Stig Brodersen  10:07  

Jim, what should we do? I think that would be the question to ask really, because we talked about how history repeats itself. As you said, like we’ve never seen this before. We can say, this is what happened in say, 2008, or this is what happened on dot-com. What do you usually do in terms of the narrative of explaining a stock market crash? What should we do?

Jim Rickards  10:31  

Well, there are three approaches. As an analyst, I actually tried to wrestle these problems to the ground. I said to all these possible outcomes, and you have to be humble and say, “Yeah, these things could go either way.” 

My view is I’ll just take them one at a time. On the growth story, I think, as I said, the Fed is overtightening, they are going to slow the economy down. The Trump tax bill is not going to have anywhere near the effect that the market believes. You’re already seeing that kind of I think fairy tale come to an end. 

You have what I call the Gang of Four: Steve Forbes, Steve Moore, Larry Kudlow, and Art Laffer. They were very influential in getting the president and congressional leadership to pass this tax bill. 

Here’s what they said, “Mr. President, don’t worry about the deficits. We’re going to cut tax rates. On a static analysis, this is going to blow a big hole on the deficit, but don’t worry about it, because we’re going to get so much growth and so much stimulus, new investment, new jobs, etc, that the taxes on that growth will make up the revenue gap. It won’t have nearly the budget impact you expect.

“By the way, for proof, we have the Reagan Revolution. Ronald Reagan signed a tax bill in 1981. Then to effect in 1982, and between 1983 and 1986, we had 16% real growth, which is true. Just banging out over 5% a year real. That expansion continued until the 1989-1990 recession. What’s not to like?”

Let me tell you that everything I just said, which is what Kudlow is saying to the president is incorrect. Let me tell you why. 

First of all, yes, we did have very strong growth between 1983 and 1986, continuing to 1989. That’s absolutely true. But in 1981-1982, we had the worst recession since the Great Depression. 

Now there was a worse one in 2008, but until 2008, that 1981-1982 recession was the worst since the Great Depression. In a normal business cycle recovery, in a normal V-shaped recovery, you should have expected strong growth in 1983 because we were coming out of a severe recession in 1981-1982, with high unemployment, lots of slack and labor, lots of unused industrial capacity. 

You were sort of going to get good growth anyway, with or without the tax cuts. However, in addition to that, the thing that really drove the economy and again, we did have that kind of growth and credit to Reagan. Reagan was a big spender, contrary to popular belief. 

When Reagan was sworn in, the US debt to GDP ratio was 35%. It was about the lowest it had been since the end of World War Two when it was well over 100%. 

When Reagan left office in 1989, the debt to GDP ratio was 55%. Reagan took it from 35% to 55%. That’s a 60% increase in the debt to GDP ratio. Now, to his credit, he won the Cold War. So nice going and we got a 600 ship navy. We restored our military. We bankrupt the Soviet Union by going out with *inaudible* Wars. 

I would say Reagan was not reckless. He got something for the money. As I say he won the Cold War, but he did drastically increase the debt to GDP ratio. It was the spending and the cyclical recovery that drove growth, not the tax cuts.

Now, come all the way forward to 2018. The conditions are not at all what was facing Ronald Reagan. First of all, our debt to GDP ratio today is 105%, not 35% or 55%, but 105%. The research is clear and convincing, not just Reinhart–Rogoff, but Bank for International Settlements, ECB… 

Many scholars have said that any debt to GDP ratio in excess of 90% is kind of like if you’re a high altitude mountain climber, you go about 26,000 feet, they call it the death zone. From 26,000 to 29,000 feet on Everest, you can’t survive. You have to get up and down. 

We’re in the death zone. Debt to GDP north of 90% not only slows growth, but it also stops growth. The Keynesian multiplier goes negative because you get no bang for your buck plus your interest on the debt. People begin to fear that you won’t repay them. They fear that you’re going to turn to inflation. They believe it’s out of control. All those things act as headwinds to growth in addition to all the other headwinds, demographic and otherwise. 

Also, we’re in the ninth year of an expansion. We’re not coming out of a two-year severe recession with lots of slack and lots of factory inputs that you can pick up and apply. 

We are in the ninth year of an expansion. Unemployment is 4.1%. Industrial capacity utilization is sky high. In other words, we don’t have any of the conditions that Reagan had and so the case that somehow these tax cuts are magically going to pay for themselves is completely false because A.) it wasn’t true to begin with, there were other factors involved. Then B.), none of those factors are present today. 

*inaudible* says you’re not going to get any growth at all, because your debt to GDP is too high. Those are all the reasons the tax cuts are not going to work. 

On top of that, I would throw the fact that this was the most poorly designed tax bill I’ve ever seen this completely, even the *inaudible* corporations. If you want to give the economy a boost, pack the payroll tax.

50% of Americans pay no income tax. It’s not a disparaging remark. It’s just true, they don’t make enough income or they’ve got earned income credit or daycare credit or standard deduction, whatever.

50% of Americans don’t pay any income tax. It doesn’t matter what you do. You can cut it to zero, it’s not going to change their marginal propensity to consume because they get no benefit. 

This was heavily skewed to the rich, who have a low marginal propensity to consume. A guy making a million dollars a year, if he makes some million… because you kind of have taxes as far as this repatriation of offshore money. That’s a complete myth. The money was always here. 

You actually think Apple had a trillion dollars or $100 bills stacked on pallets in the basement of the Bank of Dublin and Ireland? No, they had it on the books. That multi trillion dollar cash flow was on the books of a foreign subsidiary. They did not pay US taxes on it. But it was always invested in the US government securities market, which you can do without paying taxes. 

The repatriation thing was a sham. That was just put over on the American people and the media to get them think that there was this tsunami of money coming in. They’re gonna invest it. 

If Apple wanted to build a plant three years ago, you don’t think they could have borrowed money at like 1%, build the biggest plant in the world and hired all the workers they want? There was never an impediment to investing in the United States, other than a bad business climate.

The so-called offshore money was always here. It was just in the Treasury markets elsewhere. But now that they have degrees of freedom to use it for things other than passive investing, what are they doing with it? They’re giving it back to the shareholders. It’s in dividends, stock buybacks and M&A activity. They’re not building plant equipment. 

So is this good for the stock market? Yes. Is it good for the wealthy? Yes. Does it do anything for the economy? No. 

Then even if we’re better designed, you’d have all these impediments that I described earlier. 

This tax thing is going to add up to nothing. That’s already being revealed. If you look at the Atlanta FED GDP now tracker rally a couple of weeks away from actually getting a print for the first quarter, they’re saying 1.9%. That’s not a recession. It’s not a depression, but it sure isn’t 4%. It sure isn’t what Larry Kudlow is talking about. 

Meanwhile, the debt continues to go up at 5-7% of GDP per year. You went up your debt. You’re going to have your nominal debt to 7% of GDP. Your economy is growing at 2% plus inflation, maybe 3%. What’s happening to your debt to GDP ratio is catching up with Italy. The US is going broke.

Preston Pysh  17:53  

Yeah and you don’t have any trade peace. For example in Japan, you’d have trade surplus versus a trade deficit. Over here, it’s all trade deficit. 

You don’t have any other advantages, trying to prop any of that up. I think that that’s a major concern. 

Back to what Stig was saying. Jim, do you just do the Warren Buffett model? Do you just basically have cash and cash equivalents and you just keep building your balance sheet for that rainy day? What’s the strategy?

Jim Rickards  18:20  

Well, that’s one approach. I would definitely reduce allocation to stocks. I would increase an allocation to cash. I would want a 10% allocation to gold, physical gold, not paper gold, as a form of insurance. I think it’d be a very good asset class. I can make a very strong case for gold. I do frequently.

Even if you thought gold was going to be flattish, it would be a good thing to have as a kind of insurance. So increase your cash allocation to maybe 30% or more, get 10% and gold. If you want to be in the stock market, my stock investments are more in private equity, FinTech and natural resources, a couple other areas. That’s just a completely different bet. 

In those cases, you know, management are probably friends or family or certainly, people that you’re very much in touch with not the same as investing in a public company. 

However, the stock market is going to continue to exhibit this kind of schizophrenic volatility we’ve seen. 500 one day, you’re talking about the Dow Jones down 300 the next day. You get these intraday moves. 

I looked at it last week. It was kind of up about 1.7% for the week, but had these three 4% intraday moves. It’s like saying a roller coaster ends up in the place it has started. Well, yeah, but it’s still a roller coaster ride. That’s what the stock market is doing. 

It’s because of these four factors. I mentioned a growth in the Fed, trade wars, geopolitics and tech regulation. Everyone’s concerned Congress is going to break up Facebook and Zuckerberg is up to the Hill. 

Well, everyone said he did a great job. I thought he was an awful witness personally. I’ve testified before Congress. I’ve testified under oath, investigative committees. I kind of know a little bit about that drill. 

I thought he was evasive. He kept saying, “Well, my team will get back to you.” It’s a classic CEO who says, “My team will get back to you on that, Senator. My team will get back to you on that, Mr. Chairman.” 

They had a bunch of “I don’t know.” Like for real? You’re a late 20-something CEO of a major corporation and you don’t know what’s going on when you’ve had weeks to prepare for your testimony?

I thought he was at times condescending and arrogant, even though he was warned not to do that. I thought it was evasive in more ways than one. I personally thought it was an awful witness. 

However, I guess the markert felt that he didn’t… do worse or fall off his chair or anything so the stock rallied but I don’t think we’ve heard the last of that. That’s another one where Wall Street seemed to have said, “Yeah. Okay, headline news for a couple days, but it’s over and they can go their own way. It’s business as usual.”

No, I think they’re going to get very serious. So you’re not just Facebook, when Amazon also looked from the Justice Department under the antitrust law, certainly the privacy considerations. What’s going on in Europe, a lot of times they take their cues from us, this may be one where we take our cues from Europe in terms of the privacy regulation.

At some level *inaudible* profits and increased costs and disrupt their business model. I’m not saying it’s the end of Facebook, but it will be a headwind for them. I don’t think we’ve heard the last of that. 

However, you could take the other side. My point is that I have a view on these factors, I think growth will disappoint. I think the trade wars will escalate and get worse. I think the geopolitical situation is a little bit quiet at the moment, but the President’s getting ready to walk away from the Joint Comprehensive Plan of Action on Iran. That will exacerbate that situation. I think either the courts or the Congress are going to move on these big tech firms. So that’s me. 

For people to take a different view, you might want to be in the stock market. So it is confusing and that’s really the point. All these outcomes are plausible. These factors are not going away. None of these things are going to get resolved very soon. This will linger for at least a year, maybe well into 2019. 

So what do you do with volatility and uncertainty? Go to cash.

People disparage cash and say it has no return and is a drag on your portfolio, you’re missing out on stock market rallies, etc. 

A couple of points on that. Number one, a cash allocation reduces the volatility of the rest of your portfolio. So if you got things moving 5-7%, over here, gold has been volatile and stocks have been volatile. 

If you have a slug of cash, it reduces the overall volatility. That’s just what it does. It’s the opposite of leverage. It’s the anti leverage. The same way the leverage doubles or triples your gains and losses, cash in the portfolio dampens the impact of the gains and losses you do have. So you sleep better at night, but the hidden value of cash is that it gives you enormous optionality. 

What if I said, “Hey, what would you pay me for an at the money call option on every asset class in the world? That sounds pretty valuable.” Well, that’s what cash is, at the money call on every asset class, because you could wake up any day and take your cash and go buy something at the market. 

That right which is equivalent to a call option, is extremely valuable because if you’re in something else, you’re in real estate, you’re in private equity, or you’re in volatile stocks on a down day, it’s not so easy to get out and pivot to another asset class. Though when you have cash, it’s very easy. So that’s valuable in and of itself.

Preston Pysh  23:27  

I wanted to talk a little bit about the Facebook comment, I was talking to a friend about this. My friend said to me, “The real problem isn’t all this stuff that you’re really kind of seeing in the media. I think the real problem is that people can’t go into their data and delete anything. Like they cannot clear their history.”

So for me, if I wanted to log into my Facebook account, and literally delete every single, like, every single thing that I’ve done in the last five years on Facebook, there’s no mechanism for me to do that.

I think that’s the problem that everybody is starting to have with these large FAANG stock companies. I really think that this is where the politics are really going to get involved. It’s going to be mandated that people are able to go in and literally clear their search history, if you will, of everything that they’ve done. 

I think Facebook is the absolute worst at not allowing people to adjust the data that’s collected on them. I think if that becomes a mandate, through law, that these companies have to allow people to start deleting their history, or that they have the optionality to delete their history, and it’s very clear as to what data is being collected on them, the value of those businesses drastically changes in my book. I think that they will drastically change. I’m curious to hear your thoughts.

Jim Rickards  24:47  

I agree completely. By the way, Facebook has a lot more on you, me and Stig than we’ve ever given them. I rarely use Facebook. I’m very active on Twitter. I don’t use Facebook, but I do have an account because I’m an author. Fans want to find out where to get your book and all that stuff. I put on, name, address, birthday, the usual kinds of four or five things and a couple of pictures. That’s it. 

Well, they have far more than that because if you have an active timeline, they got a bunch. Even if you don’t, they have huge files on you that they’ve collected from third parties. 

A vendor comes to Facebook and says, “I want to launch an advertising campaign and I want to target the following.” Let’s say your name is on the list and my name is on the list. Facebook says, “Well, we know a little bit about this guy.” “Does she make a purchase?” Then they add that, and then they launch the advertising campaign. 

Facebook is collecting data on you from all sources, not just what you put in and then aggregating it. You can’t delete that either. 

I agree, that’s an easy change. The company will never do it. It can’t be legislated. It’s not the equivalent of an ad trust suit to break them into pieces. I can see how you can break up Amazon and some others, but I don’t even know how you would break up Facebook. Does it have a product monopoly? Anyway, they’ll do something like that. At that point, the value of these algorithms and their reach goes way down.

Stig Brodersen  26:15  

Interesting. Let’s shift gears here, one of the things I thoroughly enjoy is to read your thoughts about Bitcoin, like you have a very adamant opinion about Bitcoin. 

We have a lot of listeners on here on the show who are very skeptical about it. We also have a lot of listeners who are very positive about it. 

I’m curious to hear not only your strongest argument against Bitcoin, but because you’re definitely not a follower or a fan. Why could you be wrong about Bitcoin? I think that’s really what I’m asking for here. 

Preston Pysh  26:49  

We want to hear you argue with yourself, Jim.

Jim Rickards  26:53  

I say I have two law degrees so I’m very well trained in doing that. This is how they brainwash you. This is what law school is all about. They teach you to argue both sides of everything. So sit tight, I’ll take both sides of the argument. Although I have a view. 

The first thing you have to do when you discuss this is to separate Bitcoin, the coin from the Distributed Ledger Technology. It used to be called blockchain. Now I think the better word is DLT, or distributed ledger technology. 

A ledger is just a record. Distributed means it’s a whole bunch of places, not in one central source. Technology speaks for itself and is encrypted. So it’s an encrypted distributed record of transactions. That’s all a blockchain is. That’s a platform on which you can create coins and Bitcoin is one of those coins. 

Bitcoin is like, imagine if you’re paleoanthropologists. You’re studying hominids. We all know that here we are. We’re homosapiens. We’re the survivors of this branch of the family tree, so to speak. But there are many other hominids along the way. *inaudible* and Neanderthals, *inaudible* and others. 

Neanderthals had a good one. They had culture, burial rites, art, and some kind of language. Then they died out. They were robust to the Ice Age, but then the glaciers melted. It got warmer and they didn’t have the right body type. They didn’t survive. 

That’s what Bitcoin is. Someday we’ll look back and there will be some very valuable cryptocurrencies. There’ll be massive applications of permissioned and permissionless distributed ledger technologies,but there won’t be any bitcoins there. There’ll be like Beanie Babies, or pet rocks. You can still buy a pet rock. You might not remember the pet rock, it was a 70s fad. It was a rock that came ina gift wrap box that you would buy for kids or family members. It was a present and just a fad, right? But they got like really crazy. 

You can still buy them. You go to eBay and find a pet rock. They’ve actually outperformed coal. I know an economist who did this Time series. Pet rock has slightly outperformed coal. But it’s a novelty and a joke. It has no use. I don’t know why you buy it.

Preston Pysh  28:59  

I’m sorry to interrupt you, but for a person who would look at HTTP, they would say that that was like the first protocol. They would look at that and say, “How could that thing stand the test of time because the code for that is just terrible?” But then you talk about network effects. That’s why it’s still around today and they’ve kind of built on top of it. 

What do you say about that for a person who would say well Bitcoin is a protocol, so maybe it is going to be around and there’s just going to be layers that are built on top of it? You agree with that?

Jim Rickards  29:26  

No. It is too slow and too expensive. 

First of all, the energy consumption of mining, I’m sure you guys are familiar with the fact that it grows exponentially the way Nakamoto said these math problems stuff. They keep getting harder. They require more and more processing power. 

They’re putting the coin mines in Iceland because they cover the windows and it’s cold. They spend less on air conditioning. They’re putting them in China because China’s burning coal and killing the population but the electricity is cheap. They’re putting them out near Moses Lake in Central Washington because the Bonneville Power Authority, the Columbia River Hydroelectric Grand Coulee Dam. Electricity is cheap. 

They’re currently using more electricity per year than the country of Nigeria. They’re on course to use more electricity than Japan, the third largest country in the world. Now, who thinks that the G20, the G7, the United Nations, and the people who control the world are going to allow a novelty coin to use more electricity than Japan? Who thinks that’s ever going to happen? It’s not going to happen. That’s the first impediment.

Number one, if it costs $50 to buy a $3 cup of coffee using Bitcoin and my coffee is $53, I don’t think that’s very appealing. That’s going to stand in the way of utilization of it as a currency. 

The Bitcoin fans go, “Well, here comes lightning. Now lightning is going to solve all the problems for us.” Well, it is a layer, but all it is it says to a group of users *inaudible* all the coffee shops in Seattle, we’ll do all these transactions among ourselves on the lightning network. We will net them out, buys and sells, pays and receives and then we’ll take the net of the net. We’ll put that on the blockchain. That will use up less processing time, etc, than all the individual transactions.

Well, that’s fine, that can work technologically but it’s not Bitcoin anymore. What happened to the trustless system? What happened to the fact that you don’t need permission to join? What happened to the fact that there’s no centralization? All those things are gone. 

When you’re on lightning, you’re not on the blockchain. In the 1950s, when telephones were still getting installed around the country, we had party lines. Five people would share one phone number and you’d pick up the phone then there it’d be somebody on it. If you had an emergency, you had to ask them to hang up. 

I mean, this is kind of just like a party line for Bitcoin. So it’s got issues of scalability, sustainability cost. 

HTTP has proved a lot more robust. You’re absolutely right about that. But think of all the technologies that viewing movies from Betamax to VHS, to CDs to DVDs, to Blu Ray to Netflix, and the only place you can find a Betamax machine today is in the Smithsonian. 

So this is why I make the point… distributed ledger technology is here to stay. Some cryptocurrencies or tokens have a bright future. I’m not a technophobe. I read the technical papers. I get it. I have a cryptocurrency newsletter. 

Anybody wants to subscribe? I have some recommendations for my readers, but I just look at Bitcoin and it doesn’t pass the test.

Preston Pysh  32:25  

So you actually like some of the ICOs. It sounds like you would not hesitate to invest in an ICO but you’re anti Bitcoin?

Jim Rickards  32:32  

I’m definitely anti Bitcoin. Well let’s qualify ICOs. There are  very few. 90% of the ICOs are frauds. That’s the simple, declaratory as we can. 99% of ICOs. So I don’t want to go sign up or encourage any listeners to sign up for any ICOs and I certainly don’t. 

But there are some cryptocurrencies that have sponsorship. They are put together by development teams. They have serious partners, meaning your major banks, or there’s sawtooth from Intel, there’s hyper ledger fabric. This is the Linux Foundation. it is now a repository for developments and distributed ledger technology with a developer community, who is all open source. They’re all contributing all the software for free. 

There’s a cryptocurrency called Stellar. Lumens is the name of the coin. Stellar is a sponsor organization. Ticker is XLM. This is actually being used in a pilot project with IBM to create a payment system in the southwestern Pacific and all those little tiny island nations, Micronesia, Samoa, and the Marianas. 

Well think about what they have to do. So you go to a Starbucks in New Caledonia, or someplace. That poor bank has got a merchant acquirer who accepts your MasterCard then they gotta hand it over to the local bank. That bank has to send it to a correspondent bank in Sydney, Australia. The bank in Sydney, Australia’s got to run it through the VISA network, then they got to get paid. They have to send it back to the bank. 

So think of all the steps, all the costs, etc. What if you could replace that with a blockchain? They are doing this by the way. This is a real pilot, using the Lumen token. 

Well, IBM has built this. Lumen is the token of choice. It’s working extremely well. Now this value is moving around without going through this clunky central bank network, and correspondent bank network that I just described. It’s cheaper. That means people can either lower prices or offer more services. 

It’s also big on remittances. In a lot of countries around the world, the job opportunities are limited so the population migrate. They go to Europe or the states or elsewhere to get jobs. They send money back home.

Remittances are very clunky. A lot of people have been using Western Union or other payment systems. So there are real applications for real cryptocurrencies out there, and they are being used and those are the ones that we look for.

Unless you can compete with Visa and MasterCard. See the pilot I just described with Lumen is cheaper than Visa and MasterCard. But Bitcoin is not even close. To me, it’s not a bias. I’m not a technophobe. I’m just trying to apply real *inaudible* metrics.

Preston Pysh  35:16  

Let’s just say for a moment that the scaling issue is solved, and that the energy issue is solved. Let’s say we have a decentralized crypto coin. We could come up with whatever name we want. Do you see central banks and governments, the IMF, you name it, government entity allowing that to become a global dominant force?

Jim Rickards  35:41  

No, but what they will do is have it wrong. This is happening by central banks and governments. They’re not allowing independent teams to preempt their national currencies at all. In fact, you’re seeing clamp downs all over the world every day. Another country or another regulator. Yesterday was Eric Schneiderman, the Attorney General of New York. The day before that it was one of the Latin American countries. They are clamping down all over the world. 

What they are going to do is hijack the technology and create what they call permissioned systems. China and Russia are already working on this. They’ll call it a Putin coin, or Xi coin, or whatever you want to call it. 

Russia, China and their allies in Central Asia and elsewhere, an encrypted distributed ledger using their own token so they can sell a balance of payments between themselves and completely bypass swift and the dollar payment system. So you won’t be able to impose sanctions and you won’t be able to freeze accounts. 

Iran will be able to pay North Korea for weapons technology without fear that the US Treasury is going to get Deutsche Bank to intercept the payment, which is exactly what happens today. 

Now, they’re also using gold. It’s kind of interesting. They’re using the oldest form of money, which is gold, and the newest form of money, which is cryptocurrencies, but they’re using both. It’s all with the view. 

By the way, the IMF is not far behind. They’re working on a crypto SDR. The SDR is the special drawing right, it is world money. So the Fed can print dollars, ECB can print euros, and the IMF can print SDRs. They have and they will *inaudib;e* in the next global financial crisis. 

Between now and then we’ll build… There’s this distinction between the permissionless system and the permissioned system, in terms of DLT. The permissions system is one of the solutions to the scalability sustainability problems that you were talking about today because what it says is that only certain people can join in the case of the IMF, it will be the 189 member countries. You and I would not be able to have an SDR account down at the good old IMF. 

Russia, Brazil, India, the BRICS, the US would have these accounts. So it’s like a club, if you know who the members are. You’re not going to worry about people showing up in jeans and flip flops. Everyone’s going to wear a suit. 

Same thing, if you have a permission system, and you can trust the people in it, you don’t need the proof of work. You don’t need the proof of stake. You don’t need all the clunky governance models to validate the blockchain because you have relatively few people and you know who they are so they’re not going to cheat on that system. 

But you have the benefits of distributed ledger technology, bypassing the dollar system, and very fast, inexpensive payments. So that’s where they’re heading. The next time they issue SDR is it’ll be on this blockchain technology, but all with a view to making swift and fedwire obsolete. 

Preston Pysh  38:34  

Alright, so that’s what we’re going to wrap up our conversation for this first part interview with Jim Rickards. We really hope you guys tune in next week for our second part interview. Thanks for joining us.

Outro  38:44  

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