On this week's Stansberry Investor Hour, Dan and Corey are joined by renowned economist Jim Rickards. Jim details his illustrious career, the development of the BRICS (Brazil, Russia, India, China, and South Africa) currency, and its potential ramifications for the global monetary system.
Dan and Corey kick off the podcast by discussing store closures, Amazon's monopoly allegations, and commercial real estate's decline. Recently, major retailers like Target and CVS Health have announced they're shuttering more stores. While some of these closures are due to organized crime, most are because of the shift to online shopping. As Corey points out, "It's tough to be a brick-and-mortar retailer in today's environment." However, Dan notes the irony in this situation. Amazon, which is facing monopoly allegations, thrives in this competitive environment...
Here's Amazon being sued... for being a "monopoly" and doing all kinds of brutal stuff to keep its alleged monopoly in e-commerce... I was like, well, that's how you know what a fantastic business it is.
Next, Jim joins the conversation to share some of what he has learned during his storied career, specifically from being the general counsel on a hedge fund's $3.6 billion rescue deal. He also explains why he grew dissatisfied with risk management and how he became one of the first in finance to use "complexity theory." Though the idea is borrowed from physics, Jim has used it throughout his career to understand risk in the markets.
Dan then steers the conversation to the BRICS initiative – i.e., the five countries' goal to create an alternative currency that will challenge the dominance of the U.S. dollar. Jim explains the origins of BRICS, highlighting how they have created financial institutions similar to the World Bank and the International Monetary Fund. This, Jim points out, was a strategic move to gain greater control over their economic affairs...
They're recreating the Bretton Woods Institutions under their own control and in their own preferred format.
Jim stresses the significance of the BRICS currency, as it would facilitate trade among member nations without the need to rely on the U.S. dollar. By using a shared currency, countries within the agreement could conduct commerce among themselves more seamlessly...
Now you launch your BRICS currency... So now you can go shopping. You can go to Brazil and buy Embraer aircraft. You can go to China and buy semiconductors.
However, Jim emphasizes that a BRICS currency should not be interpreted as the end of the U.S. dollar's reign. Rather, it would be a formidable competitor in the global currency arena. As he stresses...
Currencies don't disappear overnight. Currencies don't dominate overnight. You can have more than one reserve currency, which we did then and do now. And so what I see is the BRICS currency will emerge, will start as a trade currency over time, [and will] become a reserve currency. It doesn't mean the end of the dollar.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan interviews market veteran Jim Rickards.
Dan Ferris: And today, Corey and I will talk about store closings and store closings and more store closings.
Corey McLaughlin: And remember, if you want to ask us a question or tell us what's on your mind, e-mail us at [email protected].
Dan Ferris: That and more right now on the Stansberry Investor Hour.
Store closings. Stores are closing.
Corey McLaughlin: For reasons you might not expect, right?
Dan Ferris: Exactly, yes. Now let's see, I'll start with CVS actually. They're closing, they expect to close approximately 300 stores a year for the next three years. So, maybe I don't know, it looks like about 8% or 9% of the current store count, something like that. So they say the company has been evaluating changes in population, consumer buying patterns, and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business. Do you buy this?
Corey McLaughlin: Lot of jargon there. Basically, it's, we can't make money, it seems like.
Dan Ferris: Yeah, we can't make money. And of course, maybe I'm just too susceptible to headline news, but I want to know how much is from the shrink. You know, how much is from theft and you know, organized gangs just storming the place. I mean, you know. They have drugs and valuable things in CVS. It's not all you know, luxury goods stores that are succumbing to this phenomenon.
Corey McLaughlin: Yes, this inventory shrink phenomenon which is, I've heard, you referred more and more about over the last month or so. At last, I have, in stores like Dick's Sporting Goods, big box stores. You know, Macy's, Kohl's. All of these places reporting more people just stealing stuff. And I've heard more smaller scale, not smaller scale.
But individual businesses too around here where I live, similar things. There was like a massive Oceans 11-style jewelry heist in the middle of the night one night, not far, on the outskirts of Baltimore. So yeah, this is picking up. But sorry, go ahead about the stores, CVS in particular.
Dan Ferris: Yeah, the Oceans 11 guys were so darn charming, though, and fun.
Corey McLaughlin: Yeah, and there's nice music at the end.
Dan Ferris: It's a little different. Yeah. So, let's see, I've got another headline for you. Target says it will close nine stores, these are obviously much bigger stores, in major cities, citing violence and theft. They're just admitting it. Target is closing locations in New York City, Seattle, San Francisco, and Portland. The usual suspects when it comes to this theft issue. Target, which has nearly 2,000 stores, CNBC says, has been outspoken about organized retail crime in its stores and says theft has driven higher levels of shrink.
Corey McLaughlin: Shrinkage. Inventory shrinkage. Yes. It's wild.
Dan Ferris: Look, we all know that executives make excuses on conference calls, right? We all know that. Oh, it's inflation. It's this, it's that, it's whatever. Meanwhile, it's like, they screwed up, right? But I have to wonder. I mean, is theft an excuse? I mean, I don't know. Look, like I saw another headline that was on Business Insider. It says nearly 3,200 stores are closing across the U.S. in 2023.
Here's the full list. And it's just like, 20 major retailers combined total of 3193 locations. Rite Aid. And Amazon, you know. Some of those Amazon stores. And Walmart. Bed Bath & Beyond, of course, in bankruptcy. Almost 900 stores. So yeah. They're not all closing because of shrinking, but I think that's a major factor right now, in the bigger cities. Especially in those cities that we named.
Corey McLaughlin: Yeah, at the very least. I agree with you. You can never tell for sure if, unless you have kind of Joel Litman's tools that he was talking about last week on whether these guys are, and gals, CEOs, are telling the truth or not on earnings calls or not. But yeah, at the very least it tells you a trend of people on Main Street just feeling like the motivation to steal more. And put in the work to do it too.
We're not talking about, this isn't like petty theft we're talking about. We're talking about organized groups of people. I assume some of them are maybe working at the stores too. Or you know, I don't know, you know. And I'd be interested to hear what people are actually seeing in these stores. But it's definitely a trend of the higher costs of money, you know. Just in the economy in general, for people and businesses.
I don't think Target would be closing, it's just nine stores, right? It's not going to kill a company like Target. But they wouldn't be closing stores if this wasn't a significant issue for them. Or they were doing particularly well.
Dan Ferris: As much as I hate to succumb to narrative too, I mean, look at the cities. Portland, San Francisco, Seattle, you know. I believe it. I believe exactly what they're telling me. So there's other reasons why people are closing stores. Foot Locker is shuttering 545 stores across two brands by 2026 as part of a shift away from shopping malls, Business Insider says. So malls, I get that, right? Malls are just, they're just a tough, they're a tough row to hoe these days. That's all there is to it.
And to be fair, like Rite Aid, that's a bankruptcy thing. And Tuesday Morning, you ever heard of them? Retailer called Tuesday Morning? Shutting down all of its stores amid bankruptcy proceedings. You know, it's rough to be a brick-and-mortar retailer. And it's funny, because the other side of the coin shows you exactly like, here's Amazon being sued for I think the second time this year if I'm not mistaken, for being a quote-unquote monopoly and doing all kinds of brutal stuff to keep its alleged monopoly in e-commerce.
And as soon as I saw the Amazon suit I was like well, that's how you know what a fantastic business it is. Because what are the big ones that stand out in my mind. OK, tobacco companies in the '90s and Microsoft, right? And now Amazon. You know? So, these are businesses that at the time, they're just minting money. Their margins are thick as anything and the, you know, customers are practically, are truly addicted or you know, sort of addicted to the product. You can't live without it. And you know, it's a wonderful business.
So when I see this thing, I see this suit against Amazon, and I think maybe I should buy the stock. You know? Because the returns after the tobacco settlement were great, because nobody wanted to get into the tobacco business, so it gave them a huge competitive advantage. It just ramps up the competitive advantage when they sue them for these trade things, these monopoly allegations.
Corey McLaughlin: Yeah, the same people have been talking about Amazon as a monopoly for a decade. And I mean, it's hard to make the argument broadly speaking for Amazon just because they're in online retail. Like, there's plenty of opportunity around there. And now there's certain things they might be talking about with their ads and that sort of thing, which I can see an argument there.
But still, there's other options besides Amazon. Although the amount of Amazon boxes that show up to my house, you would think otherwise. But there are other places to go. But maybe increasingly less in-person brick-and-mortar retail, if we're to make anything of all these stores closing.
Dan Ferris: What do you still do brick and mortar? Like brick and mortar, regular basis, every week. I go to the liquor store.
Corey McLaughlin: Check.
Dan Ferris: But they will do, like Instacart will do liquor from wherever, Walmart or wherever. Around here that's just beer and wine, and then you have to go to the liquor store to get everything else. State liquor store. So yeah.
Corey McLaughlin: I mean, it's a good question.
Dan Ferris: Where else? It's hard to think of where else.
Corey McLaughlin: Local businesses for food and drink. And then there's recreation, right? So there's really...
Dan Ferris: How about a gym? Do you go to a gym? Do you have a gym membership?
Corey McLaughlin: I don't go to a gym. But I do exercise, just outside. Or inside if needed.
Dan Ferris: Yeah, me too. I have all the equipment I need right here.
Corey McLaughlin: Yeah, it's tough. And we could have a whole other conversation about commercial real estate. Yeah, it's tough, for sure.
Dan Ferris: That's an interesting conversation. Because commercial, in general, people talk about commercial. But the brutalized sector is office. And the, I feel like you know, work from home has been really, it's persistent. People really, really want it. And companies have trouble pushing back on that. And it's probably here to stay forever, in a big way.
So let's say we overbuilt, by that standard we've overbuilt the office without realizing it. But I think we overbuilt the hell out of malls, obviously. I think we overbuilt malls even without the Internet disintermediating that industry. But then you pile that on top of it and that's a problem. Do you enjoy going to the mall?
Corey McLaughlin: What mall? I haven't been to the mall in a long time, no.
Dan Ferris: You haven't? Yeah, haven't been to malls. So I've been to the mall at least once in the past I don't know, year or so. Several months. Once or twice. And I just didn't, it used to be a real outing. It used to be a fun outing. And now it's like, oh, do I really have to wander into this giant cavernous place that's going to take me 10 minutes to get where I'm, you know, it's like do I really want to do this?
It's just not the fun, wonderful outing that it used to be. And the only thing my wife is interested in, in the mall, she says oh, they have one of those escape rooms. That looks like fun. Can we do that? Otherwise, we have no use for it at all. So what do we do with all this office and mall space? What is going to become of it?
Corey McLaughlin: I'm with you. What I've seen in different areas is people trying to turn it into residential space, right? Like mixed-use apartments and some commercial space, which probably you know, will keep happening given the housing supply shortage in the country. But I don't know if that's enough for these businesses to exit gracefully.
Dan Ferris: No, it's not anything like graceful. In fact, it's prohibitively expensive in the majority of cases. Like, the way that things are built, offices are built like, it's nothing like residential apparently. So to redo it for residential it just requires so much work. It's mostly not worth doing. And you can imagine what that would look like in a mall. I mean, what does that look like?
Now, I have to say, it would be really cool. You could imagine this indoor community or whatever. It would be almost futuristic kind of cool. And in a cold place, it would make a lot of sense. They have that up north in the mining settlements. I think Fairmount was the one we flew over, up there like just over the border from Labrador. And it's this massive, massive building where everything's indoors. And it's thousands of people living there. It's kind of cool.
So I don't know. Just, I don't know what happens to all of this. I just think there has to be some other commercial use for it. But god only knows what that will be. It's a tough thing. There's going to be a lot more I think store closings and bankruptcies and all this. And I don't know where it ends or how it winds up. Or what's the silver lining to this dark clouds? I don't know.
Corey McLaughlin: I'm not sure either, now that I'm thinking more about it, as you're talking. It's I think not great for cities I would say, in general, right? In the near term. Kind of speaks to just I don't know, going back to this shrinkage, inventory shrinkage idea. It just, to me it just talks about the, kind of the culture that we're in right now. You know... that we see right now. And more of the cost of culture.
It may end up being a relatively small piece of the economic pie like we're saying with people stealing things from stores overall. But the fact that people are motivated more than ever to do it is not a great sign. And if we have something like a recession ahead, where times get even tougher, I mean. Just the environment here is not going to be great. You know, if you go into cities now, they still have not recovered from the pandemic. Not even close. I mean, some may be.
Dan Ferris: I see. So you're talking about the, the economic breakdown that makes people desperate, and then the I don't know, call it a moral breakdown that makes them say OK, I'm stealing. I'm going to get mine however I have to get it. And me and my friends are going to organize and overrun the whatever. Calvin Klein store or whatever.
Corey McLaughlin: Yeah, exactly. I don't think anybody wakes up as a kid or a young adult saying yeah, I want to go rob stores in 10 years. It's, because a lot of time people feel pressured to or that's what they're surrounded by, just examples of it. To me it goes back to the cost of money. And unfortunately, the system that we're in, the freewheeling fiat currency world where these things happen. It's inflation suddenly surprises people. Like, the Federal Reserve. Ooh, that was a while since I mentioned Federal Reserve. That's good. It took me a while to get there.
Dan Ferris: It did take you a long time.
Corey McLaughlin: Everything's linked, you know? Everything's linked, long story short.
Dan Ferris: Yeah, I've been thinking a lot more about the Fed, believe it or not. I act like I try not to, but I actually try to think about it a lot, because you know, the fastest tightening cycle in history begs for your attention. And you know, there's another way that that is a bad thing, which is that it's, it reduces the value of collateral. In the financial system, there's a lot of collateral... Treasurys, right?
So if you had a billion dollars' worth of Treasurys as collateral three years ago, maybe you have 700 million now or something. And it's, I don't know. Maybe they're even lending less per dollar of collateral now because rates are higher. So maybe your credit isn't as good. So it tightens things up in more ways than one.
It doesn't just make interest payments more expensive. It contracts the whole credit industry. So, it is, and you can see that in a lot of these store closings, those 3,200-odd store closings that I mentioned. And I went down the list a little bit with Rite Aid and Bed Bath and Beyond. They're bankruptcies, man. They just couldn't hack it.
Corey McLaughlin: A lot of bankruptcies. And if rates stay higher for longer, I'm talking multiple years and there aren't cuts as a lot of analysts, and whatnot are hoping for and expecting. There's going to be more bankruptcies, not less, ahead. You know, a lot of companies were able to refinance in 2020 and 2021. But say the inflation story sticks around higher as we're seeing now, and the rates stay what they are, companies are going to be, bad companies are going to be screwed. So I'll be watching for that. Unfortunately. Moving ahead.
Dan Ferris: I think we've really done our best. We put forth our best effort to really depress the heck out of everyone. So maybe we'll move on. I'm not sure that our guest today has an upbeat message. That's not to say he has an upbeat message. But he does have one worth listening to, as an insider and one of the most famous financial sort of calamities in history, and a lot more that we'll get to in the interview.
I don't even want to list it all. His name is Jim Rickards. You probably have heard of him. He's written several books. He's a pretty famous guy in the financial world. And we're really happy to have him on the show. So let's do it. Let's talk with Jim Rickards. Let's do it right now.
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Jim, welcome back to the show.
Jim Rickards: Great to be with you.
Dan Ferris: Yeah, thanks for being here. I can't remember, I think the last time you and I actually spoke, we were having dinner at a Stansberry editors conference. It was years ago. So it's been quite a while.
Jim Rickards: Yeah.
Dan Ferris: But one of the things I'm curious about that I hope you don't mind talking about this, is I have always thought that gosh, this guy negotiated, you worked for long-term capital and negotiated their $3.6 billion sort of rescue deal as general counsel, and I thought you know, you have to have come away from that with something you know, that you sort of learned about the world, that hmm, maybe I'll never do that again. Or I'll do it differently next time. Or something. Am I right? No?
Jim Rickards: Yes and no. Um, it starts with my role. I was the general counsel. I was the lawyer, and I had other responsibilities.. you know, external relations and compliance and all that stuff. But in this capacity, I was the chief lawyer. And you know, you never do anything alone. We had outside law firms. We actually had two outside law firms, because we had the management company, which you all worked for. And we charged feels and made money and all that.
Then we had the fund, which is where the money was that actually did the trading. And a lot of people don't understand this about hedge-fund structures or even for that matter, private equity fund structures. The management company and the fund are two different legal entities. And when I say fund, we had I think 14... 14 funds, we had what's called a master-feeder structure. You know, separate funds for Japan and so on and so forth.
Normally there's no conflict. You're trying to make as much money as possible. The investors want you to make as much money as possible, and everything's fine. But in a distress or meltdown situation, there can be conflicts. What's good for the partners may or may not be good for the investors. And so, I was in the middle no matter what. I was general counsel, the whole thing.
But what we did, I hired one major law firm to represent the management company, and one major law firm to represent the fund. And that way we were getting legal advice that was not conflicted. If you were working for the fund, you were just working for the fund. And that solved that problem. I was in the middle no matter what, so there was no way around that and everyone knew that.
So that was one thing we did to kind of address that conflict. But as a lawyer, I mean, this was 1998. I graduated from law school in 1977, so it's 21 years as a professional. I had worked for investment banks. I had worked for the biggest bank in the world at the time, which was Citibank. I had a lot of experience, I had traveled all over the world. So I was kind of you know, at that point, your you know, it's 47 or whatever, you're at the height of your career.
It doesn't mean your career is over. I've done a lot of things since. As a lawyer, it's kind of as good as it gets. You've got enough seasoning to know what you're doing and enough energy to do it. You know, going days without sleep which is what we did. So, and we came out of it without a scratch. So that sounds amazing. But in fact, there was no wrongdoing. And there never was.
But it was investigated. The CFTC, the SCC, state securities regulators, Cayman Islands security regulators, everyone looked into it. The Italian government was in an uproar, etc., because we were the biggest traders in Italian government funds. So they all came away saying OK, you guys lost a lot of money. It was a near-global earthquake, which it would have been if we had not been able to close the deal.
But nobody did anything wrong. It was just bad risk management. But that wasn't, the risk management was not my responsibility. My responsibility was the legal. We came through it fine. There were no unfortunate actions, no lawsuits. In fact, the principles went on to make fortunes. They were smart guys. One group just lifted up the entire back office, moved one town closer to New York from kind of Greenwich Connecticut to Harrison New York, if you know that part of Westchester, and started a GlobeOp, which became one of the largest fund administrators in the world. And they were later bought out by SS&C Technologies for I think a billion dollars or more.
So those guys, the former LTCM guys went out and made a billion dollars as hedge-fund administrators, which was a smart business model. So in different ways, Bob Merton is still a university professor at Harvard today. Marvin Shoals and Bob shared the Nobel Prize. You know, so everyone got back on their feet. Everyone did well. Everyone came out of it without a scratch.
So my view of what I did as a lawyer was that I did my job. I brought the thing, it was four engines on fire. We brought the thing in for a soft landing. We were hours away from shutting every securities market in the world. That didn't happen, because we got the deal done. It was not easy. I don't want to get into personal confidences, but you know. Some partners were like, where do I sign? And other partners were in tears. And other partners were, what's in it for me.
So I had at some point the personal link rather than the legal link became critical. I had to go one by one and sit down with them. And we got it done. So as a lawyer, yeah. It was kind of my, I don't know, a D-Day or whatever you want to call it. IT was very successful. We got the deal done, the world did not come to an end and everyone got back on their feet.
But, to your point. I came out of it very, very dissatisfied with the risk management. That wasn't my responsibility, but I said wait a second. We've got two Nobel prize winners. We've got a raft of Harvard, MIT, and Chicago PhDs in applied mathematics, economics, etc. A great staff. You didn't get hired at LTCM unless you know, 11 partners agreed that you were the best out there. So that's how you got in the door.
So, and I started hearing things, you know, talking, I stayed around for a year. My view was when you blow up the chemistry lab, you're supposed to clean it up before you go to your next class. So I stayed for a year, until August of '99. By that point it was clear it was in liquidation, everything was under control, and people could begin to move on, which I did. But during that year, it was the same partners, and mostly the same staff coming into the office every day.
And I started to hear things like, this is a 15-standard-deviation event. The odds of this happening are like one in three billion, or couldn't have happened since the beginning of the universe. I thought to myself well, must have been a really bad day for us if those were the odds. But I quickly realized that they were using a, what's called a normal distribution, also Gaussian distribution. Probably better known as the bell curve.
But that was their model of how risky events occurred. And three, four, five tie in standard deviations is a statistical metric, basically describing how far out the curve are you. You know, the curve comes down to the x-axis, which if you hit the x-axis there's a zero probability. But even 15 standard deviations is way out on the curve and practically never happens.
So I said to myself, well those models cannot be correct. That cannot be the way risk operates, because these things don't happen every three billion years, they happen every seven or eight years. The October 19th, 1987 stock market goes down 22% in one day. That would be the equivalent of what, a 6,000 point on the Dow, a 6,000 point drop on the Dow today. Not 600, 6,000 in one day. And I've been a magnet for trouble. I was around in 1970 for the Herstatt Bank crisis, the 1994 tequila crisis, the S&L crisis. We had the '87 stock market crash.
Dan Ferris: You've seen your share of this stuff.
Jim Rickards: Well, more than my share, harder to think of what I haven't –
Dan Ferris: You've seen my share and your share and everybody else's share.
Jim Rickards: Involved in one directly or indirectly because of my work. I worked at Citibank and I worked at investment banks and hedge funds so you're on the front row of all this stuff. Not to mention 2008 and more. So I'm like OK. I know they happen every seven or eight years. Look at the history books, look at the calendar, go back as far as you want. And these models say that it happens every one billion years, so obviously the models are wrong.
So that part of it was easy, but, relatively easy, but then I said OK, well if that doesn't work, if those models don't work or those models are not the weighted mattress, what does work? So I set out, I continued as a lawyer. It was not long after that 9/11 happened, and I was tapped by the CIA to help them with financial warfare. And I worked for the CIA for about 10 years doing that.
But you know, I could do other things as well, or they were complementary. But I began a systematic investigation, so I had to kind of dust off the math textbooks and delve into everything from behavioral psychology to complexity theory, which I was one of the, I didn't invent complexity theory. That was invented around 1960, but it's been around since the creation of the universe. That was a complex, dynamic system.
But it was in 1960 that a scientist named Edward Lorenz had been working on climatology by the way, noticed some things that led him to describe complexity theory very well. Complexity theory has been used in physics, biology, all kinds of dynamic systems. You know, rocket engines, turbulence, you name it. It was never applied to finance, and that was a field just waiting to happen. So I was one of the finders, not the only one, but one of the first to take this whole body of complexity theory over here, bring it over to capital markets and see if it worked.
And the answer is, it did work. In fact, in terms of predictive power, describing the operations system, understanding risk, it worked perfectly. And it was a short leap to say ell OK, the capital markets are a complex dynamic system. So complexity theory is going to help you. Not just help you, but it's the best way to model financial risk. And the predictive value is huge compared to all these other models that just don't work.
So, and I used that, at the CIA we used it to predict terrorist attacks. We had some success with that. We built a working prototype, a model that you know, that basically, an engine, analytical engine if you will. And it wasn't just complexity theory, it was Bayes' theorem. It was behavioral psychology, history. We were able to create a neural network using all those fields, combining them in our predictive analytic models that worked very well, and I continued to use them. I still do it today.
So as a lawyer, I felt that I couldn't have done any better. But as an analyst, I felt that a whole new field had opened up. And sure, I learned an enormous amount. Mostly self-taught. You had to teach yourself, because there was no one else teaching it. So yeah, you reach out to experts. But that was the big learning experience for me.
Dan Ferris: All right, well thank you for that. I really, it's a fascinating episode. We all learned a lot from it. And hearing from somebody on the inside is just really valuable. But let's talk about what you're doing now. So I've happened upon this presentation of yours, and it is dramatic. I mean, it's right at the top of the screen here. It says this is the raw uncensored reason we invaded Iraq.
And it's all about this new weapon of mass destruction, which apparently was Saddam Hussein's final wish maybe, to have this weapon created. And it's about to be deployed by Saudi Arabia. Now I know you want people to watch the presentation, so let's not give away the whole enchilada here. But I just have to tell you, reading the front page of this thing is a little bit scary, is all. Like, the weapon's not going to be deployed here in southern Oregon, is it? That's what I want to know first.
Jim Rickards: Yeah, Oregon's a pretty state, but they have enough problems with the governor, so I won't unleash any weapons on Oregon.
Dan Ferris: OK.
Jim Rickards: But yeah, look, I don't write the headlines. And I don't write the lead-ins and promos. But yeah, I do write the content, or being interviewed, so yeah. I'm totally responsible for that. This, it's a little big, but this could refer to a number of things. But I expect it refers to the effort of the BRICS to create an alternative to the U.S. dollar and promote it as first a trade currency and then a reserve currency.
And this very intriguing link to gold which is not very well understood. And actually mentioned by Sergey Lavrov, who's a total genius and most powerful and successful diplomat in the world. He's the foreign minister of Russia. So, he would know, and he doesn't speak loosely or lightly. If he says something you can expect it will be the case. So the problem, Dan, with this area. I can talk a lot about it, as much as you like. I can describe it in detail. I can tell you what's going to happen.
Unfortunately, a lot of analysts pick this up and run with it, and come up with all kinds of crazy talk that gets out there. The great reset, the end of the dollar, you know, etc., etc. None of which is true. I can tell you what is true, but I don't, just because I have spent a lot of time and I'm an expert on this BRICS currency development, which I am, it doesn't mean I'm not one of these people talking about the end of the dollar and all that.
So here's what's happening, and here's how it works, if, to kind of get to your point. So who are the BRICS? Well, they started out as BRIC. It was Brazil, Russia, India, China, with a small "s," so BRICs. Then after about four or five years, they invited South Africa to join. So then you got a capital S, so B-R-I-C-S, BRICS. And they, it's not just a once-a-year kind of thing. They have a hundred different initiatives, over a hundred meetings a year.
There's only one meeting a year where the leaders show up, where you see President Xi or President Ramaphosa or Prime Minister Modi and the other, Lula and Putin. But they have all kinds, they have working groups on women's rights, athletics, the environment, you name it. And they're working all the time. There's a secretariat.
They created what they call the national, or sorry, the New Development Bank based in Shanghai which is their clone of the World Bank. It makes development loans, it can raise capital, it can issue bonds, it has $100 billion of subscribed capital, etc. Then they created something called the Contingent Reserve Allocation, which is basically their clone of the IMF.
It's a swing lender, so if your country, you're in financial distress. You have a balance of payments deficit, there's a run on the bank. People are trying to get the money out. You can get a loan from them to kind of weather the storm, change of policies, and see it through. So what they're doing, and they've been working on this for say 15 years, they're recreating the Bretton Woods institutions under their own control and in their own preferred format.
So they've got their own World Bank set up. They've got their own IMF set up. They've got their own, you know, secretariat set up. They're meeting all the time. So they're basically building a set of robust multilateral institutions for the global south that will face off against the old school, the G7 and IMF which is under the thumb of the United States. You know, etc. So that's been going on for a long time.
What's new are two things, both very important. One is this new currency I talked about. And let me just kind of explain that briefly. So right now, Russia is selling oil to India. And India's been paying in rupees, the Indian currency. And India would like to keep paying in rupees, why wouldn't you want to pay with a currency that you can print. But Russia's kind of up to here with the rupees.
And the problem, any two countries can agree on any medium of exchange. It doesn't have to be the dollar. It could be baseball cards or bottle caps, like when we were kids. Happens to be Indian rupees. But it begs the question, what is Russia going to do with the rupees? How much curry chicken do they actually need? India has some cool technology, but they don't have natural resources and they don't have semiconductors and they don't have drones and they don't have things that Russia wants to buy.
Likewise, China's been talking to Saudi Arabia about paying for oil in yuan, China's yuan. Well, that's nice if you're China. China is the biggest customer of Saudi Arabia. But they've been talking about this for a couple of years. It hasn't actually happened. And again, I don't want to mention names. But what I call the usual suspects who show up on you know, King World News or Kitco or you know, and all these channels. Like oh you know, the petroyuan is here. No it's not. There's no gold-backed petroyuan. Saudi Arabia hasn't taken any yuan. They're talking about it.
But here's the problem with any bilateral currency arrangement of that type. If you're delivering the goods or services and you're getting the currency, you can only spend it in the country that's paying you. You can't spend it anywhere else. Dollars are different. You can spend dollars anywhere in the world, and euros are pretty good too. Yen, you know, is liquid, heavily, widely traded. But it's pretty much dollars. Dollars are 60% of global reserves, 80% of payments, and close to 100% of the oil markets.
So the currency doesn't go very far. Now what's the answer to that? The answer is that Dwight Eisenhower had a great line. He said if you can't solve a problem, expand the problem. In other words, by making the problem bigger you can often see a solution that you couldn't see when you had the problem in a box. And if you want a currency union, expand the union. And this is the success of the euro.
There's one analyst, a guy I follow closely. He's brilliant. I hold him in the highest regard. But he said once, this BRICS currency isn't going anywhere because the members don't have a common fiscal policy. And I was like wait a second, have you not heard of the euro? There's no common fiscal policy in Europe. Do you think Germany's fiscal policy is in sync with Greece? Do you think the Netherlands has policies in sync with Italy?
Dan Ferris: Hope not.
Jim Rickards: Right. They don't have a common fiscal policy, but they do have a very successful currency union. Now, you need a common monetary policy. You need a central bank. But the BRICS have already set that up with this new development bank I talked about earlier, or which could be easily adapted as a central bank of issue. That's kind of the easy part. But the hard part is getting expanded union.
Now I remember around 2010, 2011, during the European sovereign debt crisis, you know, Nouriel Roubini and Paul Krugman and Joe Stiglitz and all these guys, some of them Nobel prize winners. They were all running around with their hair on fire saying, "This is the end of the euro. Greece is going to get kicked out. Spain is going to quit and go back to the peseta. And there will be a northern tier and a southern tier, Netherlands and Germany are going to go there." And I said I took a lot of grief for it. I got blocked by Zero Hedge or whatever. But basically ridiculed, which I'm used to.
But I said no. I said none of that's going to happen. Greece is not getting kicked out. Spain is not quitting. There will not be a northern tier. In fact, they're going to expand the eurozone. Basically, the countries that use the euro. And I was exactly right. They had 16 members at the time. Today they have 19 members. Greece is still in, Spain's still in.
And the key to understanding that is to understand that it was never, it's money, it's a form of money, but it was never a monetary project. It was always a political project. And once you understand the political dynamics behind it, you can see that it's not going to break up. So getting back to the BRICS, what they need is to expand the membership. And by the way, that's exactly what they did on August 22nd. So I said August 22nd, the leaders summit in Johannesburg, South Africa.
And President Xi, President Modi, sorry, Prime Minister Modi, President Ramaphosa, President Lula of Brazil were all there. Putin would have been there but there was an arrest warrant, for his arrest from the International Criminal Court, and South Africa happens to be a signatory of what's called the Treaty of Rome which enforces the International Criminal Court. And Ramaphosa called Putin and said, "Don't worry. We're not going to arrest you." But his political opposition went to the Supreme Court and said yes we will. So, who knows? Some NGO shows up with a warrant.
So Putin didn't go, as I guess his distraction. But Sergei Lavrov was there in person, and Putin participated by video. Anyway, all the leaders were there, four of them in person and the fifth one by video. And I said this would be a landmark returning point in the development of the BRICS currency. And unfortunately for me, I actually have to read this stuff, and there's a 24-page single-spaced final communique from the BRICS Johannesburg summit, and I read the whole thing. It barely mentions the new currency. Just in passing, and one section, kind of oblique, but barely mentions the new currency.
And everyone said hey Jim, you said this was going to be a landmark in the development of the new currency. What happened? Well the answer is, it was. They did the thing they needed to do. It wasn't issuing a currency that was going to fail if you only had five members. They expanded the membership. They're now the BRICS-11. They added Saudi Arabia, Iran, UAE, Egypt, and a couple other countries. So now they went from five to 11, but they've got a waiting list of like 20, other countries waiting to apply. Algeria, Argentina and Malaysia, etc., etc.
Now who did they add? Well, when you put Russia, Saudi Arabia, UAE, Iran, and Brazil, in the same group, who needs OPEC? You've got more oil output in those five countries than you do in OPEC, because Russia's not a member of OPEC and it's the second largest oil producer in the world. So OPEC is now inside the BRICS, or the OPEC power to set oil prices is inside the BRICS. But more importantly, now that you're up to 11, and again, they're on their way to 20. Give it another year or whatever.
So now you launch your BRICS currency. And you're Russia, and you sell oil to India, and instead of getting paid in rupees, you get paid in the BRICS currency. But the difference is instead of having to buy whatever, rice from India, you can go shopping. You can go to Brazil and buy aircraft. You can go to China and buy semiconductors. You can go to Iran and buy drones. You can go to Argentina and buy, they have a lot of natural resources, etc. And so can everybody else. China gets paid in the BRICS currency, they can buy oil from Saudi Arabia, oil from Russia, etc. And so, or Embraer from Brazil. They're very good aircraft.
So the point being, when you expand the membership, you make the, not just the likelihood but the feasibility of the new currency much greater. So give them one more round. They'll invite in another six or seven members. Next year they'll get up to around 20, close to 20, which is about how many members you have in the European monetary zone. And then launch the currency to great success. So that's how it's playing out.
The gold link, and this is what Lavrov said about six months ago. He never said it would be gold backed in the sense that if you had some BRICS you could march down to People's Bank of China, the Central Bank of Russia, and say give me the gold. He never said that. And again, I don't want to mention names. But you know, the usual suspects get all spun up over this, and they're on all these programs. He never said that.
What he said was that it was not gold backed, but gold linked. And what he meant by that, and he was specific. Because you have to ask, what's the value of one BRIC? I call it a BRIC. I don't know what they're going to call it. Maybe the bank where, John Maynard Keynes. By the way, everything I'm talking about is what Keynes proposed in Britain in 1944. It was all shot down by the United States, by Harry Dexter White who was a Stalinist agent.
But this is basically the return of, it's the ghost of John Maynard Keynes. Because what the Russians are doing, it's exactly what Keynes wanted to do. He wanted a world currency, not a U.S. dollar, etc. So, but what Lavrov said was that we're going to define the value of one, I'll call it a BRIC. One BRIC is going to equal weight of gold. And he didn't say what the weight is. I use it, I say one BRIC equals one ounce. That's just for illustration purposes. It doesn't matter. You can call it a bank or you can say it's a kilo. It doesn't matter.
So, all of a sudden you have a currency that is, the value of which is determined not by reference to another currency, but by reference to gold. You can call it a commodity, but I think of gold as money. So did Pierpont Morgan. Now, you say well, OK. But what does that mean out in the real world? Well, there's a dollar market in gold. The global market in gold is dollar denominated. You can buy another currency in a store or something like that, but it's pretty much a dollar market.
So now we're back to Aristotle, who created syllogisms and logic. Father of logic. Father of logic and the transit of law. So if one BRIC equals one ounce, again just for illustration, and one ounce equals a certain number of dollars, today it's 1950, up and down, whatever. Then with the transit of law you can say one BRIC equals $1,900.
But here's the key. It's not a fixed exchange rate. As the dollar price of gold fluctuates, the value of a BRIC as a weight of gold will not fluctuate. It's fixed as a weight of gold. But using the transitive law, the dollar value will fluctuate. But it puts, it means the U.S. has to do all the dirty work. In other words, this is the genius of the Russians. They can just free ride on the dollar gold market. They don't have to intervene. They don't have to buy gold. They don't have to sell gold. They don't even have to have gold. They just say this is what it's worth and then let the dollar do all the dirty work.
With one footnote, which is if you're the issuer of BRICS or the holder of BRICS and it's worth the weight of gold, what do you want to happen to the price of gold? Well, you want it to go to the moon, because you're destroying the dollar through the transitive law and through the dollar-denominated gold market. That's for the long run.
Now, third point, and I'll finish up, is this does not mean the end of the dollar. Again, that's the other thing people are shouting. It doesn't mean that, and I've never said that. And for a case study, look at the demise of sterling as the leading gold reserve currency and the rise of the dollar. I can tell you the month that that started. It was November 1914, because at the beginning of World War I in August 1914, what happened?
Well, the U.S. was not in the war. We didn't get into the war until 1917. So we were not a belligerent. Our markets were open. But the Europeans by and large were all belligerents. So every one of them, Germany, Belgium, Italy, France, they suspended gold conversion. They said the currency's no longer convertible to gold. Keeping all the gold, we need it to fight the war, etc.
The U.K. Exchequer had the same issue. And John Maynard Keynes, here he is again, said no. Don't do it. Keep the gold window open. Here's why. He said you're not going to win this war with money. You're not going to win it with gold. You're going to win it with credit. And that was the ability to borrow huge amounts of money [inaudible] going to be what's decisive.
And Jack Morgan, who was the son of Pierpont Morgan, went out. And he did massive bond issues... $100 million bond issues. This was back when $100 million was real money. He did $100 million bond issues for the U.K. and France and never raised a penny for Germany.
So again, Keynes has a reputation as this gold hater. It's just not true. He's like, people say that don't know anything about Keynes. Keynes was the leading advocate for keeping the gold window open in 1914. Now what happened was, everybody in Europe including the U.K. sold everything they could in the U.S. They sold stocks, they sold bonds, they sold real estate. And in those days, when you had capital accounts for trade surplus, you got paid in gold.
And they said, "Send us the gold. We need the gold." And because of German U-boat activity, it was very dangerous to ship the gold across the ocean. So the Bank of England actually opened a branch office in Ottawa, Canada. And they sent because it was in the Commonwealth. And Morgan sent the gold by train from New York to Ottawa, so it's technically property of the Bank of England. But that way he didn't have to put it on a vessel and sail it across the ocean.
So this worked brilliantly for the U.K., but it didn't last and here's why. They got all the gold. They sold everything, got all the gold. But then they needed to buy stuff. They needed food. They needed ammunition. They needed weapons. They needed clothing, boots, you know, etc., etc. And everything that, because everything was being, their economies were going on a war footing and they needed to buy all this stuff. Where did they buy it? The United States, because we were neutral. How did they pay for it? Gold.
So all that, that flow of gold between August and November all went to Europe. But then November was the month when it started to come back to the United States because they needed it to buy this material for the war. So you can pick a date. November 1914 is when the flow reversed and that was the beginning of the end of sterling. But it took 30 years. It wasn't until 1944, at Bretton Woods, that the role of the dollar, and by the way. Bretton Woods did not fix all those currencies in relation to gold. It fixed all those currencies in relation to the dollar, and then the dollar was pegged to gold at $35 an ounce.
What that meant was that you could devalue against the dollar. And implicitly, back to the transitive law, devalue against gold. But if you wanted to devalue currency, you had to knock on the door of the IMF and get permission. And the U.S. controlled it. And what you were really doing was devaluing it against the dollar, but the dollar gold peg was sacrosanct. You couldn't touch that. Well of course that changed in 1971.
But the point being, the process by which sterling was diminished and the dollar was enhanced as a global reserve currency took 30 years, from 1914 to 1944. So two things, and sterling's still around. Sterling's still a reserve currency, it just has a small slice. But my point is, currencies don't disappear overnight. Currencies don't dominate overnight. You can have more than one reserve currency which we did then and do now. And so what I see is the BRICS currency will emerge, will start as a trade currency. Over time, becomes a reserve currency.
It doesn't mean the end of the dollar. It just means the dollar has some competition. And you might see the dollar percentage of global reserves drop from 60 to 45, and BRICS go from zero to I don't know, 25 let's say, alongside the euro. Well, that's a big deal. But it doesn't happen overnight and it doesn't mean dollars go away. It just means you've got some serious competition. But that has geopolitical consequences. In geopolitical and military and diplomatic affairs, you're only as strong as your currency. And if your currency is weakening, your country's weakening. And that's the key link.
Dan Ferris: All right, and I just want the listeners to know that you can see the presentation I mentioned earlier at RickardsDeal.com/Ferris. Jim, we are actually at the point where I'm ready to ask my final question which is the same for every guest, no matter what the topic, even if it's a non-financial topic which it occasionally is. But the question is simply, it's something that I cooked up for our listeners so that they would have a takeaway. And it's simply, if you could leave our listener with a single thought, a single idea today, what would it be?
Jim Rickards: Well, for investors and savers and asset allocators, I would, I'll say something that's going to sound totally obvious. You'll just roll your eyes. But then I'll explain why it's not obvious. You need diversification in your portfolio. And I say that and everyone says well, of course you need diversification. We all understand that you can't put all your eggs in one basket, etc., etc. And there's a lot of science behind it, and the efficient frontier and how you actually diversify and all that.
The problem is that the overwhelming majority of investors don't really understand what diversification is. They say they do, and they try to practice it. But they don't understand it, and I'll give you a concrete example. I run into people all the time and they say Jim, I'm fully diversified. I've got 50 stocks in 10 sectors. I've got technology, semiconductors, metals and mining, consumer non-durables, etc., etc.
And I look at them and I go, you're not diversified. You may have 50 stocks, but you have one asset class. They're called stocks. And guess what, when you don't care when things are fine, there's a certain amount of non-correlation. But when the system's in distress, which is when you care the most, the correlation is perfect. They all go down together.
And so real diversification means have a slice of stocks. I'm not saying I hate stocks or sell or something, I'm not saying that. Have a slice. But have a slice of U.S. Treasury notes. Maybe 10 years if you like, five years, two years, season to taste. That's very, they're liquid and that's very good protection against a recession. And a recession, everyone's talking about Goldilocks and a soft landing. Good luck with that.
But in a recession, which is coming, interest rates are going to go down. The value of those bonds is going to go up. Have a big slice of cash. I kind of recommend 30%. Everyone was like cash, you know, it doesn't pay anything. Well first of all, that was true for 10 years. It's not true today. I mean, you're getting, you can get five-and-a-quarter percent on a six-month Treasury bill. Even my bank is paying you know, three and a half, four on a CD. So, first of all, you can get yield on cash.
But more to the point, it's deflation protection. The value of cash could be your best performing asset in deflation, because the value of your dollar goes up as prices drop, No. 1. But more importantly, it has huge, embedded optionality. And people, I shared an [inaudible] six months, so I probably see options under a rock. But if you're the one with cash and things do fall apart, which I expect, you can wait it out, preserve your wealth, and go shopping. You're the one who can pick up bargains in the wreckage.
Obviously, I recommend gold. You know, 10%. Season to taste. If you like 5%, that's fine. But I can't imagine, I run into people, they say, "Jim, I don't understand how you can sleep at night with having gold in your portfolio." I say, "How can you sleep at night having all stocks?" I mean, that's the real risk. So I would say, a slice of gold has a place.
And then, alternatives. Land, property, not commercial real estate. That's heading for a fall. But residential housing, income-producing property, farms. Just land in good locations, that will serve you well. So the point is, you build a portfolio of stocks, Treasury notes, cash, alternatives, real estate, gold, and other assets. That's diversified. That will serve you well in all states of the world. And that would be my advice to people trying to allocate the portfolios.
Dan Ferris: Excellent. Thanks for that. And thanks for being here, Jim. I really appreciate it. I feel like I've just gotten a wonderful master class in LTCM and geopolitics and all the rest, all the other things you discussed. I appreciate it. Thank you.
Jim Rickards: Thanks, Dan.
Dan Ferris: The Fed wants you to believe they've got inflation under control. But I believe we've only seen the beginning of a devastating new crisis. And if you don't prepare now, you could see your savings evaporate as inflation and interest rates soar even higher over the next two years. It all traces back to a golden thread that ties together the biggest financial calamities in America's history. But it seems the entire financial world is falling into the very same denial trap that led to massive devastation the last time this crisis played out.
If you know your history, you know there will be winners and losers. And now is when you decide which one you'll be. I've spelled it all out in an urgent new report. Go to www.bankrun2023.com to get your free copy. I'll also show you how to get my complete playbook for navigating this crisis, including the three critical steps to take immediately. Again, that's www.bankrun2023.com for your free copy of my new report.
Well, I can really just listen to Jim talk for hours. And I mean that. Hours. We could do a three-hour podcast, and he would talk for you know, two hours and 50 minutes and I'd be cool with it. And I hope you would too, because he's obviously, like when I asked him about long-term capital, he was there. That's why I asked him... because he was on the inside. And he had a lot of detail to share, and gave us a lot of insights as to how it all works and what he learned from it.
A big takeaway for a lot of people from that episode was exactly what he said, which is that they no longer trusted the models. When they say something happens every 6,000 years or whatever it was, and it really happens every seven or eight years, you know the models aren't so great. And I was glad to hear that he had come to that as a result of that episode. That was exactly the sort of thing I was looking for when I asked him the question.
And I'm really glad to hear how frankly level-headed he is on the BRICS issue, because he's right. We don't want to mention names, but there are people all over Twitter for example, where I spend some time each day, who are talking about how the U.S. dollar's going to crash and the BRICS currency is going to destroy the U.S. dollar and all this stuff. They don't have a currency yet at all. And the dollar is not going anywhere for a long time probably, so. Those arguments are kind of silly.
But then again, we should take the BRICS situation seriously, as Jim laid it out anyway. If you believe what Jim is saying, then it's something to take seriously. The same way you'd want to take the euro seriously when that was happening. So it was good to get this sort of detailed bottom-up kind of level headed frankly view of this big geopolitical and really frankly very political economic development in the world, and to hear all the details and Jim's view on it.
And I just, I really hope that you enjoyed this as much as I did. That's our tagline, isn't it? And the reason for that is that we have guests that we really think we're going to enjoy talking with. And so when we turn out to be right, which you know, keep your fingers crossed that it will remain to be fairly often. I wind up telling, gosh, I hope you enjoyed it as much as I did.
So if you did, and you want to hear more about Jim and I recommend that you do this. Go to RickardsDeal.com/Ferris. And just click on whatever you've got to click on when you get there, and you will see a really incredible presentation about all of Jim's ideas that he's recently developed.
And this you know, potential weapon of mass destruction which I think is a dramatic way of stating it. But it's probably at least partially true, and you should decide for yourself. Go there, see the presentation, all the ideas behind that presentation are Jim's. And I highly recommend that you do that.
All right. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
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