Porter’s back from Nicaragua and he’s growing more and more concerned about corporate and consumer debt. In our current “Escher Economy” it’s hard to distinguish which way is up and which way is down. The underlying balance sheet of the US consumer is in big trouble and Porter tells listeners that the likely outcome could lead to big changes at America’s ballot box in 2020.
Porter & Buck welcome special guest Grant Williams, co-founder of Real Vision TV. Known as “Netflix for finance geeks,” Real Vision is the world’s only video-on-demand channel with a finance and investor focus. Porter and Grant talk about how we’ve come to accept the madness of global economic activity over the last decade, how there seems to be a bubble forming in just about every asset class, and the two big signals to watch for that will show you when economies fueled by debt are about to run out of gas.
Porter answers a listener’s question in the mailbag about gold and gold miners…and reveals one of the biggest mistakes you can make with these investments. Next week, Porter and Buck interview James Damore, the ex-Google employee who wrote the viral memo, “Google’s Ideological Echo Chamber.”
co-founder, Real Vision TV
Buck: Hey everybody, welcome to the Stansberry Investor Hour. This week, joining us on the show, is Grant Williams, cofounder of Real Vision TV, the world's only video on demand channel for finance. Real Vision delivers unbiased interviews with the smartest brains in finance by giving them the freedom to tell you what they really think. I'm talking about people like Kyle Bass, Jim Rogers, John Burbank, and Dwight Anders, to name a few.
Some have described Real Vision TV as Ted Talks for finance. Get a free 14-day trial to Real Vision TV and get access to insights usually reserved for elite hedge funds and investment banks by going to realvision.com. That's http://www.realvision.com. We want to send our thanks to all the listeners who have been writing into the show and leaving comments on the Stansberry Investor Hour iTunes and YouTube pages.
People like Ben S., L.V. Falco, Crows Call, and Dungringle, thank you for your comments on the iTunes page this past week and for helping us share the show with other listeners. We also want to thank listeners like Robert T. Patch, Aaron P. Spirit, and Dan B. for tuning into the podcast on YouTube and for giving us their feedback on the Stansberry Investor Hour YouTube channel. Please keep the comments and reviews coming, folks. We read them all and love hearing from you and getting your thoughts on the show.
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Okay, let's get started. Porter, what is on your mind, as we go into Stansberry Investor Hour this week?
Porter: You know, I'm focused on the finance, Buck. I'm growing more and more concerned about consumer debt in the U.S. There's a big uptick last year and auto loan defaults and that's continuing this year in credit cards. And I'm looking at data like Starbucks same-store sales declining. So even though we've got full employment and everything seems to be going pretty well in the economy, I think that the underlying balance sheet of the U.S. consumer is in big trouble.
Any time you see an increase in default rates before an increase in unemployment, that's a big problem. I mean, that shows you that the economy is sort of running out of gas, because it's been driven by all of this excess debt that we've been enjoying over the last almost decade now. So that's a concern for me and I've been working on it with my analysts and trying to figure out how to hedge that risk and those kinds of things.
What are you working on?
Buck: I'm concerned – I was going to say from a political angle, I'm concerned that this is the problem that the Trump team just doesn't see coming. And the moment – you know, you're already hearing stuff about look, the Clintons have been cast aside. That's been a very interesting storyline in recent weeks. It's finally safe to say Bill Clinton was a sexual assaulter, sexual harasser, if you're a Democrat. I mean, Republicans and people like me have been saying for a long time, the Clintons are no longer running the Democrat Party.
That is a big change and so it's going to become the Elizabeth Warren, Bernie Sanders Party, and Porter, to your point about the debt and some of the risks right now in the economy, I don't know if the Trump team realizes it, but if what you've been talking about, which is that the downturn comes, it doesn't matter what the reality is. About how long it's been building and everything else, it's going to be blamed on Trump and that is how the Sanders Party becomes – Sander's Democrat Party becomes ascendant again for the midterms. So if what you're saying is going to happen happens, it's going to be all blamed on Trump.
Porter: Yeah and if you were Sanders, this is exactly what you need to see. You need to see the 60% of America that hasn't done well in the last three or four decades. You know, the lower middle class and the underclass, you need to see them struggling to pay their credit cards, struggling to pay their auto loans, struggling to pay their student loans and you need to be able to promise them a debt jubilee, which is one of the likely outcomes that I see.
And that plays right into the next election in 2020. I wanted to ask you about – because I really don't know much about politics. I was surprised to see the former head of the Democratic Party, and I'm going to mess her name up and it's not intentional. "Brazile"? Is that how you pronounce her name?
Buck: Donna Brazile, yeah, Donna Brazile.
Porter: Donna Brazile. Like I said, I really don't know anything about her, so I was going to butcher her name. She wrote a book that shed more light on what I think everyone already knew, which was that the nomination had been rigged for Hillary. There had already been allegations of this and things that had come out about how Hillary was shown the debate questions in advance and things like this. But what I couldn't understand and maybe you can explain it to me was I thought that Donna Brazile was the woman who orchestrated all that.
So I'm confused. How do you write a tell-all book that says that you're a complete scumbag and a liar, but somehow come out smelling like a rose? How does that work?
Buck: Because the first person with the mea culpa usually gets a pass. And also, Brazile and other people who were part of the Clinton apparatus want to be a part of the next power apparatus in the Democratic Party. What I think you saw there, Porter, with that book, and it was a bombshell for a couple of days there. people had known for a while that this was a concern or that this was going on, right, that super delegates – I mean, there's a whole roadmap that you can make of how the election was rigged for Hillary over Bernie.
But it's not the Clintons' party anymore. What you've seen happen is a realignment with the Democrat Party. They don't know who the candidate is, but the apparatus, the high-level political operatives, the money guys that the people that are all going to be around the next candidate, they're saying we're done with the Clintons. We're moving onto the next thing and Brazile was a big – was essentially symbolizing that or was the first one into the breach.
Porter: That makes sense that that book is kind of like the last chapter in the Clintons' whatever – 25-year-reign at the head of the Democratic Party. The deep state on that side of the aisle is not moving past them.
Buck: You are seeing – the short answer to your question, Porter, is there has been a realignment of the deep state within the Democrat Party and that's why you're seeing stuff come out about Clinton. By the way, with all the sexual harassment stuff as well, you have people now that are writing about how yeah, you know, Bill Clinton was credibly accused of rape, we probably shouldn't have victim-shamed. That's not because they become moral all of a sudden, it's because the Clintons are now expendable.
Porter: Well, let's talk about that. This politically correct world seems to be exploding in our faces. I don't know if we're going to get to it today in the mailbag or not, but there was a funny email that was written in about the removal of the statutes in Baltimore and I want to make sure that we distinguish between any kind of sexual assault, any kind. And the kind of political speech and rhetoric that you and I find laughable and sometimes offensive. But the latest one I heard about was the Al Franken picture and I don't know if you have any of the details on this.
But Country Club Guy, would you fill us in?
Male: I was just checking the drudge report before we got down here and apparently, Al Franken's in some hot water. There's a picture – I guess he was overseas with the troops and a journalist was dressed up in fatigues asleep and he had someone take a picture –
Porter: A woman.
Male: A woman. I'm sorry, woman journalist. So she was dead asleep and he was reaching over and put his hands on what her breasts were, because I guess she was wearing one of the flak jackets and smiling and taking a picture.
Porter: So he was – was he touching her, though, or was he miming touching her?
Male: The angles – can't tell.
Porter: What I want to know here, Buck, is do we live in a world where a faux assault that's done in humor and in jest is the same thing as an actual assault?
Buck: Yeah, I mean, I would just put out there that there's another component of this. There's another allegation that he forced himself on her essentially to stick his tongue down her throat when she was awake. Yeah, yeah, yeah, so it's not just the grabbing of the chest with the flak vest. Look, if she was wearing a flak vest – look, I don't know. I mean, some flak vests are soft. Some of them actually have plates in it. But sticking the tongue down the throat is just sexual assault and -
Porter: Where's the judgement of all these people? Like what is going on?
Buck: When you know the full context, because I talked about this today on the outnumbered couch over at Fox News. This is one of our topics where I was the sole male and there were a bunch of wonderful ladies who were weighing in on the subject around me, but the context is that Franken kept trying to write a comedy sketch where he would make out with her. And she was like – I forget, some kind of a model and she was, at the time, very much on the cover of magazines and such.
And she's like we, I'm not – this is a USO tour for the troops I'm on, I'm not making out with you, this isn't SNL. And then he kind of went for it anyway and she pushed him away. So there's that and there's also the groping. So, you know, Franken was a jerk and was going after women without their consent and he's been very vocal about how the republicans need to have a reckoning with all the sexual harassment going on; Donald Trump, everything else.
I should note, though, guys, right as we came on the air as well, the latest sexual harassment accusation or sexual assault accusation, pardon me, and we should use those terms separately, because they mean separate things. The latest sexual assault allegation is against Sylvester Stallone. That's up on Drudge, Sly Stallone, I know. 16-year-old fan claims that – this is in the Daily Mail, that Sylvester Stallone and I think his bodyguard threatened her if she did not perform sex acts on both of them. That's what it says on the Daily Mail.
Porter: Oh boy.
Buck: Yeah, another one. Look, the dam has broken here. People are coming out and, by the way, the stories about Weinstein and Louis CK – Porter, look, you know, I'm not a priest. But, like, some of this stuff, I've never heard of before. I'm just going to be honest with you. I'm like this is weird.
Porter: I've been thinking the same thing.
Buck: This is really weird.
Porter: I mean, it's like huh, I've never even thought about doing any of that stuff.
Buck: Yeah, there's multiple instances of these guys engaged in what I think you'd have to call, you know, with a plan to now you've got CK and also Harvey Weinstein. I think you could call it exhibitionist, horticultural, auto-erotica.
Porter: I don't even really want to discuss it, Buck. I just got to tell you that the stuff that annoys me has nothing to do with any of those things. The stuff that annoys me, I was at an industry conference last week in Nicaragua down at Rancho Santana, which is a beautiful place. Highly recommended if you're looking for a real luxury vacation, this place is the nicest hotel I've ever been to. But we were talking about our publishing companies.
We have a bunch of people now at Stansberry Research. We have close to 180 employees, most of them in the Baltimore offices. Another publisher, not me, was saying that he was having a hard time with some of his female executives, because the kind of complaints that are categorizing as sexual harassment had been expanded. So, for example, there were female employees who were complaining that it was sexual harassment to work with another woman who was pregnant and they said was dressing inappropriately.
So it was women complaining about women, not complaining about men. And they were taking action or threatening to take action under laws that were setup to protect people from sexual harassment. Another example, again, not at Stansberry Research, at another publishing company. Publisher was talking about how a female executive had complained and threatened action under sexual harassment laws and lawyers, because she had been asked out on dates.
Not that she was being assaulted, not that she was being blackmailed, not that she was being forced or touched inappropriately. That she was complaining about what's the word – a workplace that's – hostile workplace, because people kept asking her on dates. Not the same person repeatedly, right. Not someone stalking her, just yeah, "I've been asked out on dates three times at work and that's a hostile work environment." Sounds like a very friendly work environment to me.
I'm also – I'm overwhelming frustrated particularly with folks in the millennial generation that they seem so eager to be offended.
Buck: Did you see the article, Porter, on self-cyberbullying? This just came out this week. There was an epidemic of people, millennials, to your point about this, who are creating fake harassment online meaning that they create a sock puppet account that they control on Facebook, on Twitter, wherever, Instagram, and they harass themselves and say terrible things, so that they can go then tell adults and other people oh my gosh, look what's happening to me. And they want this sympathy for self-cyberbullying. This is an epidemic.
Porter: Yes, well the same thing happened at the Air Force Academy in their prep school. Remember the Air Force general who gave that wonderful speech about how if you're a racist get out, there's no room for you here? That speech was triggered by the N-word being graffitied somewhere in the school. I forget the details. Well, it turns out it was the black student who complained about the graffiti who had done it.
Buck: That's not uncommon, by the way. That's actually a commonplace occurrence for alleged hate crimes to turn out, especially on campuses or institutions, to be hoaxes. And here's the part that a lot of people forget. Even when it is a hoax, they will defend the individual who engaged in the hoax after all the workshops, but also they call it raising awareness. So even a fake incidence of a hate crime is a good thing, because it gets us talking about hate crimes. I'm not making this stuff up, this is how it goes.
Porter: So anyways, here's why I come down to all this, Buck, and we can move onto something that has some usefulness or utility -
Buck: Can we talk Venezuela or Zimbabwe, by the way?
Porter: …to anyone, but so how can you say that I'm 100% in favor of taking the most aggressive actions that are possible as a society and certainly, this is how we run things personally and in my company. You know, we don't tolerate any kind of sexual harassment and we don't tolerate any kind of sexual assault, get out of here. I mean, I know the men who work in this company and if there was a woman in this company ho was being harassed or assaulted, you'd see a whole bunch of guys getting mean, and it wouldn't be pretty.
I mean, you know, we're proud men and we admire and respect the women that we work with. I don't know that it's ever – I can't imagine it would ever be any different. At the same time, I have the greatest respect for free speech. And I think that tolerance is the cornerstone of a cohesive society. By the way, this is probably a radical view. I don't really care about the N-word, because the N-word has never hurt anybody. What hurts people are people who assault one another. What hurts people is a lack of respect for civil discourse and civil society.
The language may lead to a problem, but the language itself is just a word and it's only people overreacting to language that gives it any kind of real importance or meaning and I'm sure that's a very unlikely minority view, but that's the way I've always felt about it. I really do worry about conflating any kind of issue about free speech with any kind of issue about assault. Those are two widely different categories. But listen, let's just put -
Buck: Can I ask you about Tesla real quick, before we get to the guest? Because I know there was something big you wanted to talk about with regard to Tesla this week.
Porter: Tesla is now losing a billion dollars a quarter. It's never made a profit and it has $8 or $10 billion in debt. I don't have any idea why investors think it's worth more money than Ford or GM. And it's – I could talk about it constantly, you know, continually. It's just completely insane and I think it's the poster child along with the price of a lot of these cryptocurrencies of the excesses that are in our financial markets, because of what's happened in the credit markets.
And by the way, you know, it's all coming unraveled. You mentioned Venezuela, they're in default, they're the first big sovereign default. And certainly won't be the last. There's a lot of things that are in our financial markets that don't make any sense. Tesla is one of them. You know, Buck, we have a world-class global economist, Grant Williams, for the interview this week. He can actually talk more about Venezuela and Tesla than I can. He's been following these stories for as long as I have. He's the real expert, so why don't we bring Grant on now and we'll get to the rest of the show in a minute.
Buck: Grant Williams is co-founder of Real Vision Group and has more than 30 years of experience in finance during which time he held senior positions at investment banks in London, Tokyo, New York, Sydney, and Singapore. Grant is also the publisher of Things That Make You Go Hmmm, a newsletter combining history and humor, along with keen financial insights to help investors make sense of a misunderstood and ever-changing financial landscape.
Williams is also the co-founder of Real Vision TV, the world's only video on-demand channel for finance and has been described by some as the "Netflix for Finance Geeks." Real Vision's content features exclusive interviews and presentations from the world's best hedge fund managers, independent analysis, geopolitical strategists, and economists. Guests have included Jim Grant, Kyle Bass, Mark Cuban, and Jim Rogers. Grant Williams is a frequent speaker at investment conferences across the globe and recently gave a captivating presentation to over 700 Stansberry readers at the Stansberry conference in Las Vegas titled "A World of Pure Imagination."
Porter sat down with Grant earlier today and this is what they had to say.
Porter: Grant, thank you so much for being on the podcast with us. I have followed your work for, I don't know, at least a decade, and the thing that strikes me about what you do as compared to pretty much any other writer about finance or any other economist, whether they work for a bank or whether they work for a publishing group, is no one comes close to making their presentations as entertaining as you do.
Nos, listen, it's not – I'm not trying to tell you that you're a standup comedian or anything like that. Your work is dense and rich with facts and insights, but your presentation quality is just stunning. Our audience, by far, voted you the highest-rated speaker; 700 people agreed with me. So this isn't just a matter of taste. What is it in your background, in your education, or in your history of working in investment banking? How did you get to be such a fantastic speaker?
Grant: That's extremely kind, Porter. I appreciate it. Thanks for having me on. I'm sure I've been told many times in my career that as a trader or a finance journalist, I make a great standup comedian, so maybe I just [inaudible] a few people's advice. I think there's too many – finance is a pretty dry subject, let's face it.
So to me, it was always a case of if you can make it a little bit more engaging, a little bit more entertaining, you've got a better chance of holding the audience and actually trying to take them on a journey with you instead of just presenting them with a whole bunch of facts and figures and trying to let them sift through them and pick out what they think is important.
I think if you can weave a story or narrative through a set of figures, then, as is aid, you've got a better chance of taking people with you and look, I mean, right now it's a pretty depressing subject. So it pays to try and liven it up a little bit any way you can, whether that's through humor or whether it's through a bit of music or something, just to try and bring it to life was all I've really ever tried to do.
Porter: Right now, I would say the dominant themes of your presentations and also, by the way, sort of the dominant themes that I see in finance is this – you called it a "world of pure imagination." I've called it the "Escher Economy," where it's just hard to know where the circle starts and stops because the money gets printed and the system gets warped and the warp becomes the system again. And I just wondered, off the top of your heard, have you seen anymore fantastic illustrations of this? I have a couple ideas in mind I want to ask you about.
In your world of pure imagination or in my Escher Economy, are there any more of these little stories that just seem absolutely too strange to be true, but are?
Grant: I think what really astounds me and the whole idea of the presentation we're talking about this world of pure imagination was just to try and take a step back. We live this every day, we've kind of grown up with this strange world being created around us. Sometimes when you do that - I hate to use that boiling frog analogy, but it's so apt in this particular case.
When it's happening gradually around you, it's very easy to just become immune to the whole thing. So the point of this presentation was to step back and say you know what, just take a look at this in isolation. Forget the fact how we got here, step back and look at these charts, look at a chart of the S&P 500, which shows that we're so far beyond what were previously acknowledged as massive bubbles.
Take a look at negative interest, the whole idea of negative interest rates in isolation, not as part of the construct. But think about that as a concept. Look at the fact that European junk bonds are yielding less than U.S. Treasurys. You know, each of these standalone pieces of the puzzle is extraordinary and at any point in the last 5000 years of interest rate history, they would have all made you sit there and go well, that can't be right. But because they've all kind of gradually happened in this post-crisis, quantitative easing-fueled economy, people have kind of come to accept them.
The fact that the money printing is continuing and the fact that no major accidents have happened since 2009 – we've had a couple wobbles. But each time, they were dealt with my more of the same – more of the medicine. The fact that nothing bad seemingly has happened has just made people think maybe it doesn't matter. The point of my presentation is just to say it does matter. It may not have mattered, but these things have a habit of not mattering to anybody until they matter to everybody. And when they do matter to everybody and people kind of see this world for what it is, they're forced to take that step back.
I think they're going to suddenly think how the hell did we get here and have to do something about it. And doing something about it I think might be pretty ugly for markets.
Porter: Yeah and, you know, Grant, I agree with you about all of these things, which is, of course, why we invited you on the podcast. So I'm not trying to make an argument with you, more of a rhetorical argument that you and I are both going to agree on. When you say that nothing bad has happened yet, I think it really just sort of depends on what lens you're taking when you look at it. Because if I – you know, if I told you five years ago that Netflix was going to spend $8 billion dollars in one year on content and will have not made a profit in the last five years, you'd think how does that get financed?
Or if you knew, again, five years ago, that Tesla would have a larger market capitalization than GM or Ford would have billion-dollar-a-quarter losses and would already owe bondholders something close to $10 billion, you'd wonder how the hell did that get financed? If you – I'm sure you do. If you know that AT&T is looking to raise additional bonds that will carry its total debt load to $250 billion, which is more than the sovereign Republic of Ireland, you'd think how the hell does that get financed? So I think if you look just below the surface of stock prices, you see a whole ton of financings that don't make any sense.
Like in the United States. College students now owe $1.5 trillion, more than a trillion dollars in credit-card debt and, of course, you know, even more than I do about how the corporate bond market globally has been massively inflated. So like you just said, we're going to wake up in a couple of days or couple of weeks or couple of months and go how the hell did we get here? How can you tell that story to the average person or to the average policy maker who genuinely doesn't even understand what real interest rates are?
Grant: It's a great question and I was thinking you hit the nail on the head. When I say nothing bad has happened, what I'm talking about is what people look as their benchmark for something bad happening, which tends to be the stock market falling or there being some kind of round in the bond market. You know, those things haven't happened, but everything you've just talked about is something bad that has happened. It just hasn't added up to something quantifiable. You're absolutely right about Netflix.
You're absolutely right about Tesla, and I talked about that in my presentation. It's ludicrous. You know, all this stuff is ludicrous in isolation and it should add up to major problems in markets. But because it hasn't, because that manifestation in a way that people can understand hasn't happened, people have become conditioned to the idea that it doesn't matter. And that's the worrying thing.
You know, we had this moment in time a couple years ago when 23% of the world's GDP was being produced by countries that had negative interest rates. That was a moment in time when you kind of thought well, how can this happen? Within a couple of years, the idea of negative interest rates isn't so shocking to people anymore, because they've seen them. They assume the wheels would fall off, but they didn't, so they go oh, okay, obviously that doesn't matter.
We're about to enter into or we've already entered into a period of rising interest rates. Now, I think that will get squashed fairly soon when it does some damage, because it will do damage, it always does damage. One of the slides of my presentation showed that since World War II, by far the biggest cause of recessions have been monetary policy mistakes, by far. So the Fed will hike one time too many in this – maybe it's the hike in December. Maybe it's a hike next year, we don't know.
But this idea of a rising interest rate environment, if you were to have managed money the last time we had a secular trending interest rate rise environment, you're now in your 60s. So there aren't many people around managing money today who have experienced a rising interest rate environment. And that's what we're in right now. Things have changed. They may not manifest it themselves, but the environment has changed and so the fact that people haven't adjusted to that yet is really not the important thing to focus on.
It's really trying to work out when is all this going to matter? What's going to be the trigger and when it does matter, what's going to be the reaction? And the reaction to evaluations like these in equity markets, if you suddenly believe that interest rates are going higher is the markets move lower. If you think interest rates are going higher, the bond market moves lower. We are going to see these things unfold, as it plays out. The world we've created around ourselves is simply I'm not going to worry about anything until it happens, because I don't have to. Central banks have my back, the markets go up every day, and I will always be able to get out, if things change. I think all of those are going to be proven to be fallacies.
Porter: I'd like for you to speculate for just a minute. You and I both agree on the underlying cause of this world of pure imagination, this Escher Economy. And you and I both have a matching intuition that things that can't go on forever won't. But how they will break apart is totally unknown and like Yogi Berra said, you know, predicting the future is hard about – especially about things that haven't happened yet. So I've got an interesting factoid here.
Recently, the Bank of Japan did a stress analysis on what a 100-basis point rise in interest rates would do to the banking system. Now, for those of you who aren't traders or finance folks, 100 basis points is 1%. If the funding costs of Japanese banks went from where it is now at less than 1% to say 1.5%, so a 1% increase or 100 basis points, as the traders call it, what would happen?
The Bank of Japan estimates that that kind of move, which is a very, very minor move in interest rates, would lead to a $20 billion loss for Japan's mega banks, which they could probably absorb, a loss of $25 billion for its regional banks, which they probably couldn't absorb, and a lot of $20 billion for its credit unions, which they definitely couldn't absorb. So to make the point that you were just making, as interest rates rise, there are new stresses on financial institutions, especially anybody who's borrowed short to lend long. And the losses can be just as spectacular as the gains have been on the way up.
So my question for you, Grant, is what breaks first? Is it Japanese banks? Is it European banks? Is it the American consumer? Is it global manufacturing? Where do all of these mal investments and all of this misallocation of capital, where does it finally spin apart?
Grant: It's a great question. I think that's the $64,000 question, because for the first time I can remember, there are potential stumbling blocks everywhere. You look at the bond market, look at the equity market, look at the real estate market, look at japan, look at Europe, look at the U.S. Everywhere you can find something that could be the trigger. I think the U.S. consumer is broken already, but again, it hasn't mattered, because they can still – they still have access to cheap debt, which is keeping them afloat. And they are financing.
You can see in the data they're financing their everyday absolutely must have purchases on their credit cards. They just clear, but because they can afford to do that still, just, even when you look at the server details, it's like one in 10 people doesn't have $5000 in the bank to cope with an emergency. These things are all predicated. This whole system now is predicated on keeping rates at a level, which we've only once reached this level in 5000 years.
If you've been short, the environment we're in now, you would have been wrong precisely once in the last 5000 years. And that's pretty good risk/reward profile. So for me, this is all about the fact that the difference between going from 6% to 7% is completely different. So the difference between going from 1% to 2% in terms of the cost of your financing. That's where we're at. The quantum of a 1% move higher down here is massive.
So I suspect it's going to be rates to break this thing. It's going to be – as I said, the Fed hiking one time too many, because they feel they can just squeeze another 25 basis point or quarter of a percent rise out of things. And at that point, if they do break things and they have to come back in and cut rates immediately, then I think this narrative about the economy being strong, the economy recovering is suddenly blown out of the water.
And if you believe the economies blown out of the water and the economy is perhaps heading for recession, as I said earlier, fed hikes already lead to recession at some point, then the markets are overvalued. It's simple. They are not valued correctly for an economy that's about to go into recession. We are in the third longest expansion of all time in the U.S. It's by far the weakest recovery and that's a very bad combination.
As long as rates stay where they are, it's kind of financeable. But it doesn't take an awful lot for those stresses, as you point out, to start mounting very, very quickly. And this point in the cycle, if the only solution we have is more debt to keep this thing going, at some point, people are going to look at the total debt load and say I'm not prepared to lend to these companies at 2%. I'm going to want 4% as a risk reward for my money.
So to me, it's going to be one hike too many and it's going to be an interest rate problem that tips somewhere – whether it's in Southeast Asia, the student loan problem, whether it is car loans, I don't know, but delinquencies are inching up. They're still not at the kind of levels we saw that led to the great recession of 2008. Again, we were coming from a sort of 5% yield on the two-year treasury at that point.
So to me, that's what's going to tip it and I think people should be paying very close attention to that, because we're on a real knife edge.
Porter: Let me ask you a broader question about the financial system as a whole. As an American publisher, I'm really dealing mostly with questions about American finance and the American financial system, but the American financial system has been copied all over the world, in terms of essential bank and paper money and the way that central banks are managing economies all over the G20.
So you have more of a global view, and I'm sure you can apply these concepts into the other economies just like I'm applying them in America. There's a couple of things that seem very clear to me and the general hypothesis is something about the way we've organized the financial system isn't working at all. And just a couple of things that I'll point out to you here, little factoids.
In America, currently, the top tenth of 1% of the population now owns assets equal to the bottom 90%. So when people talk about the 1%, what they really should be talking about the tenth of the 1%. That's the largest skew since the great depression. And it's not all – the problem isn't only the wealth gap, as it's called. If you look at how much money and credit has been created since 2008, you'll find that sovereign debt in America has more than doubled.
You'll find that consumer debt is already back at new all-time highs, but despite this, despite how much consumption has been pulled forward through the issuance of this debt, Obama was the first president in American history that never saw annual GDP growth during his presidency of more than 2%. So it never reached 3% in any year for any part of his presidency. That's a first, so Grant, think about that for a second.
We had an eight-year period where we have added more debt than ever before, but even all that additional consumption, all of that additional consumption didn't lead to sustained GDP growth. And then you've got some other interesting economic problems. How do you explain the continuing decline in the velocity of money despite all of this inflationary pressure? And how do you explain the rise of all of these very unusual phenomena, like the cryptocurrency bubble that we're seeing? And you and I have already talked about the huge bubble in entertainment and media assets.
So you put all these things together and the coup de grâce for me is that in America, the link between productivity gains and wages has been broken for 40 years. That is enormous macroeconomic concept. That was the tightest-linked correlation in all of economics and it's completely broken under this current financial system.
So the question I have for you is one, do you agree with me that there is something fundamentally wrong with the way the central banks have organized our economies and something fundamentally wrong with the way paper currency is working by not transmitting gains and productivity to wages and allowing massive accumulations of wealth through paper credit?
And two, if you do agree with that, will the coming correction, bear market, whatever you see – however you want to describe it, will the coming correction be the one that leads to an entire financial reordering?
Grant: Well, this concept of a financial reordering of a re-imagination of the financial system is such a hard thing for people to understand, but it's happened periodically throughout history. This is not an outlier. And so again, to my point about these things being built around us, that's what's happened to us. So it's unimaginable to most people for there to be major change. But history is repeat with examples of that.
You touched on two things. First of all, the links in wages and productivity, which I think is absolutely the most important thing. This idea that real wages haven't gone anywhere in 40 years is a really difficult thing for people to understand, particularly when they look at how the cost of their food shopping each week and their rent accommodation and house prices. You know, all the things, health care. I mean, these things have gone up. The world is becoming more and more unaffordable. When you throw in the other set about M2 and this crushing of the velocity of money, the answer is hiding in there.
What's happened in this age of concert of easing. This massive printing of $12 trillion globally of quantitative easing, that money has gone to that 0.1% that you spoke about. Asset prices have inflated and it is the 0.1% who own the assets. So if you inflate the value of the assets owned by the 0.1% who have a very low propensity to spend, that money doesn't go into the real economy. They don't need to realize the gains and spend them in the real economy.
They just sit getting richer and their land valuations and their art. You know, we had a Leonardo da Vinci painting sell this week for $450 million. It's half a billion dollars for a painting. When people talk about there hasn't been any inflation, they're looking in the wrong place. The CPI hasn't moved and the central banks are desperately trying to get the CPI to move. But if you look at seven, eight years ago, if I told you you'd be earning $100 million and you couldn't afford to buy the most expensive apartment in New York City, you'd think I was crazy, but that's the truth of it. There's a $200 million duplex going up for sale in the new Nordstrom Tower.
It's extraordinary, so all this asset price inflation has made that 0.1% richer and again, I'm a great student of history, I love reading history. This has happened so many times before and it always leads to societal instability, which is what we're seeing. It generally ends very badly for that 0.1%. I think judging by a lot of articles I've read and people I've spoken to, they are starting to sense that there is a major imbalance here. That could explain the rise of something like bit coin where you have the 0.1% in China. The gap is bigger than it is in the U.S. The 0.1% in Saudi Arabia, same thing.
So I think the people that have assets, have money, are looking for ways to get that money offshore – get it somewhere "safe". And until we get a change in the way that this system is managed, these imbalances aren't going to be corrected and that's where this idea of a re-imagination of the financial system comes in. You've got people suggesting that communism may be the answer, because of this inequality.
Again, history will tell you communism is never the answer, but that doesn't mean people won't think it's worth another try. To think that the society we live in and the freedoms we manage to engineer for ourselves over the last 50, 60, 70 years in terms of technological improvements, to think that that society would have as many people as it does in it thinking, you know what, maybe communism is the answer, because capitalism doesn't work.
And I put it to you that capitalism does work, but what we have now is not capitalism. It's certainly not free-market capitalism. It's state-sponsored capitalism where, as I said, the 0.1% get richer and the 99.9% don't. That not only has to change, but it will change somehow. If it's not changed through design, it will be changed through circumstance and that circumstantial change is always the kind of change that societies really don't want to go through, because they're very volatile changes full of the kind of upheavals that we haven't seen, again, for the last 40, 50 years. So we assumed they were gone for good. I just don't think they are.
Porter: Grant, you've been very kind to spend so much time with us this evening. I know it's very late in Singapore and I really just have one more question for you and it's not a hard question. It's a finance question. You have lived in virtually all of the great cities; London, Tokyo, New York, Sydney, Singapore, and probably a couple others I'm not mentioning.
Having traveled so widely and spent so much time in so many places, if you had all the money in the world and all the time in the world, but you could only pick one city to live in the rest of your days or maybe even not a city, maybe someplace else. Where would it be? Where is it in the world that you've been that you think is a really fine place to spend time?
Grant: That's the hardest question of all. You know, to me, my favorite city in the world is New York. There's something about New York that just feels like I'm home. But if you put me down somewhere and I wasn't allowed to move, it would be Charleston, South Carolina, which may come out of the blue for a lot of people, but I think anyone that's been there will just be nodding their heads quietly and going yep. And anyone that hasn't should go and take a look at it, because it's just a spectacular part of the world.
Porter: Very good. Not many people can give a succinct answer to a question like that, so I appreciate the fine thinking that went into it and, of course, I have spent a lot of time in Charleston and it is a great city. It's a city that's about people and not about money or about commerce or any of those other things. That's one of the things that makes it great. So listen, Grant, thank you so much for your time today. I hope that we'll see each other soon and do a lot more business in the days to come.
Grant: I look forward to it, Porter. Thanks so much for having me, I really appreciate it.
Buck: All right, first up in the mailbag, this is from Matt. "Porter, I appreciate you raising the specter of a Debt Jubilee. My family has zero consumer debt, due to a combination of my hard work and our delaying gratification and limiting consumption as a family. I set aside a ton for retirement and due to having set aside enough in a 529 to pay for my kid's college 15 years in advance, I can even take steps like pulling back on college funding in anticipation of 'free college lunacy.'
More generally, it seems like the prudent will be forced to pay for the stupid, lazy, and short-sighted in a Debt Jubilee." Wow, this is like what we talked about at the beginning of the show, Porter, with the rise of Sandersism. "How does the prudent benefit from or at least mitigate the effects of a Debt Jubilee? From, Matt."
Porter: Matt, that's a great question and it's one of the subjects that my research group and I work hard on all the time. I think the – there's a couple of broad themes that I would say. That is one, you've got to look at corporations that really have existed or have succeeded, because of the unlimited access to credit that American consumers and our government have had for the most of the last 40 years. So unfortunately, you target those companies by selling short their stock or perhaps buying an option that would benefit if their stock price collapses.
To do that successfully, you really have to wait until you see some signs that default rates are rising in that space and prices are falling – and I'll give you a great example. We watched the subprime lending in the auto space get out of control in 2014 and 2015. And we knew the result would be soaring default rates, which happened in 2016. And the number one thing that happens when you have a soaring default rate in the auto lending business is people have to dump cars at auctions every month.
So you wait for the numbers of used car auctions to spike and, of course, as a result, used car prices decline. There's a fantastic security to trade that, which is the car-rental companies. So the car-rental companies, if you read my report on it, you'll see there are huge leveraged bets on used car prices. And when used car prices decline, impact on these stocks, because they're highly leveraged is dramatic. So you try to figure out things like that. With the rising credit card default rates, there's much wider range of companies that may be affected. We'll be targeting those in the coming months in my newsletter.
Buck: All right, next up in the mailbag from John M., who writes, "Porter, I'm a long-armer who has been a reader and fan of yours for over 15 years. I continue to place a great deal of value on your thoughts and commentary. I have three points to make followed by a question. Number one, I loved your interview with Kevin O'Leary and I'm looking very seriously at the two ETFs that he has crafted. Number two, a potential jubilee scares the poop out of me. It also infuriates me. I am 59 years old and I'd like to think my wife and I live frugally and invested wisely over the last 30 years.
"As a result, we could finance our kids' college educations and each of them was able to graduate with no debt. I am rather proud of that. After acting responsibly, to have all student loans forgiven is a possibility I find appalling and then three, in your most recent podcast, you mentioned that if the jubilee and/or the debt crisis does occur like you and Jim Rogers mentioned, gold, gold stocks, and junior minors will take a hit. I've been taking a page from the Porter Stansberry playbook and buying physical gold and silver.
"I've also established an equity position in many producers and royalty companies such as Royal Gold, Franco-Nevada, and Kinross among others. I've been doing this primarily to protect against such an event as a jubilee. Are you saying that these guys, the miners, will get hit as well and that the price of physical metals will also go down? Thanks for all you do. From, John M."
Porter: So there's one question which I'll answer and I just wanted to make a comment back to John about the second point he made about the student debt. He says forgiving all the student loans would be appalling to him. And I agree completely, but I also – it doesn't matter. It doesn't matter how I feel about it or how you feel about it. There's $1.5 trillion in student debt outstanding and about 40% of that debt has never been serviced. Some of it because it's not due yet, but most of it, because the default rates where the students never pay a penny is over 10%. The deferment rates are very large and those deferments eventually end up in default. Trust me, they will.
If you've ever leant money to a 20-year-old, the idea that you're going to get it back is just delusional. So you got to get past the fact that you find it appalling. It's inevitable. The question is what does that mean for the economy, what does it mean for you and your family? That's – to your next point about gold and gold stocks. Look, gold and gold stocks are very different things and people tend to lump them together, which is a mistake. Gold stocks are securities and they have very different characteristics. So for me to say junior gold stocks are going to get hurt, if there's a jubilee, I think that's true, because junior gold stocks are heavily influenced by the cost of finance.
As interest rates go up, the amount of capital that will be available for junior mining is going to be reduced and therefore, the cost of capital is going to go way up for them. Far more so than any other companies, because they're so risky, but that is not the same thing as saying I expect the price of gold to go down. It's not the same as saying that I think a company like Franco-Nevada, which is the best of breed, is going to suffer. It is true that in the very short-term, gold and high-quality gold stocks can be sold off. We saw that in the fall of 2008.
When people are hit by margin calls, they have to sell everything. And stuff that's liquid enough like a gold ETF or a senior gold stock, that can get sold and that can get sold off. Looking past something like that, looking past a quarter or two of volatility, there's no question in my mind that sooner or later, the folks who are currently buying bit coin as a way to get out of the risk of holding U.S. dollars in an over-leveraged and highly indebted economy, sooner or later, those folks are going to realize you don't need electricity to exchange a gold coin.
So having more of that gold coin is probably going to be useful, too. In summary, I think that the senior gold companies will continue to do just fine and I think the price of bullion is going to do very well. Because the value of the dollar is going to get destroyed.
Buck: All right, one more from the mailbag. This is from Paul. "Dear Buck, first of all, I thoroughly enjoy the Investor Hour and consider my time well spent, as I listen to the ideas presented. Much of the time, I'm hearing ideas that are new to me and they open new frontiers of thought. However, in this most recent Investor Hour, I found that the privacy view advanced by your guest, Ken Cukier, does not fit within my experience. In particular, his view that outdated concepts of privacy are holding back the implementation of AI in the practice of medicine.
On the other hand, the assault on privacy is relentless and the consequences seem to be increasing. I disagree with Mr. Cukier to the extent that he seemed to be advocating for us to throw off the yoke of privacy for some theoretical social good. Maybe you can get Ariana to weigh in on socialism and privacy. Regards, Paul." A very thoughtful question. I'm not sure how to pull that off at the end there, though, so let me go into the privacy thing. Porter, I'm a big advocate for somebody who spends a lot of time talking about how I think technology isn't just changing the way that we do business, communicate. It changes behavior in profound ways.
Part of that – a lot of that is really good, but it is because of the massive intrusions into privacy and both the level of collection, as well as the retrievability of all this information. Meaning, you know, you're videotaped all the time, you're recorded all the time. People know where you are. People don't even know, Porter, that your cell phone is giving a constant read on you to the cell towers around you, which means that one of the easiest, oldest tricks in the book for law enforcement is to say where were you last week? It used to be well, I had some witnesses or whatever. They already know where you were last week. They just want to know if you're going to lie about it. They know if you lie, then they got to figure out what else is going on.
Porter: So as with a lot of issues, I find myself having a very bifurcated view. So you know the philosopher, Michelle _____? He came up with this very important observation of humanity that the way that armies align tents and things like this, they're all based on observation. The fact of the matter is most people will not behave if they're not being observed. My father taught me that character was doing the right thing even when no one was looking.
Most people didn't have a father as good as mine. Most people, when they know they're not going to be observed, will behave in truly abhorrent ways that are very bad for society. On the one hand, the rise of observation, the rise of lack of privacy I think has benefits for humanity and benefits for society, because people are way more likely to do the right thing, to do what they've said they will do and to observe civil behavior when they're being observed.
So in that regard, I think it's a good thing and I think you can draw those lines very simply. If you are in a public space, prepare to be observed. If you're walking down the street in Baltimore, it's a public space, then the city has the right to film you, has the right to monitor your behavior. That's the way I feel about it. I know a lot of libertarians would think that it's evil to say that. Just as importantly, the flip side of that is everyone should have the right to privacy on their private property in their home.
That's a foundation of our constitutional view of government. Your home is your castle, so any kind of monitoring device that would invade the privacy of your home, I think that's a whole different matter. So I think you have to sort of define your expectation and limits to privacy based on time and place. I think they're very, very different. The cellphone tacking thing is fascinating. I find that it's very helpful. My wife, for example, can follow me using an app called "Find a Friend" or something like that, so I can know where she is and she can know where I am, which is very helpful, because I don't have to call her sand say are you on your way home or whatever.
I can already verify that. Of course, for folks who aren't interested in the normal bounds of matrimony, that feature may be somewhat of a problem. But again, I think that in general, I think having people be more observed is better than having them not be so. That all goes to who's going to do the observing and do you trust them? The answer to that question is absolutely not. I don't trust the government at all.
Buck: As somebody who used to do a lot of observing, Porter, you don't want to trust the observer.
Porter: I know, so again, I think it's very hard to get your head around whether or not this is good or bad. But, you know, certainly at the end of the day, I think you and I would both probably agree that when you go out into public, you're waving your rights to substantial amounts of privacy. You're going to be observed in public. The police are allowed to tail you, they're allowed to follow you. When you're in your home, they need a warrant to violate your privacy.
And how that happens online and with your cell phone, those are all technological questions that we probably haven't even begun to work out yet. But in general, that's where I would draw the lines. When you're in your home, you have a near absolute right to privacy and when you're in public, you have a near absolute lack of privacy.
Buck: Yeah, I would agree. That's it for the mailbag for this week. Next week, we'll have James Damore, the ex-Google engineer that made headlines recently with his 10-page, 3,000-word memo titled "Google's Ideological Echo Chamber." We'll sit down with James and dig deeper into what led him to write the Google memo in the first place. That'll be fantastic. That'll -
Porter: That will be. That's the most brilliant thing I've read in many, many years.
Buck: All right, have a question for us? Write to [email protected] If we use your question on the show, we'll send some Stansberry Research swag. Love us or hate us, just don't ignore us. I was wondering if Porter was going to do – that was an alley-oop, but I just had to put it away myself. Remember, if you want to get access to transcripts from the show, all the show highlights, and receive the Stansberry Investor Hour weekly update each Thursday, just go to investorhour.com and enter your email. Mr. Stansberry, thank you so much, sir.
Porter: Buck, it's always a pleasure. We'll see everybody next week.
Buck: Fantastic, that's it for this week everybody, see you next time.
Male: Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your email. Have a question for Porter and Buck? Send them an email at [email protected] If we use your question on air, we'll send you one of our studio mugs. This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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