First of all, I do know Raoul. Great guy, very smart guy. Not surprised you had him on the program because you’ve got great guests one after the other. And not only do I agree with him completely, [but also] I’ve been saying this for a while: Raoul and I, and four or five others are the only ones… But I see 10-Year notes going down perhaps a little 1%, when all of a sudden done. So, 70-80 basis points. 

If that sounds extreme, I just remind listeners that yield to maturity on JGB benchmark 10-Year notes has been negative for a long time. German bonds, which is the Euro denominated, the Chairman issued benchmark has been in and out of negative territory. There are intermediate to long-term bond markets all over the world of major economies. I’m not talking about Zimbabwe here with negative yields. So what’s the state doing? 

Tonight as we speak about 2.2%, that’s a huge spread, and you talk to bond traders and they go well, “That’s all about inflation expectations. If you think, you know, there’s going to be more inflation in the US and you want more protection for your money, and you want higher yields and all that.” I agree with Raoul, and I see the inflation. 

I’ve said this goes all the way back to my first book “Currency Wars” which came out in 2011. Unlike page really, but Roman three “i” like an introduction before you even got to the book, I talked about the unstable equilibrium between inflation and deflation. 

I use the metaphor of a tug of war, and I say, when you have a tug of war, you’ve got two pretty evenly matched teams. Two teams that [are] really kind of strong people, typically, if you’re talking about the competitive version, and when it starts, not much happens. 

I mean, you have enormous enormous force being exerted on the rope in opposite directions. And yet, because the force is offsetting in opposite directions, not much happens. I’ll eventually see a little action that one team wears down the other end, one team collapses, and they get pulled over the line by the winning team. But that can take a long time. 

And I saw inflation, deflation in that kind of dynamic. So what are the deflationary forces? Who’s on the deflation team? Well, you have demographics, which we I think we’re all pretty familiar with at this point. You have debt deleveraging. If I’m over leveraged, what do I do? 

Well, I sell some assets and take the money and pay off the debt [and] reduce my balance sheet. Well, when I sell assets, what’s happening to the price? Probably going down, other people are doing the same thing. So what does that mean? Well, it means more deflation, because asset prices are going down. 

The third element is technology. And again, I don’t need to elaborate on it, but when you see Smartphones go from $900 to $200. And some of them, they’re given away. That tells you something as well. So demographics, that deleveraging and technology are all natural deflationary forces. 

To that, I would add some behavioral psychology, not just residue, but maybe intergenerational, almost Post Traumatic Stress Syndrome from the financial panic of 2008. When I grew up in the 50s, my grandparents and even my parents, they would recycle newspapers and save tin cans, and it wasn’t out of environmental consciousness. I don’t think they might have because of that. 

It was because you can get money for them. I mean, that’s how frugal people were. You were not [a] spendthrift, because they were still 20 years… I didn’t live through the Great Depression, but 20 years after the Great Depression. I lived in a society where people remember that and acted accordingly. It wasn’t till the 60s and 70s when the baby boomers grew up, and we just thought we could spend money like there was no tomorrow. 

But now, because of the 2000 dot-com crash and 2008 financial panic, we have a generation who have been kind of burned. When you see new *inaudible 35-40 years and you see half your retirement income go up in smoke, it probably changes how you’re going to look at the future. And you know, save more and we’re in a liquidity trap. So these are all natural deflationary forces. 

What are the inflationary forces? Well, in a word, monetary policy, money printing. $4 trillion on the Fed’s balance sheet. But when you look around the world, and you realize that ECB and the Bank of Japan, the Bank of England, and the People’s Bank of China, it’s not really much of a hard currency, but put them in the mix. This looks more like $20 trillion of money printing, not to cap the $100 trillion of debt that’s been piled on top of that. So you have this money printing, leveraging up aspect of it as well. 

So these are the two teams. And what’s been happening really the last seven years is they’re fighting each other to a standstill. Inflation has not taken off the way some of the Fed critics expected. We don’t have hyperinflatio. We can’t even get to *inaudible inflation target. Forget about hyperinflation. 

On the other hand, we haven’t fallen into a deflationary spiral and inflation is still low. But to me that’s not a balance. That’s not an equilibrium at 1.5% to 2%. That’s the result of two tectonic plates pushing against each other, creating energy and the potential for a major earthquake somewhere down the road. So that’s the lay of the land. 

Now, with that said, there’s nothing that’s causing the deflationary forces to go away. So every now and then, you have these inflation rallies and some of it is commodity price driven. Some of it is QE1, QE2, QE3. I do think it’s interesting. One question I would ask is, why did the Feds start QE2? Well the answer is QE1 failed. Why did they start QE3? Because QE2 failed. 

There is no way in 2009 when we were in QE1 that the Fed thought we’d be sitting here in 2017 with you know, first quarter estimated up below 1%. There’s no way. They wouldn’t have gone down this road if they thought this is where we would end up. They were pretty sure we get some self sustaining trend growth and of course growth is not returned yet. We’re in a depression, the way to understand the United States is we are Japan, the people like Bernanke ran around the early 2000s, the rating in Japan telling them they were idiots because of their monetary policy and what was wrong with them. They had a lost decade. Of course, now we’re in the third last decade. With Japan, 20 year depression. What’s wrong with the people? Why can’t you get out of it? 

And yet Bernanke and now Yellen have made every single mistake the Japanese made. We basically replicated Japan with below trend growth, occasional technical recessions, occasional dips into deflation, etc. So rates have come down to 15, 10, 5, 4, 3. So you count them, No reason they can’t go lower. I know so many guys have been carried off have perished on the short trade, where they’re like, “Oh, those rates just can’t go any lower.” You know, short term, guys in the bond business, 20-30 years, they can’t believe we’re talking about low single digits.

Preston Pysh  11:03  

You know, it’s interesting because we were talking with Bill Miller from Legg Mason, back in December, and he had told us that he was literally putting shorts on the 10 Year bond. And when he was telling us this, we’re like, “Oh, bond yields have to start going up. If Bill Miller’s put in shorts on this, it has to be getting ready to sell off.” 

And you know what? It went up to like, 2.6. But ever since that it has been just getting hammered, going lower and lower. So I’m curious with this question here, Jim. You know, we went how many years? Eight years with a 25 basis, interest rate rise from the Federal funds rate in eight years, one time, and then in December. And then in February, we had the Fed move two times for 50 basis points. Do you see that trend continuing where they’re going to continue to try to ratchet it up?

Jim Rickards  11:52  

I can tell exactly what the Fed is going to do, and you can do this at home. So listeners want to take notes. It’s really easy.

Preston Pysh  12:00  

I want to highlight to our audience the last time you came on the show, I want to say it was November. And you told us, the Fed is absolutely raising rates in December and you were 100% right. So I want to throw that out to the audience before you tell us your opinion here. So let’s hear it.

Jim Rickards  12:15  

Well, thank you. But let me just take the story a little bit further. I’ll give you another data point, pres. And the reason I’m doing this is not to pat myself on the back, but basically to validate the model because it’s the model that I think the listeners can take away with and have some value. 

So you’re right. I did say that December, beginning in late December, okay, so they raise rates on December 14, the whole world knew that in late December. I said they’re going to raise rates in March 2017. And there is a Fed Funds Futures contract and based on the pricing, you can get an implied probability of a rate hike and a series of forward *FOMC meetings. And the market was giving it a 28% probability. Then, I said, I hate to say anything’s 100% that’s kind of dumb. So I said I was giving a 75. My brain I was kind of saying 80% but 75% probability late December. 

So the market probability stayed at 28-30%, the entire month of January. The entire month of February, I went from 75 to 80% in January. So I’m at 80%. All January-February, the markets at 28%. What happened? 

On the last two trading days of February, the first trading day of March, the market probability went from 30% to 90%. Boom, just like that. In two days, two or three days, the market goes to 90%. Why? So we converted 90% by March 15, we were all hundred percent and then the Fed raised rates. So that whole gap, if you draw two lines on a graph, and just go horizontally on the y axis at 80% and 30%, look at that gap, and then it closes at the end. I mean, that was the money to be made there. 

Now, here’s why and I’m absolutely not smarter than all the other people who are commenting and all the people on Wall Street but I like to say if you have bad models who get better results and if you have good models to get good results. Here’s the model. 

First of all, what is the problem the Fed is trying to solve? What is their solution? And then what are the exceptions to that so that we can have a complete predictive analytic model? The problem they’re trying to solve is the following: We know from a long series of experiences, you know, 30, or more business cycles since the end of World War Two, that when the US is in a recession, you have to cut interest rates, 3% to 4%, to get the US out of a recession. You need 300 to 400 basis points of cuts to get the US out. It’s like a plane heading for the ground. How do you pull it out of a nosedive and get it back up in the sky? The answer is 300 basis points of cuts. How do you connect your straights? 300 basis points when you’re only at 75 basis points. The answer is you can’t and forget about negative rates. The evidence is now pretty good that negative rates do not work. And those negative rates are not more of the same. 

When you go from let’s say a half of 1% and you go to a quarter, and then you go to zero, and then you keep going to negative 25. You didn’t just ease by another 25 basis points. The evidence in Japan and Europe is that you’re through the looking glass and you have very strange effects, really unintended consequences. I’ll give you a couple examples. 

So the conventional theory is, well, the more I could interest rates, the more stimulus I get. That’s a joke, but that’s what they think. But if I go negative, you’re absolutely going to go out and spend the money because if you don’t spend the money, I’m going to take it away, sit there long enough, you’ll have nothing left in your bank account, because I’m going to take with these negative interest rates, I’m gonna take it away. So people will run out and spend. 

And the other thing is that it’s obviously, from a lending point of view, they’ll borrow money because bank pays you to be a borrower. But here’s what happens in the real world. This is there between academics and human beings. When people see negative interest rates, people have goals in mind, they have lifetime goals, right? They want to kids education, parents’ health care, their own health care, retirement. If you start taking their money away with negative rates, guess what they do? They save more. 

Like, “Hey, I gotta put my kids to college, you’re taking my money. Well, I better save more. “And then what kind of signal is the Central Bank sending with negative interest rates? They’re sending a deflationary signal. So people go, “Well, if you think there’s gonna be deflation, I’m not going to spend money, I’ll wait till the price comes down.” So you’re trying to encourage lending and spending, and what you get is more savings and no spending. You get the exact opposite of what you want. 

So again, another egghead experiment gone awry. But the point being to negative rates don’t work. So zero bound really is zero. That really is a boundary. And, you know, Bernanke has said this in his recent writings, and I think he’s right about that. 

So back to the problem. How do you cut interest rates? 300 basis points when you’re 75? Well, the answer is you can’t so you have to raise them to 300 basis points. So the problem the Fed is trying to solve is how do they get rates to three and a quarter percent before the next recession? 

Now, I’m not saying the Fed sees a recession and that’s easy because the Fed never sees recession in 102 years. The Fed has never seen a recession, never forecast recession. But in other economic history, we are eight years into an expansion. It feels punk I mean, the growth is anemic. But you know labor force participation is low. Productivity is dropping, there are bad things going on. But in fact we are in the eighth year, actually coming up on… soon be entering the ninth year of an expansion which began in June 2009.

Preston Pysh  17:11  

Which is the second longest in history, which I think people don’t realize is this thing’s been running longer than almost any other business like we’ve ever seen.

Jim Rickards  17:21  

Right. Well, you have a hard time convincing most Americans that we’re not still in a recession. Depressions are different than recessions. You know, the technical definition of a recession is two consecutive quarters of declining GDP with rising unemployment, couple other bells and whistles, little subjective factors, but that’s basically it. So people when you say depression, they’re like, “Huh, depression sounds worse than a recession and the recession is two quarters of declining GDP, then a depression must be like 10 quarters of declining GDP, because it’s got to be worse.” But that’s not the definition. 

The definition of a depression, you can have growth in a depression but it’s below trend growth. In other words, if trends is 3, 3.5, and you’re actually banging out 1.5,2, that gap between, let’s say 1.5 and 3.5% growth, that’s depressed growth. It’s an output gap, it compounds over time and you never get it back. We are losing trillions of dollars of wealth. We are impoverishing future generations, on a relative basis. There’s an inability to get back to trend growth.

So the reason American people do this and don’t listen to the economists and they’re right is because we’re in a depression. So leaving that aside, the Fed at least understands the business cycle and the fact that the next recession, you know, they said they don’t die of old age, but they do die. And we’re getting close to the next one. So they are in a desperate race to get rates up to 3.5%  before the next recession hits so they can cut them to get out of the recession.

The question is, can you raise rates enough to cure the next recession without causing the recession you’re preparing to cure? That’s the dilemma. That’s the finesse. My answer is no, they’re not going to be able to do it, but they think they can. Why are they in this box? Well, because Bernanke should have raised rates in 2010-2011, in the early stages of expansion, when the economy would have been much better able to bear it than it is now. Bernanke skipped the whole cycle. He skipped a whole rate increase cycle to pursue these wacky experiments and you know, QE and zero interest rate  policy.

I spoke to Bernanke about this. and he used the word experiment. He said, this was an experiment. Bernanke made his academic reputation by studying the Great Depression in the wake of Friedman and Schwartz and some others. But he was a great scholar of the Great Depression, and he got his chance to kind of try out his theories. 

But what he told me was, he said 30 years from now, some new Ben Bernanke, you some young scholar will look back and tell us if we did a good job or not, we actually don’t know right now. See that the Great Depression was really two technical recessions, 29 to 33, and then 1937 to 1938. From 33 to 37, we had an expanson but the whole thing was a depression because we never got out of it. Yu know, the stock market recovered the 1929 high in 1954. That was a long time to get back to even. 

But Bernanke motto was :Doing something’s better than doing nothing.” I completely disagree. It’s better to do nothing if you don’t know what you’re doing. And this is really the monetary equivalent of the Hippocratic oath, you know, a doctor say, you know, first of all, being a doctor is first do no harm. Anyway, bottom line is, by pursuing QE and zero interest rate policy, Bernanke failed to raise rates during the early stages of a cyclical expansion, which he should have done. 

If he had, if he had the economy would have been just fine and we’d be able to cut them today, but he didn’t. So Janet Yellen now has to make up for lost time. So that’s the mission but again, this is what the market completely does not get and the Wall Street economists don’t get. Nobody gets this because they see the Fed raising rates and they’ve done that correlations and regressions back to where we’re to and they go, “Hmm. Every time the Fed raises rates, the economy is getting stronger. So if the Fed is raising rates, the economy must be getting stronger, so bid up stock prices, etc.” 

That’s like saying umbrellas cause rain, because they’ve got the causality backwards. The Fed never leads the economy ever. The Fed follows the economy. So a normal business cycle looks like this. So you get a little expansion going and unemployment starts to go down and industrial capacity utilization starts to go up and inflation starts to go up. And the Fed is watching, watching watching and then it keeps going. They go, “Oh, it’s getting a little hot. We better raise rates,” and they raise rates, but of course, they started too late. The expansion keeps going, inflation keeps going up, unemployment keeps going down. Then the economy starts to cool down, unemployment goes up, and then prices go down, capacity utilization drops, and we get into recession like, “Huh, we better cut.” Then they cut cut and then you hit the bottom and then you come out of it again. 

So think of that as like a nice pretty sign wave. That’s it business expansion business contraction over and over 30 years. So time since the end of World War Two, with the Fed always following the economy, never leading the economy. So all the big brands on Wall Street, they’ve got all this data and they say, “Well, every time the Fed raises rates, the economy is getting stronger.” That has absolutely been true for like 30 times since the end of World War Two. It is not true today. 

The reason it’s not true today is because Bernanke skipped the cycle and they’re playing catch up. For the first time since 1937. the Fed is tightening into weakness. That’s the key thing to bear in mind. The Fed is tightening into weakness. They are not leading the economy to strength, they are not responding to strength even though Wall Street thinks they are. And there’s a great danger that they’re actually going to cause the recession they’re prepared to cure as I mentioned. 

The Fed will raise rates 25 basis points four times a year from now until the middle of 2019, until they get them to three and a quarter percent. So like clockwork every March, June, September, December for 2017 2018 into 2019, look for a Fed rate hike until they get to three and a quarter percent, at which point they’ll be able to say, “Alright, now we’re three and a quarter. If we have a recession tomorrow, we can cut them back down to zero again, get out of it.” That’ll be mission accomplished. 

Now, this is why I was sitting there in December like, “Yep, they’re gonna raise in March.” And right now, I’ll tell your listeners, they’re gonna raise them in June. There’s your Fed response function. There’s your baseline scenario. 

What are the exceptions to a Fed rate hike? Under what conditions will they not raise rates? Because this everything I just described to you they’ve had in mind since March 2015 when Yellen took patience out of the statement, that was the end of forward guidance. But if you go back to 2015, I said they’re not going to raise rates all year and they weren’t gonna do the lift off. The people were looking forward to March, June, September, and they didn’t lift off in September because the Chinese rate exchange devaluation, the stock market fell out of bed August 2015. Finally, they raised them in December 2015 and while she was ready for March, I said no in June, no September. No, it wasn’t till December 2016 that they raised them the second time. 

So obviously, there are conditions under which they don’t raise rates notwithstanding the baseline scenario. So what are those conditions? There are three, well, four actually. So if you see job creation below 75,000 that will cause them to pause. But the pause is, the keyword if you go on through the speeches, you’ll see the word pause in Dudley’s recent remarks. Pause is the Fed’s jargon for we’re not going to raise rates. We got the *inaudible scenario which I took the Fed is their scenario or a technical recession. So, you know, we’re going to know Friday what the first quarter GDP is. It’s pretty close to negative but not saying we’re gonna recession now. We might be, but if you see a recession, they’ll pause. If you see job creation below 75,000, they’ll pause.

By the way, that’s a very low bar. You know, if you see a jobs report, this is the other thing that confuses Wall Street. You see a jobs report with 100,000 jobs. So Wall Street goes,”Oh that report is really weak. The Fed is gonna think twice.” No. 75,000 is the number.

Yellen told us that. it was in one of her speeches just have to be a geek like me and read all the speeches. 

So the third factor would be disinflation. So the Fed is at 2% inflation target. They missed it for six years, they’re finally getting close to hitting it. By the way, I think the listeners know, they use the PCE core deflator year over year. There’s PPI and CPI, and core, a bunch of inflation indices, but we know what they use. PC or deflator year over year, that actually has been getting close to 2%. But if you see it turn around, if you see that gap down to like 1.5, 1.4, 1.3, then they will pause. 

The last condition for the pause is a disorderly decline in stock markets, more than 5%. If you see a 6, 7, 8 percent decline. So if the S&P went down 100 points, the Fed doesn’t care. Dow Jones goes down 1000 points, the Fed doesn’t care. But beyond that, if you see the S&P start to go down 150 or the Dow start to go down 1500 points in a disorderly way. It looks a little scary. It looks like there’s no bottom. It looks like, if you see that, they will pause. 

So the Fed is going to raise like clockwork, four times a year for the next two and a half years, unless you see job creation below 75,000. Disinflation, a technical recession. If you don’t see one of those things, they’re going to raise rates. And so right now, I don’t see any of them. I mean, they could all happen, but it looks like you know, growth is going to be positive. Job creation has been decent, you know, over 100,000. Disinflation is probably coming, but not quite here yet. And they’ll want to see a couple months in a row, and the stock market’s crashing. So none of the conditions are in place. Therefore, they will raise rates. Simple.

Stig Brodersen  26:55  

Thank you for the explanation, Jim, really. And by saying that and by predicting that you’re definitely also invited until the next, let’s say, the next 10 quarters and follow up on that. And, of course, I’m smiling while I’m saying it, but it is true what Preston said before that you were definitely right in predicting the last hike. And your reason was correct. So I’m really curious about what we’ll see in the next, if not 10, but the next quarters.

Preston Pysh  27:21  

I remember that time back in 2015 when everybody on Wall Street, everyone’s saying the Fed si gonna and here’s Jim Rickards on Squawk Box or whatever. Every time he said, They’re not gonna hike, they’re not gonna hike. They’re not.” And I mean, you were one of the only people in all the financial news saying they’re not going to hike that entire year and you were dead right.

Jim Rickards  27:45  

Thank you. And the reason I said that I didn’t just pull it out of the air was because one of the pause conditions was in place. Now it was deflation. The one that wasn’t hitting the note was deflation. Job creation was very strong. We were banging up 200,000 jobs a month. Now, you did have the two episodes, August 2015 and January 2016, when the stock market dynamic took over, which is why they did not raise in March of 2016. It was why they did not raise in September 2015. So those were two specific *FOMC meetings when I could say they pause because the stock market was in a disorderly decline. 

But all the others, I based it on the inflation vector, because we did have growth, and we did have the job creation. So we were hitting two out of four, but we were missing one which was deflation. 

Now, today, I don’t think we’re missing any, which is why my forecast is they’re going to raise. I think that will change by the way. I think if you want to go out a little further, they will raise in June based on the fact that none of the four conditions I described are front and center. But by July or August, what I’m looking for is that the *inaudible I described, how do you tighten when the economy’s weak without causing recession? 

I think they will cause a recession or close to it. Either that or the stock market will fall out of bed because the Trump stimulus is not coming as expected. But either way, I expected that by the summer, we will see two or more of these pause factors emerge. It could be disinflation and stock market rout, could be recessionary growth and disinflation, maybe job creation will fall off a cliff, maybe we’ll lose jobs. Maybe it’ll be four for four. So I don’t know. But I expect that one or more that conditions will kick in by July and they will not raise in September. But right now they are on track to raise in June.

Stig Brodersen  29:32  

I’m sure that everyone out there in the audience, they’re super curious to hear about how to apply this myself. If I agree with Jim, if I also think that either the Fed will hike or will not hike, how do I make a position in the market to benefit from a prediction like that?

Jim Rickards  29:51  

Well, it’s a great question, Stig, and it’s really difficult. One of the most tried and true investing techniques is and it really works very well is just trend following. Just find a trend, write it, keep in tight stops, you know the oldest saying and the best thing is let your profits run, cut your losses short. So he gets something right, roll with it. Tou get something wrong kind of short Get out, get a good night’s sleep. Wake up the next day see how you feel. So that’s good trading. And it’s often the case that companies that have bad earnings reports that surprised the market will have like three more in a row.

So there’s a good fundamental securities analysis, that Benjamin Graham stuff that they teach in Columbia Business School, I guess elsewhere, all good stuff. But here’s the problem. We are in a very different environment. I know that when you say that you get a lot of skepticism almost to the guy who says, “Oh, it’s different this time.” You know, he’s always wrong turns out to be the same, right? 

But I’ll actually say it is different this time and I just explained one of the reasons which is the Fed is tightening into weakness for the first time since 1937. So if nothing else that’s different. The deflationary forces you got to go back to the 1930s, 1929 to 1933 was the last deflationary episode in US history. So it’s not different in the scheme of 300 years, but it is different in the scheme of 75-80 years. We are experiencing things that are outside the living experience of everybody on Wall Street, unless you’re 95 years old. You don’t remember this stuff and you never lived through it. And you can read about it, but that’s about it. 

So there are a number of things are different. One of the things that one of the reasons hedge funds are closing up shop, good hedge fund managers with a good track records are losing money. 2016 was only the third time in the history of the hedge fund industry when they had net outflows. The other two times were 99, and 2009 when you know, one in the wake of LTCM, and one in the wake of Lehman Brothers. So that makes sense. But what’s up with 2016? Why are people pulling money out of hedge funds? Because the performance stinks. And these are by and large, smart, seasoned people. 

The problem is that you can really report the balance sheet, the income statement, read the footnotes, get on the management call, meet with management, talk to your peers go to some conference do that all day long. And eventually America gets on the wrong side of the bed and picks a fight with a Greek finance minister, you could get hammered for reasons that they never taught you at Columbia Business School. In other words, the point is there are these big, big macro swings. And stock trading has become commoditized. 

Now, like the whole stock market rallies when it’s risk on and the whole stock market goes down when it’s risk off. So a lot of guys trained in all these fundamental things, and I’m not disparaging them. It’s hard. It’s hard to do, right? And it’s good stuff, but you’re just getting whipped around by the macro and that’s, that’s what I do. I’m not a stock picker, you don’t want to take stock tips for me. But in terms of the macro analysis, these big picture things that’s kind of what I do. That’s one problem. 

The second problem is because of that, and because of this Fed and get back to everything I said about the Fed where they want to type, they are not neutral, they don’t wake up in the morning and say what do we do? They want to type. But they have these pause fact. So this means they flip flop. And we’ve had a flip flop since May 2013. May 2013 was when Bernanke he gave the taper talk. He didn’t start the taper, he just said we’re thinking about starting to taper, that was enough to close in emerging markets debt crisis. I mean, those risk off, all the hot money flowed out of South Africa, Iran crash, left Indonesia, Turkey, Brazil, all came back to the states. Guys were unwinding the carry trade, paying off the short term debt, closing out the position. I mean, the whole world came uncomfortably close to a meltdown. Certainly the emerging markets thought it was a meltdown, simply because Bernanke just said he might start the taper. 

And then September, they thought they would they did and they put it back till December 13. So that was kind of punting. And we saw it again. And you know, the whole world was set for liftoff. Remember liftoff that was going to be in September 2015. But they put that back to December. They had to go back to happy talk. You know, I recall the first week of September 2015. So the stock market had crashed 11% August 10 to August 31. We looked like there was no bottom. But the Fed had sort of led us to believe that we’re going to lift off in September 2015 with the first 25 basis point rate hike. They didn’t do it, they went to happy talk. 

If you’re a fundamental analysis, there are no fundamentals. What we have is a totally manipulated system. This is what happens eight years, nine years of manipulation, you paint yourself in the corner and you cannot escape the room. The Fed has no way out and no good way out. All the ways out I see are pretty disastrous. 

But if you’re a trader, and you’re like, well, what’s the trend? There is no trend. So the answer to make money, try to get a couple things right based along the lines of use the Fed model I just described. There’s an opportunity right now today to buy the Fed Fund Futures. You know, there are 60% probability and I’m giving you an 80% probability. You can make some money there. There are ways to make money, but you have to be nimble, you have to be prepared. Just wake up and do a 180 and just get out of the chair. So what, you know, in terms of the recommendations I have to readers in my newsletter.

The newsletter industry is interesting. It’s I analogize it to the daily racing form, you know, if you’re going to go to the racetrack, you know, we’re not wealth managers or money managers. We do research and we, we put out ideas. If you’re going to the racetrack and you want to bet, a lot of betters will pick up the daily racing form. And it’s informed opinion by four or five experts. I think CBS is gonna win in the fourth race, and they tell you what jockey is up and the tracks muddy. And you know, how this horse performed at this distance before, maybe he’s not so good at long distance, but it’s a short race and all that stuff. But you got to make the bet. You’re the better you know. That person who wrote that form is not going to make the bet for you. 

But lately, I’ve been advising readers to get out. Maybe we make, you know, 30% or 40% on something. I say like take your money off the table and just kind of wait for the next idea because you don’t want to give it back. If you had it right and things were going to stay the same, you’d let that one run, you’d say we’re going to make a lot more. But things don’t stay the same. We have these fed flip flops, these 180s, so my advice would be stay nimble. There are no set and forget *inaudible trade. So I think first of all, I sympathize with active managers. It’s a tough environment out there, but my advice is try to get the ideas right. When you do get them right, be prepared to take some profits and go to the sidelines because none of these trends last long because of the Fed flip flop.

Stig Brodersen  36:30  

Alright guys, Preston and I really hope you have learned as much from Jim as we have. Stay tuned for next week’s episode, where we continue our conversation.

Outro  36:39  

Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.