Porter and Buck have an in-depth interview with David Stockman, former Director of the Office of Management and Budget under Ronald Regan from 1981 to 1985. Porter and David discuss the alarming growth in consumer debt and the broken link between productivity and wages that’s been out-of-whack in the American economy for over 30 years. Stockman reveals why productivity is faltering and how CEOs of America have become dangerous financial engineers that could lead to a new type of profitless economy and massive distortions in the world’s markets.
Porter and David explore the nature of Bitcoin mania. Is it an aberration? Or is it a warning sign of an entire financial system that’s bloated beyond all recognition? A speed round of questioning results in Porter asking David if Bitcoin is crazier than European junk bonds with zero yield. Or which type of debt is in deeper trouble, auto loans or student loans? David tells you what he thinks about the chances of President Trump finishing his term, and how to read his insights each day in the Contra Corner newsletter.
Buck opens a Christmas stocking full of mail from listeners with a timely question about our fiat monetary system, and a query about how to subscribe to Porter’s latest investment research. www.theamericanjubilee.com
Former Director Office of Management and Budget
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour.
Male: Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at www.investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
Buck Sexton: Welcome, everybody, to the Stansberry Investor Hour. I'm nationally syndicated radio host Buck Sexton. And with me here, our fearless leader, Porter Stansberry himself, everybody.
Porter Stansberry: Your extremely hungover fearless leader. Yesterday, Buck, was my 45th birthday. And I decided to find out exactly how much wine I can drink in one night. Now I know.
Buck Sexton: Are you gonna share that with us or is this a state secret?
Porter Stansberry: Well, like I told you, we had a great party. Had about a dozen guys over. It was a lot of fun. And then at 12: 30, I thought it would be a really great idea to drink another whole bottle of wine by myself, or as I like to tell you, a guy broke into my house, held me by the back of my neck and made me drink a bottle of wine. That's what happened. That's my story. I'm sticking to it. No, it was a ball. We had a great time.
Buck Sexton: How does it feel to be 35, by the way?
Porter Stansberry: Yeah, yeah. Yeah, right. [Laughs]. You've been over to my guest house, my little bungalow. We had like – we had like a dozen people crammed in there last night. It was fun. It was a good time.
Buck Sexton: This week on the show, we welcome author, businessman, and former director of the Office of Management and Budget under Ronald Reagan, David Stockman. Mr. Stockman is here to give you his fiscal perspective of the tax bill making its way through Capitol Hill and to talk about his new book, Trumped! A Nation on the Brink of Ruin...And How to Bring It Back.
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Porter Stansberry: Happy holidays, everybody. It's Christmas. Come on.
Buck Sexton: That's right.
Porter Stansberry: What are you asking – what are you asking for from Santa? I already got my present. I got a tax break, Buck.
Buck Sexton: Oh, look at you.
Porter Stansberry: It's gonna save me like a million dollars. [Laughs]. It's great.
Buck Sexton: The Trump administration comes through the chimney like St. Nick.
Porter Stansberry: Yeah. So, Buck, tell me what's going on. What's on your mind, buddy? How are things? I saw a really pretty picture of you and your lovely girlfriend at a holiday party or something. Look at her keeping the blues.
Buck Sexton: Yeah, thank you. That was at Sean Hannity's radio show party. Quite an interesting collection of folks there. Ah, I'm going to the iHeart party this week as well for premier syndicated hosts. So that will be like two of us. So yeah. Here in New York City. And our staffs, of course. Everything is good though, man. Everything is good.
I actually kind of have a funny story for you, though. Can I tell you my funny story?
Porter Stansberry: Yeah. Do people still listen to the radio? [Laughs].
Buck Sexton: They do, in large numbers. But [laughs] I'm a little – the Netflix versus cable, which I want to talk to you about in a second, that's playing out now in the audio world as well. The digital behemoth cometh. I mean, this is getting real now.
And I think it's – we're reaching the point – you remember when some years ago – I forget what the specific year was. I think it was 2003 or 2004. Mp3s had been around for a while. And CDs were still getting bought. And people were like, "This makes no sense. Why are people still going to HMV and buying CDs and Virgin Megastore and all that stuff, when you can just download an Mp3?" And it was pretty easy and everything. And then in basically one year it just stopped.
Porter Stansberry: Boom.
Buck Sexton: And it was – and the CDs – yeah, done.
Porter Stansberry: Lights out. Even at Target, no more.
Buck Sexton: Yeah, lights out.
Porter Stansberry: Yeah.
Buck Sexton: Yeah. And I'm worried that –
Porter Stansberry: Lights out, guerrilla radio. [Mimicking music]. Sorry, I'm keeping it –
Buck Sexton: Look at you with the –
Porter Stansberry: I'm keeping it a little loose today.
Buck Sexton: No.
Porter Stansberry: Hey, you know, that reminds me –
Buck Sexton: Rage against that machine, Porter.
Porter Stansberry: That was – that reminds me, Buck, [laughs] one of my favorite investment stories of all time. We are here to talk about money at some point. We have this deep value investing letter called Extreme Value. And sometimes stocks are cheap for a reason.
So there is this business called Handleman that made the little jewel cases that the CDs were sold in, the little clear plastic thing. And the stock was trading – I don't know – like at $7, and it was like four times earnings or something. It was really cheap. And a good friend of mine and a very good analyst, Dan Ferris, thought he a saw a very cheap stock that would do well. And it circled the drain. It went all the way to zero because no one bought any more CDs.
Buck Sexton: Oh.
Porter Stansberry: Thus the lesson, a lot of your success in life and your career, and also in your investments, has to do with the industry that you're in, not necessarily the individual business.
And radio [clears throat], I've got to say, terrestrial radio to me seems like the kind of business that's circling the drain.
Buck Sexton: I mean, I can tell you this, Porter, when I was at TheBlaze a few years ago, there was another host, not Glenn obviously, another host who shall unnamed for our purposes, who had come off of a radio gig where he was making a million dollars a year at the major –
Porter Stansberry: [Whistles].
Buck Sexton: – at a major city station. And we went head to head in the numbers. And it was digital, so we could see. And I crushed the guy two to one. But, you know what, it doesn't matter because people aren't making a million dollars a year doing radio anymore.
Porter Stansberry: No. You're – I think you – Buck, I think if you want to be on the radio, you've got to get yourself in with Sirius. You've got to be in the running for the next Howard Stern or something like that. I mean, he's the only guy that's still making a killing on the radio. Him and Rush, and who else? Hannity?
Buck Sexton: It's all here, Porter. It's pod – no, the big guys are huge and crushing it, but it's – the question is, will there be another generation? And I think the answer is decidedly, it won't – it will be different, and it'll be podcasting. We are right now, as we are doing a podcast, Porter, I've been looking at the numbers and talking to folks about it in the recent months. We are at – CDs are to terrestrial radio as Mp3s are to podcasts right now.
Porter Stansberry: Mm-hmm.
Buck Sexton: It's about to switch over digitally and into podcast in a huge way, and everyone sees it coming. It's gonna change. People like to listen to stuff. They like storytelling. They like information. That's not gonna change. But the delivery mechanism, it's all going digital.
Porter Stansberry: It has to. And I – actually, I – I think there's something bigger at work. Follow me here for a second. I think the entire untracked advertising model is dead in the water.
I don't know if you guys watch television shows ever. My wife is a big TV watcher. Her favorite thing is to put the kids to bed at 8: 30, 9: 00, and watch a show each night. And she's got – she's got them all, the Game of Thrones, the new one about the '80s kids that are playing Dungeons & Dragons. What's that one called?
Buck Sexton: Stranger Things.
Porter Stansberry: Stranger Things. I don't know. There's a bunch of them. She's got them all. I call it her stories, in reference to the Wedding Crashers remark. You guys remember the butler was watching his stories in that little anteroom. Nevermind. [Clears throat].
The point is, we don't ever watch commercials, ever. There are no commercials that air in my household. I watch one television program. I watch Pardon the Interruption. I love the banter between the two sports analyst guys, Mike Wilbon and the other one, Tony something. The control guys are –
Buck Sexton: Kornheiser?
Porter Stansberry: Kornheiser, yeah. The control guys are shouting to me, as though I can hear them through the glass wall. [Laughs]. Anyways, keeping it loose today.
But – and I – it's – I – we call it – I record it. And I say we TiVo it, but it's not a TiVo. It's just a cable box or something. But my point is, anytime there's a commercial that comes on, I hit a little button and it fast-forwards immediately through the commercials and I never see them.
And I know what those commercials cost. They're very expensive to produce. I know this because I'm in business. I buy advertising. No one's watching them. And more importantly, it can't be tracked. So all of the online advertising that you do, it all can be tracked. You can know exactly what it's worth, and you can know whether or not it's working. And Facebook is the greatest engine for advertising that's ever been built. It is amazing, and people are addicted to it. It's perfect for advertisers.
It's gonna completely put – the network television model will be completely gone in less than five years. It will not exist. You will pay for everything directly. The same way we sell newsletters. You'll pay for NFL games. You want to follow the Seahawks, you buy the season pass to the Seahawks, you get the games. There will be no advertising.
Same thing is already happening to radio, right? You've got Sirius. They know exactly how many people are buying the subscriptions. They know if people – I guess they know if people are using them or they wouldn't keep buying them. So you know there's a listener there, but there's no way to track the ad. So there isn't really advertising on Sirius. I know that there is. I know Howard Stern still has advertising on his show.
But the whole model is dead. You're not gonna get – we are not gonna be able to go get a major-brand advertiser for our podcast because there's no way we can prove that anyone's listening to the ad.
Buck Sexton: Well, that's actually changing. Right now. Like, that is in the process of changing with podcasting. They're actually – Porter – and this is a whole – there's a whole layer of depth to the discussion. And, guys, we're on a podcast. I don't know how much people really want to hear us talking about podcast advertising.
But it's interesting because the brand model, right? Run an ad. Do people buy the Chevy for the – who knows, right? But you've run the ad on a big – you say, "This is the market. This is the amount of eyeballs you're getting. This is what we're gonna charge." And they would say, "Well, we have an ad budget," Chevy or a major company, "And so we're gonna spend that money." And the idea is that this is about raising brand awareness and a long-term payoff, et cetera, et cetera.
The old terrestrial advertising model is, "I'm gonna do a live read," which I still do on the show. And you have a much, generally speaking, closer association with the brand. And there's also a – an expectation that people would either call a certain number or use a certain promo code. It's direct response. It's not, "Hey, I'm advertising on this show because I think that being associated with the brand is valuable in and of itself necessarily." That's part of it.
But also, if I'm selling the new pot holders that are better than the other pot holders, how many using the promo code or how many going to this specific phone number we give out are we actually selling versus what the ads cost?
That's what podcasting will allow people to do. There's been a bizarre hesitancy with looking at the metrics, that you can actually – Porter, you can find out right now – I mean, we could find out right now, if we wanted to, how many people actually click and open the podcast, how long they listen, if they fast-forward through any parts of it. The information you get from digital platforms is infinitely more precise than what network television, for example, has been relying on for years.
I mean, Nielsen and all this stuff –
Porter Stansberry: Done.
Buck Sexton: The way they do radio and TV ratings, it's nonsense. They are making it up as they go along. This is what people don't realize. [Laughs].
I have had this discussion with people about radio numbers. And I'll say, "So hold on a second. You're gonna tell me that from this month to that month, there was a 500 X increase in listening in that -" "Oh, well, no. We had a couple of more monitors," meaning people that actually wear a monitor in that market. And I say, "That's not a metric then." I mean, if you try this with like a biotech company in a human trial, [laughs] people would throw you in prison.
Porter Stansberry: [Laughs]. That's right. No, I think it's very exciting. I much prefer the direct response model. It's how I built my business. And it makes you do a better job with your advertising. You can't waste people's time. If you're depending on direct response, it's got to be effective. It's got to communicate. It's got to solve a need. It's got to be priced. It's a hard offer in direct response. It's not all this nonsense branding ads.
And I tell you what, I think that's the main thing that's killing football right now. The games are like four and a half hours long because of all the replays. And look, I'm already gonna buy some Miller Light. I don't need to see an ad 17 times telling me to go buy Miller Light. I got it. I got the message.
So I think it's gonna be good for all kinds of content and good for businesses to get rid of that unknown model. "We bought an ad. What happened? Well, we don't know." That's all going away. And it's great. It's good for the consumer, and it's good for businesses.
All right. We've got a little bit more time before Stockman comes on. You guys who are listening, you probably fast-forward anytime I talk. I don't take it personally. But we're gonna have a great discussion with Stockman about the whole jubilee thing and America's insane indebtedness.
But before we get to that, I've got to ask just some – a little – just a little – a little friend talk here, a little bro – a little bro moment. What's your holiday plan? And are you gonna see any movies over the break? Because for me, Christmas is all about the films.
Buck Sexton: It's probably the only time all year when I actually might go to a movie theater, would be over the holiday break. And I would say a couple of things. One is I'm here in New York City with family, splitting time with my girlfriend Molly's family, also in New York City, and my family. So that'll be very nice.
And then I head off to the beach to Aruba, which, Porter, I should probably ask you – I'm sure you've got an Aruba guy. Like you probably have somebody that –
Porter Stansberry: Aruba?
Buck Sexton: No? Yeah.
Porter Stansberry: Aruba?
Buck Sexton: Yeah.
Porter Stansberry: All right.
Buck Sexton: The beach, yeah.
Porter Stansberry: But you're like –
Buck Sexton: Yeah, the Caribbean.
Porter Stansberry: You're like me. You're genetically engineered for an Irish peat bog. What are you gonna do in Aruba?
Buck Sexton: Oh, I wear, like, long sleeves and stay under an umbrella. Molly, who's half Mexican, she actually will be out getting sun and enjoying herself. I will be under the – I find the biggest umbrella that I can find and the most boring esoteric books on history I can and then I just disappear in the shade.
But yeah, I'll be down in Aruba. I'll enjoy it at night. It'll be balmy and a [laughs] nice breeze. But I'll be there.
And as for movies, I want to see the Churchill movie. I have read more biographies of Winston Churchill than any other historical figure. And it was the first – he was the first historical figure that got me really interested in reading biography as a genre. And I've heard this – Darkest Hour I think is the name of it. I just know that it's the Churchill movie. It's supposed to be really good. So I want to check that out. How about you?
Porter Stansberry: Well, [clears throat] we go up to my mountain place in Pennsylvania three or four days with the kids. We've got like a 20-foot Christmas tree up there. It's just complete madness. Packages and wrapping paper. I've got a 10-year-old and a 6-year-old, so for us Christmas is really all about the kids. And we'll do a big prime rib dinner and Christmas presents the next morning, and have some fun.
Films. I just saw Dunkirk last night, or the night before last. And it was excellent. I wasn't expecting much. It was a really great film. I highly recommend it.
And that's it. No – no, I don't think I'm gonna do any sun and fun. I might fly down and go fishing maybe the first week of January on the boat, but I don't have any plans as of yet.
Buck Sexton: David Stockman is a former two-term Congressman from Michigan and was also the Director of The Office of Management and Budget from 1981 to 1985 under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street with Salomon Brothers and Blackstone. He's the author of three books, The Triumph of Politics: Why the Reagan Revolution Failed; The Great Deformation: The Corruption of Capitalism in America; and Trumped! A Nation on the Brink of Ruin...And How to Bring It Back.
He's also founder of David Stockman's Contra Corner, featuring his own articles and those from leading contrarian thinkers on geopolitics, economics, and finance. Please welcome to the show Mr. David Stockman.
Porter Stansberry: Thanks very much for coming back on the show. It's been a couple of years since you were with us.
David Stockman: I think so.
Porter Stansberry: And you have been busy. You wrote another excellent book. Nobody writes books like you do. You have this enormous resume, this incredible background. You've been at the nexus of American finance and politics at the most senior levels for decades. And yet you write these screeds. I mean, they are polemics.
David Stockman: [Laughs].
Porter Stansberry: How do you dare to be so brutally honest and direct with your readers? It doesn't sound like anything else that's published out there.
David Stockman: Well, thank you very much, first. But second, I guess after you spent 20 years in Washington and then more than another 20 years on Wall Street, you are finally so fed up with that experience that you feel a need to express it as colorfully and vehemently as possible just to get through the din and noise of the daily narrative and conversation, which is so decoupled or uncoupled from reality that it's truly amazing.
And with each passing day as we now get up into the stratosphere with the market, it becomes even the more so. So, I guess that really explains it. When you've seen everything I've seen, you've got to sort of speak out loud.
Porter Stansberry: Well, listen, I want to jump right into it because our economy and our currency and our banking system, the whole fiat currency world that we have, it's been going – it's been coming unraveled and it's been going crazy for a while. But I never thought I would see anything like the bitcoin mania that we have seen this year.
Can you think of anything else in your life, not from all of history – I know the tulip mania. I get those references. But can you think of another time in your life when you have seen more people making more radically bad financial decisions ever?
David Stockman: No. I agree with you entirely on that. And this is not just bitcoin. Bitcoin may be the poster boy, sort of the ultimate excess on top of everything, but it's only symptomatic of an entire financial system that's bloated beyond recognition, that's valued relative to real-world income and production at levels or multiples that we've never seen before in history on an across-the-board basis.
And so, therefore, I think it shouldn't be dismissed as an aberration way out in left field somewhere, but simply a warning sign that at the heart of this financial system, there is massive instability. And it's not even irrational exuberance. [Laughs]. It's irrational exuberance on steroids and then some.
Porter Stansberry: One of the things I've been writing about lately is the incredible growth in consumer indebtedness, particularly the rise in indebtedness of the lower class in America. And I focused a lot on explaining to folks the disconnect between productivity and wages and how that has become uncoupled.
Do you have an opinion about why that has occurred, that very strong historic relationship in our economy between wages and productivity, that link was broken in about 1970-ish and has become completely untethered so that wages have not increased at all with productivity for the last 30 years or a little bit longer? Do you have a thought about that particular issue, why that has happened and whether or not that's important to us?
David Stockman: Well, yeah, I have a couple of thoughts. One, because we've not had real wage growth effectively for the last 30 years, the living standard of lower and middle class has been elevated or bloated by borrowing. And it's not just in the last three or four years, or even since the 2008 crisis.
If we go back to what I would call stable times, pre-1980, the debt-to-wage-and-salary level in the household sector – and that's what you have to look at, wage and salary income, because that's what you pay the interest or amortize the debt with. And when you compare those two factors, we're in a different ballpark today.
Historically, household debt — this is mortgage loans, revolving credit, and all the rest of it — was about 75% of wage and salary income. By the time we reach the peak craze in 2008, after the mortgage – subprime mortgage bubble and so forth, we were at 225% [laughs] total household debt to wage and salary income. Now that's rolled back a little bit because mortgage debt has stopped growing and there was some defaults. But when you factor in that auto debt now is at an all-time high, student debt at $1.3 trillion, is off the charts.
Porter Stansberry: It's insane, yeah.
David Stockman: We're still near 180%, 190% debt-to-wage-and-salary-income. It's an unsustainable equation first. And second, it hasn't really been remedied. I mean, if you listen to the Wall Street strategists and economists, they keep telling you, "We've delevered and the household sector is healthier than it's ever been before." [Laughs].
But the underlying fact of debt levels relative to wage and salary income is still off the charts and is the only reason that the economy has held up as well as it has. If we really did delever to get the household sector back in a healthy sustainable long-term position, we wouldn't have had even the anemic growth, so-called, that we've had since 2008. So that's the first point.
The second point as to productivity [laughs] I think is very clear. What I call monetary central planning, what the Fed does with its massive financial repression on interest rates, its propping up of the stock market, the so-called Greenspan, Bernanke, Yellen puts, the whole intrusion into pricing in the financial markets and the falsification of interest rates, stock prices, risk asset prices and yields across the board, the effect of that [laughs] has basically been to transform the C-suites, as I call them, the executives who run the big companies of America, the boards and the top executives, into financial engineering joints.
They are using their balance sheets, they are using their cash flow to massively buy back stock, pay dividends, do levered recaps, fund massive M&A deals, most of which bring no additional productivity to the economy, rather than invest in the long-run future and productive assets in the businesses and on the Main Street economy where they operate. One number which is – I think captures the whole story is that in the last ten years, Corporate America has spent $15 trillion on stock buybacks and these giant M&A deals, which just create even bigger companies that no one can really [laughs] understand or manage.
So, therefore, the reason productivity is faltering is that the Fed has created such massive distortions and misguided incentives, that we now have the C-suites of America eating their seed corn, so to speak. They constantly manipulate the GDP number to have you believe the economy is in some kind of new phase of expansion because we had two quarters of 3%. What does that mean? Two years ago, we had two quarters of 4% and 5%. It goes up and down.
What you need to look at is real final sales, which takes the inventory fluctuations out of the picture — and they're big — on a cyclical basis, since the last peak [inaudible due to phone cutting out] now in month 102 of this so-called expansion, since June 2009. And month 102 is near [laughs] the record expansion, which happened during the 1990s and is almost double the normal business expansion.
So, therefore, it's fair to say that on a peak-to-peak basis, real final sales have grown at 1.2% over the last nine years. That's a third of the historic growth rate of 3% or 3.5%. That's how weak the economy's become on an honestly measured trend basis as a result of this whole system I've just described [laughs] of the C-suites becoming financial engineering joints in order to fuel these massive stock market bubbles.
So you can't solve this problem with a tax cut. [Laughs]. I think that's where we're going next. You can only address this problem by a massive house cleaning of the Fed and repopulating it – if we're going to keep the Fed – with people who believe in sound money and letting the free market price financial assets. Let it set the price of money. Let it set the yield curve. Let it determine what the stock indices are going to do from day to day and month to month and year to year.
We're not even close to anything like that because Trump unfortunately is an ignoramus on monetary matters and is populating the Fed with Keynesians and Friedmanites who are just as bad as the people we have there. As I say, Paul is sort of Janet Yellen in trousers and a bowtie. That fundamental problem isn't being addressed. And to throw a tax cut of this magnitude on top of it is only going to inflate the national debt enormously. And it's already out of control, as we all know.
Porter Stansberry: David, thank you very much for having me on your podcast.
David Stockman: I went a little – I went a little long on that one, but –
Porter Stansberry: Listen, I know Buck's pulling his hair out because you said something negative about Trump. And the Buck Sexton over there is a – not-a-never-Trump Republican. He is a conservative and also I think a fan of Trump, knows his daughter.
David Stockman: Yes.
Porter Stansberry: I want to do a little speed round with you. Now, David, you have to give me either yes or no or one-word answers because we [laughs] don't have time for any more soliloquies.
David Stockman: Okay. Okay.
Porter Stansberry: So, okay. Here – this is a fun game to play. Okay. So here we go. What's crazier, bitcoin or European-denominated junk bonds with zero yield?
David Stockman: They're both as – you know, crazy –
Porter Stansberry: You've got to pick one. You've got to pick one. It's a hard game.
David Stockman: Bitcoin is crazy, but it's marginal. The European yield on junk bonds is systemically reflective of central banking out of control. It's the bigger danger.
Porter Stansberry: All right. We've got to hold you – we've got to hold you to quick answers.
David Stockman: Okay.
Porter Stansberry: Okay. Next thing –
David Stockman: All right, yeah.
Porter Stansberry: What will have a larger default rate, the auto loans made in this cycle or the student loans made in this cycle?
David Stockman: Student loans already are at 30%, honestly measured. Nothing can be that bad.
Porter Stansberry: Nothing will be that bad, okay. What happens first, the 30-year U.S. Treasury bond going below 10% – sorry, going below 2% – so the 30-yield – I can't talk all the sudden, Buck.
David Stockman: Yeah.
Porter Stansberry: The 30-year yield going below 2% or the Dow going over 40,000?
David Stockman: Oh, [laughs] I think neither are ever gonna happen.
Porter Stansberry: You don't think the 30-year will go below 2%?
David Stockman: No. No, I think yields are going up because finally the central banks are beginning to shrink their balance sheet and because fiscal expansion is gonna knock your socks off when you see how big the deficit numbers become.
Porter Stansberry: Will the current tax cut lead to GDP growth in excess of 3% for the entire year next year?
David Stockman: I have no idea what it'll do from year to year. I seriously doubt it. But over time it won't even come close to 3% –
Porter Stansberry: Okay.
David Stockman: – because the –
Porter Stansberry: All right, all right. I'm cutting you off. Quick answers.
David Stockman: [Laughs]. Okay.
Porter Stansberry: Will President Trump be impeached?
David Stockman: I doubt whether he'll serve out his term.
Porter Stansberry: Oh, very good. Will a – will the next president be more radically progressive than Obama?
David Stockman: Well, it'll be Pence. [Laughs]. And I think he's gonna be a lot more conservative than Obama.
Porter Stansberry: One last speed question for you and then I'm gonna hand you over to Buck.
David Stockman: Okay.
Porter Stansberry: What is the most powerful firm today on Wall Street? Is it Goldman or someone else?
David Stockman: JPMorgan.
Porter Stansberry: Very good. What's the move that Trump's administration should make now in order to cement some improvement in our economy and in his own political future?
David Stockman: They need to address a fiscal situation that is out of control. They just passed a defense appropriation that raises defense spending by $60 billion a year, or $600 billion over a decade. Now on top of that, they have this tax bill that in the full fiscal year 2019 will add $280 billion to the deficit on top of the defense, on top of the disaster, and on top of the $800 billion that's already built into the baseline.
Now, I'm not talking about the next 10 years. I'm talking about the next full fiscal year when all of this becomes effective. We're gonna be borrowing $1.2 trillion, or about 6% of GDP in fiscal '19 – 2019. And the reason it's important is two-fold. That will be month 111 to month 125 of this so-called "business expansion." And the reason that's important is that we've never been there before in all of recorded history. [Laughs].
There's never been a business expansion that long. I seriously doubt we'll make it through September 2019 without a recession, but if we do, what kind of nonsense is it to borrow $1.2 trillion at the tail-end of a long-in-the-tooth business expansion and expect that anything good's gonna happen there after? They're just setting up a fiscal disaster.
So he needs to wake up and understand that they can't – this late in the business cycle, in the face of the Fed going into quantitative tightening for the first time in history – and it's big. By the spring they'll be shrinking their balance sheet at a $350 billion rate, by next October at a $600 billion rate. This will cause yields [laughs] to soar. It will undermine the entire pricing system of the financial market, which is based on ultra-low yields.
And if he doesn't begin to understand that and focus on getting the fiscal side under control, there's nothing that can save the picture.
Porter Stansberry: David, I've got one more thing to talk with you about. I don't know if you've noticed or not. If you've written about it, I apologize I didn't see it. But do you realize how much credit John Deere has extended to American farmers?
David Stockman: I don't know the exact numbers, but I wouldn't be surprised at all.
Porter Stansberry: $38 billion at the last count.
David Stockman: Okay. [Laughs]. Oh my God, okay. And it's all off balance sheet for the most part, right?
Porter Stansberry: It's all – it's – no, actually, it's on their balance sheet. You'll find it on their balance sheet.
David Stockman: Is it?
Porter Stansberry: Yep. They've extended $38 billion in tractor loans to American farmers. And as you realize, that's produced lots of corn and soybeans. So the prices of those commodities have tumbled. I know that because I bought a corn farm at exactly the wrong time.
Porter Stansberry: So –
David Stockman: Yeah. $2.85 corn is – $3 corn at the delivery point isn't doing a lot for you, I take it. [Laughs].
Porter Stansberry: No. It actually costs us more to harvest it than I can sell it for. [Laughs].
David Stockman: Yeah. Wow.
Porter Stansberry: But the question I have for you is, there obviously is a correlation between the extensive amount of credit that's been delivered to American businesses and farmers that's had a big impact on commodity prices going down. Lots of malinvestment. And the oil industry in particular, lower oil prices. Lots of malinvestment in the farming industry, lower commodity prices.
I think, if you're right about the pullback in credit and you're right about raising interest rates, I think people are gonna be very surprised by the corresponding increase in commodity prices. Any thoughts about that?
David Stockman: Yeah. I think you might be right about that, but you're even onto a bigger issue. And that is the people at the Fed, Yellen and the rest of the Keynesians, are totally mystified why inflation is too low by their accounts. [Laughs]. By my account, the lower the inflation, the better. In fact, in the greatest periods of historic growth, we've had zero or negative inflation.
But nevertheless, the reason why measured inflation is so low is there's been massive malinvestment, overinvestment in the entire world economy. Almost everything gets priced at the marginal cash cost, just like you were talking about your harvesting cost on corn. And that creates the appearance of low inflation, but it also obviously is an unsustainable condition and a measure of how much distortion you have in terms of the efficiency of capital investment and capital allocation.
So I think it's all over the place. Manufacturing worldwide, mining worldwide, the energy industries are also frankly way overinvested. Or even look at retail in the United States. Amazon's about ready to invade the pharmacy space. People don't know it, but there is $20 billion of off-balance-sheet leases, which are nothing but debt, behind Walgreen's' 10,000 stores, half of which are [laughs] gonna be obsolete by the time Amazon gets done with them.
We're gonna have wreckage all over the economy as yields go up and the full impact of all this malinvestment and distortion makes itself fully felt. Even Amazon, which everybody thinks is the greatest thing since sliced bread, and as a business enterprise is certainly an innovator and disrupter and destroyer, but I doubt who they would be pricing as radically low as they are Bezos' net worth were $10 billion, not $100 billion.
In other words, when they're valued at 280 times net income, they don't have to have any net income. And if they don't have to have any net income, they can plow into sector after sector with what is effectively from an economic point of view predatory pricing, destroy capital assets [laughs] –
Porter Stansberry: Yep.
David Stockman: – across the board.
Porter Stansberry: That's right.
David Stockman: And Wall Street cheers it, but they don't understand –
Porter Stansberry: They don't.
David Stockman: – that's why growth is being stymied.
Porter Stansberry: Yes, yes. I've got to jump in because I just want to comment about that. I wrote a whole magazine article about this "Escher Economy" that's profitless. And I think –
David Stockman: Yeah.
Porter Stansberry: I think the Amazon is a fantastic example. Look, I love Amazon as a customer, but they're running their entire retail business on a 0.14% margin. And there's no –
David Stockman: Right.
Porter Stansberry: And there's no way they could do that if it wasn't for the buoyant capital markets, which is what you just explained.
David Stockman: Yeah.
Porter Stansberry: David, it's been a great pleasure to have you on the show. I want to encourage all of our listeners to read your book. Can you tell me the exact most recent title?
David Stockman: The most recent book that I did was Trumped! – that's the name. Trumped, exclamation point. It came out in September 2016. I thought that he might win. I said, "It's a reflection of the failure of the economy in flyover America that the Wall Street/Washington axis simply has no clue what they have perpetrated out there." And that was right.
I also said that he is – he represents a force of disruption, a rejection of the status quo, but he doesn't have an agenda that's gonna solve anything. [Laughs]. I think I'm proving to be –
Porter Stansberry: Right and –
David Stockman: – correct on that as well.
Porter Stansberry: Right and right. You also have a wonderful online presence. Your Contra Corner is a great spot. How often do you publish new content on that Contra Corner?
David Stockman: Every day. Every day.
Porter Stansberry: Every day.
David Stockman: And I'm publishing this week some things on the tax bill, which there's a lot more [laughs] there than meets the eye. And also, I also comment on politics. Yesterday I basically went off at the Mueller investigation and the whole Russiagate hoax. And I think we now have pretty good evidence that the meddling in the election happened in the Justice Department and the FBI, and it was an effort to derail Trump's campaign. [Laughs].
Porter Stansberry: Yeah, only – by the way, only in American politics can the people who are called to investigate the President actually be the people who were interfering in the election.
David Stockman: I know. [Laughs].
Porter Stansberry: It's just training –
David Stockman: I mean, talk about the fox in the –
Porter Stansberry: Life is stranger than fiction.
David Stockman: – chicken –
Porter Stansberry: It's crazy.
Porter Stansberry: Yeah. This is the fox in the chicken coop if there ever was one. Okay?
Porter Stansberry: I can't keep up with it all. Listen, David –
David Stockman: Yeah, I think –
Porter Stansberry: – it really is – it's such a pleasure to have you. And listen, I'm a publisher. And I know you do a lot of writing. And I know you've had some different publishers over the years. I would love to talk with you about what we could do for you if you're ever interested in having a publisher.
David Stockman: Yeah. Well, why don't we definitely do that. Okay? And I'm in the conversations with Bill Bonner right now. So maybe we could all loop together.
Porter Stansberry: Yeah, he's my partner. And I just –
David Stockman: I know.
Porter Stansberry: I know we could get you a hell of a lot more readers. And I believe you deserve a lot more attention. So listeners out there, go to the Contra Corner. And, David, I'll follow up with you in the new year. Maybe we can work something out.
David Stockman: Okay. That would be terrific.
Porter Stansberry: Okay. All the best.
David Stockman: Good to be on with you.
Porter Stansberry: Thanks.
David Stockman: Okay. You, too.
Porter Stansberry: Thanks very much.
David Stockman: Okay.
Porter Stansberry: Bye-bye.
David Stockman: Very good. Bye.
Buck Sexton: That guy was super interesting. A lot to say.
Porter Stansberry: He is encyclopedically smart. And unfortunately, as you know, he gets on a roll [laughs] and like I said, it was fun being on his podcast.
Buck Sexton: Yeah. He was letting it rip.
Porter Stansberry: I've got to go to the Contra Corner and see what he wrote about the Mueller thing because that whole investigation, the whole Russia thing is so insane. I really can't get my head around it. Buck, anything about that? Is there a smoking gun yet? Do we have that? Do we know?
Buck Sexton: There's no smoking gun. But as I've been saying to people as much as I can, at some point you go from being a conspiracy theorist to being a coincidence theorist, right, that, "Oh, no, there's no conspiracy. There's no conspiracy. It just happens to be that a top-level guy in the Russia investigation was also a top-level guy in the Hillary investigation and also happened to be involved in interviewing General Flynn, who was charged after somebody most likely from the DOJ or the FBI leaked information illegally about a conversation with General Flynn."
I mean, you start to connect these dots in a circle and you go, "Okay. I understand people don't want the tin-foil hat stuff and -" but at some point, you have too many things that all connect together for this to be a coincidence. And I think we're there with the DOJ and the FBI.
Porter Stansberry: Buck, did you ever read any of those Jack Reacher novels? Do you know what I'm talking about?
Buck Sexton: The Tom Cruise movie I know about. I never – I didn't even know there were novels.
Porter Stansberry: Yeah, yeah. I didn't really – the movies aren't that great. But the Jack Reacher books are really good. Maybe somebody in the control room knows the name of the author who writes those. Maybe they can buzz in and tell me in my ears. They're Googling.
I can't remember the name of the author. But he's been writing these books for about 20 or 25 years now. He generally writes like one book a year. I think they're great reads. Lee Child is his pen name. It's not his real name. But the author's name is Lee Child. Not his real name, but that's his publishing name.
Anyways, the Jack Reacher books are great if you want a fun – just a fun quick novel, right? It's not literature. It's just fun. But there's lots of detail and guns and stuff that I like in the novels. I get like good gun reviews by reading these novels.
But the thing about Lee Child and Jack Reacher is he – for years he has painted the FBI as the most corrupt institution in America. And I think it's really interesting that the facts of the FBI are just playing out according to this fiction. I find this very fascinating. I would love to know if there's a listener out there who agrees with me about Lee Child's books and also the way he's painted the FBI.
But, Buck, listen, why don't we move along. It's Christmas. I know you've got some shopping to do.
Buck Sexton: I actually don't do gifts with my family because we're all old now. We don't have any kids yet. So none of us do gifts. But I have shopping to do, nonetheless, for myself. Got to take advantage of those deals after Christmas.
Porter Stansberry: You know what we do, we do – I do gifts because I like – I'm a –
Buck Sexton: Yeah, you've got kids.
Porter Stansberry: Yeah. We do – but I do gifts with my family. I love getting people gifts. I just love it. I'm a glutton for punishment.
But we do the $20 gift game. And I highly recommend this for your gathering Christmas Day or Christmas Eve, whenever your family gets together. So you've got like six or eight people. You've got some cousins that you never see, but they come over for dinner. You know what I'm talking about, right? The family gathering moment.
Well, what you do is you have everyone bring a $20 gift and put it in a paper bag. Like, don't wrap it. Just put it in a bag, $20 gift. And the tackier and the more useless, the better. Okay? So like you get – you put a deck of cards in a bag. That's a $20. Maybe it's a nice deck of cards. Or maybe it's like one Tervis tumbler. You know? [Laughs]. Like, what's one glass?
So you do this, okay? And then everyone draws straws and you determine what the batting order's gonna be. Somebody goes first; somebody goes last. The first guy has no choice. He just picks a gift. He can pick any one he wants. He gets one gift. Okay? He opens it up. That's his gift. Okay? He's kind of screwed because he didn't really get much of a choice. But the next guy can choose either any present that's been opened or can choose to open a new one.
And so the game gets exciting because after like the fifth or sixth person, he takes your present, now you – you don't have a present anymore. You can open a new one or you can take somebody else's. And so there's this big sort of melee. And usually there's only like one or two presents that are actually worth having. And it's very competitive for who gets them.
And then basically it brings like all of the greed and avarice in your family out at Christmastime, which is what everyone really wants to see. Try it. You might like it.
Buck Sexton: Nice. You get into the Christmas spirit with some vulture capitalism. [Laughs].
Porter Stansberry: That's right, yes.
Buck Sexton: Just go for it. You want to look at what's in the stockings? We got stockings full of mail this week. Do you want to do it?
Porter Stansberry: Yeah, let's do the mailbag here. I'll do the first one.
"Dear Porter and Buck, love the show. Helps me understand what's happening in the world. Being a curious person, I always need something to think about. I'm wrapping up the program from last week, and I have a question for Porter." Oh. "Porter, will you please elaborate on how the current fiat money system has led to increased productivity without increases in wages?" Oh, we were just talking with David Stockman about this. "I know this accounts for the enormous wealth gap and has something to do with increased credit and capital available to only a few." That's exactly right. "However, the details are hazy for me. Please explain further."
Well, Tyler, thanks for the question. I'll try to answer it as best as I can. It's real simple. In the early 1970s, the central bank cut the link between our currency and gold, a commodity. So normally, as productivity increased in our economy, the value of our money would increase. So if you look at big periods when we had sound money and lots of economic growth, you would normally see something people call deflation. Well, deflation isn't necessarily bad. It just actually means the growth in the purchasing power of the dollar.
So, as computers came along, as spreadsheets came along, as robots came along, as big increases to efficiency in manufacturing and automotive power come to pass, everything should have gotten cheaper. But it didn't. Instead, everything got more expensive. The purchasing power of the dollar declined. And that's because the Federal Reserve has consistently increased the money supply well in advance of gains to productivity.
And so, anyone who's just earning a wage has been screwed, and anyone who has access to capital has done great. You borrow a whole bunch of money, you build a bigger plant, you fire half your workers. That's the secret to success in America, as long as credit is not tied directly to savings – which it no longer is, thanks to the Fed. And that's how it happens. And that's why for 40 years, Americans have gotten poorer but people who own capital have gotten vastly richer.
Buck, next question.
Buck Sexton: All right. This is from K.S. "Buck, I really enjoy the new podcast. I wanted to put in a request to have your friend Kmele Foster as a guest on the show. An investment podcast might not be right in his wheelhouse, but he's an entrepreneur with a good degree of teleco and media knowledge. Mostly, I'm curious how his hard-nosed contrarianism would mix with Porter's thoughts. Could be a lot of fun. K.S."
[Laughs]. So it's not K.F., because I would be like, "Is this Kmele writing in?"
Porter Stansberry: [Laughs].
Buck Sexton: Yeah, I do know Kmele Foster. I don't know. Porter, do you know who Kmele Foster is? He was on Fox for a little bit, on Fox Business. All right. He's a really good guy. He's a smart guy. I don't know about his teleco knowledge at all. I know he works in media like me.
I've done his podcast, which is called We the Fifth, which has some smart guys sitting around a table just talking about things for an hour while they drink, by the way. That actually happened. I did not drink because they only had beer. So I actually couldn't partake in that.
But, yeah, I'll see if – I'll send Porter and the squad here something from Kmele, maybe a clip of him. And if they're interested, we'll book him on the show.
Porter Stansberry: I would love to have him. I would love to ask him if he knows much about telecom. I would love to ask him about the craziness that is Japanese SoftBank and their enormous investment that's going to zero in Sprint. Love to talk about that.
Let's do one last question here, Buck. It's a good one. "Dear Porter, is there a charge for the Stansberry letter?" From Jay Wynn. And the answer is, why, yes, there is. Please go to www.theamericanjubilee.com to get our latest offer and also read a lot about the research into America's coming debt crisis that I have been doing. That's www.theamericanjubilee.com. Jubilee, by the way, is J-U-B-I-L-E-E. Theamericanjubilee.com.
Buck Sexton: Heads up, everybody. Next week we'll will broadcasting a special "Best of Bitcoin" episode over the holidays to wrap up the year, featuring our best interviews on bitcoin and crypto assets. Without question, crypto has been a huge story for 2017. And it looks like it will not be slowing down at all in 2018.
Next week you'll hear from Wall Street Journal lead writer and author of age of cryptocurrency Paul Vigna, as well as bitcoin and blockchain expert and editor of Crypto Capital, Tama Churchouse.
Porter Stansberry: Buck, as always, tremendous pleasure to see you. Hope you have a wonderful holiday. I hope that Santa brings you something wonderful, or at least Molly, but someone brings you something wonderful.
Buck Sexton: Well, thank you, sir. Same to you and your family and the whole Stansberry crew down there in Baltimore. I'm excited. I'm gonna come down and see you guys in January.
Porter Stansberry: Very good. We would love to have you. And while you're in Aruba, please do your best to avoid any homicidal Dutch men that you may encounter.
Buck Sexton: Indeed, I will. That's gonna be a – Porter, Merry Christmas to you, sir.
Porter Stansberry: All the best. Listeners, we will see you back here in 2018.
Buck Sexton: Merry Christmas, everybody.
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Porter Stansberry: Ho, ho, ho.
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