WIEDEMER (Robert Wiedemer): Well, thanks for inviting me, Jerry! It’s great to be here.
FTM: Over the last week, Bob (maybe over the last two weeks), I have been seeing Treasury bonds yields have jumped to their highest levels in almost a year. We have been seeing levels on the 10-year Treasuries hitting 3.7%; the 30-year yields are hitting about 4.7%; leading some economists to believe that rates are beginning to track even higher over the coming months. My concern here, Bob, is that the Federal Reserve does not have the will or the foresight to slow their easy money policies and their relentless money printing—which is going to lead to massive inflation. What do you make of the recent moves in the U.S. bond market, and how much faith do you have that the Federal Reserve will react quickly enough to suck out the excess liquidity that they’ve created?
WIEDEMER: Well, I think, as you say, the recent moves are partly (obviously) an expectation of inflation. I’m not sure if we won’t see a pullback in yields, though, shorter term. But longer term, clearly, you’re going to find inflation becomes the overriding factor—because I don’t think the Fed can pull the money back. As one of my friends in the Fed has said, “Inflation is not something that’s forced on you; it is a choice.” And the reason we tend to choose inflation, it is the easy out; it’s a fairly easy way to try and grow the economy. The other alternatives are not as easy, whether it be taxes or so forth, and so that’s why they tend to go into that trap. As you said, it’s hard to (quote) “pull the liquidity out once you’re doing it,” because every time you do that you’re going to slow the economy down; you’re going to create problems; and again, there’s no easier out at that point. And you have to, of course, pull the inflation trigger back, or the money supply spigot back even harder, making for a much harder pullback than if you’d just not done it in the first place. So, it gets harder and harder to pull it back, because you’re having to hit the economy harder and harder than if you just never opened the spigot in the first place. It’s a little like a Chinese finger trap: don’t put your finger in it. It will be very difficult to pull back out.
FTM: How much do you give credit to the increasing risk appetite that we’re seeing in the markets: people pulling money from bonds; moving over towards more riskier assets like stocks…how much of that has to do with the increase in yields that we’re seeing?
WIEDEMER: Well, I think it’s a fair amount. Fundamentally, if you look at the stock market, when Ben announced that he was going to start printing money August 29th{2010}, it’s been almost a straight, upward slope since then. So, clearly, the movement into stocks is related to the money printing. I think that’s why Ben is very happy about it; he took credit for the market’s climb; and I think that’s part of what they’re trying to do. Of course, again, unless that growth is really based on real economic growth, it’s going to fall. And what’s always amazing to me is how so many people on Wall Street can fall for this: “Oh, gee; they’re printing money; they’re borrowing money; that’s great! The markets should go up,” but not countering that with the obvious downside coming later. Clearly, I think that’s what’s pushing up the market now, but it also means you have an inevitable fall later to come when the inflation hits.
FTM: Bob, our books came out about the same time. Your book Aftershock came out in 2009, and it brought a lot of clarity to a lot fears that many people were having. And many of the people who read my book commented that they read your book as well, and what I wanted to ask you about—because many people in our audience have thought about moving into the real estate market, seeing how depressed that it’s become. We’re kind of in a catch-22 here, because it appears from several reports that foreclosures are going to continue to happen, especially when we look at the latest reports from Q4 from 2010. But the reason that it’s a catch-22 is because we do see that fixed mortgage rates are going up simultaneously with the bond yields. And so, if the idea is that rates go higher, what do you think about real estate right now as an investment, obviously in not in really risky areas, but just as a general investment? What do you think about real estate right now as we are in the very beginning of 2011?
WIEDEMER: Well, it’s an interesting combination of short-term, long-term. In the short-term, I think you’re going to see bargains, and prices could go down. You could see even bigger bargains and I think people maybe are going to jump on those when they can get reasonably low fixed-rate mortgages. The problem is longer-term: what happens with what we were just talking bout, Jerry, when that inflation kicks up and interest rates go up? We just did a chart that was basically showing how much a home price has to fall if interest rates go up to, say, five or seven, or 10%? Basically, at 10%, home prices will have to fall by 50% to maintain the same monthly payment. So, the risk here is not so much short-term; I think you could find some real nice bargains and you could lock in a low interest rate on a 30-year note, but what’s the house itself going be worth? It’s going be a lot less when you have those higher interest rates. So, real estate all over the country is very sensitive to interest rates, and that, I think, is the bigger risk—not in the next year or two, but in three, four, five years out as those interest rates really start to climb, not just one or two percent, but that seven percent or 10% range we’ve certainly seen before can be just devastating to the value of the real estate.
FTM: Bob, right now, the U.S. stock markets are hitting new highs. There are projections that the U.S. GDP growth can reach as high as four percent this year. And it seems that the fear factor in the markets in general has begun to subside—at least a little bit. So, the Fed has accomplished one of its goals, and that was to create the “wealth effect”: they have certainly been able to buoy the asset prices through their money printing. But my question to you is: how much of what we’re seeing right now from the markets is a sign of real recovery, and how much of it is just through craft monetary policy—i.e., the wealth effect? Is it a little bit of both, or what’s your take on this?
WIEDEMER: It’s a little bit of that, but let’s not forget what it also is: it’s not-so-crafty borrowing. Our borrowing is up about $1.3 trillion from a few years ago—government borrowing. Okay? If you look at our economy, it’s about (almost) $14 trillion. We borrowed almost 10% and shoved that into the economy and helped boost it up. So the real question is, “What would this economy look like of you went back to the deficits of only a few years ago?” You’d see almost all of that growth gone. And people don’t point this out: that almost all of that growth is due to borrowed money by the government and the government spending that money. So that’s the real problem here. If it was due to true growth in the economy, and not borrowed money by the government and the government spending that money, as well as (as you point out) monetary policy that’s been very easy to help boost the stock market and the wealth effect, well, I’d be thrilled. But the reality is that’s what’s driving it. (I’d say even more, frankly, the government-borrowed money than the printed money—although the two go hand-in-hand—keep in mind that the government would have a problem borrowing that money if the Fed wasn’t stepping in and printing money to buy a lot of those bonds that I’m not sure that we’d be able to sell as easily (in fact, I’m sure we wouldn’t) if the Fed didn’t buy ‘em.) So, that’s what’s really driving the economy: that enormous increase in government borrowing (it’s up 500% from a few years ago), plus (as you say) the printed money and yes, a little bit of wealth effect certainly is encouraging some spending. But if was just that alone, and there wasn’t that massive increase in borrowing, you wouldn’t see the economy turn around anything like it has.
FTM: How concerned are you that we’re going to see in the wake of this Quantitative Easing Part 2 as they’ve called it, QE-2, another round, as we’ve really experienced a jobless recovery here. There seems to be lots of signs of life that the government keeps pointing to, but there’s still no jobs. We still see a very, very sluggish job market right now. And so, how concerned are you that we’re going to see this QE-2 morph into another QE-3 and a possible QE-4? Is that a concern to you?
WIEDEMER: I almost say so far as to be a guarantee in that I think that you will get a QE-3 of some sort. It might be along the lines of “we’ll print money as needed, as the economy needs it,” it might not be QE-3, or it might be; I don’t know. But I can guarantee that we’ll need to print more money, and the reason is that, again, we’re not getting growth out of the economy; we’re simply borrowing money. And if we don’t borrow a lot more…if you really want to get this economy rolling, borrow another one and a half trillion, meaning a total of three trillion a year and spend it in whatever way that the government wants to. You’ll boost the economy even more! But ultimately, this is going to start to blow up your fundamental economy, isn’t it? Especially if you have to buy those bonds—that printed money. It’s going to create inflation. And we are going to have to do that. That’s the problem: part of what the Fed is doing is making up for the huge amount of spending that the federal government is doing. So, it’s going to have to keep printing to keep that up. It’s going to have to keep printing to keep the stock market up. If it stops printing, that market’s going to fall, and if it falls 10% or 15%, where’s the floor? And the floor in the past was—well, it was 6,000 back in March ’09, and the Fed printed massively then to try to pull it back up. Well, it can fall again, but the Fed will have to print massively to bring it up. So again, you’re sort of going into a Chinese finger trap (in) that’s it’s hard to pull back out. We’re going have to print more money—and that’s the bottom line—just to keep the massive borrowing we’re doing by the government in some way viable in the current bond markets.
FTM: Bob, I’ve already mentioned your book Aftershock, but in it, you lay out the scenario that you see coming for the U.S. economy, and much of it is already being played out now. You suggested hard assets, like gold and silver, as a hedge of protection in your book. Talk about some of the asset classes that you like as we head into 2011. For example, are you still bullish on gold and silver going forward?
WIEDEMER: Well, I think gold will end up this year positive, and that’s partly because I think they will print more money in one way or another come this summer or this fall. And I think that will be positive for gold. I think inflation around the world will help gold: inflation in China, inflation in India—which are far larger (I should say far larger, but they’re larger) purchasers of gold than the U.S. So, remember, gold is a world market, and if other countries have inflation, people there get scared and run to gold—in India and China especially. So, I think there will be upward pressure. I don’t think it will repeat the performances of last year, being up almost 30% {in 2010}, but I think it’ll end up positive this year. Commodities will continue to do well: agricultural commodities, other hard goods. The only issue I have there is if China’s bubble pops, their construction bubble in particular, which is way, way out of control, because of a lot of printed money by the Chinese government (everybody’s jumping in on this printed money party). That’s going to maybe put some downward pressure on commodities at some point, eventually off-set by inflation. But at least in the next year you’re asking, I think that commodities are okay with that little caveat if that construction bubble in China starts to pop, that can be a bit of a black swan that could take it down. But I don’t think that’s going affect gold too much; I think gold will still end up positive for the year, and we’ll hope, perhaps, a nice 10% gain.
FTM: What’s your favorite way to gain exposure to commodities? When you talk about those, are you thinking about ETFs for the Average Joe on Main Street, or are you actually talking about futures contracts?
WIEDEMER: Yeah, the money management firm that I work with, we do that through DBA in the commodities and other ETFs like that. Yeah, commodities ETFs are, I think, the best way to do it. There are certainly other ways, but for most (your average, and even your professional) money managers, I think the very efficient and effective way to trade commodities are ETFs.
FTM: Let’s talk briefly about global investing. We have seen the growing inflation fears around the globe. We’ve been hearing it out of India, Indonesia, Thailand, China, of course (as you’ve already mentioned), and we also see now the unrest that is unfolding in the Middle East. All of this has led, basically, to a record-outflow of money from Exchange Traded Funds that are invested in emerging markets over the last couple of weeks. So, I ask you Bob: What do you think about emerging markets now? Is now a good time possibly to invest in this dip, or do you think that they have much more to fall before the investor moves back into emerging markets?
WIEDEMER: I think it’s like any bubble: if you looked at the housing bubble in our own country, it sort of had some ups and some downs; it didn’t always go straight up. I think this could be a dip that could be followed by some more gains. I think China’s the key here. I think emerging markets are driven much more by China than people maybe want to admit—not only psychologically, but in reality, a lot of what Brazil and other emerging market exports its goods or other natural resources to China. Korea is the same thing. So, there’s a lot of interdependence on China, and I think there’s a lot of psychology dependence on China—both. So I think you can get this bubble to continue to go up this year, but it’s not a long-term play. At some point, China’s construction bubble will pop; it’s not fundamental; it’s driven by printed money; it’ll pop. Could you play the bubble a little longer? Yes, but it’s not long-term. Make sure if you got into it, capture your gains; don’t spend too long in it. Again, it’s not like the housing bubble. You could have made money there, too, if you bought in 2004, and you sold, well, bought in 2002 (laughing) and you sold in 2005. You gotta time it, but it’s not a long-term bubble; it may have a little bit more to run before it pops would be my guess.
FTM: Well, you’ve obviously mentioned China, and that seems to be one of the major, major trends that many people have made a lot of money off of. What are some of your other favorite emerging economies right now? What are some of the other emerging markets that you have your eye on, that your firm has their eye on?
WIEDEMER: Well, we like India. India has an advantage in that a lot of what it exports (at least to the U.S.) are services which are a big cost-saver. And an awful lot of companies, as we know, are suddenly looking to save on expenses, and outsourcing to India is a good way to do it. I have a friend who works at one company, and he’s just traveling the East Coast just pitching the off-shoring jobs off to India. It is a big cost-saver, so I think it’s still got some legs on it. The only problem with India, of course, is that it’s a fairly unstable economy in they have a lot of infrastructure issues. But I like it for that reason in that I think it probably has a little more growth to it. Brazil I’m worried about simply because of its dependence upon China (although its stock market has certainly shown one of the more impressive gains). China’s stock market hasn’t done that well. Shanghai composites now about where it was in mid-2009. It’s been a more difficult area. So, I would be wary of China. It seems like the government is going to start throttling back—it already has started throttling back—on inflation by increasing its interest rates, and I think it’ll continue to do that. So, India is one to continue to take a bit of a risk on. Istanbul (if you want to go a little bit way out of line), Turkey has done very well, and they’ve got a lot of good fundamentals; not quite as dependent upon China and things like that. So, that might be another one to look at as well. Turkey and India, would both be interesting ones—certainly ones we’re looking at. Turkey’s growth has actually been almost as good as China’s in terms of the GDP.
FTM: Turkey, Bob, brings us very close to the Middle East, which obviously we’ve talked about the unrest there. There are many investors who are looking for exotic ways to get into the Middle East; there’s just a few, just a handful of ETFs right now that invest in the Middle East; and actually, those are the more stable Gulf countries. What’s your take on investors who are seeking to gain access to the Middle East markets? Do you think that makes a good play over the course of the next decade or so? Or are you a bear long-term on the Middle East?
WIEDEMER: I’m going to be a little more of a bear. Middle Eastern markets are a little less advanced than the Turkish market. Although you’re right—it’s part of the Middle East—it’s a little bit more European in some ways. Middle Eastern markets are more volatile, obviously tied to oil. I think that when China’s construction bubble pops, oil will start to have problems in terms of maintaining its price. And ultimately, the declining price oil is probably going to hurt the Middle East. Now, as I mentioned before, the price in the U.S. of oil will go up, because if our dollar falls at the same time, that’s going increase the cost of all imported goods, including oil. But for the Middle Eastern countries, that sort of “world price” will go down when China’s construction bubble pops and we start to have more problems as well, and Europe as well, it’s going to reduce demand. So I’m bearish on the Middle East longer-term, and certainly some of the high-flyers like Dubai have seen a lot of popping in their economies already. So, no; and even in the short-term in the Middle East, it’s tricky to get into, so even though there may be some room left to run in this current bubble, that isn’t probably where I’m going to put a lot of time. And again, long-term, I’m concerned about it—quite concerned.
FTM: Now, we talked about metals earlier, but what about silver? I don’t think I got your take on silver. What are your thoughts on silver as we go into the rest of this year? Are you bullish on the metal?
WIEDEMER: You know, I’ve been—I won’t say “changing my take,” but I’ve been spending more time on silver; (in) our money management firm, our precious metals are about 75% gold, 25% silver. We’re still more bullish on gold long-term. I think it’s going to be viewed as a great source of value worldwide, more than silver. And silver still has the problem of almost 50% demanded by industrial use. So, it’s going to be more vulnerable to any downturns in the economy. That said, just like I mentioned in our own portfolio, I think it’s good to have some silver in part of your portfolio. There’s a real chance silver could break out a bit more because of it being “the poor man’s gold” (it’s cheaper to buy). I still would say my long-term is that I’d have a little more gold than silver, but I think silver’s got a great run. You’re going to have a smile on your face in two or three years, and certainly in five years, if you buy silver now. Big smile.
FTM: (Laughing) Well, okay, if everything plays out the way you see it, over the course of the next several years, kind of give us a breakdown, a timeline —and I don’t want to hone you down and force you to predict and break out your crystal ball here—but just give us an idea of what we can expect to see as we go forward. As you outline in your book, some of the caveats that you warn investors about, and just consumers in general; where are we heading? Where do you see this whole thing heading?
WIEDEMER: Well, this year’s not going to be that bad: again, we have that huge support from the Fed printing money; we have that huge support from the government borrowing even more money this year than last year; that will support the economy. But as you said, the jobs problem isn’t just a corporate America problem—it’s a construction problem. What drives this economy are service businesses. If you don’t see hotels being built, retail shops being built, office buildings being built…the factories of the modern service economy are not being built! And you’re not going to create those jobs. And construction? Look anywhere in America at this point, and construction’s way down. I live in Washington, D.C., a “recession-proof” city as they come; construction has almost fallen flat here. There are some, heavily government-funded, but for the most part, it’s gone. And if you don’t have that construction, you not only lose those construction jobs, as I said, you lose a lot of the service jobs that are created when these buildings are built. So, you’ll see jobs come back when you see a lot of construction. I don’t see a lot of construction coming back for a while. So that’s the one hole you’re going to going through this year that will be hard even for printing and borrowing to off-set. Next year, of course, we still have this same stimulus money of printing, of borrowing, but the problem is, but next year, people are going to start getting more and more worried about inflation—because it’s going to start to show. You printed for a long time; you printed a lot of money. We’ve increased our money supply 300-400%; it’s going to start to show. And I think inflation is going to be the big issue in 2012; by 2013, you’re going to start to have a real problem, because, of course, inflation also pushes up the interest rates the U.S. government pays on its debt (because a lot of our money that our U.S. government borrows is short-term). And when you start to see that going up, people are going to start to figure that we’ve got real problems. I mean, 10% interest rates? We’re going to consume most of our income taxes paying just interest alone on our government debt. So, it’s kind of a “okay this year; inflation scares next year.” But after that, things can get to be a real problem because that inflation is going to be reflected by significantly higher interest rates by 2013.
FTM: If that plays out the way you see it, Bob, in the markets, what are some of the sectors in the economy—which industries, in other words—will thrive during that time?
WIEDEMER: Well, clearly—I’m going to be old-fashioned on this one, and it’s been said so many times before—but health care is one thing that’s going to do as well as anything; it’ll probably do better than most. As we’ve seen, education has been good, but education is still easier to cut than health care. Health care is—we will be cutting it, but fundamentally, the aging population, the fact that you need health care (a lot), and the system (frankly, it’s difficult to control costs on health care) also means it’s going to grow, to the detriment of the whole economy, but at least for that sector, that’s going to be the best sector I think to be in; it will be certainly for the next two, three, four, five, six—probably even 10 years.
FTM: All right, well, if people would like to learn more about you and your work, how can they do so, Bob?
WIEDEMER: You can check out our website, aftershockeconomy.com. We’ve got all of our information there, and you can see our updates; we’ve got newsletters; we even do little audio conferences; so there’s a lot of ways you can keep up with it. We also have our updated 2nd Edition Aftershock coming out in May, so you can find out more about that as well on the website.
FTM: Excellent. Thank you so much for your time, and we’ll look forward to having you back on the program soon.
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WIEDEMER: Well, I think, as you say, the recent moves are partly (obviously) an expectation of inflation. I’m not sure if we won’t see a pullback in yields, though, shorter term. But longer term, clearly, you’re going to find inflation becomes the overriding factor—because I don’t think the Fed can pull the money back. As one of my friends in the Fed has said, “Inflation is not something that’s forced on you; it is a choice.” And the reason we tend to choose inflation, it is the easy out; it’s a fairly easy way to try and grow the economy. The other alternatives are not as easy, whether it be taxes or so forth, and so that’s why they tend to go into that trap. As you said, it’s hard to (quote) “pull the liquidity out once you’re doing it,” because every time you do that you’re going to slow the economy down; you’re going to create problems; and again, there’s no easier out at that point. And you have to, of course, pull the inflation trigger back, or the money supply spigot back even harder, making for a much harder pullback than if you’d just not done it in the first place. So, it gets harder and harder to pull it back, because you’re having to hit the economy harder and harder than if you just never opened the spigot in the first place. It’s a little like a Chinese finger trap: don’t put your finger in it. It will be very difficult to pull back out.
