFarlane and Keith Knight.
And our newest edition, Jen the Libertarian with Jen Monroe.
Check them all out at LibertarianInstitute.org.
Hey guys, don't you think it'd be cool if you could go to college but Tom Woods was the dean of the thing?
Yeah, well, something like that.
Check out LibertyClassroom.com where Tom Woods went and had his pick of all the best professors to teach their courses in the real history and economics that you didn't learn when you went to college the first time around.
Or maybe you didn't learn because you skipped your higher education altogether.
But here's some real American history and some real economics, the kind of stuff that you've been missing.
Check out LibertyClassroom.com and make sure to click through the link in the right hand margin of my website, ScottHorton.org.
Alright, well, so, assuming a guy like me, a paranoid nut like me had any money, what would I do?
Just buy gold and hoard it and be afraid?
Well, I mean, the simplest answer for anybody, no matter who you are, whether you've got $100 million or $1,000 or $500 and you want to just invest without thinking too much, is diversify.
And what's his face?
Before Ron Paul, the guy that ran for the Libertarian Party a couple of times that was real popular.
Harry Brown.
Yeah, Harry Brown.
He was an investment advisor and had something he called the permanent portfolio.
So, anyone can look that up, buy his old books.
And he basically advocated, put a percentage of your money in gold, put a percentage of your money in stocks, a percentage of your money in bonds, and just do that and don't worry about it.
And the thing is, if everything collapses or something, the gold will go up.
And you don't have to worry if you're doing this and the stock market does fine, you're making money in stocks.
So, that's the simplest solution.
But there's nothing wrong with buying physical gold or physical silver.
And I tell just friends of mine, just do that.
And if you don't even want to mess the stock market, you don't have to.
I think right now, that's honestly probably the simplest and best investment for the next 10 years.
Yeah, and the point there isn't to gamble on it and hope there's a huge bubble in gold and cash in on it in that way, right?
This is just to protect yourself from the constant printing of money by the bank and its banks.
Yeah, exactly.
And, you know, in the 70s, gold and silver did well.
But it did well, it's actually outperformed the stock market since the top of the Dow in the year 2000.
And I've done computer simulations, like testing different ways you can invest.
And if someone had put a third of their money in just bonds, a third of their money in stocks, and a third in gold, and rebalanced it.
Meaning, every single year, if something went up, so you're no longer 30%, but say 40%, you sell some, buy the other stuff that hasn't gone up.
As much or gone down.
If you did that every single year, you would beat the market and not even lose that much during 2008.
Because bonds went up, and gold went up too that year.
So that's basically the simplest thing to do.
And you don't even have to predict what's going to happen or anything.
Yeah, in other words, build yourself a roof and live under it, whether or not the weatherman's predicting rain.
Yeah, exactly.
And if you go to a traditional stockbroker where I live, they have all these Edwards and Jones guys.
And they train them to tell their clients, put half your money in mutual funds and half your money in our stock funds.
And historically, when the stock market goes down, bonds go up, and you'll do good.
And they're right.
But they tell people to avoid gold and silver because they don't have funds on them that they make their money off of.
And if I'm right, and one day the bond market goes to crap, like it did in the 1970s when there was a lot of inflation, gold will go up.
So they don't backtest the 1970s.
So that's another reason I think people should think of having gold or silver as a part of their investing.
All right.
Well, there you have it from Mike Swanson, WallStreetWindow.com.
And of course, author of the great book, The War State.
Thanks again, Mike.
Thank you.
Great talking with you.
All right, y'all.
Thanks.
Oh, yeah, and read my book, Fool's Errand, Timed and the War in Afghanistan at foolserrand.us.
