Living In The Greatest Financial Bubble Of All Time

The US continues to defy all rational valuation metrics as it continues to make new highs. I contend this is the result of the huge amount of liquidity being provided to the markets by the FED. This bubble now appears to be entering its blow off phase. As I have said before, just because a market is overvalued does not earn it cannot become more overvalued.
Nevertheless, at some point the music will stop and a massive decline in the stock market will occur.

Will the reduced economic activity caused by the coronavirus be the needle that pricks this bubble. So far the markets, with the exception of commodity markets, are shrugging off the news that China is basically on lockdown.

The German energy transition continues to fail as the country considers building more coal generation as energy rates soar and CO2 emission targets are not being met. A lesson for policy makers in the US to take into consideration.

 

00:00
hey guys John Paula me here actionable
00:03
intelligence
00:04
today is Sunday February 16 2020 this is
00:09
the weekly market update
00:11
so before right before I get into the
00:14
charts I just want to make some comments
00:16
on the continuing coronavirus situation
00:20
as it relates to what we’re doing when
00:23
it relates to in the markets and I’m a
00:28
little bit I don’t know
00:31
shocked not shocked but what’s the right
00:34
word confused we’re seeing all-time
00:38
highs last week and in many stocks in
00:42
the stock market and so you know it
00:49
makes you wonder what’s going on is the
00:51
market so efficient that its pricing and
00:54
the fact that this isn’t going to be a
00:56
big deal or is it more that I what I
01:00
think it is which is a liquidity bubble
01:03
plus all kinds of money coming into the
01:06
US for various reasons safe haven flows
01:10
if you will I think that’s probably an
01:14
explanation for why stocks are going up
01:15
there’s some stocks that are
01:17
inexplicably not going down which should
01:20
I’ll give some examples as we go and get
01:23
into the discussion what I want to say
01:25
though is is that I’m getting very very
01:27
concerned about the bubblicious
01:29
conditions we are at some of the highest
01:31
bubble levels that I’ve ever seen
01:34
now we’ve been talking about that for a
01:36
while and we’ve said that liquidity
01:39
flows matter you know the stock market
01:42
isn’t necessarily correlated with the
01:44
economy in the longer term it seems to
01:47
be but you know it’s liquidity matters
01:50
and with the QE for that that the Fed is
01:55
doing that the QE for non QE for
01:58
whatever they want to call it the repos
02:00
that’s high-powered money that’s t-bills
02:03
they’re buying this is the first time
02:04
they’ve done that in many years and that
02:06
money is going directly into the markets
02:09
couple that with the fact that you
02:11
already had dollar flows into the u.s.
02:13
prior to the coronavirus and now the
02:16
u.s. still being a safe haven that’s
02:19
where the money’s going so I would
02:22
caution you it what’s what’s fascinating
02:25
is is the the only thing that’s really
02:27
bad are commodities so the commodities
02:30
are showing us that you know demand is
02:34
obviously gonna have a knock-on effect
02:36
from this you know when you shut down
02:39
the Chinese economy basically you’re
02:41
gonna in some largest consumer of things
02:43
like oil largest importer of oil copper
02:46
aluminum cement things like this you’re
02:51
going to have a knock-on effect as China
02:54
basically everybody’s in quarantine and
02:56
Industry slows down we’ve also seen that
02:58
in the supply chains we’ve seen more
03:01
announcement this week we saw one
03:03
announcement where the company went back
03:06
to work and there was like a thousand or
03:09
2,000 employees and what the employees
03:11
had coronavirus now everybody’s
03:13
quarantined to the factory they can’t
03:14
even go home so I don’t know I’m back to
03:18
what I’ve said before I don’t really
03:20
know what’s going on here do you trust
03:23
the data in China no if you look at the
03:24
John Hopkins tracker coronavirus tracker
03:28
they take in they don’t just take in one
03:30
bit of information they gather
03:32
information from several sources it
03:33
seems like things may be starting to
03:36
peak in China if you believe the data
03:38
which I want I don’t believe the data I
03:41
would say though that I think the rest
03:46
of the world cases are still going up
03:48
slightly they’re still under a thousand
03:49
cases it’s like 750 outside of China
03:54
most of them concentrated in the areas
03:56
directly around China so there’s 15
04:00
cases in the US for example so we’re not
04:03
seeing this big epidemic now there are
04:06
many commentators or people that I’ve
04:08
listened to that said that the next wave
04:10
is coming and this thing is going to
04:11
explode outwards I don’t really know
04:13
what I’m I’m not a you know happened
04:15
epithelium ologist
04:17
I don’t have not an expert on academics
04:20
epidemics outside my circle of
04:22
confidence we still have to look at
04:23
those it’s affecting the markets that
04:25
were involved with which is resource
04:27
markets
04:27
for in a large part so I would be very
04:34
cautious if I was basically one of the
04:38
things I’m recommending is you know I
04:39
mean I think we’re going to see some
04:42
interest rate cuts from the Federal
04:43
Reserve as the economic numbers have to
04:47
be affected by this they have to be I
04:50
mean you’re just not going to have this
04:52
kind of slowdown in China and not have
04:54
it have a have an effect on the rest of
04:55
the world so I expect that that means
05:00
higher bond prices probably especially
05:02
in the Treasury market that’s a good
05:03
place play to put money in a short term
05:06
cash is always good I have a lot of cash
05:09
I like gold still Gold’s in a bull
05:12
market I think with the accelerating
05:14
monetary malfeasance that continues
05:16
around the world especially in the US
05:18
and I think you know what’s gonna happen
05:20
in China I think gold is poised to go a
05:23
lot higher especially with the debt
05:26
levels in the US we’re gonna be hitting
05:28
trillion dollar deficits I wrote an
05:30
article this week that kind of pointed
05:33
out the fact that I believe this is the
05:35
first year when the Social Security
05:37
trust fund now goes into the red and is
05:40
now going to become an on budget item so
05:42
you’re gonna have to pay out of the
05:46
federal budget there’s the two hundred
05:48
billion dollars that you don’t have in
05:50
the Social Security trust fund and I’ve
05:52
written articles about that people can
05:54
go my my site and look at that so there
05:57
is no lockbox there is no thing nothing
06:00
to dip into it’s just a bunch of IOU use
06:01
that now come do so things are not
06:05
getting better they’re getting worse but
06:08
yet the markets move higher and higher
06:10
and higher because it’s all about
06:11
liquidity so you know if you look at the
06:16
Venezuelan and Zimbabwe stock markets
06:19
when they went into hyperinflations
06:21
that’s not what I’m suggesting is gonna
06:22
happen in the US I’m not suggesting the
06:24
hyperinflation but if you look at their
06:25
stock markets they crashed upwards
06:27
there’s people piled in the stocks who
06:30
tried to hold some type of value so like
06:35
I said all these bubbles and we’ve
06:37
talked about bubbles even since I’ve had
06:38
this channel we’ve went through two
06:40
bubbles the Bitcoin
06:41
bubble that was one of the first videos
06:42
I did was about Bitcoin being a bubble
06:44
it was it crashed people a lot of people
06:47
lost a lot of money
06:48
same thing with cannabis stocks we
06:50
talked about that that’s now crashed
06:52
people have lost a lot of money so you
06:56
know we’ve seen bubbles before here’s a
07:02
chart shows various bubbles what happens
07:04
they crash they don’t usually come back
07:07
for a while you see the this particular
07:10
person chose excuse us what as
07:11
disruptors it’s just the post great
07:14
financial crisis that induced bubble but
07:17
this is the greatest one of all and it’s
07:19
now gonna go it’s I now believe it’s
07:21
accelerating too far it’s blow off top
07:22
and this is something we suggested in
07:24
previous videos what happened I’ve
07:25
talked about this I’ve got a Cassandra
07:29
but I suggested that even though the
07:33
stock market was overvalued and it’s
07:34
been overvalued from a long time it can
07:37
get way more it can get way overvalued
07:39
you can get much more overvalued and it
07:42
probably will another chart here you can
07:47
see going back to 1991 this is the
07:51
build-up to y2k that was going to be the
07:53
you know computers were gonna lock up
07:55
the world was gonna end the Greenspan
07:58
Fed printed a bunch of money it led to
08:01
the tech bubble it blew off but what
08:04
happened this is the Nasdaq he crashed
08:06
90% then you had your great financial
08:09
crisis in here we’ve had nothing but
08:11
money printing since and now QE 4 if you
08:14
will and we are now accelerating to what
08:16
I think is the blow-off top in this US
08:19
stock market so you need to be you need
08:24
to be concerned you need to be
08:26
understand what’s happening now I don’t
know what’s gonna prick the bubble some
I’m looking at my my indicators as I
look at the high-yield debt market which
I think will be the first thing that
rolls over and it’s not there’s no fever
there there’s no issues there right now
08:42
that can change you know as we start you
08:45
know one of the things like forecasts
08:47
are thought what could happen was that
08:50
if we did go into a recession there’s a
08:52
lot of zombie companies about 25 to 30
08:55
percent
08:55
the companies out there that have junk
08:57
debt are zombie companies and they
08:59
cannot afford to have rates go up rates
09:05
won’t go up unless we have some huge
09:07
breakout inflation so what could happen
09:10
though is that the economy slows
09:11
massively because of this China thing
09:13
cash flows can be constricted and that
09:16
could force companies into a situation
09:18
where they do not have sufficient cash
09:21
flow to service their debt and then you
09:23
begin a cascading flow of waterfall
09:27
effect if you will of debt explosions
09:32
and and you know reorganizations so I
09:35
think that’s a possibility but my
09:39
original thesis was that this thing was
09:41
gonna rip and roar we were gonna have an
09:43
energy was going to drag the inflation
09:45
rate up I we were on that track and then
09:48
the coronavirus had you remember we had
09:50
WT I was over it was sixty two dollars a
09:52
barrel at the beginning of January and I
09:56
was forecasting higher oil prices
09:58
because of the lack of investment and
10:00
the slowdown in shale and I thought that
10:02
that might be what kicks inflation into
10:05
gear and forces the Fed to raise rates
10:08
but now with the coronavirus and the
10:11
collapse and commodity prices that’s
10:14
happened that particular pin has been
10:17
put back into the into the drawer so
10:21
this is really amazing though because if
10:23
you look here at what’s happening in our
10:25
stock market I mean you could this just
10:27
correlates perfectly with what happened
10:29
with that we whole repo QE for non QE
10:33
for is what I call it so liquidity
10:36
really does drive these markets whether
10:39
people can then me you know you
10:40
supercharge this what the fund flows
10:42
into the US as because of it being a
10:45
safe haven or considered a safe haven or
10:47
the least dirty shirt in the HAMP or
10:50
however you want to characterize it but
10:52
this is what we are seen and this is not
10:55
healthy this is not going to end well
10:57
folks this is not good we’re gonna see
10:59
this blow off and then we’re gonna see
11:01
and I don’t know what’s gonna happen on
11:03
the downside so let’s go back talk about
11:07
some China stuff
11:08
for a while here her the resource
11:10
markets you know so the Baltic Dry Index
11:12
you know 415 it’s been a decline since
11:18
mid-2009 teen as the world economy was
11:20
slowing down but then we’ve got this you
11:23
know really what’s happened since the
11:25
beginning of the year and this
11:26
coronavirus took off and this things
11:28
crashed by you know three quarters or
11:33
two-thirds this is that lows we haven’t
11:36
seen in a decade so or almost of the
11:41
lows of 2016 so anyway this is not good
11:44
this is an indication that you know iron
11:47
or various ore concentrates they’re not
11:52
flowing you know because China is
11:55
basically shut down you know we’ve
11:57
already seen China declare a force
11:58
majeure on some energy deliveries like
12:00
LNG deliveries not good but what I’m
12:08
showing you this for is because I’m not
12:09
seeing the knock-on effect the market so
12:11
really don’t seem to be pricing any of
12:12
this in and it’s kind of it’s very weird
12:15
the signal is not good there’s China
12:19
travel collapse this was the passenger
12:21
transport volumes in China during the
12:23
Lunar New Year you see that we are
12:25
downed on rail roadway and air travel
12:30
anywhere from sixty to eighty percent
12:33
almost it’s a complete collapse the
12:35
whole country’s in lockdown basically
12:39
what I want to talk about why is this
12:41
relevant I just picked this one company
12:43
because I’ve heard other people talking
12:45
about it and kind of piqued my interest
12:46
this is wind resorts that’s a casino
12:48
operator they have properties in Las
12:52
Vegas but they also have two casinos I
12:54
believe in Macau which is a another
12:56
small island off the coast of China
12:59
where they allow gambling a lot of
13:01
Chinese well ninety five percent I’m
13:04
sure 99 percent of the traffic there is
13:06
is to these casinos is from China
13:13
mainland China what I find fascinating
13:16
here is is that the two casinos I look
13:19
at some of the financials real quickly
13:20
for Wynn Resorts
13:22
and the casinos the two casinos in Macau
13:29
are shut down now they’re still making
13:30
payroll basically they’re not to just
13:34
keep the casinos in the current state
13:37
they are paying payroll the 12,000
13:39
employees is about 2.5 million a day
13:41
they have no revenue coming in I believe
13:43
these two casinos if I read it correctly
13:45
contribute 300 million dollars of EBIT
13:48
da to the two Wynn Resorts bottom line
13:52
last year I think a billion dollars in
13:54
sales if I’m not mistaken regardless
13:58
when you shut down a large portion I
13:59
mean you had a bit of a drop off
14:00
obviously I mean actually if you look at
14:05
the beginning of 2020 when this virus
14:06
took off this thing made all new time
14:07
highs and then it it kind of did pull
14:09
back but not like you would think I mean
14:12
it pulled back about you know 20 percent
14:15
and now it’s rallying again why is this
14:17
thing rallying when there’s you know two
14:20
of their major properties and their
14:21
major revenue generators I mean are not
14:24
you know in business they’re just
14:27
sitting there we have no idea when
14:28
they’re gonna reopen so well I like I
14:31
said there’s two things going on here
14:33
either the market is efficient and its
14:35
pricing and the information and the
14:36
coronavirus is gonna blow over in the
14:38
next you know a few weeks or month or
14:41
two and then we’re gonna be back to
14:42
business as usual that’s one option of
14:45
another option as the market is just not
14:47
getting this I mean the same thing
14:48
you’re seeing like some of these cruise
14:49
ship companies these things should be
14:51
crashing who is taking a cruise with you
14:54
know to cruise ships go around like you
14:56
know Typhoid ships that can’t even get
14:58
into various ports I know I’m
15:00
overdramatizing that one of the ships
15:02
can’t but one of the one of the ships I
15:04
think that’s in Japan they’re finally
15:05
taking off British and American
15:07
passengers the governments of the UK and
15:10
the United States are dealing with this
15:12
but you know this news is not good this
15:16
thing’s supposed supposedly is so very
15:17
early and yet people are still taking
15:21
cruises and the you know it’s not really
15:24
being reflected you think any stock
15:25
prices only stock prices it’s reading
15:27
reflected as the resource markets you
15:30
know gold and copper down you know
15:33
anywhere from 15 or that gold but what
15:36
copper or down anywhere from 15 to 20
15:38
percent the stocks are down 30% which is
15:42
what you would expect get priced in
15:45
because of the you know like I showed
15:47
you earlier China’s basically shut down
15:48
so I don’t know this is not making a lot
15:51
of sense this thing is either gonna blow
15:53
over or it’s just going to we don’t know
15:55
what’s gonna happen and I just think
15:57
that some of the reactions in this
15:58
market are just ridiculous and they
16:01
don’t make any sense it’s just I think
16:04
like I said liquidity driven and no
16:08
fundamentals are even being considered
16:09
so you got to be careful out there guys
16:11
this is not this is really not textbook
16:15
what’s going on here well like I said
16:17
I’m still I still like gold I think you
16:20
can’t go wrong at gold sir we already
16:22
knows was in a bull market if we’re
16:24
gonna see increased money or increased
16:27
currency units being put into
16:29
circulation then I think that that’s
16:33
going to manifest itself in a higher
16:34
gold price at some point continued
16:37
higher gold price we’re starting to see
16:38
earnings come out excuse me
16:41
cup sum up some of the gold companies
16:43
ones that I follow I’ll just give you
16:47
one that I like that I follow I don’t
16:48
have it in the portfolio but I like it
16:50
it’s a company called Caledonia mining
16:52
they have a mine a very very profitable
16:55
mine in Zimbabwe and yeah I know people
16:59
kind of scoff at that but the company
17:00
really is a performer and they really up
17:02
their guidance for this year next year
17:06
because just of the gold price and how
17:10
that leverage is translating with their
17:12
low costs and their increase in
17:13
production so you really you know with
17:17
lower fuel costs with the oil price down
17:19
that’s a major component of a lot of the
17:20
miners and that’s going to have a
17:23
knock-on effect also so it also depends
17:26
where you’re operate if you’re operating
17:27
in a country like Zimbabwe and your
17:29
costs are in Zimbabwe dollars which are
17:31
being depreciated by the government and
17:33
yet you’re selling your commodity for US
17:35
dollars that also helps quite a bit I
17:40
want to give some other things here
17:42
quickly us to create a uranium reserve
17:46
we saw the news it was all over the
17:47
tortoise Twittersphere you
17:49
twit it looks like that starting next
17:55
year the Trump administration put into
17:58
the budget to create a uranium reserve
18:04
if you will 150 million dollars a year
18:06
for the next ten years do I think that’s
18:09
a major market mover no but I think it’s
18:13
it’s part of the commitment the Trump
18:14
administration is making to uranium and
18:17
to nuclear power in the US I mean we are
18:19
totally behind everyone else I mean it’s
18:22
just ridiculous
18:22
I mean somewhere close to 20 percent of
18:28
our our power in the United States is
18:32
from nuclear power and we don’t even
18:34
mind 1% of our fuel and process it here
18:37
I mean that’s just a national security
18:38
issue not only that just based on our
18:40
nuclear Navy fleet so I think that if
18:44
the if Trump gets reelected he is
18:48
pro-nuclear I’m Pro nuclear I think this
18:50
is good for the country
18:52
we shouldn’t be relying on Russia and
18:56
causality z’ and for our uranium it’s
19:02
just not in our interest to do that we
19:05
also need to get you know I’ve always
19:06
been an advocate for this I’m gonna say
19:08
it again
19:08
you know if you really are into stem
19:10
which is science technology engineering
19:11
and math and you really want high wages
19:14
and you really want to deal with climate
19:16
change if you if you think that co2 is
19:19
the control knob for climate then why
19:22
not do something like build 100 nuclear
19:25
power plants in the next 10 years or 20
19:27
in 10 years or something like that
19:28
because these are high paying jobs and
19:30
long life construction projects very
19:32
technical even for the operations
19:34
personnel that work there you have to
19:36
have be very highly educated
19:38
these are high-paying jobs it would
19:41
create a infrastructure manufacturing
19:45
infrastructure based here in the US that
19:46
we could export and we’ve just left this
19:49
to the Chinese and Russians and that’s
19:51
just stupid because the Chinese and
19:53
Russians use their nuclear industry to
19:58
gain political footholds and countries
20:00
and to cozy up with him and they
20:02
run the thing fullcycle they’ll come in
20:04
engineering procure and construct then
20:06
operate then deal with the fuel supply
20:09
and the waste you just sit there and you
20:11
know charge for the electricity while
20:13
they run everything so that helps their
20:16
home industries that are involved in
20:18
this it helps them politically as they
20:21
go around the world and try to woo
20:24
various countries to their block so the
20:31
u.s. from any perspective you look at if
20:34
you are look at it from wages climate
20:36
change energy supply energy diversity
20:40
national security it just makes sense
20:42
and I think that you know a lot of
20:46
people make fun of Trump but I think he
20:48
does he spot-on on this so this isn’t a
20:52
game changer but it’s more you know more
20:54
wind in the sails and it certainly isn’t
20:56
going to hurt things now I want to bring
20:59
up some things this is gonna get me some
21:01
bad mail people don’t like this wanted
21:04
to talk about read some good articles
21:06
this week about the energy transition in
21:09
Germany’s fleet joke it’s it’s it’s big
21:13
problems I’ll put an article up had it
21:17
really pretty good vignettes in there I
21:19
mean basically you know here’s that
21:20
here’s a slide from the article this is
21:22
green Germany’s proposed coal plant
21:25
expansions you know you’ve got your yeah
21:28
just in the yellow that you’ve got for
21:30
these late-night mines
21:31
that’s that surface mining with that
21:33
cheap dirty coal of course you got the
21:35
other plant sees that these are plants
21:37
that are going to be built because solar
21:41
and wind are not getting that the energy
21:43
transitions not happening and the Merkel
21:46
regime there which is not going to be in
21:48
power much longer I don’t think well is
21:52
you know did a snap judgment on shutting
21:56
down or phasing out and shutting down
21:59
the German nuclear fleet which is in
22:02
progress so you have to get power from
22:04
somewhere so now you have a situation
22:06
where Germany is now suffering power
22:08
rates are some of the highest in the in
22:10
Europe German industry is suffering
22:14
people are suffering because they don’t
22:16
have there’s poor people there that
22:17
don’t have enough money to pay there’s a
22:20
link to an article in the article that
22:23
I’m going to link to where people are
22:24
shifting to wood stoves and they’re
22:26
sneaking out into the woods and chopping
22:28
down wood illegally I mean it’s it’s not
22:32
working it’s not gonna work and I think
22:34
that you know just in the article the
22:36
one article there’s linked to and
22:38
they’re you know it gave it vignette of
22:40
you know Merkel just as just does things
22:43
on a snap judgment she’s a consummate
22:45
grubby politician and with her finger in
22:49
the wind so you know with the Greens
22:51
party making inroads in Germany she’s
22:55
counting to it but the problem is is
22:57
that you know it’s hurting business and
22:59
industry and jobs and most people
23:02
there’s a lot of people that don’t care
23:04
about that that green a lot of people in
23:07
the green movement could care less they
23:09
want deindustrialization they want you
23:12
know they tie everything into socialism
23:14
and equality and to you know however
23:17
they define it rights of different
23:20
indigenous peoples all this thing is
23:22
just tied into one big goulash that they
23:24
create and they’re in their philosophy
23:26
and they could care less
23:27
but the majority of people do care the
23:30
majority of people do not want to see
23:33
their standard of living go down the
23:34
majority of people want a better you
23:39
know standard of living and I believe
23:41
that you’re going to see a big upheaval
23:43
in German politics culminating with a
23:45
reversal I think of the nuclear band and
23:50
I think Germany may even start building
23:52
nuclear plants
23:53
I mean I’ve put up article after article
23:55
you can’t even build a new wind farms in
23:57
Germany the opposition out in the
23:59
hinterlands and farms and rural areas is
24:03
just too high they will not allow it and
24:05
especially the East Germans East Germans
24:07
have had enough of this they they see
24:10
right through it and that’s why you’re
24:13
seeing AF D alternative for Deutschland
24:16
make inroads in some of the recent
24:18
elections and you’ve also seen you know
24:21
this this has led to the Christian
24:24
Democratic Union Merkel’s
24:27
Hera parents she actually resigned
24:29
because of something that just happened
24:31
in one of the states German states in
24:34
East Germany one of the CDU person that
24:38
was elected got elected with the support
24:40
of the AFD in a coalition and that was
24:44
determined to be racist and all that
24:45
stuff to say FD supposedly is right-wing
24:47
and so this governor resigned and that
24:51
reflected back on the Hera parents so
24:53
there’s a lot of upheaval coming in
24:55
Europe that’s a whole nother video just
24:59
about you know the EU is on its way out
25:02
this is not sustainable
25:04
there’s too many competing agendas and
25:07
it’s just not going to last and breaks
25:11
it is the beginning the populist revolt
25:13
whether it’s populism coming from the
25:14
left or the right
25:15
it will continue around the world the
25:20
other thing to point out and the article
25:22
which I thought was interesting or I got
25:24
this from somebody else I can’t remember
25:26
here are the emissions of co2 in Germany
25:29
I believe 2009 was the year they started
25:32
the energy transition and I somewhere
25:35
around here I can’t remember I have to
25:36
look it up the energy and I can’t
25:40
pronounce it so they long german word
25:41
that means energy transition basically
25:43
the solar and wind but you see there’s
25:46
really not been no decline and that
25:48
emissions of co2 in germany you know if
25:51
you wanted to get this down you get your
25:54
nuclear fleet back and you get rid of
25:56
all those coal plants and why are you
25:58
going to build more coal plants that
26:02
does say in the article though that
26:03
because these are supercritical boilers
26:06
supercritical blowers are boilers that
26:07
run at like 3000 psi coal-fired they
26:11
actually have 30% reduced emissions of
26:14
co2 but you’re still going to be pumping
26:16
out a lot of co2 and this number is not
26:19
gonna get better so something to watch
26:23
you know like I said I’ve said this
26:25
before you know Germany is a real-life
26:26
Laboratory of a major industrial country
26:29
that has attempted and we can argue in
26:33
state if actually that is still trying
26:36
to attempt to do an energy transition
26:38
from fossil fuels to
26:40
it’s simply you see what happens it’s
26:43
not working it cost a lot of money power
26:46
rates go up and you know what your net
26:48
co2 doesn’t go down
26:49
that’s like I’ve said before there’s a
26:51
reason why we use Coal Fired there’s a
26:53
reason why we use nuclear power because
26:55
large base load generation is cheap and
26:58
reliable that’s why we use it you’re not
27:01
going to play solar panels into Baltic a
27:04
lot of the Baltic Sea where you know and
27:06
it does the Sun doesn’t shine that often
27:08
that’s just I mean the certain areas
27:10
it’s not Arizona or Texas where the Sun
27:14
shines all the time or Florida or
27:15
Southern California this is Germany for
27:17
heaven’s sakes northern Europe but you
27:20
can’t explain to some people I want to
27:23
point out another thing saw an article
27:26
shale pioneer John Hass heading off
27:28
Shores Hess production Hess oil from the
27:35
article production of the Eagle Ford
27:37
Shale in South Texas is starting to
27:39
plateau while the bat Bakken field North
27:41
Dakota where Hess as a major producer
27:43
will hit its peak production levels
27:45
within the next two years this is a
27:47
speech that our presentation has gave at
27:50
a recent oil conference the Permian
27:53
Basin the top US shale field in Texas
27:55
and New Mexico will plateau plateau in
27:58
mid decade and is already facing well
28:00
interference issues has said so has John
28:05
Hess plans to use cash flow their Hess
28:07
company it’s a big very big oil company
28:10
plans to use cash flow from the Bakken
28:11
to invest in longer-term offshore
28:13
investments the company is relied on
28:15
offshore Guiana one of the world’s most
28:18
important oil and gas discoveries in the
28:19
last decade so just another piece of
28:23
information piece of the puzzle you know
28:27
I really about shale peaking and shale
28:32
accounted for 98 percent of the oil that
28:37
met the demand increases over the last
28:39
you know five six years in the world you
28:43
know oil demand goes up a million
28:45
barrels to a million point one point
28:47
five million barrels a day every year
28:49
increases by one to 11.5% every year
28:53
and that increase has been met by the
28:55
increases in shale production it’s been
28:58
huge
28:58
so non-opec conventional oil has not
29:03
been invested in it’s not been a
29:05
contributor and OPEC is just sitting
29:08
there we don’t you know it’s it’s the
29:10
call on OPEC has not been to increased
29:12
production so I think what’s going to
29:15
happen if things stay correct and we see
29:18
this decline in growth and shale which
29:23
is happening if it stays consistent if
29:27
in fact we are at the top and this
29:29
thing’s rolling over which I believe it
29:31
is that being shale the cup there’s not
29:38
that enough investment main offshore
29:39
that’s been my thesis and that’s where
29:41
people that’s where the money’s gonna go
29:42
now the problem is is with this
29:44
coronavirus it kind of short-circuited
29:46
the recovery in oil prices we don’t
29:49
really know we have to watch inventory
29:51
levels things are very chaotic right now
29:53
we don’t have enough information we
29:55
don’t know where this is going to end
29:57
but you know looking out three to five
30:00
years I hate to say that because you
30:02
know it’s like you just keep saying that
30:04
every year another three years and
30:05
people just aren’t going to wait that
30:07
long I get it but you know if you look
30:10
at the Reserve life indexes of major oil
30:12
companies if you look at the investment
30:15
dollars that have went into oil
30:17
exploration it’s not been enough to
30:19
sustain production and the penetration
30:22
of electric vehicles is not going to be
30:24
sufficient in the timeframe that’s
30:25
necessary to create demand destruction
30:30
and oil I mean in fact electric vehicle
30:33
sales were down last year they weren’t
30:35
up so that should tell people something
30:39
I think oils gonna be around for a lot
30:41
longer and once we get to this
30:43
coronavirus which has really been a
30:45
septic shock to the oil and commodity
30:49
markets we’ll have to see what happens
30:50
as we come out of this but I think as
30:54
this thing gets back on plane and we can
30:55
see real data it’s gonna become more and
30:57
more obvious what’s happening that the
31:00
call on non-opec a conventional supplies
31:04
will not be able to be met because the
31:06
lack of investment
31:07
and then we’ll see if OPEC has the
31:09
weather with all or has the ability to
31:11
increase production regardless these are
31:15
extractive industries and if you don’t
31:17
invest enough money in replacing your
31:20
reserves you eventually go out of
31:21
business I mean I’ve said that over and
31:23
over and over and that’s really where
31:24
we’re at so a lot of information there
31:28
guys that’s it for this week
31:31
appreciate the support appreciate the
31:32
viewership you guys are the inspiration
31:36
to why I do this more people keep
31:38
subscribing I thank you a lot it means a
31:42
lot to me and keep on sharing keep on
31:46
liking the videos it really helps out
31:48
enjoy the comments switching to a less
31:52
stressful career so I probably should
31:54
have more time and I’m hoping to make
31:57
some changes get some more interviews
31:58
but we’ll see how things happen over the
32:00
next coming months that’s it for this
32:02
week guys thanks a lot and we’ll talk to
32:04
you next week

🔴 Global Currency Crisis Is Coming – The “Dollar Milkshake” Theory (w/ Brent Johnson)

Watch Brent Johnson’s follow up to The Dollar Milkshake Theory: https://rvtv.io/2tdRouM and The Great Dollar Debate with Brent Johnson and Luke Gromen: https://rvtv.io/2TGSnza only on Real Vision. — Santiago Capital CEO Brent Johnson rejoins Real Vision with a plethora of predictions that revolve around a strengthening dollar. Johnson believes that a global currency crisis looms, but that there is a bull case to be made for the greenback, gold and U.S. equities. Filmed on May 29, 2018 in San Francisco. Published on June 6th, 2018.
Transcript

00:06
Now, one thing I want to make clear is this is not a story that ends well.
00:09
This is a story that ends very, very badly.
00:11
The strength of the dollar is going to cause such chaos in the global monetary system that
00:15
the safe haven that gold has always provided, I think, is going to become into higher demand.
00:20
And there will be a point where they rise together.
00:22
This isn’t a Pollyanna view.
00:24
I’m not saying to go out and buy equities, because things are good.
00:26
I’m saying, go out and buy equities, because things are bad.
00:29
Things are really bad.
00:30
It’s just that the road to bad looks much different than what the typical person thinks.
00:50
I’m really happy to be able to come onto Real Vision today, because I haven’t been this
00:52
excited about markets in a very long time– not because I think everything is going to
00:56
be easy, and things are fine, but really, because I think everything is bad, and it’s
01:00
going to be very hard.
01:01
But I think that it’s also going to present a lot of amazing opportunities for those who
01:04
can kind of see through the fog of what the markets are going to do over the next year
01:08
to two years.
01:09
Now, I’m sure over the next 30 or 40 minutes, there’s going to be a few of you out there
01:13
who agree with what I say.
01:14
But I know for a fact that there’s going to be a lot of people who disagree or who maybe
01:18
agree with part of what I say, but who are going to disagree with a lot of what I say.
01:22
And there’s also going to be some people out there who absolutely disagree with everything
01:25
I say.
01:26
And that’s fine.
01:27
What I’m asking you to do now is, at least for now, let’s put aside challenging me, and
01:31
just actually listen to what I say and think about how I might be right.
01:33
And if it turns out after you’ve actually thought about it and more than for a minute
01:38
or two, and you still want to have a conversation to discuss it, I’m more than happy to do that.
01:42
We’ve seen a nice bounce in the dollar after losing 10% to 12% on the dollar over the last
01:47
12 to 18 months.
01:49
So I think it’s a good time to discuss this.
01:51
I really think the dollar move higher is really just getting started.
01:54
Now, that doesn’t mean that there’s not going to be starts and stops, and in the short term,
01:57
it’s probably due for somewhat of a pause or even a short pullback.
02:01
But one thing I want to get across to people is this move is only just getting started.
02:05
The dollar, in my opinion, is going to go much, much higher over the next year to two
02:09
years.
02:11
And so as I get into what the actual dollar milkshake theory is, it really comes down
02:16
to the fact that I think the whole world is really one trade right now.
02:19
And it’s the trade on the dollar.
02:21
Everything wraps around the dollar.
02:23
I’m going to talk about gold after a while, but I think even gold– all roads go through
02:27
the dollar.
02:28
So even though I’m very bullish gold long-term, that road also goes through the dollar.
02:33
And so at the end of the day, why I think the dollar is so important is because whether
02:37
you’re talking about a company, whether you’re talking about a family, or whether you’re
02:41
talking about a country, everything comes down to cash flow.
02:45
Everything investing ultimately comes down to cash flow.
02:48
And if you don’t have enough supply of cash, then you need flow of cash coming through
02:53
to keep operations going.
02:55
And I really think that’s where the whole monetary system is right now.
02:58
And that’s really the heart of the dollar milkshake theory.
03:01
And so I’m going to get into that as we go further into the conversation.
03:04
Now, one thing I want to make clear is this is not a story that ends well.
03:08
This is a story that ends very, very badly.
03:11
But I think the road to badly is much different than a lot of my peers think it is.
03:15
To get really into the theory, we all know that the central banks of the world injected
03:19
$20 trillion of new money into the global economy over the last 10 years.
03:24
And I kind of title this as this is the milkshake that all the different countries created.
03:29
They pushed down on their syringes, and they injected this tons of liquidity into the market–
03:36
euros, yen, pounds, yuan, dollars.
03:39
And they created this soup or this milkshake of all this liquidity out there.
03:44
But now, while the rest of the world is still pushing down on their syringes, the United
03:48
States has– we’ve gotten this monetary policy divergence, where we’re not using a syringe
03:52
anymore.
03:53
We’re no longer injecting liquidity.
03:55
In fact, we’ve swapped out our syringe for a straw.
03:58
And so as we lift up on our interest rates, that sucks that liquidity to the US domestic
04:04
markets.
04:05
It sucks that liquidity up into our domestic markets.
04:07
And I think it’s going to push asset prices higher.
04:10
In other words, we’re going to drink the milkshake that the rest of the world is still mixing.
04:14
So the implications of this milkshake theory are several, and I’m going to try to walk
04:18
through them step by step.
04:20
But they really kind of all happen at the same time, and they all kind of go on at the
04:23
same time.
04:24
So while I’m going to try to walk through this linearly, I don’t want you to think of
04:27
it as necessarily a progression.
04:29
One might happen before the other.
04:30
They might happen at the same time.
04:32
But it’s really this soup.
04:33
It’s this milkshake that we’re dealing with.
04:36
So there’s three main implications of the theory, and the first part of the theory is
04:40
that the US dollar is going to strengthen.
04:43
And when I say the US dollar is going to strengthen, I don’t mean that it’s going to
04:45
strengthen a little bit.
04:46
I mean it’s going to strengthen a lot, and I hesitate to use the
04:49
word “supernova,” but it has the opportunity to really break out to incredible highs.
04:55
The second implication is that this dollar strength is going to lead to all kinds of
05:00
trouble in the global marketplace, specifically in the international markets and the
05:04
emerging markets.
05:06
And finally, the third implication of this is it will ultimately react into
05:12
a currency crisis.
05:13
And we’re already starting to see the beginnings of that.
05:16
The monetary system is just not designed for a
05:19
strong dollar.
05:20
So the implications of a strong dollar are really profound.
05:23
It really comes down to the flow that I was talking about earlier, but it’s the monetary
05:26
policy divergence as interest rates differentials eventually pull flow into the dollar.
05:32
Now, that hasn’t happened for a while.
05:34
The first part of the year, it didn’t look like
05:36
interest rate differentials mattered.
05:37
But you’re starting to see with a two or three-month lag that it actually does matter.
05:41
We’re also in a period where there’s not only this
05:46
increasing demand for US dollars due to the flow into the higher interest rates, but
05:51
we’re also– it’s compounded by the fact that we now have a situation where supply is
05:56
contracting.
05:57
So you have increased demand with contracting supply.
05:59
That’s through the quantitative tightening that the Fed is
06:01
currently pursuing.
06:03
The other thing is that demand for dollars– there’s a lot of talk about a lack of
06:06
demand for dollars.
06:08
There is an incredible amount of demand for dollars just to pay
06:11
the interest on dollar-based debt in the world.
06:14
Now, a lot of people will focus on the $20 trillion that the United States government
06:18
owes.
06:19
And that is a problem.
06:20
I’m not going to deny it.
06:21
But the fact is that there’s another $20 trillion outside the United
06:24
States, either through direct dollar loans or the shadow dollar market, that
06:30
international entities own.
06:32
Oh, and those are dollar-based demand that they need as
06:36
well.
06:37
And so if you add up all the dollar-based debt in the world, and if you just assume
06:40
that all that debt has the same rate as the US Treasury, which is 2.3%, which is
06:45
ridiculous.
06:46
There’s no way that that’s what all these different loans are actually made
06:50
at, but if they did, there’s over a trillion dollars a year in demand for dollars just
06:55
to pay the interest on the dollar-based debt.
06:57
And that stays the same, whether– even if people totally move away from the dollar and
07:01
never borrow another dollar going forward, there’s still a trillion dollars
07:06
in demand to service the existing dollar-based debt.
07:10
And the reality is it’s probably twice that high.
07:11
It’s probably $2 trillion.
07:12
Now, another reason is that– we’re getting into a period where the dollar is going to
07:17
go higher– is that the US debt ceiling is now gone.
07:21
And we’re at a place where the government is providing fiscal stimulus.
07:26
And this provides increased demand.
07:27
And what I mean by that is a year ago, we bumped
07:30
up against the debt ceiling, and we could not issue new bonds.
07:34
And so the checking account that the US government, that
07:38
the Treasury has at the Federal Reserve, had about $500 billion in it.
07:42
And they drew that down to less than $100 billion.
07:44
So they pushed $400 billion out into the system.
07:47
That created supply of dollars, and that’s part of the reason why the dollar dropped.
07:53
That’s completely flipped now.
07:55
Not only is the government not pushing that $500
07:58
billion or $400 billion out into the market, but they’re actually entering the
08:01
dollar market to get funding.
08:04
They’re selling bonds in exchange for dollars.
08:06
So you have a situation where the supply of dollars is
08:09
no longer increasing, and now you have the biggest buyer in the world– the US
08:13
government– entering the dollar market, buying dollars, competing with everybody
08:17
else.
08:18
That’s a recipe for price to rise.
08:20
Another part of the cash flow back to the United States theory is the US repatriation
08:26
after the new tax bill.
08:28
A lot of people didn’t think that even if they passed it,
08:31
governments– or I mean corporations– wouldn’t repatriate.
08:33
But we are seeing a repatriation.
08:35
And I think one thing a lot of people forget is it’s not just US corporates
08:39
repatriating cash back to the United States.
08:42
Foreign banks, foreign entities can also send cash back to United States, and they
08:48
can get that higher interest rate on doing it.
08:50
Now, if you don’t think that’s possible, just go look at the breakdown of the reserves
08:55
of the Fed.
08:56
Over half of the reserves, bank reserves at the US Fed, are from
09:02
international banks.
09:03
So not only are they going to do it, but they’re already doing it in
09:07
a big way.
09:08
Now a fifth reason that the dollar will gain some of this flow coming from around the
09:12
world is that as the dollar does get stronger, it creates chaos everywhere else.
09:17
And so the dollar will start to get flow just from
09:20
a safe haven demand.
09:21
And we’re actually starting to see this already.
09:23
We’ve got problems in Turkey.
09:25
We’ve got problems in Italy.
09:26
China has just recently come out and said they’re probably going to have to
09:30
lower their reserve ratio requirements and provide stimulus at some point over the
09:35
summer.
09:36
So we’re already seeing that the strong dollar is impacting other markets.
09:41
And I don’t really have time to get into the whole euro
09:44
situation, other than to say that the euro is
09:46
just– I mean it’s really a disaster.
09:49
I really don’t know how else to say it.
09:50
It’s just not a currency that is going to be able to function
09:54
long term.
09:55
They have all the same problems that we do.
09:57
Their balance sheet is bigger than ours.
09:59
They’re still providing stimulus.
10:01
They don’t really have a way to draw down the stimulus.
10:04
And they’ve also got the political problems on top of it.
10:06
So as people real– and they’re overregulated.
10:10
The number of regulations that have gone on in the EU in the last two years are
10:14
dramatic, and we’re already starting to see the impact that that has on corporations.
10:18
So I think all of these five combined are really going to push the flows back to the
10:22
US dollar.
10:27
So one of the arguments that I often hear is that, what if people just leave?
10:30
What if they default on the dollars that they owe
10:32
and just go off to a new agreement that they’ve created?
10:35
Fine?
10:36
Would that cause chaos?
10:37
It would absolutely cause a lot of chaos.
10:39
But is it possible?
10:40
Yes, it’s absolutely possible.
10:42
And that’s one of the reasons, by the way, you should own gold, because you
10:44
never know what could happen.
10:46
That said, one thing you have to realize is if these people default on their dollar
10:50
loans, and they leave, and they go somewhere else, in a debt-based monetary
10:54
system, it’s not just the debt that leaves.
10:56
It’s not just the obligations that leave.
10:58
Money disappears as well, because in a debt-based
11:01
monetary system, when debt gets defaulted on, money evaporates.
11:05
Money disappears.
11:06
And if money disappears, that means supply falls.
11:09
So if you think about this like a musical chairs example, and we’ve got a number of
11:13
digital or paper participants swirling around the limited number of monetary base
11:19
dollars that actually exist, if some of these players decide they don’t want to play
11:22
anymore, and they leave, and they default on that debt, that’s fine.
11:26
Demand falls.
11:27
But when they leave, money disappears as well.
11:30
So the chairs disappear as well.
11:32
And if the chairs start to disappear at the same
11:34
rate that the obligations disappear, if you get supply falling even faster than demand,
11:40
price still rises.
11:41
So I don’t buy that argument that they can just walk away and
11:43
that there won’t be any chaos and any implications involved with that.
11:48
Another thing I would say is even if they do raise rates, and it does cause a recession,
11:52
well, then, that means the US is now in recession, and the rest of the world’s biggest
11:56
customer now have a cold and cannot buy all the goods from those other countries
12:00
that they were selling before.
12:02
So that has a knock-on effect to EM, and I actually think
12:05
it hurts EM and international more than it hurts the US.
12:08
So even if that does turn out to be correct, I don’t think that that’s necessarily
12:11
dollar negative.
12:13
Now, the big one that I always hear is that the Fed is going to have to– again, they’ll
12:17
have to– they can’t keep raising rates, so they’ll have to reverse course, and they’ll
12:21
actually have to implement QE again.
12:24
And that’s not going to happen either, in my
12:27
opinion.
12:28
And the reason that I don’t think that that’s going to happen is because the
12:30
whole point of QE is to provide artificial flow from somewhere outside the current
12:37
market.
12:38
That’s the whole point of buying the bonds to get that injection.
12:41
When the Fed would buy bonds, they would inject currency
12:43
into the system.
12:45
So if you can get that injection of currency into the system from somewhere other than
12:48
the Fed, then the Fed doesn’t need to provide it.
12:51
And this is the heart of the dollar milkshake theory.
12:54
The rest of the world is still providing an incredible amount of
12:56
stimulus into the market.
12:58
But we’re the only ones with a straw.
13:01
Everybody else is pushing the liquidity out into the market.
13:05
The Fed has a straw, and they’re sucking up that liquidity.
13:08
And as they suck up that liquidity, that is an injection from outside the
13:12
domestic market into the market that allows the flow to keep happening.
13:17
And that is no different than QE if we were doing it ourself.
13:21
Just because they’re operating QE out of Tokyo or out of Frankfurt doesn’t mean that
13:25
those dollars or that liquidity– the euros, the yen, whatever– stays in those domestic
13:30
markets.
13:31
In a global marketplace, all those assets can flow to the US, and I think that’s
13:34
what’s going to happen.
13:36
And that is literally the heart of the dollar milkshake theory.
13:38
It doesn’t really matter who provides the QE.
13:40
What really matters is who captures the QE.
13:43
And with our higher rates and relatively better economy than the rest of the
13:47
world, we’re going to capture that QE.
13:49
One of the other arguments that often gets made is the fact that if the Fed continues
13:52
to raise rates, then it’s going to invert the
13:54
yield curve.
13:55
Now, I can’t argue with that.
13:56
If you look back at history, whenever the yield
13:58
curve inverts, it almost always does lead to a recession.
14:01
But what many forget to put forth when they put forth this argument is
14:04
that the length of time from when it inverts until when it goes into recession is typically
14:09
18 to 24 months, and that goes back on several occasions as well.
14:13
Not only that, but what happens during that 18 to 24 months is typically a speculative
14:17
frenzy.
14:18
And that leads to the blow-off top.
14:20
And if you think about it– and I can’t prove this– but if you think about the typical
14:24
yield curve that a bank would want, they want a very steep curve.
14:28
They want short-term interest rates and high long-term interest
14:31
rates.
14:32
They want to lend long, and they want to pay short, and they make that
14:35
spread.
14:36
Well, if that’s great for the banks, that’s probably not great for the speculators.
14:39
But if you reverse it, and you get into an inverted
14:41
yield curve, that’s not good for the banks, because they’re having to pay short and lend
14:46
long, and they’re upside down.
14:48
But if it’s bad for the banks, who takes the other
14:50
side of the banks’ trade?
14:51
Well, that’s the speculators.
14:53
And if the speculators can borrow long and invest short and make that
spread and lever it up, that’s like Disneyland for them.
And that leads to the speculative mania, and that’s what leads to
the crazy excesses, and that’s what leads to the blow-off tops that nobody think can
15:08
happen.
15:09
And that’s why I don’t think that an inverted yield curve– I don’t think it’s
15:11
negative for the dollar, and in the short term, I
15:13
don’t think it’s negative for the markets.
15:17
OK, so where does all this lead?
15:20
What does this dollar milkshake mean to us in the
15:23
United States?
15:24
Well, I think what it means is that we haven’t seen the blow-off top yet.
15:27
I still think it’s coming.
15:28
I think equities are going a lot higher.
15:31
And again, this isn’t a Pollyanna view.
15:33
I’m not saying to go out and buy equities, because things are good.
15:36
I’m saying go out and buy equities, because things are bad.
15:39
Things are really bad.
15:40
It’s just that the road to bad looks much different
15:42
than what the typical person thinks.
15:45
And I think that as we get into this inverted yield curve, as we get into problems
15:48
around the world, as we have currency crises, the United States is going to be seen
15:52
as a safe haven.
15:53
And all roads go through the dollar.
15:55
And when that money flows into the dollar, it eventually goes into US
15:58
assets.
15:59
And I think it’s going to push equities to all-time highs.
16:02
I also think that it’s going to have a big impact on bonds.
16:07
Now, I’m of the opinion that interest rates are headed higher.
16:10
I don’t necessarily think that bonds are going to
16:12
crash, but I think they are going to break.
16:14
And I think that that is going to have a big impact on assets as well.
16:18
Now, there’s no doubt that there’s going to be some
16:21
moments of pure panic and terror along the way.
16:24
I’m not sitting here saying that bonds are going to fall, equities are going
16:27
to go up, and it’s all going to be smooth.
16:28
I don’t think that at all.
16:30
I think it’s going to be really frightening at points.
16:32
But I think rates are headed higher.
16:35
And when you think back to the fact that there’s been a 40-year bull market in bonds, that
16:39
means somebody could have invested their whole life for 40 years and been a fixed income
16:44
investor and made money quarter after quarter, year after year, decade after
16:48
decade.
16:49
They have never really lost money on bonds as long as they were buy and
16:52
hold.
16:53
Sure, along the way, maybe they did some trading of bonds where they
16:55
lost money, but essentially, nobody has lost money in bonds in 40 years.
17:00
Well, now we have interest rates heading higher.
17:02
We seem to have broke out of the chart of truth.
17:04
Will we retest?
17:06
Sure.
17:07
Will there be some moments where bonds rally?
17:08
Sure.
17:09
But I think interest rates are headed higher, and when people actually start
losing money in bonds, I think that’s going to be a real wake-up call not just for  finance, but from an emotional perspective.
17:20
If you have made money on something for 40 years in a row, and then all of a sudden,
17:23
you wake up, and you’ve lost money, it’s kind of like the turkey at Thanksgiving.
17:26
They have 364 great days, but that 365th day is kind of a nightmare.
17:31
I think that can happen in bonds.
17:32
And as funds flow out of bonds, I think a lot of that’s
going to flow into equities.
17:39
And so all of this– again, I’ve kind of walked through this
17:42
linearly, but this is really all going on at the same time.
17:45
And as we’ve got a period where interest rates are headed higher, I
17:48
think around the world, as bonds start to break– not crash, but as they break– and
17:54
funds start to flow out of it, as dollars flow–
17:57
as funds flow into the dollar and push asset prices up, I really think we get into this
18:02
benign circle.
18:03
George Soros talked about it in his book, The Alchemy of Finance.
18:06
You get into a place where dollar strength begets more dollar
18:10
strength, because as the dollar strengthens, it causes all kinds of problems
18:13
for yen.
18:14
And as the yen gets into problems, people seek out safe haven back
18:18
into the dollar.
18:19
Now, gold will, obviously, I think, be a beneficiary of this.
18:23
But I don’t think people around the world are going to sell everything
18:26
they own and put all their money into gold.
18:27
In fact, we don’t need them to put everything into gold.
18:30
They can just put a little bit into gold, and gold does really well.
18:33
But I think the dollar is going to be the big
18:34
beneficiary, and I think, again, as I’ve said many times, all roads go through the
18:40
dollar.
18:43
So of course, as always, I have a lot to say about gold.
18:46
I think the first thing I want to get across is that my thesis on gold has not
18:49
changed.
18:50
Everybody should own gold.
18:51
It should be part of everybody’s portfolio.
18:54
And I’ve said for a long time that gold is going to go to at least $5,000.
18:58
That hasn’t changed.
18:59
Gold is going to go to $5,000, and the reality is it’s probably going to
19:02
go a lot higher than that.
19:03
But you know, for anybody that’s trying to put me– peg me down
19:06
as far as time and price, I’ll say $5,000.
19:08
Now, I don’t know if I’m going to necessarily tell you exactly when, but I still
19:12
think gold goes to at least $5,000.
19:14
The only question is when.
19:15
But part of the other thing is that– part of the reason that gold will go that high
19:20
is because it will be at least part of the solution
19:22
when this horrible system that the central banks have created eventually comes down.
19:28
This dollar milkshake theory is not one in which the dollar remains the world reserve
19:33
currency.
19:34
I think we’re going to get to a place where the dollar gets so strong, they’re
19:36
going to have to come to some new kind of Plaza Accord or some kind of a system
19:40
where they dramatically reduce the dollar.
19:42
But it’s not going to be that we reduce the dollar, and people are mad at us.
19:48
I think the world’s going to beg us to reduce the
19:50
value of the dollar, because the strong dollar, quite honestly, it just breaks the
19:54
entire monetary system.
19:56
It breaks international markets.
19:58
It breaks the emerging markets.
19:59
And it actually is, in the long term, not great
20:01
for the US market either.
20:03
But it doesn’t mean it’s going to happen right now.
20:04
So I think over the next couple of years, the dollar goes much, much stronger.
20:08
I think initially, that breakout is going to
20:11
surprise a lot of people.
20:12
I think it’s going to create a lot of chaos, and it will ultimately
20:15
be that chaos that makes gold go a lot higher.
20:18
I tell people all the time that a lot of the typical gold theory is that dollar gets
20:24
inflated away, and gold goes through the world, goes through the roof.
20:27
And there is that view.
20:29
But there is nothing that is more long-term bullish for gold than a strong dollar.
20:33
Before we get into that, let’s talk about a little bit why gold, quote, unquote, hasn’t
20:36
worked for the last several years.
20:38
Well, the reality is I think gold has worked for the
20:40
last several years.
20:42
Many of us in the gold world got it wrong as far as timing when it
20:44
would work in US dollar terms.
20:47
But if you’re not a US dollar investor, and you lived in
20:51
Cyprus or Russia or Argentina or Venezuela, gold works just fine.
20:56
Gold did what it has always done for 5,000 years.
20:58
It’s provided a safe haven when things got bad.
21:01
And the reality is that things did not get worse here in the United States over the last
21:06
five or six years.
21:07
And as a result, gold has not performed as it has in those other
21:11
currency terms.
21:12
But it doesn’t mean that gold isn’t working.
21:13
I think a lot of the pain and a lot of the frustration with those in the gold world that
21:18
are feeling the frustration from gold not having done anything are those who bought
21:22
gold as a speculation, not as insurance, or it’s those who told themselves they bought
21:27
it as insurance, but really bought it as a speculation or a get rich quick scheme.
21:32
If you bought gold as a hedge against the rest
21:34
of your portfolio and the rest of the world blowing up or all the spinning plates that
21:37
the central bankers have going crashing, then gold is still working, because the reality
21:42
is the plates have not crashed yet.
21:45
They will.
21:46
There’s no doubt that they will, but they haven’t yet.
21:48
And so gold hasn’t needed to do anything.
21:51
But gold’s been around for 5,000 years.
21:53
It’s always been, at least from a market perspective, a currency and the last currency
21:58
of resort, and that’s not going to change over the next 5,000 years either.
22:02
So if you’re a gold investor, and you have it in your
22:04
portfolio, and you didn’t put all your money in gold, you’re probably just fine.
22:08
So now there’s also many people in the gold world who will say that the only reason
22:12
gold hasn’t worked for the last five years is manipulation, that the decades long gold
22:16
manipulation scheme between the central banks, the governments, and the
22:20
commercial banks have worked together to keep the price of gold low.
22:26
Now, even if you take that view, the fact is you are still
22:29
wrong, because if you– this is not a new theory.
22:33
This manipulation theory has been out there for decades.
22:35
Anybody who’s spent more than five minutes in the gold world
22:38
knows about this theory.
22:39
So if you bought gold five or six years ago, four years ago, whatever it is, and you
22:45
were wanting it to pay off much quicker, and it didn’t, because you think it’s been
22:50
manipulated over that time period, well, the only reason you would have bought it
22:54
four or five years ago is not because it wasn’t manipulated.
22:56
You knew it was manipulated.
22:58
The only reason you bought it then was because you thought that the
23:00
manipulation was going to fail.
23:03
And the reality is the manipulation hasn’t failed.
23:05
If you subscribe to the view that gold has been manipulated
23:08
lower, then the manipulation is still working.
23:11
And so I think it would help a lot of people in the gold world if we would just admit
23:15
that we’ve been wrong for the last five years.
23:17
I didn’t think that the monetary authorities could keep the plates spinning
23:21
for another five or six years.
23:22
I thought it would come down much sooner than that.
23:24
I was wrong.
23:25
The plates are still spinning, but it doesn’t mean that gold has failed.
23:28
It just means we got timing wrong, and I think the fact that if you say the words, “I was
23:34
wrong,” it’s very freeing.
23:36
It actually takes a lot of pressure off you, and you can actually
23:39
then move on to the next step and say, well, why was I wrong?
23:42
Why did the gold not go up?
23:43
Why are the plates still spinning?
23:45
And I think that will help prepare you for the next five or six years.
23:48
So now let’s talk a little bit about the dollar milkshake theory and how it applies to
23:51
gold.
23:52
Well, I think it largely depends on where you’re sitting and in what currency
23:55
you’re denominated.
23:56
You know, if you’re an international person or entity, and you
24:01
are not denominated in dollars– I don’t know if you’re in euros, or you’re yen, or
24:05
you’re yuan, or bolivar, or whatever you are– I think you can probably pretty much
24:10
back up the truck and buy over the next couple of months.
24:13
I think the dollar is going to get a lot, lot stronger.
24:16
But if the dollar gets a lot, lot stronger, that means a lot of
24:18
these other currencies are getting a lot, lot weaker.
24:20
That means gold, in those terms, is probably going to go a lot, lot higher.
24:24
It would not surprise me at all if these other currencies of gold rises 15% to 30% over the
24:30
next 12 to 18 months.
24:32
I think that could easily happen.
24:34
So I think determine where you’re at and which currency you’re denominated before
24:38
you just say, gold is going up or down.
24:40
I think that’s a very important point to make.
24:42
Now, I think it gets a little bit more complicated if you’re a dollar investor.
24:46
I have said for over two years now that I think eventually,
24:49
we’re going to get into a situation where dollars and gold rise together, and
24:52
I still firmly believe that.
24:55
The strength of the dollar is going to cause such chaos in the
24:58
global monetary system that the safe haven that gold has always provided, I think, is
25:01
going to become into higher demand.
25:03
And there will be a point where they rise together.
25:06
Now that said, for those of you that heard me say gold’s going to $5,000 earlier, I
25:10
want you to keep those positive feelings that you had when I said that, because I
25:14
don’t know that it’s going to happen over the next five or six months.
25:17
In fact, I think there’s a good chance that gold goes lower
25:20
in the short term.
25:21
It might not, and if it goes higher, I will embrace the break-out,
25:24
and we’ll be on to probably another five or 10-year bull market in gold.
25:29
But I’m just not sure that it’s going to break out yet.
25:31
We had another great opportunity this spring to break out, and it didn’t happen.
25:35
And I think with the move that the dollar is going to make over the next six to 12 months,
25:39
I think it will be very challenging for gold to break out initially with that.
25:44
And so I think if you are a US investor or a dollarbased
25:49
investor, I’m not saying that you should sell your gold.
25:52
The gold theory is still very much intact, but I’m just not convinced
25:55
it’s going to break out right now.
26:00
So as far as gold and the dollar rising together, I know that seems kind of
26:04
contradictory.
26:05
But at the end of the day, I really don’t think it is.
26:08
They’re both currencies, and they’re both measured against
26:10
all the other currencies in the world.
26:12
And so I think in the same way that the yen and the euro could rise together, dollars
26:16
and gold could rise together against a number of different fiat currencies.
26:20
Again, I don’t think that– I’m not even sure that
26:23
the dollar bulls have a proper appreciation for
26:26
how much damage that the dollar bull market is going to cause.
26:30
Again, the design of the monetary system was just not built for
26:34
a strong dollar.
26:35
And when it gets going and rocking and rolling, it is going to cause all kinds of
26:39
damage.
26:40
And that should be very good for gold.
26:41
When markets start melting down, and when chaos starts to happen, and confidence
26:46
starts to get lost, and you can feel the panic in the streets, that’s typically
26:50
great for gold.
26:52
And so whether or not things panic and break down in the United States,
26:56
if they panic in Europe, or if they panic in
26:58
Africa, or they panic in Asia, that’s a good opportunity to provide a chaos trade, so
27:05
to speak, or a safe haven trade.
27:06
And I think dollars will benefit from that, but gold
27:09
will benefit too.
27:10
And again, we don’t need everybody to sell everything they own and go buy gold.
27:16
The gold market’s very small on a per capita basis.
27:19
We just need the rest of the world to put 1% or 2% of their assets in gold, and
27:23
gold doubles.
27:24
So we don’t need a mass exit out of fiat currency into gold for gold
27:30
to do very well.
27:32
The other reason that gold and the dollar can rise together is that we talked about
27:38
gold being a small market.
27:39
Well, if the dollar is rising a lot– and I mentioned other
27:43
currencies would be going down a lot– if those investors do start seeking out gold,
27:48
if Europeans start buying gold en masse, or the
27:51
Asian continent starts buying gold en masse, that can have dramatic implications
27:56
for supply of gold.
27:58
And so again, we don’t need it to be really big for it to impact.
28:02
And that’s another reason why, even though the dollar may be getting a safe haven
28:04
trade, that gold can get a safe haven trade as well.
28:08
And once we get to a place where the dollar and gold is rising together, I mean then
28:13
it’s just really rock and roll time.
28:14
I mean that’s just where the gold really starts to go
28:16
up.
28:17
And then I think in a couple of years from now, whether it’s 2020 or 2021, after
28:22
the dollar has caused all this damage, the global authorities will have to get together,
28:26
and they will either have to, at that point, weaken the dollar either through QE or
28:32
some type of Plaza Accord, or maybe they introduce a whole new monetary system,
28:36
whether it’s an SDR or whether it’s a combination of a basket of assets.
28:40
I don’t know what it is, but what I know is that the monetary system, as it’s currently
28:44
designed, has a dramatic flaw.
28:46
And that dramatic flaw is about to be thrown a real
28:51
curve ball with the dollar getting stronger.
28:53
And that should be good for the US dollar.
28:55
It should be good for gold, and it should be good for those who are prepared.
29:00
A lot of people say that nobody sees the fact that the dollar has this problem, that
29:06
they have all these liabilities, all these unfunded liabilities, that our trading partners
29:10
are wanting to move away from the dollar.
29:13
I just don’t think that’s the case.
29:16
I think a lot of people see that this is a problem.
29:18
I think a lot of people want to leave the dollar.
29:21
I think there’s a big mistake in saying that this is a small problem that a few
29:25
people have discovered and that they’re going to profit wildly when the dollar gets
29:30
thrown by the wayside.
29:31
I go to meetings all the time.
29:33
I talk with investors all around the world all the time.
29:35
I can’t remember a meeting in the last couple
29:37
of years, where it either wasn’t brought up already or that I didn’t bring it up about
29:43
the dollar and its status in the world, that everybody around the table wasn’t familiar
29:48
with the issue.
29:49
Never once has anybody said, well, what are you talking about, “leaving
29:52
the dollar?”
29:53
Everybody starts nodding their head, and everybody starts putting their
29:55
two cents in.
29:56
I think a lot of people have talked– or I think a lot of people have thought about this.
30:00
I don’t think this is some small issue.
30:02
I don’t think anybody’s come up with a real answer, but I don’t think it’s an issue that
30:05
nobody knows about and nobody discusses.
30:07
Now, even though I don’t think gold has got it wrong over the last five or six years,
30:11
and while I don’t think gold has stopped working, per se, I think gold is doing exactly
30:15
what it has always done.
30:16
Again, I think, as I alluded to earlier, I think we’re the ones that got it wrong.
30:21
Now, why did we get it wrong?
30:22
Well, I think part of it is that a lot of us, me included,
thought that quantitative easing was going to be dramatically inflationary.
I didn’t think that the world could inject $20 trillion
into the global economy and not inflate fixed assets, gold being one of them.
But you know what?
They did.
We got that wrong.

It was inflationary to asset prices.
Real estate went higher.
Equities went higher.
Some commodities went higher, but some commodities
went lower.
In my opinion, all the low rates and the QE ended up being deflationary
to some assets, just as much as it was inflationary to other assets.
And I think keeping rates at the zero bound is overall
deflationary.
31:02
And so the fact that $20 trillion pumped into the economy was going to
31:06
create hyperinflation– it didn’t happen.
31:08
We got that wrong.
31:09
And I think it’s important– I really do think it’s important that we admit that we got that
wrong, because if you just say, “buy gold,” all the time, and you never say that it
could possibly go down, well, then we’re no different than those who say buy equities
all the time, and never buy gold.
I think we’ve got to be very careful that we don’t fall
31:26
into the same hypocritical arguments that the traditional Wall Street does.
31:30
I have a lot of friends in the gold world.
31:33
I have a tremendous amount of respect for them.
31:36
Most of them are my friends.
31:38
If you’re in the gold world, and you’re not my
31:39
friend, I think it’s probably because we didn’t spend too much time together.
31:42
But I do think that we can do ourself a lot of good
31:44
by kind of taking a step back and really trying to understand why gold didn’t do well
31:47
over the last five years.
31:48
Just admit that we got the timing wrong.
31:51
There’s nothing wrong with that, because just because we
31:52
got the last five years wrong, it doesn’t mean that we’re going to get the next five
31:55
years wrong.
31:56
I mean, in fact, I’m pretty sure we’re going to get the next five years right.
31:58
But I think in order– for credibility’s sake or to be
32:02
able to take a step back and be objective and
32:06
try to really understand why gold didn’t break out in dollar terms over the last five
32:10
years, I think it’s important to just acknowledge that we missed something along the
32:13
way.
32:14
Now, somewhere else where I think you can see it is in equities.
32:16
Now, at the beginning of the year, I said I thought that
32:18
equities were going to go higher.
32:20
I thought they might very well have a 5% or 10% correction
32:24
before that happened.
32:25
I said I thought it would be nice if we had it.
32:27
It would be helpful.
32:28
Well, we got it.
32:29
So kind of be careful what you wish for.
32:30
But if you look at equities, both the S&P and the NASDAQ are both in a wedge
32:35
pattern.
32:36
And I think they’re kind of near the bottom of that wedge pattern.
32:38
I’m not saying it’s going to be a straight line, and
32:39
it’s going to be easy, but I think we’re going to move higher to the top of that wedge pattern,
32:43
and I think we’re going to break out of that wedge pattern.
32:44
I think equities are going higher.
32:46
I think the Fed’s going to continue to raise rates, and I think this
32:48
dollar milkshake theory is really going to get
32:50
going.
32:51
So again, I’m really excited about where markets are headed, not because I think
32:54
things are going to be easy.
32:55
I actually think they’re going to be hard.
32:56
I think they’re going to be scary.
32:57
But I think they’re going to be fun, to be honest.
32:59
I think they’re going to present a lot of great opportunities.
33:02
And I think if you have a plan for how to get through it, I think the opportunities
33:05
are actually pretty incredible.
33:08
I think one thing to remember is never be closed off to any ideas.
33:12
I always consider everybody’s arguments that they send back
33:14
against me.
33:15
I’m happy to think about them.
33:17
It doesn’t mean that I’m giving up on my own opinions, but I think one of the
33:20
most important things to do over the next couple of years is keep an open mind.
33:23
I think we’re going to see things happen that
33:25
many people just don’t think can happen.
33:28
And I think that for those who kind of stay nimble and have a plan, there’s going to
33:33
be an opportunity to make some good profits in the years ahead.

The Big Short Billionaire Michael Lewis Missed (w/ Raoul Pal and Jeff Greene)

Billionaire real estate investor Jeff Greene built his fortune with a lifetime of hustle and no partners. In this interview with Raoul Pal, Greene explains how he transformed himself from a traveling circus ticket salesman to an investment titan putting on billion-dollar credit default swap trades. What began as a hedge turned into the trade of a lifetime when Greene astutely observed that shorting mortgage backed securities was a no-doubter in his first foray with derivatives. Greene also touches on his unique career path, his market outlook for a handful of asset classes, and the philanthropic endeavors that now dominate his focus. Filmed on January 23, in West Palm Beach, Florida.

Transcript

00:01
RAOUL PAL: Jeff, it’s great to be here in Palm Beach and to get you onto Real Vision.
00:06
Just chatting off camera, we’ve got a lot of friends in common we didn’t.
00:09
You’ve got a fascinating story and I think people would love to hear the story of how
00:15
you start your career, how you got into real estate, but even starting before then, you
00:19
as a student, going to university.
00:21
Talk us through a bit about that.
00:22
JEFF GREENE: Well, I don’t know where to begin.
00:23
I grew up, I was born in Worcester, Massachusetts, which is a city about 40 miles from Boston.
00:29
My dad was a textile machinery dealer, which meant you sold these giant machines that were
00:34
longer than this room, they could be 100 feet long, to mills and parts of that also and
00:39
they did it very well.
00:40
We’re a middle class family in like cute little house with a backyard and my mom was pretty
00:45
much a stay at home mom.
00:46
Then in the late ’60s, all the textile mills got unionized in New England and they moved
00:51
to the south.
00:52
My dad lost his livelihood because he didn’t have mills to call and that’s all he’d done.
00:56
He had all this money in this business.
00:58
He had a warehouse with parts and materials.
01:01
My parents picked up and moved to West Palm Beach, actually.
01:05
My dad bought a small rubber stamp business.
01:07
He never really got on his feet again.
01:09
For me, I was just a junior in high school when they moved here, but I was really still
01:16
in junior high school and when our financial fortunes went the wrong way.
01:21
I had to work my way through college, and I had some financial struggles, which probably
01:25
made me hungrier than ever to do well.
01:27
RAOUL PAL: How did you pay your way through university?
01:29
There’s a bit of a story about that, because you went to Harvard, didn’t you?
01:31
JEFF GREENE: Well, I went to college at Johns Hopkins University in Baltimore.
01:35
It’s interesting.
01:36
I applied for scholarships, and I got scholarships and student loans.
01:41
That paid some of my costs and then also, I had been an exchange student in Israel in
01:46
high school.
01:47
I learned to speak Hebrew fluently.
01:48
I taught Hebrew school three days a week.
01:50
I had to ride the bus in Baltimore and I had to change three changes.
01:55
Two transfers.
01:56
Three bus rides to go out there to teach Hebrew school on Tuesday and Thursday.
02:00
Then I rode out with another Hopkins student on Sunday.
02:03
Then I had another job where I checked IDs outside the gym, it was called work study.
02:08
It was a government funded program where you get paid a buck 50 an hour when you’re supposed
02:12
to be able to do your studying while you check the IDs, which you do.
02:15
Then I also, when I came down here to visit my parents, I worked with the Breakers Hotel
02:19
here in Palm Beach.
02:21
I was a busboy, and then a waiter in the main dining room, and I just slogged along and
02:27
made it through college.
02:28
I finished Johns Hopkins in two and a half years, not because I was such a genius.
02:33
I think it was because it was working so hard.
02:35
It wasn’t really a fun college one.
02:37
RAOUL PAL: Then after that, where did your career go?
02:41
JEFF GREENE: Well, so then what happened is I was down here one summer in West Palm Beach.
02:44
I was working at the Breakers, not making any money because who’s here in the summer?
02:47
Nobody, so no tips.
02:49
I signed out of the local papers, had telephone sales and I went to [indiscernible], it was
02:54
to sell circus tickets for the local Riviera Beach Fraternal Order of Police which is a
02:58
nonprofit Police Organization and it’s at $2.50 an hour or commission.
03:04
Well, minimum wage was a $1.60 in 1972.
03:07
$2.50 an hour, you can make 100 bucks a week.
03:10
Tuition at Johns Hopkins in those days was 2700 a year so if I work for 12 weeks, I’ll
03:16
make 1200 bucks.
03:17
Not so bad.
03:18
High stress on these tickets.
03:19
I’ve noticed that I’m selling more than everyone else, if I feel like I’m selling more than
03:22
everyone else in the room so I said to the guy at the end of the day, how much would
03:26
I’ve made on commission?
03:27
He said $93.
03:28
I’ll take commission.
03:29
Instead of making $20, I made 93.
03:31
Anyway, I ended up doing this all through college.
03:36
Wherever I had a break, I then would go on the road and run a telemarketing office for
03:41
the circus.
03:42
After I finished at Hopkins, I went on the road to run these telemarketing operations
03:48
for fundraising circus from Sarasota, Florida, and I would roll into little towns all around
03:55
the country like Bluefield, West Virginia, tangy, you never would have heard of.
04:00
[Indiscernible] 20,000, 30,000.
04:03
Then I had a Pontiac Grand Am.
04:06
I had my clothes on a bar across the backseat, loaded with laundry detergent in the trunk
04:10
to go to the laundromat.
04:12
I would roll into town, check into the Motel 6 or Days-in or whatever it was.
04:18
I set up an office, sell the circus tickets, hire local people.
04:23
I did this.
04:24
It was a lonely life.
04:25
I finished college before I turned 20 so I was just 20 years old, 21, 22 all by myself
04:32
like a traveling salesman in these little towns.
04:34
Forget having a girlfriend, you couldn’t even have friends because you’re always seeing
04:38
different people.
04:39
You’re always on the move.
04:41
I did this and I saved up and I worked so hard.
04:43
I saved up $100,000 in the mid-70s.
04:46
It was just from working, I worked nonstop.
04:50
I lived on nothing.
04:52
I saved every penny because I was determined after what I’d been through going through
04:56
working my way through college, never to be broke again.
05:01
My dad, actually, it’s worse than not losing his livelihood, he actually lost his life.
05:06
When I finished Harvard Business School in 1979, in May, my dad didn’t make it to graduation
05:11
because he was having heart issues.
05:13
He died two months later with a massive heart attack at the age of 51.
05:16
I really believe it was because of the stress of not just losing his life, losing his dignity
05:22
and his sense of worth.
05:25
It puts me in touch today very much and that’s probably one of the reasons I’ve gotten involved
05:29
so much in philanthropically, and politically because I’ve really saw firsthand how somebody
05:38
can get broken when there are economic reality changes.
05:43
Anyway, so I saved up all this money, go back Harvard Business School, I had $100,000 in
05:50
the bank.
05:51
Never had bought any real estate because how could I?
05:53
I was in a different city every two weeks.
05:55
RAOUL PAL: Living out of the car.
05:56
JEFF GREENE: Sorry?
05:57
RAOUL PAL: Living out of the car.
05:58
JEFF GREENE: More or less.
05:59
I did have stuff stored.
06:00
I’d never had an apartment.
06:01
I had stuff stored at my parents’ house, my aunt’s house.
06:04
I was living out of my car more.
06:06
When people say that you think I wasn’t sleeping in my car, but that was my base.
06:10
My Pontiac Grand Am.
06:12
Now, a lot of people I knew had invested in real estate.
06:16
It’s interesting.
06:17
I got into Harvard Business School.
06:19
I didn’t get into the good housing complex, so just field apartments because there was
06:23
a waiting list.
06:24
A friend of mine from Hopkins said, who would have started off with those first so I said
06:28
what do I do?
06:29
He said, well, what you can do is why don’t you go buy one of these three-deckers?
06:33
What’s that?
06:34
It’s like a three family house built in the late 1800s.
06:37
You can live in one, rent out the other two and at the end of the time, you think you’re
06:40
probably going to sell and get your money back and live rent free and I said that’s
06:44
interesting.
06:45
I was set by to discuss– a friend who was broker, also been to the business school and
06:49
who I still know actually.
06:54
I bought a three-decker, and lived in one and the market was so undervalued in 1977
07:00
when I bought this, I could see I was saying, I bought it for $37,000, 7000 down, so that
07:06
would happen as I got approved for the housing.
07:09
I said, what’ll it make me if I rent all three, how does this investment work and by every
07:14
measure I looked at, I was going to end up after my mortgage payment, making $2200 a
07:19
year on my separate thousand dollar investment.
07:21
If that’s a 30% return, I said I got to get more of these.
07:27
While I’m at Harvard Business School, I accumulated 18 properties.
07:30
I bought them.
07:31
RAOUL PAL: You were just buying them out of the cashflow of each property?
07:34
JEFF GREENE: No, I had my hundred thousand.
07:35
RAOUL PAL: Out of school.
07:37
JEFF GREENE: For the first one I wanted when that was perfect, so I’m saying I can’t be
07:41
like dealing with repairs when I’m at Harvard Business School.
07:45
Who’s going to do this work?
07:47
Then I started getting comfortable doing remodeling and for the time I was done, I was buying
07:52
junkie buildings, fixing them up and anyway, that became the beginning of my real estate
07:57
career.
07:58
As it turns out, the market was so undervalued.
08:00
That property I bought for 37,000, I sold three years later for 185,000.
08:06
Another property bought for 38,000, right near the Cambridge line, and somewhat sold
08:14
it for 3380, 330 to 380.
08:15
RAOUL PAL: Is that when interest rates started coming down that suddenly the price of property
08:18
exploded?
08:19
Around ’81, ’82?
08:20
JEFF GREENE: I think you’re right.
08:24
That’s when Reagan was just– RAOUL PAL: Yeah, that’s right.
08:28
Reagan just cut in, there’s the Reagan-Thatcher years, interest rate just peaked and just
08:32
started to come by– JEFF GREENE: The late ’70s, so yeah, so before whatever it was,
08:37
the market just exploded and my 100,000– by the time I finished Harvard Business School,
08:41
I had a million dollar net worth.
08:42
Then I was off to the races.
08:44
It’s interesting because people often– RAOUL PAL: You didn’t use your Harvard education
08:46
at all?
08:47
JEFF GREENE: I always use my Harvard education.
08:51
RAOUL PAL: You leave Harvard, you’ve made a million bucks and I guess you decided real
08:55
estate’s the business you want to be in.
08:56
JEFF GREENE: I fell into it.
08:58
What happened is I decided to move to California.
09:01
I had a great aunt and some cousins there so I moved to LA after I finished at the business
09:06
school and thought I’d do real estate but the prices in LA were very different than
09:10
they were in Boston.
09:11
Boston was– it was before the tech booms and the biotech booms and Boston was a little
09:16
bit sleepy in the early ’80s.
09:19
Slow growth.
09:22
Even after things had started to appreciate, you could still put down when you buy an apartment
09:26
building, you put down 20%, 30% you’d make a nice return on your cashflow 5%, 10%.
09:32
I go to LA and you buy a building, it’s okay, here’s what you do.
09:35
You put 30% down and you’ll lose cashflow.
09:38
Because basically in LA, you are buying the futures because everything was perceived to
09:41
be going like that, and I just didn’t get it.
09:44
I did some other things.
09:45
I bought actually 50% of a clothing manufacturing company, did that for 14 months.
09:52
RAOUL PAL: Why?
09:53
JEFF GREENE: I just finished Harvard Business School, I had to do something for my career.
09:58
I looked at buildings, they all just seemed outrageously expensive, didn’t fit the format.
10:02
I was used to cashflow real estate.
10:06
I just couldn’t figure it out.
10:07
I think, to tell you the truth, I’d taken a class, a business school by small businesses.
10:11
The way you find a small business is you do business brokers, go talk to local accountants.
10:16
What my cousin had was a textile salesman.
10:21
I said, let me go see your accountant.
10:23
Well, the only companies the accountant knows is textile and garment companies.
10:26
He said, well, I got this guy who has half of– he has a company, he’s just fired his
10:31
partner, he’s looking for someone like you to come in and help run the business.
10:37
I bought half of this company, and it was very successful 14 months.
10:42
I hated every minute of it.
10:43
It wasn’t my cup of tea.
10:45
I was thrilled and I’m showing up in my– at the time, Brooks Brothers suits and buttoned
10:49
down shirts and ties and these guys who were working there, gold chains around their necks
10:55
and they were in these spray on printed shirts that just it was aggressive, tough screaming
11:01
and yelling.
11:02
It wasn’t what I was planning on doing with my newly minted Harvard MBA.
11:05
Anyway, I got out, made some money and then I started doing real estate deals and started
11:10
buying.
11:11
I figured out the LA market, started buying properties and had a nice run up till early
11:16
’90s when I participated in the crash like most developers and investors.
11:20
RAOUL PAL: When you said you figured out LA property markets, does that mean you just
11:24
went into the momentum trade and realize it was all about price gains and not about–
11:28
JEFF GREENE: Yeah, I realized that you’re not going to make your cashflow in year one,
11:32
you’ll get your cash flow in year three or four and that’s how it was priced and just
11:36
I started doing things that way and sure enough, you bought one or two so I bought like an
11:40
eight-unit building, a seven-unit building.
11:42
Then you’re seeing there, as the rents go up and I started saying, now, I get this.
11:48
By the time I get to a– that was the starting like in ’82-’83 and by ’91, ’92, ’93, I had
11:55
about 100 million dollar real estate portfolio.
11:57
I never had investors or partners, but I had a lot of debt.
12:01
That’s how I built it.
12:03
I probably had debt on at maybe, I don’t know, 65 million, which is 35% equity, had been
12:10
refinanced and did grow aggressively, and then the market dropped and all the sudden,
12:16
somebody– ’92, ’93, ’94.
12:18
By ’94, my $35 million net worth was like minus $15 million.
12:24
RAOUL PAL: Did that terrify you?
12:27
How did you think about debt from then?
12:28
JEFF GREENE: It was tough, because basically, from my papers and snow shoveling jobs, my
12:34
whole life in business had been straight up.
12:39
The truth is let’s finish Harvard Business School at 24.
12:42
I have a million dollars.
12:44
I’m thinking I’m a genius.
12:45
I’m bored, and people call you, you must be– you’re really boy wonder, you think I’m really
12:49
a smart guy here and basically, I had never been– had not been married.
12:54
I had girlfriends, but I had been single, all I really had was my career, to tell you
12:58
the truth, to hang my hat on.
13:00
In 1994, I was just turning 40 years old and basically, everything I had worked for was
13:08
all of a sudden that and it was traumatic.
13:11
It was a tough few years.
13:12
It was a tough few years, because I’m thinking like I could actually very easily be liquidated
13:18
out back to zero and have nothing at all to show flow for what I’ve been doing in my whole
13:23
career.
13:24
I got good education, but what would it have gotten me?
13:26
RAOUL PAL: How did that affect you psychologically at the time?
13:28
JEFF GREENE: It’s tough.
13:30
It’s interesting, I still– RAOUL PAL: You can’t take risk so easily when you’re thinking
13:33
like that.
13:34
JEFF GREENE: It’s interesting.
13:37
I’ve always been a fundamental– believe in the fundamentals like the way I invest, where
13:41
I do everything and I try to focus on long term and not let noise bother me.
13:46
I knew why that market had happened.
13:50
I understood it very clearly.
13:54
It’s a longer story, but the government empowered savings and loans and then try to allow them
13:59
to make crazy loans.
14:01
Basically, because what happened and if you will remember back, interest rates started
14:06
going up, SNL is having their books, all these fixed rate loans, and they were all in trouble
14:11
so the government said, okay, you want to be able to pay 8% for CDs, we’ll let you do
14:16
anything.
14:17
People were buying McDonald’s franchise with the SNL funds and they will make 100% construction
14:23
loans.
14:24
Of course, you’re going to have this crazy froth in the market.
14:27
I didn’t really feel I would like that.
14:29
Then nothing that I had done, it was the government that did it, and it happened and so when it’s
14:35
so good, I plotted through it.
14:37
I kept renegotiating with lenders.
14:39
Lucky for me, I had one main lender, called Glendale Federal Savings, they were the sixth
14:43
largest SNL in the country and believe it or not– RAOUL PAL: They stayed solvent?
14:48
JEFF GREENE: Barely.
14:49
They had $200 million in capital.
14:51
I owed them like 69 or 59, give or take.
14:53
RAOUL PAL: Okay, so you were too big to fail.
14:55
JEFF GREENE: It’s crazy because they were like, it’s almost a $20 billion SNL, my little
15:00
thing was enough to push them over the hump so they kept working with me and I was– look,
15:04
I was very persistent.
15:05
I’d give them a building, they would cut loans in other buildings.
15:08
We just work together and kept restructuring a few times, then eventually by probably ’95-’96,
15:16
my net worth was zero again, like all my loans equaled my values.
15:21
Then I got lucky and I said, look, I sold one property.
15:23
I had a property on Sunset Boulevard, a nice house at a very nice part of LA, 40-unit building.
15:29
It probably was worth $4 million.
15:32
The loan was for $4 million, but the Getty Museum needed housing for the new faculty.
15:35
They were just finishing the new Getty Museum.
15:38
They had looked at some other land I had, I called them up and I said, how about this
15:42
building?
15:43
I sold it for $6 million, so I get 2 million bucks cash.
15:47
Now, most people having been through what I was, they would have taken that 2 million.
15:52
I said, I’m not going to risk this ever again, but I didn’t.
15:56
I went I bought three new buildings immediately.
15:59
I bought them from the RTC.
16:01
I bought an office building for $30 and cents– RAOUL PAL: I just want to get back a little
16:04
bit.
16:05
How do you– the psychology of doing that.
16:07
Taking a loss or getting close to having to realize a big loss is actually quite hard
16:11
thing to do.
16:12
Trading, investing and I run a hedge fund.
16:14
I know what that’s like, how did you distance yourself from that?
16:17
Let’s do it again.
16:19
You thought you had nothing to lose anyway?
16:21
JEFF GREENE: No, no, I just felt that– I really felt that I understood why this had
16:26
happened.
16:27
I felt that this was a crisis that was brought on by the savings loan excesses and that the
16:34
RTC and the government had it very badly.
16:36
I don’t know if you remember it, the Resolution Trust Corporation.
16:40
They just took everything and liquidated and they caused a lot more havoc than would have
16:44
otherwise been in the market.
16:46
I could see that’s why my properties were dropping in value to those levels, not because
16:50
people were leaving LA or didn’t want to live there anymore.
16:53
I have a chance now to buy these properties at barely pennies on the dollar.
16:58
I snapped up an office building at 30 bucks a foot, that was like eight years old, it
17:02
was what it costs $200 a foot to build then.
17:04
Then I bought another 65-unit apartment building for 2.7 million.
17:10
All townhouses and I’m thinking there’s no way you can lose money on these deals.
17:14
Sure enough, they all like tripled in value.
17:17
Then I was able to get those stabilizes, or refinanced.
17:23
I just started going and buying and honestly, I’d say that my recovery in the late ’90s
17:30
was really relationship oriented.
17:31
I’ve always been very relationship oriented.
17:33
I had one bank that I worked with a lot.
17:37
I figured out what they needed, they figured out what they need to do with me, and they
17:41
were my lender, and I started buying properties very aggressively at very cheap prices.
17:47
RAOUL PAL: All in LA?
17:48
JEFF GREENE: All in LA.
17:49
I was buying apartment buildings, because what you had was you had in this SNL period,
17:54
you had people who had built all these new buildings.
17:58
Hundreds and hundreds, if you drive to LA today, you’d still see these late ’80s, they’re
18:03
four-stories.
18:04
That’s the zoning over two levels of parking.
18:08
Wood frame, stucco.
18:09
They all look the same.
18:10
Basically, these buildings, what happened is moms and pops would have them or people
18:16
would not own them.
18:17
They were shell shocked because they went through rents– because they have a building.
18:22
They may be got it in say, and I’m just guessing they built it maybe in, I don’t know, 1987,
18:27
’88, ’89.
18:28
That’s when the big build– now, this RTC gets the building next door and cuts the rents
18:32
by 40% so now, you cut your rents by 40%.
18:35
By the time you get to ’96, you’re just so happy to have tenants.
18:39
No one’s raising rents, rents are way below market.
18:42
You go into buildings, you just buy them, we clean them up a little bit.
18:45
Change the entire rent roll to market and then refinance and buy more and so I got this
18:51
going again through great broker relationships, lending relationships, and I got up to 8000
18:56
units by 2005.
18:57
RAOUL PAL: 8000 units?
18:59
JEFF GREENE: Yeah, and over a billion dollars’ worth of real estate.
19:01
RAOUL PAL: All in LA.
19:03
JEFF GREENE: All in LA.
19:04
RAOUL PAL: Talk me through the next phase then.
19:07
2005, you’ve now got half of LA, it sounds like.
19:10
JEFF GREENE: It was a great run.
19:12
I’m freaking out, and my debt was probably I’m guessing 500 million.
19:16
I’ve said I’ve gone from minus 15 million to positive 500 million net worth, but I know
19:22
that stuff can happen and even things that you have nothing to do with like the SNL crisis.
19:28
I’m thinking what had happened was the value’s gotten so high because after the dot-com bust,
19:35
interest rates were cut to the lowest since World War II.
19:38
As a result, cap rates on apartment buildings got very low and I’m thinking like, this may
19:44
not be sustainable.
19:45
What can I do?
19:48
As this is happening in like ’04, ’05, I’d go and I’d sell five or six buildings, get
19:52
some cash, then I think, yeah, I’d do an exchange and buy more buildings.
19:56
I’m thinking there’s got to be some hedge because I’m reading about all this stuff on
20:00
Wall Street.
20:01
RAOUL PAL: Which year are we talking about now?
20:03
JEFF GREENE: This is ’06.
20:04
There’s got to be some way rather than just selling buildings and paying and getting nervous
20:08
then buying new ones.
20:09
There’s got to be some way to get a hedge so if the value of the buildings drop, I won’t
20:15
lose as much money.
20:18
I go to talk to Goldman Sachs, JP Morgan, they said, well, you can short the SNL stock
20:24
because if the market collapses, those will drop.
20:25
Then I think, well, if you do that, what happens if the one that you short gets taken over
20:30
or something.
20:32
Then I went to see a very old friend of mine, John Paulson, who was a very close friend.
20:36
I called him up, and I said any ideas on this, he said, come see me and work on something
20:42
you may like, so I went to his office and he showed me how– he said, I’m shorting subprime.
20:47
Subprime?
20:48
What does that mean?
20:49
Well, I’m using derivatives.
20:50
What’s a derivative?
20:51
Well, you use credit deposit?
20:53
What’s a credit deposit?
20:54
Then he shows me some slides.
20:57
I get the idea.
20:58
Housing prices are not going to go up, are going to drop and people won’t be able to
21:03
pay the mortgages and the bonds will default, but these are very complicated instruments.
21:08
I didn’t really know exactly how you get from giving your money to this up to putting your
21:13
money up to you make a profit because the way these bonds work, they were very complex.
21:21
I remember saying, I said JP, can I do this on my own because now, we’re friends and I
21:24
may be– and he said, no, you won’t be able to because you have to sign this.
21:29
It’s an institutional trade.
21:34
His fund wasn’t ready for several months, anyway.
21:36
This is like in March or April of ’06.
21:38
I went back to LA and went to Berlin.
21:40
Then I called up all my bankers, and they told me, absolutely not, you can’t do this.
21:44
I hustled SIP, and I’ve pushed them in then I got approved to do this trade.
21:50
Initially, I went short $650 million worth of subprime mortgage backed securities with
21:57
JP Morgan and Merrill Lynch.
21:59
RAOUL PAL: You then sit it out for a bit, because nothing happens.
22:03
It gets marks against everybody.
22:05
JEFF GREENE: Yeah, a little bit.
22:06
It went down a little bit, and then I went to JP, sent me his fund, finally said, I’d
22:11
like to go in your fund now.
22:13
I told him, I’d done every email, I told him my I’d done some trades, and he got upset
22:17
that I’d done the trades.
22:18
RAOUL PAL: Without him?
22:19
JEFF GREENE: Yeah, but I still wanted to go to his fund.
22:21
We’re still friends now.
22:22
I think it was I should have probably told him I was doing it when I did it.
22:27
I’d say, I just did it.
22:29
I figured he’s running up, at the time, he had $5 or $6 billion in a matter I think,
22:32
he’s got a big business and I’m just doing a relatively small amount of this in the overall
22:37
scheme of things but, and I’d said I should have told him and I couldn’t, I think it caused
22:41
a problem between us for a while, but nevertheless, I ended up doing that.
22:45
The fund dropped in the summer a little bit and then so I was down.
22:53
Then it went up and then it went down again the next January for some reason.
22:56
RAOUL PAL: Have the housing prices have a tipping over at this point?
22:59
JEFF GREENE: Housing prices with– all the fundamentals of housing were going like this,
23:03
the punt’s going like that by January, it made no sense.
23:06
I said I want to do more of this.
23:07
I caught up and I was able to do another 400 million of the short and so I had 1,000,000,050
23:13
on at that point.
23:14
I was going to do more truthfully but by the time I got approved for more at one of the
23:19
two banks, it already started to deteriorate, the prices already dropped against.
23:24
I had this in them.
23:26
Then I just gradually started closing out that trade in, I’d say, 2008 and it was a
23:34
very profitable trade.
23:36
It turns it wasn’t a hedge at all.
23:37
That’s the craziest thing and I knew when I went and started, the more time I spent
23:41
on this trade, it’s faster I realized that this is not a hedge because apartment buildings
23:46
values were a function of rents and interest rates, lower interest rates provide low cap
23:52
rates and high and stable rent markets, people want to buy buildings with stable rental markets,
23:59
but I looked at it, I knew it was an incredible trade because I’m thinking this doesn’t make
24:02
any sense.
24:03
There’s no way that these bonds are getting repaid.
24:06
That’s why I stepped right up and I did over a billion dollars in this stuff.
24:12
RAOUL PAL: That was a hell of an initiation to the world of derivatives.
24:15
JEFF GREENE: Yeah, pretty lucky.
24:17
It could have gone wrong.
24:18
RAOUL PAL: It could have gone wrong.
24:20
There again, in the end, they’re not very expensive trade.
24:23
The good thing is they were relatively cheap to put on but the punt was so ridiculous if
24:28
you get them right.
24:29
JEFF GREENE: Yeah.
24:30
Well, I think I had to put up I think to 5% which made sense because basically I was doing
24:33
it 1.3 over.
24:35
Here’s the problem.
24:37
The problem with this trade is I was very lonely doing this trade.
24:41
I’d never been on– I’m going up against the biggest banks on Wall Street effectively.
24:45
I don’t know anything about the stuff.
24:47
I’m thinking about– am I missing something?
24:49
Just seems all seemed too good to be true.
24:51
I would talk to my smart friends, like my close friends from Harvard Business School
24:56
and some other friends who are on Wall Street.
25:00
I’d say, what do you think of this?
25:02
They would go talk to their advisors.
25:04
Interestingly enough, a lot of very smart people would come back and said, the problem
25:07
is just really stupid that you’re basically agreeing to pay the spread for 30 years on
25:14
these margins.
25:15
If no one pays off the loans, you’ll pay for 30, but that’s completely nonsensical, because
25:20
even normal loans get refinanced and as an average duration of any bond, any pool of
25:26
loans.
25:27
In this case, I focused every– I don’t know if you have seen how these loans business
25:34
is like, so basically, there was one type of loan, it was called a 2/28 loan.
25:41
I would try to find bonds at 80% of this.
25:45
What that meant was for two years, the rate’s fixed at some very low rate, maybe it might
25:49
have been at, in those days, at 6% for a subprime loan, and then in month 25, it can go up to
25:59
300 basis points, then 100 basis points every six months till it peaks at 600 basis point
26:03
increase.
26:04
It means after three and a half years, it’s a good chance that these loans are going up
26:08
6% to 12%.
26:09
On top of that, a number of the loans of the pools that I shorted went from interest only
26:15
to amortizing.
26:16
Imagine you have a 6% interest rate loan, three and a half years later, you’re amortizing
26:21
it at 12%.
26:23
Of course, nobody can afford.
26:25
The only way out is if housing prices keep getting higher and you can refinance, but
26:31
when I did this trade, only 11% of buyers in California could qualify for the median
26:37
priced home loan, means 89% couldn’t qualify.
26:42
Who is going to possibly push prizes for a lift?
26:45
Nobody.
26:46
That’s exactly what happened.
26:47
RAOUL PAL: You get through the housing crisis pretty well, and the value of your real estate
26:51
portfolio didn’t really suffer?
26:53
I guess single family homes got really killed in that.
26:55
JEFF GREENE: Yeah, everything dropped, I’d say, but apartment rents dropped 15%, 20%
27:00
in LA and the value’s the same.
27:03
The thing about LA, it’s a very supply constrained market.
27:07
Even in the worst crash, it never really that bad.
27:09
It was bad in the early ’90s.
27:10
There was such an enormous overbuilding, there wasn’t any overbuilding going into 2000 into
27:15
this crash.
27:16
There was no overbuilding at all of apartment buildings.
27:19
It was a very tight market.
27:21
Of course, people, the economy get bad so rents dropped a little bit.
27:24
It was no big deal, then they came back immediately.
27:28
RAOUL PAL: Then after that housing crisis, and that was the financial crisis, what opportunities
27:34
did you see?
27:35
Because a guy like you sounds like you would have been looking for opportunities in there.
27:37
JEFF GREENE: Well, it’s interesting.
27:39
What happened was I’d never been married.
27:41
I met my wife in the summer of ’06.
27:43
’06 had a pretty good, spring, summer when I did subprime short in April, I met my wife
27:48
in June.
27:49
That’s a pretty good period and I’d never been married.
27:51
RAOUL PAL: Mike Tyson’s party, is it?
27:53
JEFF GREENE: Mike was actually on a boat I owned in Sag Harbor for his 40th birthday.
27:59
I’m like a guy who likes to really figure things out and really plan things out, that
28:04
are going to happen, I don’t know, like depend on random circumstances.
28:06
I don’t go to Vegas and place bets on things.
28:10
I’m really pretty mathematical serious.
28:13
Meanwhile, how do I met my wife?
28:15
I’m having a crazy party for Mike’s 40th birthday.
28:19
Friends of mine go get a DJ.
28:21
DJ says, can I bring a few hot chicks?
28:24
Walked in with the DJ.
28:26
It ended up that’s the mother of my three children, go figure it out.
28:31
You know the plans you have, they sometimes are funny.
28:34
Anyway, so what happened is, so I met my wife that summer, summer ’06, and then we ended
28:42
up getting married in September of ’07, and she’d been living on the East Coast and in
28:47
truth, I knew I was cashing out the subprime debt anyway and I was thinking, you know what,
28:51
I’m going to have 100– I could save 100 million dollars in state income tax if I live in Florida
28:57
versus California.
28:59
The point is I was only in LA three or four months a year, because I was on my boat a
29:02
lot, traveling, so it wasn’t like I was– had kids in school.
29:07
I was only there part time, so I said, and I was already in Florida a month and a half
29:10
a year because I had my boat or something and I went, let’s spend a couple more months
29:13
in Florida, one month in LA and I’ll save 100 million dollars and I’m not doing anything
29:18
illegal, everybody gets that’s the law.
29:20
We end up moving to Florida, getting a place in Miami and this is in early ’08.
29:28
At that point, everything was a mess.
29:31
RAOUL PAL: Miami got murdered in that.
29:33
JEFF GREENE: Interesting enough, well, you couldn’t get anything in Miami because what
29:36
happened is I’d be driving around and I’m giving up, I’ve got like, I’m a real estate
29:40
guy, who truthfully never had any money.
29:43
You don’t go from zero to eight to a billion dollars with a real estate with no investors,
29:48
and no partners and have cash in the bank.
29:49
You do that by you refinance a building, 15 minutes later, that build money is due to
29:54
buy another building.
29:55
It’s like literally you got enough money to pay for lunch but not much else.
29:59
I’m cash poor, asset rich my whole life because I was always moving around.
30:05
Now all of a sudden, I’m sitting with either a million dollars of cash and the real estate
30:10
market has collapsed and everything’s– I’m thinking like, wow, this could really be a
30:15
lot of fun for me, instead of being like all my peers, struggling, I’m just the guy with
30:19
the money.
30:20
What a great reversal that was.
30:21
RAOUL PAL: Somebody told me once very early my career, he said, listen, there’s one piece
30:25
of advice.
30:26
He who has cashed in the recession is king, and it’s so true because then you’ve got the
30:30
opportunity that nobody else has got.
30:31
JEFF GREENE: Anyone else– it’s not saying that like I didn’t need to make more money.
30:34
It’s really more that also, it’s just so much more relaxing years I have in liquidity.
30:40
Just in general, even forgetting opportunity, just not having– it’s nice to build a business
30:45
and grow, and not have partners or investors to worry about, but it’s stressful constantly
30:50
trying to move things around and depending on loans and refis.
30:56
It was certainly like I saw in Miami, I’m there and I’m driving around like some– I’m
31:01
a deal junkie and I’m a serial entrepreneur, I’m looking around and I see all these big
31:04
buildings with all these low lights on and I see all these empty lots next to the big
31:09
buildings.
31:10
I think, how do I get some of these and nothing’s available because it’s early ’08, and they’re
31:15
in the bank portfolios, nobody’s sure what’s happening.
31:19
Then, but we moved here in December of ’09 to Palm Beach.
31:24
By the time we moved here, it was just the time I’d say like 2010 when the property started
31:32
getting sorted out, the lender started getting control of them and they were starting to
31:36
liquidate them.
31:38
I started buying here very aggressively.
31:39
I bought this hotel.
31:40
I bought the note here and foreclosed on it.
31:43
This hotel, I think it cost the former owner, it was over 100 million dollars, I bought
31:48
the note for 41 million from UBS and all kinds of fractured condos and land and it was really,
31:58
there’s a lot of opportunities in this market.
32:01
Originally, I was coming here just thinking, okay, I’m living here in Palm Beach, I’ll
32:05
do a few things to make some money.
32:08
I thought they’ve really great values.
32:10
I didn’t really necessarily think it was a great place to do deals, that it was a good
32:14
place to do deals.
32:15
Then the more time I spent here, realize this is just a great place to live, a great place
32:20
to invest, a great place to develop.
32:22
I was able to snap up all these great opportunities.
32:24
RAOUL PAL: Then the whole hedge fund industry moves here.
32:28
The whole of Greenwich turns up here, and that’s going to help you, the hotel, and of
32:31
the neo taxes and the big move here.
32:34
JEFF GREENE: I don’t think it’s as big as people think.
32:36
As soon as you talk to people in business, first of all, hedge fund people, how many
32:41
do they employ?
32:43
First of all, the kinds of hedge funds that come here, the little ones are on office,
32:47
they have a satellite office.
32:48
RAOUL PAL: Yeah, because people like Paul come here and it’s just him, he stays in his
32:51
office and he didn’t bring any employees then.
32:52
JEFF GREENE: No, of course not, because everyone says us, from these big business developments
32:57
had said, we’ve got all these hedge funds to move.
33:00
People and hedge funds, first of all, if you have a hedge fund in New York City, you’ve
33:03
got mature, serious people, have wives and parents living there and kids in school and
33:10
country clubs.
33:11
They’re not just going to, hey, guys, let’s all moved to Palm Beach, okay, we’ll all just
33:14
go there.
33:15
RAOUL PAL: It’s only the founders and the owners who come down here.
33:16
JEFF GREENE: Of course.
33:18
It’s hard to come here because they still have to keep their presence because people,
33:23
it’s not that that people don’t like, it’s a great quality of life but people have commitments,
33:27
not everybody don’t just going to pick up and moved and uproot themselves.
33:30
You really haven’t seen that.
33:32
On top of that, those aren’t the kinds of companies that employ large numbers of people
33:37
like LA, you got like Snapchat, they open an office, and they employ– they have 200
33:42
people, rent 100,000 a year in one office.
33:45
Google, when those kinds of companies come into New York where I’m building a building
33:49
and about two blocks away, Google’s building a saying jobs terminal, you’re talking about
33:54
6500 jobs and I read the average pay is over $100,000.
33:59
That’s what moves as an economy here.
34:01
We haven’t really seen that.
34:02
RAOUL PAL: Talk to me about the New York real estate market, because I’ve been talking to
34:06
a few people.
34:07
Just the Real Vision offices are in New York and I’m there every two weeks, and there has
34:15
been one of the largest buildups of New York real estate, I think in history, has gone
34:20
in the last four years.
34:21
What do you about all of that?
34:23
What’s in your radar?
34:24
JEFF GREENE: I wish I had another deal I do.
34:28
I’ve just finished a 25-story building.
34:31
It’s when I started doing this, it seemed like a great idea.
34:35
The problem with real estate developers is one developer has a successful building.
34:41
It does really well and then there’s no regulation how many others can do it.
34:45
Then 15 other developers are hired to do the same building and everyone thinks, well, I’ve
34:49
got a better architect, I’ve got a better view.
34:52
I’m a smarter developer.
34:54
Then you end up with 20 buildings, and there really were enough buyers for just the first
34:58
one.
34:59
I think in New York, that’s what have happened.
35:03
For me, look, I don’t use construction loans.
35:05
I don’t have investors.
35:06
I don’t have EB-5 money.
35:07
I don’t have limited partners.
35:09
I try to just do enough, that kind of development that I can afford to pay for with my own cashflow
35:14
and I’ll make it through this cycle.
35:15
I think it could be a long cycle.
35:16
The good thing about the building I’m building, lucky for me, is it’s in an area called Hudson
35:21
Square, which is a little– not Hudson Yards, but Hudson Square, which is a tiny pocket,
35:27
just below the West Village, above Tribeca, between Soho and the river so it’s really
35:32
a five-minute walk to West Village, Tribeca, Soho or the river and that was great because
35:37
you’re in the middle of everything.
35:39
What’s even greater is ABC Disney just in that is building right now.
35:43
The whole operation one block from my building on the same street, it’ll be ready in a few
35:47
years and then Google’s building St. John’s Terminal two blocks away.
35:53
We’re going to have 15,000 new jobs within two blocks.
35:56
That’s very lucky.
35:57
I think that I have to figure out how I’m going to make it till when we’re done in about
36:01
six months till three years from now when the neighborhood really comes into it, but
36:05
New York’s– you know what, you can’t bet against New York because isn’t even as bad
36:08
as it is.
36:10
Just those two projects in my neighborhood are going to have 15,000 jobs and I realized
36:16
the ABC people were working up in the Upper West Side, but those buildings solve a steam
36:21
bottom and they’re going to rebuild them into something.
36:24
New York is like it’s the greatest city in the world.
36:30
It’s our biggest city.
36:32
If you want to do certain things, you want the talent and the resource.
36:37
You want the infrastructure, that’s where you’re going to go.
36:42
Eventually, we’ll figure out a way to get past this cycle, I’m sure and all this real
36:46
estate, they will just– RAOUL PAL: How are you thinking of the real estate market overall
36:49
now?
36:51
I know you’re mainly focused here in Florida, I guess, for most of your investments and
36:54
some in New York, what are you thinking now?
36:57
What’s your senses?
36:58
Because you had amazing timing in 2006-’07.
37:01
JEFF GREENE: Look, I think there’s different kinds of real estate obviously.
37:06
Right now, I’m building a 300,000 industrial building here in West Palm Beach.
37:10
I feel very positive about that, because the movement is clearly towards more industrial
37:14
because everybody’s ordering on their computers and getting it delivered by Walmart or Amazon
37:19
so there’s tremendous demand for industrial space.
37:23
It depends on the category, I would say that the values of things like apartment buildings
37:28
that are in the three to four cap rates, and based on rents which have already gone up
37:33
for the most part a lot, seem pretty high.
37:37
It feels like we’re in an asset bubble in almost every category to be honest with you
37:41
and I think stocks are at an all-time high, bonds low, interest rates are low.
37:47
Those are all close to a high.
37:49
Real estate’s close to a high, and it’s interesting, everyone just seems to be very optimistic.
37:55
I just had lunch with someone today from Merrill Lynch, he was telling me how he thinks all
38:00
the smart people, they were just going to be fine because rates are low.
38:04
When everybody thinks things are going to be fine, that means everybody’s already in
and you’re not going to be so fine.
38:09
RAOUL PAL: That’s one of the things that struck me about Nome Goldsman, who we talked about
38:15
before.
38:16
Nome, he’s had to say he’s had had a sense of some of this.
38:21
His whole, he went over the hedge fund business and a lot of real estate and he ends up buying
38:26
fast food, businesses and frozen food.
38:30
He bought a huge chain of Burger King.
38:33
He built the largest frozen foods business in Europe, just looking for that anticyclical,
38:41
smooth thing.
38:42
It feels like it’s the time to be cautious when nobody else is.
38:48
JEFF GREENE: Yeah, but interesting enough, look, the other side of this, everybody’s
38:50
been saying that now for a long time.
38:53
RAOUL PAL: Yeah.
38:54
It’s been going on.
38:55
JEFF GREENE: People are sitting on a lot of liquidity, stay in the loop of liquidity,
38:58
though is coming from this– you’ve had a rigged economy for 10 years, where basically
39:02
with artificial– you have the central bank balance sheets adding, I don’t know what,
39:08
$15 trillion globally to their balance sheets, and you have rates held artificially at zero
39:14
for almost for a decade and now, again, very low and negative in Europe.
39:20
It obviously cause distortions in the market now.
39:22
I think everyone’s used to the distortions and figures the distortions will keep on going,
39:27
so everything will be just fine.
39:30
Who knows?
39:31
I don’t know if that’s going to– RAOUL PAL: What about the community here?
39:33
There’s a lot of hedge fund managers, a lot of people, entrepreneurs who’ve made a lot
39:35
of wealth, is their sense starting to shift?
39:39
Because some people I know are sensing shift and others are saying, no, still full on,
39:48
aggressive risk taking mode.
39:49
What do you think the mood is here?
39:51
JEFF GREENE: Everybody talks, everybody says you got to be cautious, but I think everybody
is also thinking I can’t– cash is trash.
We got to buy things.
Look, one of my biggest holdings is Apple.
40:04
It’s sitting at 1.3 trillion market cap, I get it.
40:09
It’s no longer a device company.
40:11
It’s now a platform that everyone’s on.
40:14
It’s now the telephone company when I was a kid, everybody has to have one and we’ll
40:18
keep getting them and buying these services.
40:21
The question is, what’s the value of that?
40:23
Is the value, is it more than 1.3 trillion?
40:27
If it’s less than 1.3 trillion, stabilize them, we’re all going to lose money in today’s
40:30
stock price.
40:31
I don’t really, obviously, if you could show me that earnings are going to keep growing
40:37
from today’s levels at that company and they’re going to be making– I guess they’re going
40:42
to have to make 100 billion dollars a year to trade at 13 times earnings, which is what
40:49
you’d want to be at some point, maybe not today.
40:52
It’s a lot of money to make, even a global company with the monopolistic platform like
40:56
the iPhone.
40:59
Who knows where these things are going?
41:00
That’s been real estate to me.
41:01
It definitely feels that a lot of good news are already out there.
41:07
Rents have gone up a lot.
41:09
Unemployment rate’s very low.
41:12
Just to be– I guess the question is how real is this global economy and how much of is
it rigged?
That’s the question.
41:17
If it’s real, and it can get a snide, you can do, we can rig things, but then the rig
41:21
timing can lead to real– RAOUL PAL: Well, the question is does rigging last?
41:26
What fragility is it building?
41:28
It’s like you talked about the SNL crisis.
41:30
That was a rigged situation where the SNLs were just because of the government irresponsible
41:36
of what they’re doing.
41:38
We’re seeing the central bank’s irresponsible with how money’s being thrown around the economy.
41:43
JEFF GREENE: Well, yeah, so no.
41:46
Look, if that’s the issue, like who knows?
41:48
The reality is, I can tell you this, up until two or three years ago, if we had employees
41:54
who in any way, were a substandard, giving us a hard time you’d said, bye-bye.
41:59
There’s another one waiting right now, starting about two years ago probably when Trump became
42:03
president, not because of Trump, I’m saying but at that time in the cycle, the way labor
42:07
market changed dramatically, all of a sudden, carpenters who are making 35 an hour are making
50 an hour and you can’t even get them.
All of a sudden, in hotel, workers that were making 10 an hour, make 15 an hour and wage
didn’t go up 3%, they went up 20%, 30%, 40%.
42:23
Pilots, I have a plane and my pilot salaries went up 30%, 40%, just like that.
42:29
What’s happened is all that liquidity has now led to increased wages.
42:33
Now if that’s just starting to happen, maybe we are more mid-cycle and then maybe we’re
not late cycle because it– RAOUL PAL: If it filters through that is, because people
42:41
can raise prices in the hotel or whatever.
42:44
JEFF GREENE: It is filtering through because everyone’s making more money and Donald Trump,
42:48
lucky for him, gets to take credit for it.
42:51
Whoever the president at the time, he’s the custodian of the economy.
42:58
That’s what seems to be happening.
42:59
Now, I can’t tell you like it does– what’s the consumer debt levels, I don’t know that
they’re necessarily overextended.
A lot of people are refinancing their homes no with lower rates, their 401ks were on all-time
high, they’re going to spend money, it’s going to keep this economy moving.
What is an economy anyway?
An economy is it’s a perception and so that’s why people are so confused, because you look
at the reality of all this funding money voodoo stuff going on, and you think, is it real,
but then you think at the end of the day, if everybody believes it’s real and they’re
out spending money, it becomes real.
43:38
RAOUL PAL: Outside of Apple and real estate, what do you invest in?
43:41
Do you have gold, do you think about gold?
43:43
JEFF GREENE: I don’t really, I don’t own gold.
43:45
Because we have a lot of real estate, which is a hard asset, we have a nice art collection,
43:50
which is a hard asset.
43:52
I’ve other, Alibaba is a big possession of mine, Google’s a big position of mine.
43:56
I tend to lay down to one of those tech stocks.
44:00
I have to own the banks and others, too.
44:03
I have a lot of liquidity right now to me, honestly.
44:06
A big chunk of money sitting in a lot of them in these bank prefers that I know are going
44:11
to get taken out because they’re about to roll into very high spread preferreds.
44:19
I’m sitting on a lot of money making 1.7% to 2%.
44:24
I’m happy with it.
44:25
I’m thinking like you know what, when things that move– I often look at a time in the
44:29
cycle, I’d say is morally, if you had to make one bet, it’s two choices.
44:33
Things are going to be 20% higher than today or 20% lower than today a year from now, two
44:37
years from now.
44:38
I think most smart people would say the better chance, they’ll be 20% lower because of where
44:43
we are.
44:44
I’m happy to sit in market, plenty of liquidity.
44:47
Look, everyone’s different.
44:49
If I were 25 years old, maybe I’d filter.
44:51
I’m 65 years old, I’m not assuming and if I have any trouble, I’d be worried but I’ve
44:55
already had that.
44:56
I’m basically just being cautious and I’m ready to have the liquidity available.
45:00
If there’s great opportunities, fine, if not, then I can live fine on my assets and make
45:05
2%.
45:06
RAOUL PAL: Talk to me about your other interests, the institute you set up.
45:09
JEFF GREENE: That was set up because five or six years ago, I could see that a country
45:16
that was solving its inner world, that was solving its problems only with monetary policy,
45:22
was going to leave behind a lot of people and I could see it happening.
45:24
You could see that those were the assets– RAOUL PAL: Is this when you were involved
45:27
in politics as well at the time, or?
45:29
JEFF GREENE: No, I’ve been involved in politics a few times, I actually have lost.
45:32
It’s funny, people say that you learn a lot more from your mistakes than in your successes
45:37
so I must be an expert on politics then because I’ve lost three, three out of three.
45:40
Obviously, I must really be smart in that space.
45:45
I think that you could just see because I could see that wages– I could see as owning
businesses that wages were not going up at all.
45:53
All of this with assets, saw our value’s going up, because with low interest rates, real
45:58
estate prices go up, stock prices go up, bond prices go up, those were the assets who’re
getting richer, those with labor were not getting richer, were struggling.
46:06
I said, this is unsustainable.
46:11
On top of that, with what was happening with technology and AI and machine learning and
46:17
how that was driving people out of the worst workforce and would cause some big disruptions.
46:23
We started a nonprofit and we’ve had some really stimulating conferences, in which we
46:28
brought together some very smart people with Ray Kurzweil, a Tom Friedman, and Larry Summers
46:33
and Tony Blair, and David Cameron’s been here and they’ve all come right to this hotel and
46:38
we’ve had some talk in the old education.
46:41
The list goes on, super smart people convening together to really talk about the future of
46:47
work.
46:48
Again, as I said earlier in this interview, I have a personal experience with what can
46:56
happen to somebody when their work life changes because of my dad.
47:01
I’m very sensitive to that.
47:03
I have friends, honestly, who were highly educated, who have been marginalized and lost
47:07
their jobs and never gotten jobs again.
47:10
If you lose your job and you’re in your 60s, you really got to go get retrained to become
47:16
a welder.
47:17
Of course, you can’t do that.
47:19
I really think that we are going to have a lot of disruptions and we have a lot of work
47:22
to do.
47:23
We talked about that.
47:24
We talked about education.
47:25
I don’t know if you know that we started a school in West Palm Beach.
47:29
We basically were– I have three young boys and we were frustrated with the private and
47:33
public school options so we started the Green School.
47:37
If you ever hear and want to see it, we have to take you by, it’s up to just under 130
47:42
kids, pre-K to eighth grade.
47:44
That school really embodies what I’m talking about and that we want our children to develop
47:50
a love of learning because we realized that kids today were going to going to graduate
47:55
15 years now or five years from now may have five, six, seven,10 career changes and they
48:01
may have to constantly learn and relearn, they can’t hate learning, they have to love
48:06
learning because they may have to learn new skill sets throughout their lives.
48:10
We’ve also have a focus on getting kids digitally influenced.
48:12
They start doing coding in kindergarten like kid coding exercises all the way to building
48:17
robots in the fifth and sixth grade.
48:20
We have enough emphasis teaching the whole child so we have met mindfulness and yoga
48:25
and dance and art.
48:26
We’ve really tried to create– and it’s a nonprofit school.
48:31
My wife and I funded it 100% ourselves.
48:35
We give financial aid so kids pay what they can’t afford what the computer says they can’t
48:41
afford to pay.
48:42
It’s 30%, 40% get financial aid and it’s been very fulfilling for us, as you can probably
48:49
see from our [indiscernible].
48:50
RAOUL PAL: Yeah.
48:51
How do you think we’re going to resolve this rich/poor divide?
48:56
Because it is not getting better.
48:58
Yes, there’s some marginal wage growth, late cycle wage growth that we talked about, but
at a structural level, we’ve still got a huge problem.
49:07
The Fed injecting more liquidity and stock prices exploding higher and your Apple shares
49:11
got 35%.
49:12
JEFF GREENE: Apple’s doubled in the last year.
49:15
RAOUL PAL: Yeah, doesn’t help the average guy.
49:19
How do you see that resolving?
49:20
You’re getting all these people together, they’re talking about it.
49:23
Are they talking about it?
49:24
Is somebody thinking, because you’ve got Trump on one side, you got Bernie Sanders on the
49:29
other.
49:30
That’s how split this is becoming.
49:31
Someone’s got to find a solution somewhere.
49:34
Because if not– JEFF GREENE: We know that the Bernie Sanders socialism doesn’t work.
49:39
As they say, certainly in socialism, the poor will be richer, but you’re not going to make
49:46
the poor richer by making the rich poorer.
49:49
Basically, to me, I think the first thing is education.
49:52
That’s like the absolute no brainer.
49:55
Right now in this country, 14% of Americans are illiterate.
49:59
Now, if you’re illiterate, it’s not an issue.
50:02
It’s not about an income gap.
50:04
It’s about a possibility of you moving forward, it’s virtually impossible.
50:09
We’ve really failed in our education in this country.
50:11
I think that’s the first thing.
50:14
I think that– because you can’t even be as happy if you’re not educated.
50:18
Even if we created a society that people talk about where you have this, you have unlimited
50:26
resources, people only have to work 20 hours a week because you figure out a way to make
50:30
your food more efficiently and your housing, your 3D printing houses don’t need people
50:34
to do stuff.
50:36
If you’re not educated, how are you going to spend your life?
50:39
You can only have opiates, so you’re going to do drugs and drink?
50:42
I think being educated gives you the opportunity and I’m like to do better but to enjoy and
50:47
to thrive in your life.
50:49
I think that there are great examples of successful educational improvements in American.
50:55
States like Massachusetts and New Jersey actually has gone from 35 to three in the country in
51:00
public education by doing a few simple things.
51:02
Two years of pre-K for every child, because like in a lot of the states in the country,
51:07
these kids don’t even get any preschool education at all hardly.
51:11
Then they show up at kindergarten and they have a multi-million word vocabulary deficit.
51:17
You start behind, you stay behind, and I think we’re really failing our children in this
51:21
country.
51:22
That’s the first order of visit.
51:23
If I was president of states, that would be my number one priority.
51:27
Get our kids educated competitively, because if they’re educated then at least we can compete
51:31
with whatever there is in the world.
51:34
Then how do you deal with solving the issue of jobs where we want people to feel good
51:41
about their upward mobility?
51:43
A lot of that, to me is a function of where we are in our cycle.
51:47
People don’t talk about this much, but my grandparents, like most people my age came
51:52
from Eastern Europe or another country.
51:55
Most definitely they were poor, everyone was poor.
51:57
Nobody came with any money.
51:58
They came with a shirt on their back and a dream.
52:01
The only dream my grandparents has probably that my parents will be able to have on their
52:05
table, nothing more than that.
52:06
There’s more than they had when they were in Eastern Europe and maybe a place to sleep
52:11
that was safe and clean.
52:14
Then what did my parents want for their kids?
52:16
They wanted their kids to be able to have every opportunity to follow the other Americans
52:19
who’ve been in for generations.
52:21
They fought hard and worked hard so we can go to good schools, and we had great public
52:25
schools as kids and great, great colleges.
52:27
What do we want for our kids and as it goes forward what?
52:31
The level expectation keeps getting higher and higher, and no one talks about that, but
52:36
from my grandparents’ generation to my kids’ generation, their level of expectation is
52:41
much, much greater for the kids.
52:43
Meanwhile, what’s happened is when my grandparents, after two world wars, we destroyed the industrial
52:49
complex of our competitors.
52:51
We were this global superpower with unlimited numbers of jobs and opportunities when people’s
52:57
expectations were here.
52:59
Now, we’re in a very globally competitive economy where we have to fight with much hungrier
53:05
countries around the world and their explanations are here.
53:08
You say, well, how do you fulfill their expectations?
53:12
It’s a lot harder.
53:13
I think the first thing is get our kids educated so they can be competitive globally.
53:18
Then just try to figure this all out, but it’s going to be a tough challenge.
53:23
I think it’s something– it’s the issue of our time.
53:25
The issue of our time.
53:26
RAOUL PAL: Yeah, I think it is.
53:29
I think politics remain pretty volatile until we figure out some of this stuff.
53:33
I think that seems to be a part of our future that we’re dealing with and it’s across all
53:38
the Western world and a lot of it is transition of the baby boomers, your typical, the baby
53:43
boomer, generation of the baby boomers.
53:46
That generation and the impossibility for the younger people to better afford even the
53:50
housing.
53:51
JEFF GREENE: I really believe we’ll figure it out.
53:54
It’s interesting.
53:55
Whenever I get pessimistic, I always think of our friend, Warren Buffett.
53:58
Warren Buffett, we’ve got to know, he’s members of the Giving Pledge, and we’re sitting around
54:01
a table with them in recent June and, or in late May, we’re talking and somebody said,
54:05
Warren, has it ever been this bad?
54:09
The antagonism and the divisiveness, and he said, these are two things that I have lived
54:15
through for 15 presidents, 14 I invested with.
54:18
He said, seven Republicans, seven Democrats, and there’s no place in America.
54:23
The whole world wants to come here.
54:25
Don’t bet against America.
54:26
Then he said something else, he said, I’m 88 years old, three of my lifetimes, which
54:31
is 264 years, in three of my lifetimes ago, there was nothing here.
54:36
It was dirt roads, and Indians and cowboys driving around and riding around the horses.
54:40
Look at what this system has done here.
54:43
Look what we’ve built.
54:45
In the same, you could say the same for the European countries and the whole Western world,
54:49
and so in the end of the day.
54:51
RAOUL PAL: It’ll figure itself out.
54:52
JEFF GREENE: Yeah, the ship will start to drift a little bit, but we always ride it
54:56
and I think we’ll figure out these issues and this system works.
55:00
If we just stay with our system, there’ll always be people like me who are aggressive
55:05
entrepreneurs, are trying to create and build things.
55:07
There’ll be other people who are more mellow and just want to make a living.
55:11
There’ll be other people who are creative and artists, and they’ll be like you who are
55:14
trying to build your journalism, your media business.
55:22
I think we’ll get through this just fine.
55:24
That’s my view.
55:25
I don’t know.
55:26
RAOUL PAL: Jeff, that’s a perfect way to end.
55:27
Thank you ever so much for giving an optimistic ending amongst all that.
55:30
JEFF GREENE: I really believe it.
55:31
RAOUL PAL: Thank you.
55:32
Thank you.

Triple-A Ratings Are So Yesterday

A company’s credit rating is a lot like a person’s credit score. The better the score, the more easily—and cheaply—you can borrow money through the debt markets. The highest score a company can get is AAA. The lowest is D. And for many years, companies strove to get that AAA rating. It wasn’t just the key to low borrowing rates, it was also a sign of solidity and reliability. And it came with serious bragging rights.

Back in the 80s, there were dozens of AAA-rated companies. Today, though, there are just two. Microsoft and Johnson & Johnson. That’s it. Most other companies appear to have given up aiming for that AAA gold standard. They don’t see the point. In fact, many companies seem quite happy to get a BBB-, which is the lowest rating that many investment companies will tolerate, and just one notch above a ‘high-yield’ or ‘junk’ rating.

How can this be? How is it that corporations have gotten okay with letting themselves go like this? We talk with Moody’s Analytics Chief Capital Markets Economist John Lonski and Bloomberg Credit Reporter Claire Boston about what’s changed in the bond market and why companies are content to get a passing grade.