Today’s rant by Dan Ferris is about you – you and your investments.
Hardly anyone will tell you this, he says, but investing is personal – it’s an extension of who you are.
And before you buy one stock, or bond, or share of a mutual fund, there are questions you need to know the answers of concerning… you.
Most people shouldn’t want anything at all to do with the stock market, because of their own beliefs and preferences. And big banks and Wall Street don’t want you to know investing is so personal – they want you to think there’s a one-size fits all formula to it.
It’s total B.S. – and as Dan will show you, you can no more outsource investing your capital than you can outsource someone to digest your food.
Of course, people like Dan can point you to helpful insights and “news you can use.” We’ve got a bit of that this week, as Dan breaks down the news of Tesla’s $20,000 deposits on its new semi truck, Apple’s game-changing streaming service, and Lyft’s looming $2.1 billion IPO.
He then welcomes this week’s guest, Nomi Prins.
Nomi is a renowned journalist, former international investment banker, author and speaker. Her new book, Collusion: How Central Bankers Rigged the World, explores the recent rise of the role of central banks in the global financial and economic hierarchy Her other books include a historical novel about the 1929 crash, Black Tuesday, and the hard-hitting expose It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street.
You won’t want to miss her answers to Dan’s questions on the sustainability of 10+ years of market stimulus, the ongoing trade wars, and the surprise continent that may be the biggest loser from all these global machinations.
Author, Collusion: How Central Bankers Rigged the World
7:12: You probably know by now that Wall Street isn’t on your side as an investor. But Dan reveals that there’s another person going up against you who you would never suspect.
14:29: Dan talks about Tesla a lot because he’s certain that one day the stock will collapse “like a house of cards.” Now he discusses the $200,000 deposits for its Founders Series semi trucks, and why the reveal of the Tesla Model Y was “a very curious undertaking.”
18:52: Kraft-Heinz just hit a 52-week low due to being put on credit watch-negative due to failing to file a report with the SEC. This fumble is part of a pattern in the consumer brands that are not the business they used to be.
22:05: Dan introduces this week’s guest, Nomi Prins. Nomi is a renowned journalist, former international investment banker, author and speaker. Her new book, Collusion: How Central Bankers Rigged the World, explores the recent rise of the role of central banks in the global financial and economic hierarchy Her other books include a historical novel about the 1929 crash, Black Tuesday, and the hard-hitting expose It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street.
36:40: Nomi explains the backstory behind the basket of major reserve currencies was extended from the dollar, Japanese yen, and euro into including China’s currency, and how the the People’s Bank of China pushed for it through the UN, arguing not without merit that the Fed was distorting markets.
42:44: Nomi explains why the market has chugged along for a decade despite the artificial nature of government stimulus. “As artificial as the stimulus has been, for as long as it’s been… it still exists, so you can’t ignore its existence either.”
45:34: Nomi points out the real consequences as the trade war intensifies. “Ultimately, a lot of the trade wars will subside, but there’s going to be damage – and there has been damage done along the way.”
49:50: Dan pick’s Nomi’s brain about the political winds shifting in Britain, and the circus in parliament that’s somehow making both Tories and Labour lose their zero-sum standoff.
NOTES & LINKS
To follow Dan’s most recent work at Extreme Value, click here.
Announcer: Broadcasting from Baltimore, Maryland all around the world, you're listening to the Stansberry Investor Hour.
Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello and welcome everyone to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I am the editor of Extreme Value, a value investing service published by Stansberry Research.
We have a really good show lined up today so I am just going to jump in and go for it, folks. OK. Today's rant is about you and your investments. The simple fact is – and hardly anybody ever tells you this: Investing is personal. It's very personal. It's an extension of who you are. Before you buy one share of stock or one bond or one mutual fund, you should know a few things about yourself – not just about investing, but about yourself. What kind of investor are you? What is your risk tolerance?
Last week, we talked about the different between investing and speculation. Well, are you primarily an investor or are you primarily a speculator? Or just all one or just all the other? You should know that kind of stuff? Do you even want anything to do with the stock market at all? That's a question you need to answer. For most people, I think the probably ought to be a big fat no. But they just get carried along on the current, you know? Everybody's doing it so they want to do it too.
Now, look, Wall Street, the finance industry, big banks and brokerages – they're not on your side here. They don't want you to think investing is personal. They want you to think there's a formula to it that only they know. Right? So you get these absurd pronouncements, for example, when some Wall Street jackass says – out of someplace like Goldman Sachs, right? They'll say, "Oh, well, instead of having 60% in stocks and 40% in bonds, we now recommend 55% in stocks and 45% in bonds." It's total BS. It has no meaning whatsoever for anyone except people who, I don't know, hate their money and don't want to take 100% responsibility for it.
There are no formulas. There are no set plans for you to follow. It's your money. What do you want to do with it? Investing is a personal journey that takes a lifetime. You spend decades accumulating capital. You spend decades investing it. You spend more decades hopefully living off of it and distributing it to your grandchildren and your heirs.
So, look, I understand the desire to outsource investing. Because it's difficult and it's something you want to get to right away. You don't want to wait. So you want to outsource. If a pipe bursts in your kitchen, you don't get a book on plumbing – you call a plumber. I have these giant fir trees in my backyard and when I need to get the dead branches cleaned out so they don't fall on my head and kill me, I don't climb up there and do it myself – I pay someone else. So I sort of almost understand. But, you know, none of this is any excuse to treat your hard-earned capital like a broken water pipe or a dead tree branch. Capital allocation is not an exercise in home repair or waste disposal, OK? It's a skill and it takes years to learn and develop. And I believe you can no more outsource it than you can hire someone to digest your food.
In my last few rants, I actually covered some of the big ideas that you should master and that will help you get to know what kind of investor you are. A few weeks ago, we said you have to master the skill of saving to be a great investor and to accumulate capital and to make better decisions later on. You must understand the difference between investment and speculation. You must understand market cycles. Just a few of the things that will help you understand yourself as well as investing.
So this week, what I'm really telling you is that the only person who can learn about these things and understand them is you. You can't outsource your understanding. You can buy my research. You can buy my stock ideas. I can help you with that. But you can't buy my emotional conviction. You can't buy my understanding. I can relate it to you, but you need your own understanding. Now I have a couple of recommendations, for example, in the model portfolio of my Extreme Value newsletter, which I refuse to put any kind of a trailing stop on. If the price goes down 50%, I don't tell people to sell based on that information alone.
Now, why do I do this? Because, for me, these are long-term investments. And I'm a long-term guy and I understand these businesses very well. They're not short-term speculations. They're not medium-term speculations. They're long-term real investments. What makes them long-term investments is my attitude and my understanding. Somebody could look at the exact same thing and treat it very differently, because investing is personal to the person doing it. So it's not necessarily anything inherent in the businesses, though I would name several attributes to support my decision to treat them like long-term investments. It's about my attitude and my understanding.
And the truth is there's no magic to any of this. You either do the work that you need and possess the understanding that you need, or you don't. If you use other people's research in your personal quest for greater understanding – and I hope you'll use ours to do that – that's ideal. That's what you should be doing. Good for you. You get it. But if you think you can just sort of not understand anything very well and just slavishly follow other people's advice without sufficient understanding, forget it. You're going to get killed. Only you can figure out whether you have the right perspective too. It's just all on you. I'm sorry to have to be the one to – actually, I'm not sorry. I'm glad to be the one to tell you this.
Just like everything else in your life that's really worth doing, how you treat your money is 100% you, your job, your responsibility. It's your achievement alone if you invest successfully, no matter how much of my research you might use. And it's your fault alone if you fail. And of course it's my fault if I get things wrong, right? Nobody gets the credit for your success but you and nobody gets the blame for your failures. Nobody gets the credit for my success but me, and nobody gets the blame but me for my failures. Now, I'm the latter half of my sixth decade on Earth, so I've had plenty of both successes and failures. And they were all mine, OK?
Now, a moment ago I said the finance industry is not on your side. Well, it's worse than that. You are not on your side [laughs]. Human nature is just not built for investment success. What feels emotionally right is often financially disastrous. And what feels financially wrong is often financially prudent. What feels emotionally exciting is usually a giant mistake. Successful investing should probably not be very exciting in the conventional sense. But, again, that's for you to decide how you're going to do it.
And to make it even more complicated than all this, you can do the same action, buy the same amount of the same stock, at two different times, and one time it's a genius move and you're right spot on, and the next time it's totally wrong and disastrous. I often recommend Howard Marks' book, The Most Important Thing. It has 18 most important things. Think about that. You think you'd learn something about yourself if you studied that book and thought about the 18 most important things? I think you would. This guy's spent a lifetime transforming complex ideas into simple language that people can understand. And he can't cite fewer than 18 most important things. That's a pretty complicated undertaking, right?
And you need to know yourself really well to do that complicated undertaking of investing really well. It needs to be your personal quest, almost like a second career. It's like playing a musical instrument or becoming an accomplished chef. It's an art. It takes time. You layer on your knowledge, year after year. And like playing a musical instrument, you can't cram it all at once. You must do it a little bit every day for a long time. You need to do it for long enough in order to develop your own ideas about it. However long that takes is however long that takes. Everybody's different.
And it doesn't matter if everybody's buying internet stocks and you're not. It doesn't matter if somebody says, "You should invest in China right now," and you aren't. It doesn't matter if somebody, like me, for example, says it's a good time to buy gold and you aren't buying it. What matters is that you understand what you are doing, and, like we said a couple weeks ago, that you are not doing things that'll destroy your capital. Investing is personal. Make that immutable truth work in your favor. What's your personality? What assets are you drawn to? Do you like real estate? Do you like gold mining? It's a crazy business but maybe you like it. What do you like about them? Is that a correct assessment that you're basing that love of that asset on? Or have you misunderstood the nature of the asset and you just heard about it from your brother-in-law at dinner or something?
It's up to you to find out and decide that. You need to learn about risk for yourself. You need to learn even if it's possible to invest. We were talking about speculation versus investment in a previous podcast. Some investments are investible – others are just speculations, right? I was saying that Tesla is a pure speculation. You can't invest in it because it doesn't have the safety of principal that you need for an investment.
So, you know, how many great investment books have you read? How many great investors have you know? Enough, I hope, before you start allocating capital. Are you a long-term investor or short-term trader? Maybe a little of one, a lot of the other. You need to answer this stuff. I can't answer it for you. Nor am I the least interested in giving you a false reference point by trying to answer it for you. They're your questions, your answers. It would be totally irresponsible of me to provide you with anything but "good luck," pat on the back, "Here's some good books to read, here's my research, go get them."
If you have specific issues regarding these answers, that's another matter. Write in at [email protected] and I'll do what I can. But I won't provide you with answers to the personal questions that everyone has to answer for himself. And would you want me to? It'd be like asking me to listen to your favorite piece of music and tell you what it sounded like. You don't do that. You listen to it yourself and you allow it to take all the time it needs to wash over you and affect you. You can't follow anyone to investment success. Though you can certainly be a responsible consumer of research and information.
The famous German psychologist Erich Fromm said, "Man's main task in life is to give birth to himself." You also have to give birth to yourself as an investor. Investing is – it's your soul, your personality, your dreams, wants, needs, fears, and, of course, your money. It's like none of my business really what you do with your money, is it? It's 100% your business. Like Benjamin Graham, the value investing guru, says: "Investing is best when it's most businesslike."
And what I'm telling you today is: It's your business. Mind it well. Know your business. Run your business. And if you don't run it, you better know and know well the person who is running it. OK? You can't buy what you need to become a great investor. You can buy research. You can buy all kinds of books and tools and help. But the really important ability to allocate your own capital – it has to be acquired by your own effort. It's a real skill. You can't borrow it. You have to acquire it.
I'm honored that thousands of investors have chosen to make my work – and, frankly, the work of Stansberry – a part of their own plans and strategies. But they all know that we can't invest their money for them. Only you can do that. Investing is personal. Don't let anyone take it away from you. Don't let the authorities on Wall Street or anyone else impress you with their prestige and make you believe investing is some distant thing. What was that quote by Charles de Gaulle? He said something like, "Authority requires prestige, and prestige requires distance." Right? For you to be sort of overwhelmed by someone and intimidated, they have to have a certain distance and they have to get that prestige and authority. And all of it is just smoke and mirrors and BS. Right?
I mean, the government's not going to protect you. Wall Street's not going to protect you. Remember that Bernie Madoff scandal we talked about in Episode 90 of the podcast. The government didn't protect anybody. And Madoff sure wasn't protecting anybody [laughing]. He wasn't even investing their money after a while. Right? So investing is personal. Keep investing personal and honest and real all your life. And I think you just might find yourself sitting on a substantial fortune one day.
OK, look, that's the rant. Obviously I could go on about this because I feel strongly. But I'll leave it there. Write in at [email protected] and let us know what you think, OK? Time to find out what's new in the world. Let's do that.
Dan Ferris: You know, every week our capable producer Justin Mattas gives me some stuff to contemplate for the news and I don't always use it all. But he's got some real gems in here today. One of them, for example, is – we'll talk about Tesla, OK? We talk about Tesla a lot because we're certain that one day this whole thing is just going to fold like a house of cards. And the stock has just roared. And it's certainly come way off the highs now. But it's tens of billions in market value for something that looks like it may not survive more than another year or two or three or whatever.
And now they are taking $200,000 deposits for their Founders Series Semi trucks. So they're accepting the $200,000 deposits for the new Semi truck that they came out with. But now they have something called the Founders Series Semi truck. So they're collecting these $200,000 deposits. And they recently had the big reveal of their Tesla Model Y, which was a very curious undertaking in itself. People were broadcasting around the internet about how the cars looked kind of suspiciously like a Model 3. It was just a very weird event. I'll just leave it at that. You can Google it. But the timing was also curious. Because they're under regulatory scrutiny from the SEC and people are starting to call into question their cash balances.
And it doesn't make money. It's an early-stage company still. The CEO is a weirdo who says the weirdest things on Twitter. And now all of a sudden, now they're going to come out with the Founders Series Semi truck and take these giant $200,000 deposits? Is this – I hate to suggest it's some kind of modified Ponzi scheme. But Elon Musk is kind of – on the books in public he's said things – or actually it's been implied that he has taken deposit money and used it for other things. So, yeah, 78% of Tesla's operating cash flow has come from customer deposits. I have to wonder if operating cash flow – if customer deposits really oughta be classified in that manner. Weird situation. Very weird.
Speaking of really weird, this is funny. Apparently there's some sort of a crazy video going around the Internet with a guy and his wife testing for themselves the Tesla Autopilot feature, and he's testing it by trying to run her over. And they do it a few times. They do it three times in the video. And the first time she has to run out of the way and the car did not hit – it's supposed to automatically hit the brakes. The second time the car automatically hit the brakes. Third time, she didn't trust it anymore so she puts her handbag in the road and the car brakes for the bag but just knocks it over [laughs]. Weird. Very weird. I don't know which one of those people has a more challenged IQ. Is it him or her? I don't know. Well, she's standing in front of the car. I don't know.
We talked about Kraft Heinz in a recent podcast. And I said that the consumer brands are – it's not the same proposition it used to be. They used to be these forever wonderful businesses that you could count on. And then the firm 3G came in and levered up Kraft Heinz and they levered up AB InBev. And they thought, "Well, these are forever brands. We don't have to worry about making money. We can just add some leverage and cut some costs and the stock will scream."
Well, Kraft Heinz just hit a 52-week low because S&P, the credit-rating agency, put them on CreditWatch negative. So you're on watch for a credit downgrade at that point. They were put on CreditWatch negative due to their failure to file their annual report with the SEC even after the deadline was extended. And they recently wrote down $15 billion on their Kraft and Oscar Mayer brands. Tell you, those consumer brands are not the business they used to be.
All right. Now, there's something else I want to talk to you about. The company called Fidelity Information Services – the ticker symbol's FIS – they're buying another company called Worldpay, a U.K. company. And I would submit to you this is the type of thing you see – this is the type of buyout activity you see toward the end of the cycle. Actually this week, in the last podcast, we talked about cycles. So, just real quick, these companies are in the – they provide the technology underlying the global payment system. People are using checks and cash less and less and less and they're using cards and electronic forms of payment more and more. So that requires these big payments systems.
And so FIS is paying $35 billion for U.K.-based Worldpay. That's about, roughly speaking, nine times revenue, 98 times net income, and 55 times free cash flow, and 24 times enterprise value over EBITDA. That's a soaring – that's a huge high price. And the deal is valued – if you add all the debt and everything, it's valued at like $42 billion. That's where you get the EV over EBITDA. Just in August 17, a company called Vantiv bought Worldpay and took on the Worldpay name, and the deal price then, in August 2017, was $10 billion. So we're more than triple that now, not two full years later. That's the kind of stuff you see near the end of the cycle.
One more end-of-cycle bit for you. 2017, we saw the biggest private equity fund ever, right? Apollo raised a $25 billion private equity fund in July 2017. And in June of that year, CVC Capital raised the biggest European private equity fund, around $19 billion. 2018, what do we see? Record M&A activity, right? New York Times reported $2.5 trillion of M&A activity, mergers and acquisitions, in the first half of 2018. There was a record number of private equity buyouts in 2018. More than 5,000 deals for around half a trillion bucks.
2019, CalPERS, the California pension system, they're saying, "Hold my beer. Hold by beer, Cletus, and watch this." They're doubling down on private equity. They want to put another $20 billion into private equity. Let me tell you something, folks. At the end of the cycle, the pension funds: They go for whatever toxic waste everybody else has already bought. This is standard end-of-cycle stuff. Beware. You heard it here first, OK?
All right. That's all the news that I'm going to get to for today. We have a great guest. And let's get her on right now.
Dan Ferris: All right. It's time for our guest today. Her name is Nomi Prins. Nomi is a renowned journalist. She's a former international investment banker, author, and speaker. Her new book, Collusion: How Central Bankers Rigged the World, explores the recent rise of the role of central banks in the global financial and economic hierarchy. Her other books include a historical novel about the 1929 crash, Black Tuesday, and the hard-hitting expose It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street.
She is also the author of Other People's Money: The Corporate Mugging of America, chosen as a Best Book of 2004 by The Economist, Barron's, and Library Journal. She has appeared on numerous TV programs, internationally and nationally, including CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox, and PBS. Wow.
Her writing has been featured in the New York Times, Forbes, Fortune, Newsday, and she's going to be with us this year at the Stansberry Alliance Conference in Las Vegas. I can't wait for that. Please welcome Nomi Prins. Hey, Nomi. Welcome to the program.
Nomi Prins: Hi, thank you so much for that intro. I can't wait till the Vegas conference, I just have to say. I am so excited to be a part of it and I really love Vegas. So that's all awesome.
Dan Ferris: You are going to have a blast. So, Nomi, I hope this isn't too awkward. I have to read a sentence from your book. And it's not even in the main text. It's in the acknowledgements. And I've been dying to get you on the program so I could talk about this. It says, quote, "I have experienced this planet in a manner that has expanded my way of thinking in unimaginable ways," end quote. You have got to tell me about that.
Nomi Prins: [Laughs]. Wow. That's a good acknowledgement sentence. I should use that in other books. I traveled so much for this particular book, for Collusion. But I have traveled throughout my career and my life as well. It was just that sometimes when a circle comes into full close, it's really impactful. And for this book, I was in China, I was in Japan, I was all throughout Europe, I was all throughout South America, Mexico, and the U.S., and so forth. And it was just really eye-opening to return, in particular to China, actually, where I had first gone as a junior banker back when I was working for Lehman Brothers, which of course no longer exists.
And I had been able to visit so many central banks both in China, the People's Bank of China, and throughout that area, that it was really interesting for me to come after this whole experience of being a journalist, writing books, probing markets from a whole other perspective, talking to governments, and so forth. And just returning to see how things had changed and also what has remained the same since then, both from the standpoint of just the city, the country, et cetera, but as well as just central-bank policy and where things are. So it was a very interesting experience for me researching the book everywhere and also comparing that to my earlier days as a banker where I had done a tremendous amount of travel to similar places.
Dan Ferris: Cool. So, I'm really glad to have you on because you know a whole lot about something I know almost nothing about. And I have this stock question that I've been asking people who are experts on central banking. And you answer it quite a bit actually in your book. But maybe just for our listeners. My stock question is this: Everybody likes to say that the Fed eases and it inflates markets, but nobody ever draws me a map from Fed easing all the way to a record high in the S&P 500. And I wonder if, in the limited time we have, you could help me do that.
Nomi Prins: Yeah. So, that's a really good question. Beause also the idea of inflation, whether it's economic or market are two different things. And from the standpoint of artificially inflating the markets, which I concur has been what's happened, the steps are really this. When a financial crisis happened in really 2007, but when the world became aware of it more in 2008 and of course in the fall of 2008, the Fed of course decided to make the availability of money, of capital, to the financial system super cheap – i.e., at 0%. So banks could effectively get money from the Fed at 0%, which is a good option for them to not have to repay interest on money. And plus they had money that was part of their deposits, their assets, and so forth.
As a result, they were able to also offload on the Fed – and this happened in central banks throughout the world, which is why I call it collusion – assets, bonds, treasury bonds, mortgage bonds, things they had on their books that there wasn't really a market for at the time. Things had been very tightened up because there was such a fear with respect to the crisis. But by the Fed allowing money to be cheap and by the Fed also imposing what was called the quantitative easing policy – which effectively just meant they were buying bonds with different maturities throughout the yield curve in the U.S., and other central banks did it around the world – they provided even more money into the system, which made that money cheaper for longer rates.
It also meant that banks could mark their books up. Because there's a buyer. It's like if you got junk in your attic and nobody wants it and all of a sudden you have like a junk attic sale and some person in your neighborhood buys that little dusty lamp that you have that your great-great-grandmother had that was in a corner but doesn't work and isn't particularly even attractive, but they buy it at some crazy amount because they want to, all of a sudden all the other lamps you've got in your attic look more attractive. And that's what happened. The Fed provided money, bought bonds. It made the banks able to evaluate the level of the bonds they had left upward, which meant the market could be evaluated upward even though there was no real buying going on – it was coming from the central banks.
All that put more money into the financial system. That money had to go somewhere. And one of the places that it went, because it's easy to access, was the stock market. It's easy. You and I can buy stocks. You and I can buy options. So can lots of trading desks and hedge funds and so forth around the world. So can central banks. Not the Fed, but other central banks can buy stocks and do. And so this was a way that kind of globally elevated all of the stock markets in the world.
As a result, we see now that the Dow is up about three times from what it was, about triple the amount that it was in the aftermath of the financial crisis, from March of 2009, so about 10 years ago. And GDP growth hasn't really inflated by as much. And that's one major indicator that we can look at to see how that money didn't necessarily go into the real economy. U.S. GDP has not been above 3% for any two years since the financial crisis in a row – growth. But the market has tripled. That's where the money went.
There's also a lot of studies. I'll just wrap up this point real quick. In my chapter on Brazil, I met one of the researchers at the Central Bank of Brazil. And we don't think about the Central Bank of Brazil that much. But it was interesting because he compiled all of the data from all the central banks and he did this analysis, which I talk about and reference in the book, where there was an exact correlation between what the central banks were doing, in terms of putting money into the markets on any given day, and the jump in the markets on any given day. And I actually did that same analysis with the Fed's own minutes and their own books. So there is analysis around if you want to get wonky. But there's data and the trend of money that ultimately went from central banks into the stock markets in particular.
Dan Ferris: Wow. So there's someone actually studying the answer to my question. That's cool. And you provided a great one too.
Nomi Prins: In Brazil [laughs]. And me. Yes.
Dan Ferris: OK. Well, good. I'm glad I got all my personal questions out of the way. So, maybe we should go backwards. Your book is about recent history. But more recently we've seen the Fed kind of change gears. We saw the president tweeting about how the Fed was raising rates too fast and then, totally unexpectedly to me, they just turned more dovish on rates. I totally did not expect that. Did you expect it?
Nomi Prins: I did. I actually wrote about it. I was on Fox actually right in December before the Fed's minutes were released of the FOMC meeting, their market committee meeting that December, where they did raise rates by 25 basis points, which is the fourth rate hike, as they had promised, for 2018. And I was on the show and I remember saying to Charles Payne, the host – I'm like, "I don't think they're going to raise rates because" – and I was wrong, but because not necessarily of what President Trump had said but because the economic slowdown data was coming in. It didn't mean that the Fed was necessarily always looking at that data. But it was coming in. So if they wanted to become more dovish, here was the excuse – and the reality to an extent, but both – to do that.
And I said to him, "And if that doesn't happen, I believe they're not going to raise rates at least till the end of next year." So I did say that. I was wrong about that 25-basis-point hike. But what happened was, really quickly, after that hike, we opened the markets in January of this year and they're really unhappy. Markets are really going down. Because they ultimately wanted this dovishness to return and the sort of availability of cheap money to continue in a way they could be reliant upon. So they're all upset.
And instantly it looked like – but this had been discussed at the Fed internally, but instantly three Fed officials, including Fed Chairman Jerome Powell, go onto different programs and do different speeches – Powell in New York City, different speeches – to say, "Look, we're going to be patient now. We're going to look more at the data." And kind of changed the appearance, and ultimately the behavior, of their policy for now into going from what was hawkish or what looked like it was hawkish to what was dovish. Looking at the same data but just coming to a different conclusion.
And the reason for all of that was because the markets were doing what they did in 2016, which is that: in December of 2015, the Fed raised rates for the first time in seven years by 25 basis points, and there was a tanking in the markets when they opened in January. And the Fed did not raise rates again for the entire year until one more 25-basis-point hike in December of 2016. And Powell's sitting there in Washington – and, yes, President Trump has talked about how the Fed should not be raising rates because he doesn't want them to choke the economy.
But it wasn't really just about the economy. It was about the markets and it was about banks. It was about all the same stuff and all the uncertainty that's in the world right now. And the Fed basically turned around and said, "You know what? We need to have an excuse. We need to have reasons that we discuss publicly as to why we are now going dovish." And they all did that. And they're still continuing to do that. Jerome Powell was on 60 Minutes last Sunday basically reiterating that exact same idea of being gradual, of being patient, of looking at the data, and saying lots of things that indicated that rate hikes, for the moment, were off the table.
Dan Ferris: Yeah. When I think about the Fed I think of, golly, how the truth will out. Because I feel like, as time goes on – and you sort of hinted at this in the very end of your book. It's like the Fed is being found out, and it's becoming more transparent that they're just about supporting asset prices.
Nomi Prins: Right.
Dan Ferris: That's really what's going on here. And it becomes more and more transparent over time. And you even cited reasons why people should think about the addition of the renminbi to special drawing rights of the IMF, and why gold and bitcoin and things have become a little more popular. And I don't know. You gave me hope [laughs]. You gave me hope that one day this will all go away and that we'll have sound money again. And you expressed the same in your book.
Nomi Prins: Yeah. There is this balance between what you've just said, Dan, and what I have agreed on and written about since the financial crisis basically in a book called It Takes a Pillage. I wrote about the asset-pricing support and this sort of artificial stimulus to the markets of the Fed at the time and what was going to happen. And here we are 10 years later talking about it, and in fact it has raised asset prices, book prices, book prices, as well as the markets. And that's been artificial. And even participants in the stock market who've benefited from it if they turn around and think about how they've benefited will realize that some of that's just artificial, which makes it harder to really analyze markets going forward without incorporating this behavior of central banks, which you have to do, which is necessary right now.
However, yes, there are kind of alternatives that arose kind of in contrast to what the Fed and what it required of other major central banks to do in the wake of the financial crisis, which is that, yeah, the renminbi, the Chinese currency, has become adopted by the IMF into what they call the SDR, their standard drawing rights basket. And all that meant was – well, not all. It was kind of a big deal actually. I shouldn't say "and all that meant." But basically what that meant was that the proportion of currencies that were in that basket, that to them represented the major reserve currencies or traded currencies in the world, was extended from simply the U.S., the Japanese yen, the British pound, and what at first was the French franc and the Deutsche Mark but became the euro, into including also the Chinese currency.
And that was kind of a major big deal because all of a sudden someone outside of the G7, outside of the sort of IMF creation as a country, was involving its currency in this basket representation of the major currencies in the world. And that was a major shift. And part of the reason that happened was that the People's Bank of China, the central bank of China, pushed for it. And why were they able to get it through then? Because, as an argument, they said, "Look, the Fed is distorting markets. The Fed is creating a policy that's making markets more artificial and less transparent than before. And we at least need to adopt something else around the dollar and around the Fed because of that." And that was one of the major reasons that the IMF, beyond some personal relationships between Christine Lagarde and the head of the People's Bank of China and so forth, happened.
And now also at the same time China was developing trade relationships and currency relationships outside of the U.S. dollar with countries in that region, with countries throughout the world, to sort of establish this alternative platform of currencies, of trade, and so forth, just from a payment perspective. And that's been growing.
Obviously bitcoin and blockchain – the technology behind bitcoin – has been growing too. I have issues with bitcoin and with cryptocurrency because they're not secure enough I think to become dominant yet. And there's a long way to go to do that. But between these two things, they're just alternatives to the current dollar-based system. That said, they're growing very slowly. And so though there's reason behind it, and though there's growth, it's not really significant yet. So, yes, there is hope. But we have to have, to quote Jerome Powell, a lot of patience to get to something that looks more representative of the world and not necessarily the U.S. or Fed policy.
Dan Ferris: OK. So, knowing all this stuff that you know – and we all sort of know it. We all agree: The Fed makes the market go up. I saw a Citibank report that actually said right in the report: "We all know how this ends. Why isn't it priced in yet?" Which I thought was amazing for Citi, you know?
Nomi Prins: It's interesting that Citi said that, because they were certainly recipients of just a lot of the benefit of this policy. In the wake of the financial crisis it kept them alive, clearly. They got bailed out. They got money from the Fed. They got loans, all sorts of things. It's interesting. And there's other banks doing it. Even Goldman Sachs I think had a piece, not so much about the Fed, but kind of on that idea that things could falter quickly. But that's where the immensity of what happened to markets and by central banks during this last 10-year period can't be understated. It was such an immense program, low rates for such a long time that were considered an emergency measure over 10 years ago and are still going on – quantitative easing to the tune of $22 trillion throughout the world from just the major central banks in the world.
And I break that out in the book, as have other people. It's a lot of money. If you look at how that leverages into these markets, it goes a really long way. And that's one of the reasons why even though we who study this – who even just have a sense about it, who even don't study it that much – realize that there's something kind of artificial that's happened. It's so immense that it's carried and continues to carry markets upward from just a sheer pragmatic standpoint. Because it's still available, this policy. And things happened crashed even though it's based on ultimately a really really really big pile of sand. But it's a really big pile [laughs]. You go on a beach and you look at a huge pile of sand, it's going to take a long time and a lot of wind and a lot of rain and a lot of sort of other causes to beat it down. And that's what we're seeing: the immensity of this whole process.
The U.S. stock market, for example, is valued at about – all the stocks – about $34 trillion. And that amount, if you even look at the leverage from a Fed policy that was between $4 and $4.5 trillion of quantitative easing or subsidy, net of the cheap money, into this evaluation, you're looking at a very high leverage. So it's not just the Fed. But it's all the actors in the market, all the banks, all the players, all the funds, all the people, all the speculation that is predicated on this cheap money can create a large chunk of that $34 trillion. And then you sort of multiply that throughout the world. So it's not stable but it's big [laughs]. And that's one of the reasons why things haven't crashed to the extent that, if you really did beat the sand castle down or you did take out the carpet – that's sort of there to secure the rest of the market – out from under it, would happen in any sort of a normal situation. Because we're not in a normal situation.
Dan Ferris: Right. We're in Chuck Prince land, right? The music is playing and we're all still dancing.
Nomi Prins: That's right. That's exactly right.
Dan Ferris: Right. You're not going to come to work if you're a financial professional and say, "I can't do my job because it's all going to fall apart someday."
Nomi Prins: No. In fact, it's more that, which is, again, one of the reasons the market's been so bland for so long, is that if you're doing your job, if you're looking at what's happening, you can't ignore that it's happening, either. You can't not do anything because you're afraid of what might happen, and you can't not do anything because you know what is happening. As artificial as the stimulus has been for as long as it's been, predicated on central bank policy and everything that unleashed, it still exists. So you can't ignore its existence, either.
And that's, again, why every time a central bank leader – whether it's Jerome Powell at the Fed, whether it's Mario Draghi at the ECB, European Central Bank – says, "Hey, we're going to continue our policy of quote 'stimulating the economy,'" which is code for stimulating the markets and has been since the beginning of it, the markets go up. It's just like confirmation. The markets are very needy. They're like a needy chick, right? It's like if you get that confirmation, it's like, "OK, fine, I'll go out with you." And that's sort of what's going on.
Dan Ferris: That's a great analogy. I've never heard that. That's hilarious. I wonder if I could ask you – just change gears a little bit... You did mention trade with China when you were speaking before. So, help me understand the headlines here. I tend to think of this trade with China business in a very pure, kind of almost theoretical, economic way. I don't like protectionism. I think it has bad effects. But what is your take? How do you see all this trade business with China ultimately playing out or not? I mean, I don't know how it goes. But what does it mean to you?
Nomi Prins: Yeah. So, having been there a lot, and obviously having been in the United States a lot, there's a huge Apple Store in the middle of the most busy part of Beijing which is busy all the time. And that's just one example. So imagine that. And the reality is: we are in such a globalized world from the standpoint of money and markets and international companies that having tariffs or having trade wars between countries – it is an imposition. It does detract from overall sort of real economic growth in those countries because it sort of invokes uncertainty into: "Well, how are things going to look? Is it really going to cost 25% more to import something into the United States? OK, well let's find another partner. Or we have to cut back on production."
If it costs 25% for soybeans to be imported into China and China is buying soybeans from U.S. farmers, then the farmers either have to find another way or another place to sell that or they're going to be losing money and then they can't pay their bills and then they can't buy stuff. There's real impacts of these sorts of tariff wars. And we are seeing that. It's one of the reasons – not the only one, but there is real economic slowdown throughout the world, in U.S. and so forth. It's why our GDP popped up to 4.2% on some soybean subsidies and now it's back down below 3%. So it's a reason.
On the other hand, ultimately money does and international companies do kind of surge forward into each other, which is one of the reasons we saw record-high mergers and acquisition deals last year and it's likely they'll continue into this year, and many of them are cross-border. Because companies are going about their business of increasing, if they can, if that's in their MO, global market share. And they'll continue to do that regardless of what politicians are doing with respect to each other on a sort of geopolitical international basis talking about trade.
So I think ultimately a lot of the trade wars will subside. But it's like the market coming down after being stimulated so long ,except the opposite, which is that there's going to be damage – and there has been damage done – economically and to real product and service providers along the way.
I was just writing a piece this morning on Europe and the U.S. Because no one's talking about it. Because everybody's focused on the U.S. and China and what's going to happen with that potential agreement or discussions. But there's a deadline approaching with respect to added tariffs on cars and car parts coming from Europe to the United States which is set to go off on May 18, so in two months, and no one's really talking about that. So all these things are lingering drags. But I think ultimately – and it will take time because we have politicians kind of involved – I think there will be resolutions. It's just, again, there'll be pain along the way.
Dan Ferris: So I'm glad you mentioned Europe, because I was going to ask you about Brexit next. In the same general vein, I look at it as a pure economic exercise and, like you say, there are real economic consequences. Do you see that similarly?
Nomi Prins: Yeah. There have been. I mean, no one told – and whether someone voted for or against Brexit back in June 2016, no one really laid out – because it was a political move – the economics, one way or the other, of what things could look like if Brexit either went through or if what we have in the interim since then, all this uncertainty about what it might look like or whether it gets re-voted or whether it's delayed or whatever. And so all the information – I don't think the people in Parliament understood what the implications were, and as a result they didn't really tell people what the implications were. As a result, I think the vote was based on a lot of non-economic reactions, which people are welcome to have.
But as a result, what's happened is that the U.K. economy has declined, a lot of uncertainty has come into the service sector, and wages have not increased to the extent that they might have otherwise because there's less hiring going on with companies that are doing trade with the EU because they don't know what's going to happen. And so, again, that drag, that uncertainty drag has hurt the economy. And then you sort of add into that the fact that Parliament itself looks like a complete mess because they don't really know what they're doing [laughs]. And this is on both sides. This is Conservative, this is Labour, and this is just like in general. Because they're not having – they haven't really had a real economic analysis of every single piece of what could happen with or without a Brexit.
But at the moment it looks like the vote's going to be delayed, as was the deadline for the U.S. and China, which originally was March 1 on trade talks, as it probably will be on May 18 for the U.S. and the EU. It will be delayed. Whether there's another referendum or not is unclear, and what it would look like is unclear because there's so much sort of political discourse in both parties about that. But it looks like it'll be delayed. That will create more uncertainty, and, again, probably a flux of M&A, mergers and acquisitions, across the border to just get sort of market share security in the meantime while it's all being sorted out. And "sorted out" could mean nothing happens [laughs].
Dan Ferris: Right. So, Nomi, just for the sake of our listeners and even for me too – because I don't know a whole lot about this – why can't the U.K. trade with Europe without being a member of the EU?
Nomi Prins: Yeah, it can. The thing is this: because they're a member of the EU – and this goes back to what I was saying about tariffs before – there's a lot of trade that happens that doesn't have imposed upon it taxes to go back and forth, whether it's services or periods across the border, through customs and so forth, particularly in food and other items. And so if the U.K. were to leave the EU, by just definition of the agreement by which they joined the EU in 1999, all of a sudden, technically, without negotiation, all of that would change.
And so that's a real economic cost on both sides, European companies and to British companies. Because all of a sudden you have to incorporate tariffs you didn't have to incorporate. So, yes, they can. And they will continue to trade. Because they have to. These are major trading partners with each other. But all of a sudden –
Dan Ferris: Exactly.
Nomi Prins: – there's all these extra costs involved. And therefore there's all this uncertainty. And there's: "Well, do we just create services in Frankfurt for banks?" Which is not as fun as London. I mean, I lived in London. I wouldn't want to live in Frankfurt. But all these other indecisions come into play because of the of the actual economic cost that doesn't exist right now under the old membership to the EU.
Dan Ferris: I see. So, Nomi, I hate to tell you this – we've sort of come to the end of our time here. But I want you to – let's see. I'm going to sort of impose upon you here to try to leave us with something that makes folks want to come and see you at the Stansberry conference. Because I really think they should. I think you're one of the people they should definitely come and see.
Nomi Prins: Well, first of all, I hope everyone who's listening does come because I just think it's going to be super fun and super informative. I'm really looking forward to it. And obviously anybody's questions on their own portfolio, the state of the world, the state of life, whatever, are all sort of on the table. And I think that will be really interesting to dig through.
And I think between now and then there's a lot of things that're going to happen in the world – by date, by deadline, and by sort of economic and market mechanisms – that'll make it more necessary to think about sort of that last quarter of the year, including whether Brexit happens, including what occurs with respect to a deadline between the U.S. and China, what happens with respect to the U.S. and the EU, what happens between the U.S. and Canada and Mexico, what happens with central banks. Does Powell at the last quarter turn around and go hawkish? Does he stay dovish? These and more questions. It's sort of like a cliffhanger thing. So I think in particular it's going to be a super pivotal time when the conference does happen.
And, again, Vegas is really fun as well. And so I just think that altogether there'll be a lot of information trading around as well as I think just a fantastic – I know you have other fantastic speakers, and all of your conferences are fabulous. And so I just think this one in particular will be awesome. And I look forward to seeing everyone.
Dan Ferris: Yeah. And I'm going to sum that up for folks: with everything that is likely to happen between now and then, you'll wish that you had come and seen Nomi talk if you didn't. So join us in Vegas. And, Nomi, thanks a lot for being here today. I love your book.
Nomi Prins: Thank you so much.
Dan Ferris: I actually – I haven't read the whole thing. But I've dipped into it, read the beginning and most of the ending, and I've dipped into all your discussions about Mexico and Brazil and Europe. And it's fractal, your book is. Because the overall arc of the argument is present in each of the smaller sections. It's really good. So, thanks for being here.
Nomi Prins: Thank you for saying that. Thank you. Thank you so much.
Dan Ferris: All right. Hopefully we'll talk to you soon. But bye-bye for now.
Nomi Prins: All right. Thanks. That was awesome. Talk to you soon.
Dan Ferris: Bye-bye.
Dan Ferris: All right, folks. It's time for the mailbag. Unfortunately, nobody wrote in this week. Actually some people wrote in, and I swear to you I'm being honest – they wrote in to say the nicest things. And that's all they said were nice things. I'm getting a lot of e-mail from people saying nice things. So what I would tell you is: you know, if you liked what you heard today, if you hated what you heard today, please write in at [email protected]
And I really would like you to go back and listen to the last few episodes, starting from like Episode 90 with Jim Grant. There's a lot of really good stuff in each of these interviews that I think pertains especially well to what's going on in the world right now. And I think you'll agree today's interview was really pertaining to exactly what's happening right now. And we just keep finding these guests who can shed light on things that you really probably are very concerned about. So go back, listen to recent episodes, write in at [email protected]
And, yes, I'm going to be a little – I'm going to tout myself a little bit. I think the last few rants are something that kind of constitute – the last four including today: there's a progression there. And I talk about – they're just all about the things you need to do even before you can just buy one share of stock or one bond or one anything. So maybe go back and listen to some of those. Download them, listen to them if you haven't already, and hit us up at [email protected] OK?
So that is another episode of the Stansberry Investor Hour. Thank you so much for listening. Be sure to check out our recently revamped website where you can listen to all the episodes and see show transcripts. And I get a lot of questions about the transcript. Now, the most recent episode isn't always there right away but it's there within a few days. But for any given episode, you just click on that episode and scroll all the way down. The transcript starts right at the bottom. OK? So just go to that same address: www.InvestorHour.com. That's it for this week. Thank you so much, once again. I will talk to you next week, folks. Bye-bye.
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