Thursday, March 23, 2017

A Big 3rd-World Problem - Interview with Doug Casey

Doug Casey and I recently chatted about Trump and what his presidency means for the stock market. We also hit on the War on Cash, bitcoin, and a big third-world problem that’s headed straight for the US.
Nick Giambruno: Doug, what do you think is the root problem of the US economy and financial system?
Doug Casey: There are several, including incompetence, corruption and, of course, just plain stupidity. But there’s not much you can do about those things; they’re intrinsic to the government. But perhaps something can be done about ignorance, which starts in school: What, for instance, do most people learn about economics and finance? Very little. As Mark Twain said, “It’s not what people know that’s the problem, it’s what they think they know that just ain’t so.”
All of the economics that’s taught in the schools—what little that is taught—is completely backward. Plus, almost everything you hear on television is conventional, unsound, and wrong.
I’d like to believe anybody that’s reading this right now that has at least heard of the “Austrian school of economics,” understands the value of gold, and knows a bit of basic economic theory and history. Without at least some fundamentals, people stand to suffer a huge drop in their standard of living if the economy goes sideways.
When the current financial crisis started, in 2007, it was the leading edge of the huge financial hurricane that hit in earnest in 2008 and 2009. Now we’re in the eye of this hurricane, but we’re going to the trailing edge of the storm, and it’s going to be much worse and much different than what happened in ’08 and ’09. Or, for that matter, in the 1930s. So hold onto your hat.
Nick Giambruno: Can President Trump fix this mess?
Doug Casey: Everybody is talking about Donald Trump. He’s a complex individual. I actually made money bets that he would win the election. But that’s not the only reason I’m glad he won.
Is Trump a good thing or a bad thing? They say, “Oh he’s a racist.” “Oh, he’s a sexist.” “Oh, he’s a homophobe.” “Oh, he hates Muslims.” Frankly, we should analyze those things, but I think they’re basically all lies. In fact, he’s just a businessman, flying by the seat of his pants. He doesn’t have a core philosophy.
What’s going on in the US now is a culture clash. The people that live in the so-called “red counties” that voted for Trump—which is the vast majority of the geographical area of the US, flyover country—are aligned against the people that live in the blue counties, the coasts, and big cities.
They don’t just dislike each other and disagree on politics; they can no longer even have a conversation. They hate each other on a visceral gut level. They have totally different world views. It’s a culture clash.
I’ve never seen anything like this in my lifetime. There hasn’t been anything like this since the War Between the States, which shouldn’t be called “The Civil War,” because it wasn’t a civil war. A civil war is where two groups try to take over the same government. It was a war of secession, where one group simply tries to leave.
We might have something like that again, hopefully, nonviolent this time. I don’t think the US should any longer remain as one political entity. It should break up so that people with one cultural view can join that group and the others join other groups. National unity is an anachronism.
Nick Giambruno: What would that look like?
Doug Casey: Well look, my ideal situation politically is this… right now the world is divided into about 220 different nation states, different countries. That’s a very bad idea, because almost all of these nation states are trying to weld together people of different views, philosophies, languages, religions, ethnicities, and races, and it doesn’t work.
This is a major reason why Africa—which I’m pretty familiar with—just hasn’t gone anywhere. Every one of those countries, as well as every one of the countries in the Mid-East, Central Asia, and I’ll include India, they’re not real countries. They were put together arbitrarily in the boardrooms of Europe in the 19th century, and they have no internal consistency. So different groups in those countries try to take over the government so they can use it to steal.
Instead of 220 nation states, we should ideally have about seven billion. Everybody should be a sovereign individual.
Nick Giambruno: What does Trump mean for the stock market?
Doug Casey: Trump is associated with the free market, even though he understands nothing about economics. He’s not really a free market guy, he’s an authoritarian, not a libertarian. And he has some disastrous economic ideas—like putting up import barriers and replacing Obamacare. He’s trying to run the country as if it were his privately owned company.
He also has some good economic ideas. Cutting regulations, wonderful, and he’s doing it. Cutting taxes, fantastic. This is very good.
But he appears to want a weak dollar: What he’s really doing is destroying American savings and making imported goods more expensive. This is horrible. I mean this could actually be the straw that breaks the camel’s back. A Smoot-Hawley tariff lookalike.
I applaud the fact he also despises Progressives, Cultural Marxists, Social Justice Warriors, the media, academics, and the like. But, again, he’s no libertarian.
Nick Giambruno: Where do you think the stock market is headed?
Doug Casey: Well, anything is possible. I really believe that. So will the Dow go to 40,000? Yeah, it’s possible, but it’s highly unlikely.
I wrote Strategic Investing back in 1982. At the bottom of the bond market, when rates were 15%. When the Dow was under 1,000. I wrote, “The Dow’s going to 3,000,” and everybody said, “You’re completely insane, that’s a triple of the Dow.” Well, it went to 3,000, and then it went to over 20,000 over the next generation.
All I can say about the stock market is, by any traditional parameters of value—price-earnings ratio, price-to-book ratio, dividend yields—it’s now very overpriced. And bonds aren’t just in a bubble. They’re in a hyper bubble.
The economy itself is head-over-heels in debt. What does “debt” mean? It means that some people borrowed money and owe it to other people who are going to want it back. When you borrow money two things usually happen. First, you’re taking capital that others saved in the past, and are probably using for consumption, not to create more wealth. And second, you’re mortgaging your future, which makes you a serf when you have to pay it back. All that debt is a ticking bomb.
So my feeling is the economy can collapse and with it earnings on the stock market and with it prices of stocks. So I want no part of the stock market right now.
Nick Giambruno: What do you want to buy right now?
Doug Casey: You want to buy when things are cheap; very little is cheap. People don’t have a sense of history—they don’t realize how cheap things can get. I mean, the Dow Jones in the past, at times its yield has been 6%, 8%, 10%. At the bottom of the last depression, after dividends were cut significantly, it yielded 13%.
I watch a lot of international stock markets. I remember in the mid-1980s, three stock markets—Hong Kong, Belgium, and Spain—the indices were all yielding 12% to 15% in current dividends. They were selling for two times earnings and half of book value. Now that’s when you buy stocks. You don’t buy them at the nosebleed levels where they are right now.
Nick Giambruno: Switching gears to the War on Cash. Why are governments working to phase out cash?
Doug Casey: It’s all the governments of the world. This is not just happening in India, which is basically a primitive country where half the people still live on a dollar or two a day—as unbelievable as that sounds. But in advanced countries, in Europe, especially Sweden and Finland, even in backward Uruguay they’re trying to get rid of cash.
They say, “Well, drug dealers use cash. Criminals use cash.” Yes, of course, and free men use cash because money equals freedom. Money equals all the things you want to have for yourself and provide for other people. You don’t want the State in control of your money.
They say, “Well, that’s okay, you just have to cycle money through your bank account.” But when money has to go through your bank account, then that’s the only way that you can buy or sell anything. The government controls your bank account. If you become politically unpopular, for whatever reason, they can shut off your bank account. And they know exactly what you’re doing, what you have, and what you like.
The thing is, without cash you’re completely under the control of your rulers, and that is not acceptable to a free man. These people aren’t angels. In fact, you don’t get the best people in government—you get some of the worst people.
Look, we shouldn’t be using the dollar to start with. It used to be the dollar was just a name for a certain amount of gold, 1/20th of an ounce. Then people forgot that the dollar represented something. Now the dollar is just a floating abstraction.
It’s an insane idea. It’s a criminal idea. It’s anti-human.
But the average person who’s got a smartphone thinks, “Oh that would be convenient. I won’t have to worry so much about somebody sticking me up for the dollars in my wallet.” But even that’s wrong; phones are stolen, and accounts are hacked. There are zero advantages to a cashless society—except to the State.
Nick Giambruno: What are your thoughts on bitcoin?
Doug Casey: I’m of two minds about bitcoin. Aristotle in the Fourth Century B.C. gave the five characteristics of anything that can be used as good, reliable money.
It has to be durable, which is why we don’t use wheat as money.
It has to be divisible, which is why we don’t use artwork as money. You can’t divide the Mona Lisa into pieces.
It has to be convenient, which is why we don’t use lead as money. It takes too much to be of value.
It has to be consistent, which is why we don’t use real estate as money. Every piece is different from every other.
Last, it has to have value in and of itself, which is why we shouldn’t use paper as money.
So the problem with bitcoin is that its only value, as far as I can determine, is a transfer mechanism. If you want to send money to somebody on the other side of the world right now you’ve got to go through the SWIFT system in your banks. It’s expensive. It’s inconvenient. It’s not private.
But with bitcoin—assuming that the person on the other side of the world can find somebody that wants to accept bitcoin—you can do it instantly and for no cost. That’s the value of bitcoin. It’s a great transfer mechanism.
If the dollar starts losing value at 15%, 20%, 25% per year—which is entirely possible over the next few years—people might go to these crypto currencies just to get out of dollars. The government can’t easily control them, they’re limited in amount, and there will be more confidence in them.
Right now they’re interesting speculative vehicles for capital gains, not just bitcoins, but some of these new ones that have different characteristics, as well. They’re like buying penny stocks, interesting. A speculative bubble could easily develop in them.
Nick Giambruno: Why do economists spend so much time trying to decipher what the Fed will do next?
Doug Casey: Well there’s a whole class of talking heads that make a living out of predicting what the Fed is going to do. It’s absurd.
Let me say something radical: The Fed has no right to exist. It serves no useful purpose. It should be abolished. It’s worse than unnecessary. The Federal Reserve is destructive.
So I don’t try to second-guess what these idiots are going to do. But the last thing that they should be doing—nothing they do is good—is controlling interest rates. That’s for the market to control. Setting the price of money is as stupid as the government trying to set the price of candy bars in a store. It’s equally ridiculous but much more destructive.
Nick Giambruno: What do you think is going to happen to the US dollar?
Doug Casey: This is very important. When you work and produce you’re paid in dollars, and if you want to get ahead in life you save those dollars. The problem is after you’ve saved dollars—what happens if those dollars lose value overnight? Everything you’ve worked and planned for vanishes with the dollars. This has happened numerous times in other countries with other currencies.
The problem with the dollar is it’s the unsecured liability of the US government, which is bankrupt. In the years to come, that’s going to become very obvious, with catastrophic consequences for the average American.
How can you get ahead in the world when you have to save a depreciating asset? That’s why in these third world countries the average guy keeps falling further and further behind, because all he can save is the local currency, and the currency consistently turns into toilet paper, so he’s always behind the eight ball.
The same is going to happen in the US on a much grander scale. It’s going to be much more serious because even in all these countries smarter people try to save dollars, they don’t save pesos or kwacha or ringgit, they don’t save these horrible currencies. They try to get hold of US dollars. When the dollar is devastated, they’re going to blame Americans for their currency losing value. This has all kinds of bad consequences.
The dollar is going to cease being the world’s reserve currency sometime in the next decade; I’m confident of that. The Chinese are making a lot of progress with the yuan. The euro, however, is going to cease to exist. The European Union is going to break up. Europe has all kinds of problems.
Now that’s the bad news, but the good news is that during a time of financial chaos most of the real wealth in the world will still exist. It’s just going to change ownership. You want to be one of the people on the winning side of that equation.