The Economic Undercurrent of a Rallying Stock Market (w/ Raoul Pal and Keith McCullough)

19:07
Where will the Bs meet the Cs?
They will end up in the same place and it could be violently, it could be suddenly.
To me, that really is the point about corporate profits.
If corporate profits remain negative on a year over year basis, labor continues higher
as it always does at the end of the cycle and companies continue to push out, guiding
down because of a proposed Chinese bean deal.
Yeah, that could be your eye opener, is not that getting the T-minus three to six months
from now, this thing should look a lot different than where it looks today without the year
to date dynamics of people chasing the spreads.
RAOUL PAL: Yes, there’s a couple of things observations on that.
CCCs, there’s obviously this shenanigans going on in the funding markets right now.
There’s basically a lack of domestic liquidity in the funding market, because the massive
new issuance is coming the out of the Treasury, but that illiquidity, the Fed started printing
more money again to do it to try and alleviate some of that strain.
At the far end of the strain curve is the CCCs and they’re going, no, no, no, there’s
a problem here.
They’re not getting the funding they need so they’re blowing out.
The BBBs, because they’re supported still by the pension funds sector, are not feeling
it.
Meanwhile, there’s the corporate profit slowdown.
What’s in that bunch of BBBs?
Ford, GM, AT&T;, General Electric, and Dell.
Those five are enormous part of that market.
Any one of those and Ford one got downgraded, one of the agencies downgraded to junk but
one of those who actually falls becomes the fallen angel and falls into the CCC category.
The whole thing’s over.
Because the markets will seize up because they can’t– the junk bond market doesn’t
have enough buyers already and it’s widening.
If one, God forbid, if one of these come through and get downgraded, the whole thing’s going
to seize up.
KEITH MCCULLOUGH: What is the discussion in the boardroom to avoid that?
For all of them, it’s to fire people.
RAOUL PAL: Or usually, General Electric, the other one is equally as bad, restructure the
pensions.
KEITH MCCULLOUGH: Yes.
Somebody has to take a markdown.
RAOUL PAL: Someone’s going to get screwed.
It’s always the little guy, it won’t be the CEO.
It’ll be everybody else, those who get fired will lose the benefits.
KEITH MCCULLOUGH: Well, it’s interesting like GM.
If you look at GM, the last time they had their strike was in ’07.
Again, the dynamics are the same.
After you hit the peak in profitability, the people say, I want a piece.
Now, they’re going to get their piece.
If you get more and more of this into the election, the dynamics are real and labor’s
coming off basically a 15-year low relative to corporate profits, this is a period that
no money manager, certainly the ones that are illiquid and levered which would include
all of private equity, have had to deal with.
Again, every other cycle, labor has been high and rising.
That’s what always perpetuates a recession because the Fed can’t cut people’s wages,
and they certainly can’t fire people.
That’s what labor is going to do, but it was always high and rising.
1980s, 1990s, that’s why people like or at least they can, or at least a macro person
should like the 1980s and 1990s, irrespective of your political party affiliation, because
we had very good relatively low cost of living, we had really economic growth and labor was
high and rising.
Now, it’s been blasted to 15-year lows, again, put off paying the people, corporate profits
were big, fat and happy and labor’s rising from the ashes.
This is probably the most important secular turn in labor that certainly anybody our age
or older has seen.
You’ve never seen it before.
What could possibly go wrong?
Anyone who’s levered long assets that have people facing businesses are going to have
to face the reality of having to pay their people more and/or just getting lower quality
higher and seeing reduced corporate profit margins and reduced corporate profit margins,
negative year over year corporate profits is the catalyst to what you just year marked
as a ring of fire, if you will, of companies that really aren’t “secular growers”, I can
go off on that, but these are cyclical companies that have bloated cost structures to begin
with.
RAOUL PAL: Yeah, exactly right.
Also interesting in the margin is you see delinquencies in cars.
They come to new highs.
You’ve got– yeah, on 60 days, 60 days or more, delinquencies are at new all-time highs.
It’s like, okay, that’s something, that’s an interesting data point, the consumer’s
not quite as happy as people think they are.
You look at the credit card borrowings, and then you look at the rates credit cards are
charging, which is the highest all-time rates, considering interest rates, and that’s the
data that goes back to 1990 or something and credit card rates are high not at 17% than
they were back then when interest rates are 8%.
It’s like, okay, there’s something going on here for people– the only reason they can
do that is demand is high enough that people need the credit.
It’s the only source of credit they can get because they can’t get any other credit.
There’s something telling you, there’s bits creaking at the seams here, so how do you
think it plays out– and again, neither of us are interested in the politics of it but
the election side of it, it sounds like you don’t think that the administration can keep
the economy floated into the election.
I’ve got different view that I don’t think they want to, I think they’d rather have a
recession.
I don’t think it’s as a shoo and that they really necessarily need to keep it in the
way that it is.
Because I thought today, Trump was very clearly again, blaming the Federal Reserve, it’s nothing
to do with me, look how they screwed you.
How do you think from a nonpolitical standpoint, how you’re seeing it play out?
24:47
KEITH MCCULLOUGH: My political lens is always explicitly affected by my quad outlook.
24:52
We are right on the screws.
24:55
I’m not a believer that any politician central planner or otherwise can part the heavens
25:00
and give us a new path underneath the seas of economic gravity.
25:06
The economy is going to continue to slow and if it continues to slow into what we call
25:09
Quad 4 which is the most damning of market conditions by Q2 of 2020, that’s the worst
25:15
place for Trump to be for a period of time.
25:19
Because that’s when Elizabeth Warren’s chances or Bloomberg or whoever’s are going to start
25:23
to rise and again, it’s more about the probabilities change.
25:26
There are very few money managers on Wall Street who actually, even if they hate the
25:31
guy like the Bourbonic Plague, they still believe in some way, shape or form, that Trump
25:35
has a good chance to be reelected.
25:36
RAOUL PAL: Almost everybody.
25:37
KEITH MCCULLOUGH: Yeah, if you don’t– like I have raging Democrats telling me that I
25:40
live in the state of Connecticut, I have plenty of exposure to them in non-money market, like
25:44
nonmarket people won’t have that view but if you’re running a portfolio today, you can’t
25:48
tell me that you expect the tax rates and the truncation of tax reform, which is the
25:53
biggest thing for corporate profits that the modern era has ever seen.
25:57
Like you can’t possibly say that that’s in the market.
25:59
I think that that is a big shift, too.
26:02
You get your zero percent handle on GDP in late January, the economy continues to deteriorate.
26:07
We take a look at Quad 4, the last two times the market’s taken a peek at Quad 4, not good
26:11
for Trump, not good for the stock market, which is one and the same thing.
26:16
It’s almost like I think that– and I think now Ferguson said this, if the market starts
26:21
to go down for real for once, God forbid, actually, it’s done it multiple times, but
26:26
again, if it goes down for real, her chances go up.
26:28
It’s the Soros reflectivity view, which is, again, the faster you go down, the higher
26:34
her chances, and you could wake up one day where people are right scared of that, and
26:38
Trump gets reelected just for that reason.
26:39
Then you get the mother of all rallies from a much lower point again.
26:43
Again, that’s way out there but I’m using my quads to instruct what the political and
26:50
reflexive human response would be to just negative economic conditions.
26:54
RAOUL PAL: Now, my view is somewhat different.
26:57
I think economically, we have the same view, but my view is on the Trump side, if you can
27:01
anger the American, the middle American, because they can’t be screwed over and if you can
27:08
blame it on the Federal Reserve and the Chinese and the Europeans, then if you are going to
27:13
a recession, first, you say I will save you with some MMC John Spinning package and secondly,
27:18
it gets them mobilized because they hate everybody else.
27:22
That’s a typical thing and Elizabeth Warren will use the same tactics, will say well,
27:26
it’s all his fault and blah blah blah.
27:29
It’s going to be a very interesting election and I never trade markets on elections but
27:35
it’s just interesting.
27:36
Talking about elections, what do you see in the UK?
27:39
KEITH MCCULLOUGH: Well, we see Quad 4 in the UK.
27:42
That’s where we started and again, seeing the UK through the lens of the quads and what
27:47
are the prevailing conditions of growth and inflation has been absolutely the way to trade
27:52
the UK from a gilt perspective, long gilts Quad 4.
27:56
RAOUL PAL: Yeah, you just ignore all of the noise and just look at the economics.
27:58
KEITH MCCULLOUGH: Yes, exactly.
28:00
Short the pound, Quad 4.
28:02
Now, the pound is actually trying to have a breakout here relative to the dollar, which
28:06
is interesting.
28:07
However, it’s based on a catalyst which is this expectation which I have zero edge on.
28:12
Plenty of things I had zero edge on but one of the big ones I’m certain of is the political
28:17
outcome in the UK and when this Brexit catalyst actually can be finalized, it’s just not what
28:21
I do, but the market is saying there’s a chance, like there’s– as long as there’s a catalyst,
28:27
it’s closer.
28:28
That catalyst is also aligned in terms of the quad timing that I have for the US economy
28:32
to slow at a faster pace, then that would be bearish for the dollar and bullish for
28:35
the pound anyway.
28:37
That’s an interesting one, because I’ve not been long the pound for a long time.
28:39
I’m long Canadian dollars against the US dollar for the first time in a while, but I’ve been
28:43
willing to go there in the UK but broadly, UK data is Quad 4.
28:48
RAOUL PAL: Talking about fiduciary responsibility.
28:49
You’ve got a situation in the UK where the economics is relatively clear it’s Quad 4,
28:55
but you’ve got this huge overhang of something else, which of which you have no edge, is
29:01
the right answer to the [indiscernible], just keep out of it?
29:04
KEITH MCCULLOUGH: I just stay away.
29:06
Yeah.
29:07
RAOUL PAL: It makes no sense otherwise.
29:08
KEITH MCCULLOUGH: Yes.
29:09
I think that this is a point that you made earlier that’s critical to understand.
29:11
Wall Street isn’t like the person that’s watching this.
29:15
They aren’t like you and I.
29:16
We, until somebody removes it from us, maybe the CCP governs us and we can no longer have
29:22
any legal right to make our own decisions on our own free will, we can decide to buy
29:27
whatever we want, whenever we damn well please.
29:30
Wall Street is siloed into these are the people that trade the pound, these are the people
29:34
that do the UK, these are the people that do the US consumer.
29:37
These are the people to do US healthcare.
29:40
They have to have a view.
29:42
All of the time, think about how hard that must be.
29:46
In fact, it’s rendered itself useless.
29:48
There’s an oversupply of money managers, and you’ve basically made everybody a silo expert
29:54
of nothing.
29:55
What I intend to do is I’ll wait and watch.
29:59
I wouldn’t been able to tell you a year ago that I’m going to be long cattle and cocoa
30:02
today.
30:03
Are you kidding me?
30:05
We’ve seen negative supply dynamics, I see the volatility of the volatility of volatility,
30:09
the signal changing within the commodity space.
30:12
I see two dynamic situations that wow, this is perfect.
30:15
The crowd’s definitely not there and that’s when I go.
30:18
As opposed to feeling like I have to have a view that the crowd is having fumble on,
30:22
or tweeting about, or God forbid, reading CNBC view of every day.
30:26
RAOUL PAL: Spinning a bit more around the world and then we’ll come back, we’re going
30:30
to come to the dollar later.
30:32
There’s two markets that we’ve all looked at and thought at some point, they’re going
30:36
to enter trouble; Canada and Australia.
30:40
Where are we with those?
30:41
Is everything in the same sink right now?
30:42
Is everything in that Quad 3, moved into Quad 3?
30:44
KEITH MCCULLOUGH: No.
30:46
Well, in Canada, in particular, we have back to back Quad 2s coming.
30:51
If there is a country that looks like inflation accelerating, it’s Canada, and they are the
30:56
recipient of it, like within the Toronto Stock Exchange Composite Index, the heavyweights
31:00
are Quad 2 exposures, which include energy companies and the banks.
31:05
Canada for the first time, if only for six months, and the Canadian currency for that
31:09
matter, that’s why I’m long it, because it’s hard to find.
31:12
First of all, Canada only has twos because they’re comparing against borderline recessionary
31:17
Quad 4s that they’re coming out of.
31:18
That’s why you have that, but you also have the dynamics that they are hooked to headline
31:23
US inflation’s acceleration and the broader breakout in commodities.
31:27
Canada to me, it looks like we’ve been long it since the beginning of October.
31:31
It’s a relatively new position, but it’s the same position that I have across the board.
31:35
I bought TIPS instead of being as long as I was of duration.
31:38
I flipped the Dalio move and flipped into some of that.
31:41
It’s a cheater.
31:42
He knows it, that’s why he created it.
31:45
If you want to outperform people that are permanently long duration, let’s have a different
31:50
thing to be long while they’re still long duration and inflation accelerates.
31:54
TIPS.
31:55
It’s like the old adage, just you don’t have to outrun the bear, you just have to outrun
31:58
your friend.
31:59
Again, I’m just trying to isolate that view of inflation accelerating particularly North
32:04
American inflation accelerating, so it’s long energy, which is I think the most concerned
32:08
position that we have in equities, long Canadian energy, long Canadian equities, broadly long
32:13
the Canadian currency, and like I said, long the proteins, long lumber, which is another
32:17
way to double up on our– RAOUL PAL: You’ve got the full on reflation trade on?
32:21
KEITH MCCULLOUGH: Yeah.
32:22
Yeah.
32:23
Well, there’s no mincing words about that.
32:25
I’m short the consumption curves and software, which are, it’s a very– I have a higher beta
32:31
setup than I’ve had for a year.
32:34
Because I’m long things that are classically what I call phase transition coming out of
32:38
bearish trend, Quad 4, do not buy energy, do not buy commodities, short both to buying
32:43
what I was short, which can be somewhat unnerving, but exciting.
32:48
On the same token, consumer staples, which was a long, we’re shorting though.
32:52
RAOUL PAL: There’s a psychology that’s difficult here.
32:55
Your prevalent view is that we’re in the downside of the cycle, but what we’ve got is not faced
33:02
within a down cycle.
33:06
You have to trade against your view, which I don’t ever do.
33:09
It’ll either the out or outsize it so I could just sit with the longer term view, just different
33:15
way, different time horizon.
33:16
I find it particularly difficult to trade against my own view, that personal view.
33:21
If I know there’s some confusion, I just bail it, but you’re doing it.
33:26
How do you do that?
33:27
How do you find your plan still with that?
33:29
KEITH MCCULLOUGH: Well, my model, the way that my model is set up is not A or B, there
33:33
are four different economic outcomes.
33:35
It’s an explicit bet on what we call Quad 3.
33:37
RAOUL PAL: No, I understand that.
33:38
KEITH MCCULLOUGH: Yeah.
33:39
That is a six -month view.
33:42
That’s not against my view.
33:43
That’s my view for six months.
33:45
The hardest part will be to get back to the– RAOUL PAL: You are in the down cycle of which,
33:51
that goes on longer than that.
33:52
It’s based on your view and it’s all about time horizon.
33:56
KEITH MCCULLOUGH: Yeah.
33:57
If I only go back and look at how could I have traded ’08 better?
34:03
Crushed it in ’08 by just staying with the view that we’re in the down cycle.
34:06
How could I have done better?
34:09
Well, I would have bought commodities in the early parts of Bernanke going dovish, and
34:13
stayed long– RAOUL PAL: That whole correction that we had, the reflation correction we had
34:17
in the middle of 2008.
34:18
It was brutal.
34:19
KEITH MCCULLOUGH: It helped my consumer shorts, which is where I made all my money in ’08.
34:23
I just kept shorting every bounce in every story stock, every loved, broadly held story
34:27
stock, consumption oriented shorts.
34:30
That’s where my, I guess, my formal training came as a hedge fund analyst and then a PM
34:35
in the consumer space.
34:36
If I could do it all over again, I would have been long crude futures on top of that, that
34:41
the alpha is manifest when you have the cost curve piece on for that six-month period of
34:48
time.
34:49
It is an explicit view of stagflation.
34:51
Every time– like, again, for me, and God willing, I get to live through a couple more
34:55
cycles.
34:56
I might be 90 years old at this point if they keep [indiscernible], but it is classic late
35:01
cycle, where labor and you get that final push of inflation.
35:04
You can make money on the long side of that while you maintain your bearish view on the
35:09
consumption curve or the proper, as you said, the down cycle.
35:12
RAOUL PAL: From my perspective, I’m not so short as long term correction.
35:17
I’ve looked at the history of, of these moves in the down cycle and there’s two which makes
35:22
it somewhat complicated.
35:24
There’s one and I look at it through the lens of Eurodollars you and I’ve talked about.
35:28
That’s been a big thing for me at the moment because for me, I find it’s the best way of
35:32
trading the down cycle as well as– the up cycle tends to be equities and commodities
35:36
better.
35:37
The down cycle tends to be rates, which is why you’re not short rates right now particularly,
35:42
but you are long commodities because you’re in the reflation.
35:44
Anyway, so I look at this and both 2001 and 2007, both had 70 basis point pullbacks in
35:55
Eurodollars, which were the gut check reflation trade.
36:00
They didn’t last that long, they lasted three months, which is where we are now.
36:08
Then in 2008, and 2001, late 2001 going into 2002, before the 9/11 were these huge pullback
36:17
in rates, which was the Fed have done enough, the cycle’s over, oh no, it’s not phase.
36:24
I don’t know which one of those we’re in.
36:26
I feel like it’s too early for the bigger one, which will be the sixmonth, nine-month
36:30
trade but I hear what you’re saying and also can see that okay, maybe it’s a hybrid.
36:37
I don’t know.
36:38
It’s very interesting for me but I’m staying in the short end and just hiding out there
36:41
waiting because I was in a long time ago, and something we talked about before is if
36:46
you’re not doing monthly mark to market or even annual, then it doesn’t really matter,
36:51
you’d look at what price do I buy it, at what price do I sell it?
36:54
KEITH MCCULLOUGH: 100%.
36:55
RAOUL PAL: The entire world’s gone mad because they don’t even think about it.
36:58
When I was running a hedge fund, literally, it didn’t matter what price I bought anything
37:01
or I sold it at.
37:02
It was how much money I made that month.
37:04
If I was going to lose money that month, had to change, get rid of the position even though
37:08
I’ve made for x in it.
37:09
It’s crazy.
37:10
KEITH MCCULLOUGH: Yeah, well, great example and you absolutely nailed that was obviously
37:14
the Eurodollar trade, by the way, everybody a year later agrees with you because the net
37:18
long position there is like one and a half million contracts.
37:21
Net interest [indiscernible] just epic.
37:23
RAOUL PAL: But all the other problems are short.
37:25
That’s a part of it.
37:26
KEITH MCCULLOUGH: On that piece, that’s actually the point I was going to make, which is on
37:29
the short end of the curve, which is I like to think of, okay, we got into short term
37:35
treasuries on October the 17th of 2018.
37:40
That’s good.
37:41
We like that cost basis, but when do I go big again?
37:44
When do I grow set position up again?
37:47
That clock because I’m making a T-minus six months call on inflation accelerating, I’m
37:51
not willing to run the clock up six months, because the GDP number is T-minus four months.
37:57
That’s the January number.
37:59
I think that that’s the beginning of the Fed, because again, the short end of the curve
38:02
is what the Fed does, the long under the curve is what the market thinks the cycle’s doing.
38:07
If the Fed actually sees that and goes to where Fed Fund Futures are, their dot plot
38:13
is as wide as it’s ever been going back 12 years since the inception of the dots, and
38:18
again, a highly inaccurate dots of process or whatever you want to call that forecasting
38:22
process to do that, but they will have to acknowledge at some point that their dot’s
38:26
going up this way in terms of economic expectations have to come down.
38:31
That’s where I think I cannot, you cannot be big enough on the short end of the curve
38:36
into that.
38:37
RAOUL PAL: No, when that happens, it becomes the crisis trade.
38:40
KEITH MCCULLOUGH: Because you can take the 2-Year Yield down 100 basis points from where
38:43
it is today, which is a monster move relative to the long end of the curve.
38:45
RAOUL PAL: Yeah, and the leverage you can take in something like that is enormous, too.
38:48
KEITH MCCULLOUGH: Yes.
38:49
I’ve spent a lot of time with clients, and we can talk about it later but clients are
38:53
all asking, okay, what is it?
38:54
Should I use swaptions?
38:55
Should I do use this?
38:56
Should I use that?
38:57
Eurodollars, they do see it as having been a little bit more crowded than they would
39:02
like, that’s the discussion within this discussion but it’s pretty simple.
39:06
If we’re right on the economic projections the Fed is going to have to at some point
39:10
in early 2020, look like they are actually completely politicized relative to the Trumpia.
39:16
RAOUL PAL: I just think that the yield curve is telling us something.
39:21
Now, the yield curve goes negative into recession, we’ve seen.
39:25
The swaps curve got to zero, which is the same as it did every single, actually went
39:30
negative which was actually rare for the swaps curve 2s, 10s, and it seemed to steepen.
39:34
The prerequisite for a recession is steepening curve.
39:38
Everyone thinks it’s the negative curve.
39:40
It’s not, it’s the steepening curve.
39:41
KEITH MCCULLOUGH: Post the inversion?
39:42
RAOUL PAL: Post the inversion.
39:43
Yes.
39:44
Which it’s now doing, which plays into, as we’re both saying, somewhere within Q1, Q2,
39:51
it’s going to start getting ugly again.
39:52
KEITH MCCULLOUGH: Yeah.
39:53
Well, that steepening is just based on the Fed catching up to our view.
39:56
They’re the last one to figure it out.
39:59
Once they do, they steepen the curve by cutting the short end out and I think that if they
40:05
don’t do that, then they perpetuate having to do more when they finally do do that.
40:10
They are the catalysts for their own panic if they don’t acknowledge it soon enough.
40:15
That’s why I do think that that GDP number if we’re right on the headline, in conjunction
40:20
with profits slowing and jobless claims rising, there is no case to be made for jobless claims
40:24
rising for the first time in a decade for the Fed to not go incrementally dovish, and
40:28
probably aggressively so if I’m right on that.
40:31
Again, that would just be washing through Q4’s earnings season into the Q1 of 2020 outlook,
40:37
where the street is way outsized on earnings expectations.
40:40
They’re actually looking for earnings to be up 5%, 6%, 7% in the first quarter of 2020,
40:44
which I think is mathematically impossible.
40:46
RAOUL PAL: Yeah.
40:48
They’re just looking at, they just want a hockey stick up every time.
40:51
They just don’t want to believe the fact that things can trend lower.
40:57
Where are you most excited about in the world?
40:59
Is there anything you see different that’s not in the same cycle?
41:03
Because that’s the key thing.
41:04
Because most of the world, give or take is in the same cycle, some leads, some lags.
41:08
Is there any way you would say a great thing about this is just entirely different.
41:13
It’s a breath of fresh air.
41:14
KEITH MCCULLOUGH: Well, on the short side, yeah.
41:17
I’m feeling it’s not– I shouldn’t say feeling, if I ever say that again to you, Raoul, just
41:21
take me off Real Vision.
41:22
RAOUL PAL: Basically, there’s nothing in it.
41:24
KEITH MCCULLOUGH: There’s no feelings, there are cycles.
41:29
I think this software bubble that built within the cycle is potentially like this thing that
41:34
can almost make you giggle, or things trade at 15 to 20 times revenues with these TAMS
41:40
as far as the eye could see.
41:43
They’re seeing rate of change slowdowns in revenue growth, and massive, bloated cost
41:48
structures.
41:49
That’s like, in short selling space, that is easily bee– by the way, the software stocks
41:55
are down depending on what day you’re looking at them, they’re down 8% to 10% already since
42:00
July.
42:01
I like it when the movie already starts and the index doesn’t agree with that setup.
42:06
Actually, consumer discretionary, broadly, is the other one that’s down since the July
42:11
highs.
42:12
You have this concept of secular growers which has never happened before.
42:16
It’s only something Wall Street could make up, a secular grower is something that’s never
42:23
seen a cyclical slowdown.
42:24
Great.
42:25
To me, that like from a short seller’s perspective, because let’s be clear, you’ll find them at
42:30
Real Vision, but the art of short selling has been shot for dead.
42:34
That, to me, is the most exciting thing.
42:36
Having an independent research team with 40 different analysts.
42:39
We’re finding some really interesting shorts and very low short interests, which reflects
42:45
the broad interest that people have in story stocks, or in these TAMS, these total addressable
42:50
market stories.
42:51
It’s all about stories, and again, as they become cyclical, I think that that’s probably
42:55
the most exciting thing in terms of opening the envelope to the downside because we’re
42:59
already seeing that actually in this earning season in particular.
43:02
RAOUL PAL: Just a side story to that, it does worry me, because obviously a bunch of hedge
43:08
funds are more than skilled at short selling, but there’s the short sellers, people like
43:14
Marc Cohodes and stuff that we all know and love, are very skilled at this but it’s a
43:18
very, very skilled business, particularly if you’re fraud hunting, as opposed to trading
43:24
a directional view based economic views or whatever it is.
43:28
We saw that the amount of tourists, short selling tourists, I think more than Macro
43:32
Tourist, they all flooded into Tesla.
43:36
Then people have lost fortunes in stuff like this.
43:39
There’s a whole bunch of these stocks that they were like, they’re definitely going to
43:42
zero, they’re definitely going to zero.
43:44
It’s all a fraud, because they became market vigilantes.
43:49
A lot of them came out of the gold crowd, the same vigilante stuff.
43:53
It really concerns me that people have been pushed into stuff like that, because they
43:56
don’t really understand that short selling as you know is not easy.
43:59
KEITH MCCULLOUGH: If you don’t have, and I know that this is going to ruffle feathers,
44:04
and maybe the first time I’ve ever done so, but if you don’t have a macro process to overlay
44:10
when the cycle is in your favor as a short seller, I think you need to really rethink
44:14
that.
44:15
If you think about– RAOUL PAL: Well, unless you’re an expert short seller who writes a
44:18
whole thesis on the thing and everything else, because it’s so difficult.
44:22
KEITH MCCULLOUGH: Even that, when the cycles not on your side, and I don’t need to name
44:26
names, but they lost their hedge fund.
44:29
Since the financial crisis in ’09, I think 50% of hedge funds that launched on the Goldman
44:36
system are gone, because people start with shorting valuation.
44:43
Valuation is not a catalyst.
44:45
The cycle slowing is the catalyst and expensive stocks within a slowing cycle is the ultimate
44:52
short seller’s dream.
44:53
It made many short sellers famous, those that have ignored the economic cycle.
44:58
2017 is a great example.
45:00
I was born a short seller.
45:01
The first thing I learned how to do is short a stock because my first job on the buy side
45:04
was in 2001.
45:06
I come to my boss, John Dawson, I said, well, they’re going to miss again.
45:10
They’re going to what?
45:11
They’re going to miss again.
45:12
I just listened to what they said at the conference.
45:13
I put it in the spreadsheet.
45:14
Their margins are going to be down.
45:16
The revenues are going to slow.
45:18
He’s like, short it.
45:19
Like, okay, this is cool.
45:20
Short it.
45:21
I thought it was just like buying something.
45:22
I thought that’s what you did.
45:23
Because it’s when I was born into the business that mattered.
45:27
Anyone who’s done something well over time can tell you that.
45:30
There is a significant amount of luck in terms of when you were put in that seat to do a
45:34
certain thing.
45:35
RAOUL PAL: You have a boss.
45:36
KEITH MCCULLOUGH: Yes.
45:37
Okay.
45:38
Then the rate of change went bullish in 2002 of all the shorts, I come back to John and
45:41
I say, well, they’re going to beat it for the first time since I’ve worked for you.
45:44
They’re going to what?
45:46
Cover that short, we’re going to buy that stock and lo and behold, growth was accelerating
45:50
from obviously late ’02 all the way until 2007.
45:54
I think most people that got blown up in the story socks high multiple.
45:58
Again, there’s some epic things that have gone on, we weren’t fully loaded Tesla’s Elon
46:03
storytelling, but people were shorting them into the 2017 tax reform acceleration and
46:08
top line growth that perpetuated these multiples.
46:11
Software growth, software CapEx, for example accelerated all the way into the end of last
46:17
year, into the end of– and into actually the first quarter of this year, of 2019.
46:22
There was no backdrop to short sell software stocks in rate of change terms until this
46:26
year.
46:27
RAOUL PAL: How did you guys get on with Tesla, because you guys were Tesla shorts in that
46:31
period as well?
46:32
KEITH MCCULLOUGH: Yeah.
46:33
Well, we came into it literally, Jay Van Sciver came into it rate as it was topping.
46:36
He was looking– and I’ve taught all my analysts, if you can’t show me the rate of change slowdown
46:41
in their business within three to six months, this is not going to have a hedge on name
46:45
on it.
46:47
You can argue till you’re blue in the face but the batting averages are very low.
46:51
If you tell me you found a fraud, like our analysts, Kevin Kaiser did with multiple MLPs
46:57
and by the way, those frauds weren’t revealed until oil blew up.
47:00
RAOUL PAL: Yeah, same reason, micro, macro changes.
47:03
KEITH MCCULLOUGH: That’s when it was easier to get loud on deflation Quad 4 type theme.
47:09
I have an analyst who’s super buried up on a bunch of frauds in the MLP space.
47:14
Go.
47:15
I think that timing part, I’d humbly submit that that’s a part when I say the art of short
47:18
selling has been shot for dead.
47:20
It’s because you haven’t had the macro meets micro.
47:24
The rate of change now, your timing’s good.
47:26
Now, your batting averages are going to go up.
47:28
If you show me a software company, we found one that basically filed an S1 with two years
47:33
lookback in terms of revenues when the revenues have only gone this way up.
47:37
Post tax reform, through tax reform.
47:39
It’s a 20-year old IT services company.
47:41
It’s like hello, McFly, you slowed every single time we had a cycle but you’re not showing
47:46
the lookback.
47:47
These are the kinds of things that Wall Street underwrote.
47:49
This is why you know short selling now in a lot of these high multiple stocks is a much
47:54
more appropriate time, high multiple stock prevailing condition is slowing as opposed
47:58
to accelerating.
47:59
RAOUL PAL: Right.
48:00
You just been out seeing clients that’s why you were in a suit and tie.
48:04
KEITH MCCULLOUGH: It’s the only time I wear it.
48:06
RAOUL PAL: What are you hearing?
48:09
What are people doing?
48:11
What are they thinking?
48:12
Where are the pain points?
48:13
Where are they– I don’t think it’s been a straightforward year for many.
48:16
KEITH MCCULLOUGH: No, but if you’re having a good year, the happiness factor is back.
48:21
I do have clients that are macro aware.
48:23
They’ve been on the right side of the cycle.
48:26
Generally speaking, I’d say that the clients that if they’re paying us, they’re aware of
48:30
the view that we’ve had, certainly the Quad 4 views, their batting averages on the short
48:34
side have gone up tremendously if they are of that ilk.
48:37
If they’re long only they’ve been leaning on proxy, which they’re quite happy about,
48:41
but I’d say that, like, in particular, this last couple weeks of meeting, there’s the
48:45
markets punch to new highs throughout earnings season.
48:49
There’s an uneasiness to it.
48:52
It’s like– RAOUL PAL: That’s my opening question, uneasiness or uneasiness.
48:55
KEITH MCCULLOUGH: Uneasiness.
48:56
RAOUL PAL: Yeah, hence my opening question to you when we started this is nobody really
49:00
knows quite what’s going on.
49:01
KEITH MCCULLOUGH: Happiness becomes uneasiness when you start to underperform the bench.
49:07
That’s what’s happening.
49:08
Peak happiness was coming out of the October lows in the S&P; 500 or August and October,
49:13
our clients would be doing fine because the things that they’re long were going up and
49:17
their shorts are going down.
49:18
Now, everything’s going up.
49:19
In fact, the things that have gone down a lot are going up more., so you’ll have that
49:22
uneasiness.
49:23
There’s an absolute consensus to not be able to fade Trump’s tweets.
49:29
Therefore the value or the resurgence of these PMIs and ISMs a bottom trade.
49:36
They’ll wait to see the data point until they believe that the cycle is properly continuing
49:40
to slow.
49:42
There’s an uneasiness about that.
49:44
There’s always an uneasiness about your compensation.
49:47
A lot of people– RAOUL PAL: It’s always a difficult time of year because you’ve got
49:52
six weeks to make a decision.
49:53
Do I do anything else or do I not do anything else?
49:55
KEITH MCCULLOUGH: Yes.
49:56
There are plenty of money managers long only and long short that have set their yearend
50:01
in September, October, November, those months for that reason because they didn’t want to
50:08
be beholden to chasing the ace into yearend markups.
50:12
It’s an interesting one, but again, don’t forget that the S&P; 500 stock going up in
50:15
November of ’07, it didn’t wait till the end of December.
50:19
There’s an uneasiness associated with that as well.
50:21
The more macro where you are, the more ’07 questions I’m starting to get, which doesn’t
50:26
have to mean we’re going to have an ’08 but that’ll certainly– if it doesn’t make you
50:29
feel uneasy to some degree, I think it absolutely should.
50:32
RAOUL PAL: The hedge funds themselves, what is the appetite for risk now?
50:37
Are they gun shy?
50:38
Because they’ve had, yeah, it’s been a flip flop year.
50:41
It’s been one of those years where they came in short of equities, equities rallied, okay.
50:46
Anybody who got the bond trade got it sorted out, then it flips again later in the year.
50:50
It’s been a complex year for many people.
50:52
How are they feeling in this?
50:54
KEITH MCCULLOUGH: The better the research teams and most specifically on the short side,
51:00
the better they are doing right now.
51:02
Don’t forget, just like the high yield index or where high yield spreads are is not where
51:06
the rest of the market is.
51:08
You have multiple blow ups going on.
51:11
Think of some epic story stocks imploding and for the valuation oriented short seller
51:17
that got the timing right, I think that the batting average is going up their– or building
51:23
a confidence that wow, I have the benchmark index SPYs at the all-time high and I can
51:28
make money on my shorts at the same time with the president trying to trump up the bench.
51:33
Like it’s almost like licking the chops times for this– somebody who’s had a successful
51:38
career short selling across cycles, not somebody who’s just getting lucky.
51:43
RAOUL PAL: Final question, the dollar.
51:47
You’re, I think, majorly negative the dollar right now, do you think the dollar cycle is
51:52
turned for good, or is this part of the reflation in Quad 3 theme?
51:59
Where do you stand on the whole dollar view?
52:01
It is crucial to a lot of things.
52:03
KEITH MCCULLOUGH: Yep.
52:04
If you take the trade weight of dollars at a 20-year high, again, back in 2001, same
52:09
point, what could possibly go wrong?
52:12
Sustainably strong dollar is also one of the many negatives to corporate earnings growth
52:17
for the fourth quarter and the first quarter, so it’s the same sixmonth outlook.
52:21
No longer buying dollars– RAOUL PAL: Okay.
52:22
It’s off the same– it’s not a separate construct for the dollar.
52:26
KEITH MCCULLOUGH: No.
52:27
Quad 4 is where the dollar goes up, so the next time I’ll buy the dollar is when I think
52:30
the market’s setting up the price in another Quad 4, so I have a six-month window, might
52:34
be four.
52:35
RAOUL PAL: When do they start– when did the clock starts here?
52:38
KEITH MCCULLOUGH: October.
52:39
That’s when dollar– RAOUL PAL: End of December, January, February, March.
52:41
KEITH MCCULLOUGH: Yeah, our call was it’s pretty straightforward, it’s hashtag peak
52:45
dollar.
52:46
I don’t mince words.
52:47
The dollars peak, but again, the dollar– RAOUL PAL: The peak dollar sounds to me secular,
52:51
but you’re saying cyclical?
52:52
KEITH MCCULLOUGH: Yeah, it’s just my six-month pivot.
52:56
Again, I want to cancel– RAOUL PAL: That’s what I wanted to ask you about it.
53:00
My thinking, I’m a much longer term person so I was thinking okay, if you’re saying that
53:04
you think the entire dollar construct has now changed for the world, okay, that’s very
53:09
different than the view I have which is like okay, and this has been trading accordingly
53:14
to your view, it may had broken down or broken up but it’s– KEITH MCCULLOUGH: It made it–
53:18
it’s been like literally right on the screws played out in our playbook and this doesn’t
53:22
happen all the time obviously.
53:24
When it does, you like to know just like a good golfer makes a birdie putt, you expect
53:28
to make the putt, you hit three good shots on a par four, well done.
53:32
That’s what the process say.
53:34
When Quad 4 is you’re in the thralls of Quad 4, the dollar should rally to new highs, which
53:38
it did, Quad 4 ended in Q3.
53:40
Now, we’re not in Quad 4, the dollar should start to make lower highs for six months.
53:47
That’s pretty much it.
53:48
I don’t think that it’s like some big bang call.
53:50
I still do think that there’s some asymmetry to the Fed waking up to that GDP number in
53:54
February, and then cutting their dots.
53:57
I think that that’ll probably be wherever the dollar corrects to, that’d be the beginning
54:02
of the end of the negative dollar view.
54:05
Then I go back to being long the dollar in start of second quarter.
54:08
RAOUL PAL: Final, final question, when you’re looking at the rate of change to assess where
54:13
you are in in your framework within the quads, you’re looking at the rate of change, are
54:17
you looking at the rate of change of asset prices, rate of change the economic data or
54:20
a bunch of both?
54:21
KEITH MCCULLOUGH: Both, and that’s what I call my AB test.
54:25
A is various in the research team constantly measuring and mapping the rate of change data
54:29
across 50 different countries.
54:32
RAOUL PAL: Economic data.
54:33
KEITH MCCULLOUGH: Economic data, and then there’s me, that is measuring and mapping
54:36
the rate of change of price, volume and volatility, the relationship of all three, especially
54:41
the volatility of volatility is what I really care on, and something like that.
54:45
Like we just saw what I call phase transition in oil volatility for example.
54:48
Oil volatility or the vol of vol has now gone from bullish volatility, very negative for
54:53
the price to now bearish volatility, which is very short term bullish for the price.
54:58
We’re starting to see that too.
55:00
It’s classic.
55:01
I think, Bridgewater, Dalio to a degree, assets flow towards falling volatility, assets low
55:08
the rising volatility, and that’s why I spend so much time on that.
55:11
It’s the most humbling of experiences as it was for Mandelbrot when you had Big Blue,
55:16
the machine measuring and mapping cotton prices in all historical prices, because you have
55:22
to wait for a moment where that signal becomes real, because there’s lots of Brownian motion.
55:27
If you’re looking at it like I do, and measuring and mapping the volatility of volatility daily,
55:33
Brownian motion 101, there is nothing to do until there’s something to do, because volatility
55:38
will cluster and then become a new trend.
55:42
That’s what I’m essentially on the lookout.
55:44
RAOUL PAL: Because it’s interesting.
55:45
We’ve just interviewed John Bollinger.
55:47
I haven’t seen the interview yet, but Bollinger Bands, the technical analysis.
55:50
It’s basically based around the same concept.
55:53
KEITH MCCULLOUGH: Really?
55:54
RAOUL PAL: Yeah.
55:55
It looks like it basically looks at the volatility of an asset and if the volatility is increasing,
56:00
the band’s increasing, if it’s decreasing and usually when it decreases after a while
56:04
and you get a breakout, you’ve got to change your volatility regime.
56:07
KEITH MCCULLOUGH: Well, that’s right.
56:08
Bollinger Band would be a Gaussian standard deviation and when the volatility changes,
56:15
the standard deviation of vol comps change.
56:17
RAOUL PAL: Essentially, yes.
56:18
KEITH MCCULLOUGH: Actually, that’s a good example of what I call our risk range process.
56:22
I published daily risk ranges and people are like, wow, I can’t survive without it and
56:26
I’m like, no shit.
56:27
I couldn’t do– I couldn’t trade without it.
56:30
Again, when I see the volatility of volatility rising, what happens is my probable range
56:35
widens.
56:36
RAOUL PAL: Of course.
56:37
KEITH MCCULLOUGH: Similarly, when the range is starting to tighten, what that means is
56:40
that the volatility is starting to go away, or potentially undergo phase transition, plenty
56:45
of head fakes.
56:47
Again, when I take the AB test, this is critical.
56:50
The signal is always raw, front running the quad, the market signal’s going to get it
56:55
before the quad does.
56:57
If my quad outlook reflects what the market sees, and it’s a change of face- – RAOUL PAL:
57:02
The problem is that the market also does a lot of false signals, just keeps reading for
57:06
something different, and it gets it wrong, and it reverts.
57:08
KEITH MCCULLOUGH: 100%.
57:09
RAOUL PAL: That’s endlessly testing the narrative, the markets or indices, so yes, it’s the test
57:15
between the two is dead right.
57:16
You can’t do it without the other.
57:17
KEITH MCCULLOUGH: Which is why my hair is grayer and I’m getting fatter because I have
57:20
to do this.
57:21
That’s what I signed up for, like Hedgeye, I don’t get to have days off from Brownian
57:27
motion.
57:28
I have to deal with that damn thing every day.
57:30
Moreover, I have to try to explain it, which is unexplainable some days, but it certainly
57:35
makes– it’s made the experience of what I do, and trying to teach what I do, if only
57:41
I’m teaching myself actually, I’m sure people have realized that, wow, this guy’s not as
57:46
dumb as he used to be.
57:48
It’s a rate of change.
57:49
If you have to teach yourself through your mistakes publicly, every day, you will get
57:53
less dumb.
57:54
God forbid, you get a little bit better at it and better and better at it, but you’re
57:57
quite right.
57:58
The amount of head fakes, they’re just manifest.
58:01
RAOUL PAL: Yeah, that’s a lot of filtering.
58:03
Keith, super interesting.
58:05
I think it’s been– you’ve had a great year so well done.
58:08
Hands down to you.
58:09
KEITH MCCULLOUGH: Thank you.
58:10
RAOUL PAL: Let’s see what next year brings because it’s going to be another really interesting
58:14
macro and the great thing for us, for both of us is it’s a macro world and macro world
58:19
is the most interesting of all, because that’s what I find the big returns lie.
58:23
This whole period of time, we have low volatility, choosy, well, the grinding high prices and
58:28
that’s never the easiest to make money.
58:30
Well, you can’t easily make money if it’s never exciting.
58:33
Let’s see how it pans out.
58:34
Thank you ever so much for coming and do this.
58:36
KEITH MCCULLOUGH: Yes and congrats to you, you had a great year as well.
58:38
I appreciate you having me on.
58:39
RAOUL PAL: Yeah, and it’s all good.

The Era of Fed Power is Over. Prepare for a More Perilous Road Ahead.

Central banks have long exercised influence over booms and busts, but their ability is shrinking.

The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage.

That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation.

But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The Eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines.

The U.S. may not be far behind. “We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,” said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%.

Workers, companies, investors and politicians may need to prepare for a world where the business cycle rises and falls largely without the influence of central banks.

 

The business cycle we’re used to is a bad guide to business cycles going forward,” said Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund.

In November, Fed chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.” As a result, he said, the Fed is studying ways to alter its strategy and develop tools that can work when interest rates approach zero.

Fed chairman Jerome Powell on Capitol Hill in November. PHOTO: SAM CORUM/EPA/SHUTTERSTOCK

Central banks are calling on elected officials to employ taxes, spending and deficits to combat recessions. “It’s high time I think for fiscal policy to take charge,” Mario Draghi said in September, shortly before stepping down as ECB president.

There are considerable doubts that any new tools can restore the influence of central banks, or that countries can overcome obstacles to more robust fiscal policy, particularly political opposition and steep debt.

Business cycles in the future may resemble those of the 19th century, when monetary policy didn’t exist. From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896.

Fed’s Fading Influence

U.S. recessions were more frequent before the Federal Reserve took control over interest rates, using them as a lever to slow inflation or boost the economy. Low rates have weakened the central bank by giving it little room to reduce rates further.

The Fed’s sway over the economy has also been weakened by a decline in durable manufacturing and construction, which are sensitive to rates, and the growth in services, which aren’t.

Sources: National Bureau of Economic Research (recessions); Sidney Homer and Richard Sylla (interest rates 1854-1933); Federal Reserve (interest rates 1934-present); U.S. Commerce Department (value-added shares of GDP)
Kathryn Tam/THE WALL STREET JOURNAL

The causes of business cycles were diverse, Wesley Claire Mitchell, an NBER founder, wrote in 1927. They included “the weather, the uncertainty which beclouds all plans that stretch into the future, the emotional aberrations to which business decisions are subject, the innovations characteristic of modern society, the ‘progressive’ character of our age, the magnitude of savings, the construction of industrial equipment, ‘generalized overproduction,’ the operations of banks, the flow of money incomes, and the conduct of business for profits.”

He didn’t mention monetary or fiscal policy because, for all practical purposes, they didn’t exist. Until 1913, the U.S. hadn’t had a central bank, except for two brief periods. As for fiscal policy, U.S. federal spending and taxation were too small to matter.

When central banks were established, they didn’t engage in monetary policy, which means adjusting interest rates to counter recession or rein in inflation. Many countries were on the gold standard which, by tying the supply of currency to the stock of gold, prevented sustained inflation.

The Fed was established in 1913 to act as lender of last resort, supplying funds to commercial banks that were short of cash, not to manage inflation or unemployment. Not until the Great Depression did that change.

In 1933, Franklin D. Roosevelt took the U.S. off the gold standard, giving the Fed much more discretion over interest rates and the money supply. Two years later, Congress centralized Fed decision-making in Washington, better equipping it to manage the broader economy.

Modern times

Macroeconomics, the study of the economy as a whole instead of individuals and firms, was born from the work of British economist John Maynard Keynes. He showed how individuals and firms, acting rationally, could together spend too little to keep everyone employed.

In those circumstances, monetary or fiscal policy could generate more demand for a nation’s goods and services, Mr. Keynes argued. Just as a dam regulates the flow of a river to counter flooding and drought, monetary and fiscal-policy makers must try to regulate the flow of aggregate demand to counter inflation and recession.

The Employment Act of 1946 committed the U.S. to the idea of using fiscal and monetary policy to maintain full employment and low rates of inflation.

The next quarter-century followed a textbook script. In postwar America, rapid economic growth and falling unemployment yielded rising inflation. The Fed responded by raising interest rates, reducing investment in buildings, equipment and houses.

  • The economy would slide into recession, and inflation would fall.
  • The Fed then lowered interest rates, investment would recover, and growth would resume.

The textbook model began to fray at the end of the 1960s. Economists thought low interest rates and budget deficits could permanently reduce unemployment in exchange for only a modest uptick in inflation. Instead, inflation accelerated, and the Fed induced several deep and painful recessions to get it back down.

By the late 1990s, new challenges emerged. One was at first a good thing. Inflation became both low and unusually stable, barely fluctuating in response to economic growth and unemployment.

The second change was less beneficial. Regular prices were more stable, but asset prices became less so. The recessions of 2001 and 2008 weren’t caused by the Fed raising rates. They resulted from a boom and bust in asset prices, first in technology stocks, then in house prices and mortgage debt.

After the last bust, the Fed kept interest rates near zero from 2008 until 2015. The central bank also purchased government bonds with newly created money—a new monetary tool dubbed quantitative easing—to push down long-term interest rates.

Despite such aggressive stimulus, economic growth has been slow. Unemployment has fallen to a 50-year low, but inflation has persistently run below the 2% target the Fed set. A similar situation prevails abroad.

In Japan, Britain and Germany, unemployment is down to historic lows. But despite short-and long-term interest rates near and sometimes below zero, growth has been muted. Since 2009, inflation has averaged 0.3% in Japan and 1.3% in the Eurozone.

The textbook model of monetary policy is barely operating, and economists have spent the last decade puzzling why.

One explanation focuses on investment, the main driver of long-term economic growth. Investment is financed out of saving. When investment is high relative to saving, that pushes interest rates up because more people and businesses want to borrow. If saving is high relative to investment, that pushes rates down. That means structurally low investment coupled with high saving by businesses and aging households can explain both slow growth and low interest rates.

Richard Clarida, the Fed’s vice chairman, cited another reason during a speech in November. Investors in the past, he said, demanded an interest rate premium for the risk that inflation would turn out higher than they expected. Investors are now so confident central banks will keep inflation low that they don’t need that premium. Thus, central banks’ success at eradicating fear of inflation is partly responsible for the low rates that currently limit their power.

While the Fed’s grip on growth and inflation may be slipping, it can still sway markets. Indeed, Mr. Dalio said, the central bank’s principal lever for sustaining demand has been its ability to drive up asset prices as well as the debt to finance assets, called leverage. Since the 2008 crisis, low rates and quantitative easing have elevated prices of stocks, private equity, corporate debt and real estate in many cities. As prices rise, their returns, such a bond or dividend yield, decline.

That dynamic, he said, has reached its limit. Once returns have fallen close to the return on cash or its equivalent, such as Treasury bills, “there is no incentive to lend, or invest in these assets.” At that point, the Fed is no longer able to stimulate spending.

Less than zero

A central bank can always raise rates enough to slow growth in pursuit of lower inflation; but it can’t always lower them enough to ensure faster growth and higher inflation.

The European Central Bank has tried—cutting interest rates to below zero, in effect charging savers. Its key rate went to minus 0.5% from minus 0.4% in September. At that meeting and since, resistance has grown inside the ECB to even more negative rates for fear that would reduce bank lending or have other side effects.

In December, Sweden’s central bank, which implemented negative rates in 2015, ended the experiment and returned its key policy rate to zero. Fed officials have all but ruled out ever implementing negative rates.

In a new research paper, Mr. Summers, who served as President Clinton’s Treasury secretary and President Obama’s top economic adviser, and Anna Stansbury, a Ph.D. student in economics at Harvard, say very low or negative rates are “at best only weakly effective…and at worst counterproductive.”

They cited several reasons why. Some households earn interest from bonds, money-market funds and bank deposits. If rates go negative, that source of purchasing power shrinks. Some people nearing retirement may save more to make up for the erosion of their principal by very low or negative rates.

Moreover, the economy has changed in ways that weaken its response to interest-rate cuts, they wrote. The economy’s two most interest-sensitive sectors, durable goods manufacturing, such as autos, and construction, fell to 10% of national output in 2018 from 20% in 1967, in part because America’s aging population spends less on houses and cars. Over the same period, financial and professional services, education and health care, all far less interest sensitive, grew to 47% from 26%.

They concluded the response of employment to interest rates has fallen by a third, meaning it is harder for the Fed to generate a boom.

The U.S. isn’t likely to plunge into another financial crisis like 2008, Mr. Dalio said, as long as interest rates remain near zero. Such low rates allow households and companies to easily refinance their debts.

More likely, he said, are shallow recessions and sluggish growth, similar to what Japan has experienced—what he called a “big sag.”

Former Fed chairman Ben Bernanke this month estimated that through quantitative easing and “forward guidance,” committing to keep interest rates low until certain conditions are met, the Fed could deliver the equivalent of 3 percentage points of rate cuts, enough, in addition to two to three points of regular rate cuts, to counteract most recessions.

Mr. Clarida warned, however, that quantitative easing may suffer from diminishing returns in the next recession. Moreover, the next recession is likely to be global, he said this month, and if all major countries weaken at the same time, it will push rates everywhere toward zero. That would make it harder for the Fed or any other central bank to support its own economy than if only one country were in trouble.

Fiscal fix

With central banks so constrained, economists say fiscal policy must become the primary remedy to recessions.

History shows that aggressive fiscal policy can raise growth, inflation and interest rates. The U.S. borrowed heavily in World War II. With help from the Fed, which bought some of the debt and kept rates low, the economy vaulted out of the Great Depression. Once wartime controls on prices and interest rates were lifted, both rose.

Today, mainstream academic economists are again recommending higher inflation and deficits to escape the low-growth, low-rate trap.

Advocates of what is called modern monetary theory say the Fed should create unlimited money to finance government deficits until full employment is reached. Some economists call for dialing up “automatic stabilizers,” the boost that federal spending gets during downturns, via payments to individuals and state governments as well as infrastructure investment.

Yet fiscal policy is decided not by economists but by elected officials who are more likely to be motivated by political priorities that conflict with the economy’s needs. In 2011, when unemployment was 9%, a Republican-controlled Congress forced Mr. Obama to agree to deficit cuts. In 2018, when unemployment had fallen to 4%, President Trump and the GOP-controlled Congress slashed taxes and boosted spending, sharply raising the budget deficit. Mr. Trump has pressured Mr. Powell to cut rates more and resume quantitative easing, which the Fed chairman has resisted.

Fiscal policy in the Eurozone is hampered by rules that limit the debt and deficits of its member countries. It is also hamstrung by divergent interests: Germany, the country that can most easily borrow, needs it least. In recent years it has refused to open the taps to help out its neighbors.

Still, Mr. Dalio predicted that a weakened Fed will eventually join hands with the federal government to stimulate demand by directly financing deficits.

Once central banks have agreed to finance whatever deficits politicians wish to run, however, they may have trouble saying no when the need has passed.

The experience abroad and in the U.S.’s past suggests that once politicians are in charge of monetary policy, inflation often follows. In the 1960s and 1970s, presidents Johnson and Nixon pressured the Fed against raising rates, setting the stage for the surge in inflation in the 1970s. Such a scenario seems remote today, but it may not always be.

YouTube Rancher Warns of Financial Crisis

Did we ever really escape the financial crisis of 2008 or did we kick the can down the road and quadruple the problem? We certainly didn’t solve anything and are likely on the brink of one of the largest societal changes in modern history as the entire system faces a reset that could reshape our political climate and social experience. These types of events are not unusual, and there’s always a possibility of extending the issue once again, but eventually it will crash.

Soros Fund Co-Founder Jim Rogers on China and Global Investment

Jim Rogers has been fascinated by China since he drove his motorcycle across the country in the 1980s. The investing legend joins Real Vision to give his view of the rising Asian superpower and, more broadly, on rising Asia in general. Rogers provides his views on the Hong Kong crisis and the simmering trade war. He also weighs in on whether the era of US dollar primacy has passed — especially now that the United States has become, in Rogers’ view, “the largest debtor nation in the history of the world.” Filmed on September 10, 2019 in Singapore.

26:49
You know the rest of the story, you know what happened there, but Mr. Trump is smarter than
26:53
history so we don’t have to worry.
26:55
Mr. Trump knows he can handle history and none of us should worry, because he’s smarter
27:00
than history.
27:02
Even though people say trade wars are bad, and often lead to shooting wars, don’t worry,
27:10
I’m smarter than history.
27:11
MATT MILSOM: He does seem to be able to just move to the next person once he’s had– go
27:15
at somebody then it slackened off, just goes to next target is going to be Europe, once
27:20
he’s done with China, even though nothing’s actually resolved.
27:23
JIM ROGERS: The problem, Matt, is that when things get bad, so far the American economy
has held up well because of a lot of money printing, out of government spending, cut
taxes, everything possible to hold up the American economy has held it up.
When things get bad in America as they will, Mr. Trump is not going to say, “It’s my fault.
I got it wrong.”
Donald Trump is going to say those evil Germans, those Koreans, those Canadians, and he’s going
to come back hard with more and more whatever you want to call it.
The situation, we’re going to have the worst bear market in my lifetime.
I can tell I’m older than you, so it’s going to be the worst in your lifetime, too.
What I suggest you do is watch Real Vision, and you’ll get educated, and you will see
how bad things are.
Then you’ll get there.
Most people will turn on the internet or turn on the TV, say, “Wow, look at this.
Things are great.”
Mr. Trump tells you every day, if you watch American TV, he will explain you things are
really, really very good.
You don’t worry.
Maybe you need somebody crying wolf, maybe you need somebody saying, “Wait a minute,
guys, wait a minute.
Look at this.”
Maybe Real Vision is the last vision for all of us.
MATT MILSOM: You think he gets back in?
JIM ROGERS: Get back into what?
MATT MILSOM: Trump 2020?
JIM ROGERS: I got to respect you, what I think it’s– I know it’s very hard to dislodge a
sitting president in America for many, many reasons.

I would suspect that’s the same to this time.
Now, we got rid of Coolidge, and Hoover.
29:08
We got rid of Hoover because the market collapsed but we don’t have much time for that because
29:13
the election is only, what, 13-14 months away now.
29:18
If the market really collapses in the next 13 or 14 months, then I would change my view,
29:23
but there are enough things he can do, which is why it’s hard to get rid of sitting presidents.
29:30
They’ll prop things up long enough to get through the election.
29:34
I would, if I were betting and I’m not a betting man, but if I were, I would bet that Trump
29:39
will be reelected.
29:40
MATT MILSOM: A lot of speculation that he might actually start to swerve the Fed and
29:45
play the currency markets himself for the Treasury.
29:48
JIM ROGERS: What, Trump will start buying what?
29:51
US dollars or renminbi?
29:52
What’s he going to buy?
29:53
MATT MILSOM: He’s going to be selling dollars.
29:54
JIM ROGERS: He could do that.
29:56
Yes, and he might.
29:58
He cannot force the Fed to do it.
30:00
No, but he could, he could browbeat him.
30:03
He can certainly force the Treasury to do that, to sell US dollars.
30:10
First of all, I’m not sure the market would put up with it, it would for a while, obviously,
30:14
it would for a while, but eventually, the market, as I said to you before, I mentioned
30:18
the market’s going to say to these guys, “We’re not going to play this game anymore.
30:23
This is an absurd, ludicrous game.
30:25
It’s never happened before.
30:26
We know it’s not going to work.
30:28
We’re not going to play anymore.”
30:30
Okay, maybe we’ll try.
30:32
I don’t think it’s enough.
30:34
Maybe it’s enough to save the election, I said to you before.
30:36
It’s so difficult to dislodge a sitting president.
30:38
There are lots of things he can do.
30:41
If he needs votes in that state, he spends a lot of money in that state.
30:45
His opponent cannot do that, the opponent can say look, what a terrible person he is.
30:49
He’s spending money in your state.
30:51
The people say, thank you, thank you spend more money in my state.
30:54
We’ll vote for you.
30:55
MATT MILSOM: He can almost play the Fed to his own fiddle, I guess at the same time.
31:00
He can blame them if it goes– JIM ROGERS: He certainly can blame them, whether he can
31:03
persuade them.
31:04
He seems to be persuading them now is another question, but sure.
31:08
That’s what I mean, if he goes in there and threatens them, or does x or does y, sure
31:14
he can.
31:15
That’s the problem when you’re the president, or the advantage when you’re the president.
31:19
MATT MILSOM: I see Powell’s having a bit more backup by myself.
31:21
I just think he’s his own guy.
31:24
Really, he’s not a PhD Economics.
31:26
He’s a– JIM ROGERS: That’s the best news.
31:29
I believe PhDs, which is bad news.
31:34
We’ll see.
31:35
MATT MILSOM: I could see that arising a bigger conflict there, you think between Powell and–
31:39
JIM ROGERS: No, I can see a huge conflict and that’s going to– the Federal Reserve,
31:45
its debt went up by five, six times in 10 years.
31:50
If I had said to you 20 years ago, a major central bank in the world is going to increase
31:55
the debt on its balance sheet by 500% in 10 years, you’re going to say, “Get out of here.
31:59
We’re not going to talk to you anymore.
32:01
You’re not even smart enough to talk on TV.
32:04
What are you talking about?”
32:05
It’s inconceivable that it could have happened, but it’s happened.
32:09
Sure, they have a problem, too.
32:12
How far can they go?
32:14
How far can any of us go?
32:16
MATT MILSOM: It surprised me the volatility’s so cheapened right now.
32:20
JIM ROGERS: The debt worldwide is the highest in world history.
32:25
Interest rates are the lowest in world history.
32:27
In 2008, we had a big debt problem.
32:31
China, which had a lot of money saves for a rainy day, started spending the money and
32:36
helped save the world, but even China now has debt.
32:40
China can’t save the world anymore.
32:42
The central bank came riding in with its printing presses, helped save the world.
32:47
That’s getting late for all the printing presses in the world.
32:51
It’s getting late in the day.
32:52
MATT MILSOM: Is the rate of change as well as a debt in China that’s extraordinary just–
32:56
JIM ROGERS: Oh, no, I know.
32:58
To repeat, ports in China has said we’ll let them go bankrupt.
33:02
I don’t think they will.
33:04
Not that they’re lying, I think they believe that they’re going to let people go bankrupt
33:08
but they haven’t had this problem in decades.
33:14
They’re bureaucrats and they’re academics, haven’t felt the pressure of people calling
33:18
up saying, “You must save Chinese civilization.
33:22
This is Chinese history, our image our integrity.”
33:25
No, they haven’t had that gigantic pressure from everybody in the country, they’re saying,
33:31
“Save Chinese civilization.”
33:33
What they really mean it save me.
33:35
They haven’t had that yet.
33:37
MATT MILSOM: Xi as a link leader seems to be much more of a Maoist than ever before,
33:43
to me.
33:44
JIM ROGERS: I’m not sure Maoist, but they’re certainly closing off in that sense.
33:49
Yes.
33:50
Deng Xiaoping started opening up and Deng Xiaoping said you open the windows, you’re
33:55
going to get some flies, but you’re going to get fresh air and sunshine, and the fresh
33:59
air and the sunshine are worth the flies.
34:03
He seems to be saying we don’t want flies and the last 40 years, much of the progress
34:11
has been 18-year-olds in a garage doing crazy things on the computer.
34:16
Alibaba, Microsoft, the names go on, and on and on.
34:20
These were just kids doing wild, crazy things on the internet, which was open and free to
34:24
nearly everybody.
34:26
You start closing these things off, and it’s going to slow progress, it’s going to slow
34:31
things now, whether we like it, history is always showing that.
34:35
You close off and you go into decline.
34:38
It does seem to be happening not just in China, even in the US, but it does seem to be happening
34:43
more and more, so maybe we’re in for the dark ages again.
34:48
MATT MILSOM: I don’t know.
34:50
It’s almost that you think about where you’re going to head or what currency you need to
34:53
get into, where you’re going to be safe.
34:55
Do you know what I mean?
34:57
You start thinking about– JIM ROGERS: That’s not what I mean.
34:58
I don’t have a job.
34:59
I can’t figure out a way to save myself.
35:01
MATT MILSOM: You made the move to Asia on the back of those thoughts, I guess that that’s
35:06
going to be a Pacific centuries.
35:07
JIM ROGERS: Well, I moved here you because I know that the 20th century is Asia, 21st
35:12
century is Asia.
35:13
I wanted my children to know Asia and to speak Mandarin.
35:18
That’s the best preparation I can give them for the 21st century.
35:22
That’s why I’m here.
35:23
Of course, Asia is continuing to develop and boom and head of the rest of the world.
35:28
There is some debt in Asia, but nothing like in the West.
35:32
Most of the Western countries are really broke, especially when you pull into pension plans.
35:38
Europe’s got gigantic pension, US too, gigantic pension obligations, which they’ll never able
35:43
to [indiscernible].
35:44
MATT MILSOM: Yeah.
35:45
Demographically, where does that end up?
35:46
JIM ROGERS: It’s already starting to ruin a lot of people.
35:48
Asia has probably– will have problems but nothing like some that are rising in the West.
35:53
I can’t bear for my kids.
35:55
MATT MILSOM: The world of agricultural investment view is still a– JIM ROGERS: Yeah, agriculture
36:00
has been a disaster for 35 years or so.
36:03
The average age of farmers in America is 58.
36:07
More people in America study public relations and study agriculture.
36:12
The highest rate of suicide in the UK is agriculture.
36:15
Of Japan, the average age of farmers is 68.
36:20
Nobody becomes a farmer, you go to Japan now, there’re huge stretches of land, they’re just
36:24
empty.
36:25
They can’t find anybody to farm them.
36:27
Farmers have died, the kids have gone to Osaka.
36:29
There’s nobody to farm that land.
36:30
If you want to be a former, go to Japan.
36:33
You can get a lot of land cheap.
36:36
That’s true.
36:37
Australia, Canada, all of these countries have very, very aged old farmers, men and
36:45
women.
36:46
It’s millions of Indian farmers have committed suicide, as I’m sure you know.
36:52
No, no, agriculture is a disaster.
36:55
The Chinese have a word, you know the Chinese word weiji?
36:58
It means disaster and opportunity are the same and they are.
37:02
If you can survive the disaster, you’re going to make a lot of money with the opportunity.
37:07
MATT MILSOM: I guess the commodity complex per se, are softer on their knees-ish for
37:11
the last five years.
37:12
They’re actually doing okay in the States.
37:16
JIM ROGERS: Yeah, yeah.
37:17
Things like sugar, sugar is down over 80% in the last 40 years, what do you notice down
37:24
80% in the last 40 years?
37:27
My IQ.
37:28
Other than that, there’s not much that has declined, that deteriorated like some of the
37:34
agricultural products.
37:35
MATT MILSOM: Difficult bet to make given the climate change, too?
37:38
JIM ROGERS: Well, yeah, climate change is taking place, is taking place for thousands
37:44
of years.
37:45
Go back and look at trees, and soil layers and iceberg layer, we see that climate change
37:53
has always been taking place one way or the other, and it seems to be happening again.
37:58
Of course, that’s going to be great for some farmers, disastrous for other farmers.
38:04
The key is to be the farmer that it’s great for, not to be a farmer that gets wiped out
38:09
because of climate change.
38:11
The Sahara Desert, which is the size of the continent with 48 states, used to be a huge
38:18
agricultural area.
38:19
Pigs, cows, wheat, corn, everything, huge, huge.
38:24
We had climate change.
38:26
We had ecological change, you know the rest of that story.
38:30
If you were a farmer in Algeria 2000 years ago, you probably didn’t do very well.
38:36
You should have moved to Iowa 2000 years ago.
38:40
MATT MILSOM: Would it be too much to ask your asset allocation now?
38:44
JIM ROGERS: You can ask, I don’t know.
38:46
I don’t sit around.
38:48
I don’t have a committee met.
38:49
I don’t have anybody to answer to.
38:52
I know I can still pay my bills.
38:54
I do own some gold and silver.
38:56
I do own a lot of US dollars, I’ve told you about.
38:59
I’m short some junk bonds, short the ETF, Russia, China.
39:06
I don’t own a lot of shares anywhere right now.
39:11
The Japanese market, I sold out of.
39:13
I used to own a lot of Japanese shares, sold out completely.
39:16
MATT MILSOM: Why was that?
39:17
JIM ROGERS: I bought them so well.
39:19
It’s not often I get it right so I’m going to brag for a minute.
39:22
The Japanese market was very, very cheap and I started by and then the tsunami.
39:28
Remember the tsunami?
39:29
Everything collapsed, I bought a little, gone up a lot, it tripled since then.
39:33
I could see wasabi and the toll got stronger and stronger and stronger.
39:38
They’d already printed lots of money.
39:40
The central bank said we’ll print as much as we have to.
39:44
That’s what they said.
39:45
They said it out loud.
39:46
Not some crazy guy saying it.
39:50
I said what else can happen?
39:52
What else can go right?
39:53
They’ve spent a lot of money on infrastructure.
39:58
They bought a lot of securities, so I sold out.
40:04
So far, I’m right, but don’t worry, I make plenty of mistakes.
40:07
MATT MILSOM: I guess, it changed your beast, don’t even trade anymore, eh, because there’s
40:10
no float?
40:11
JIM ROGERS: Nothing to trade, why would you buy them?
40:14
Who’s going to buy them, except a central bank?
40:16
MATT MILSOM: They have to keep going?
40:18
JIM ROGERS: I told you I have.
40:21
I’m going to Japan tomorrow, there’s been a best seller saying, “A Warning to Japan.”
40:25
If they keep going– MATT MILSOM: That’s a book?
40:28
JIM ROGERS: Yeah.
40:29
MATT MILSOM: Sorry, I didn’t know that.
40:30
JIM ROGERS: No, it’s the number one bestseller.
40:31
MATT MILSOM: Congratulations.
40:32
JIM ROGERS: I’m shocked.
40:33
I’ve made two number one bestsellers.
40:34
MATT MILSOM: What was the other one?
40:35
JIM ROGERS: I forget that, it was some Japanese.
40:36
It was something like, “A Warning to Japan.”
40:39
MATT MILSOM: But this is a specific for that market, or they were– JIM ROGERS: Two books
40:43
in Japanese.
40:44
They were translated, my English was translated into Japanese.
40:48
Two books in 2019 have been number one bestsellers by me.
40:54
This is a shock.
40:55
How could this happen?
40:56
I’m more surprised than anybody.
40:58
They called me up, that smarty say you got to come to Tokyo.
41:01
I said why?
41:02
He said your books have won bestseller.
41:03
I forgot about the book.
41:04
The book resulted from some reporters coming here and interviewing me like you.
41:09
We’re out for several hours.
41:10
I said we’re going to publish this.
41:12
Okay, go ahead.
41:13
I don’t care.
41:14
Forgot about it.
41:15
MATT MILSOM: You got a book tour now?
41:17
JIM ROGERS: Yeah, I’m leaving tomorrow.
41:18
I’m going tomorrow for a book tour in various cities of Japan, promoting, “A Warning to
41:24
Japan.”
41:25
MATT MILSOM: What was the essence of that?
41:26
Was that demographics or that– JIM ROGERS: If you’re 10 years old, you better get out.
41:28
If you’re 10 years old, you better get an AK47 and learn how to use it.
41:33
These are not– it’s simple.
41:36
I say to them, they will say, of course, he’s a foreigner.
41:40
Don’t worry.
41:41
The Japanese don’t like foreigners, and so they will just say, he’s a– whenever they
41:44
say they don’t like somebody, they say he’s a foreigner so you don’t have to listen to
41:47
him.
41:48
I say to them, yeah, okay, I’m a foreigner, but this is arithmetic.
41:51
It’s addition, the debt goes up every day.
41:55
That’s simple addition and it’s subtraction, the population goes down every day.
42:02
Central bank has been printing huge amounts of money.
42:05
This is just simple addition and subtract.
42:09
Forget that I’m foreigner and for some reason, both of them became number one bestsellers.
42:15
I guess it’s because nobody in Japan ever says things like this.
42:18
I don’t know why I became, but listen, I’m shocked.
42:22
MATT MILSOM: Do you have any views on Softbank?
42:25
JIM ROGERS: So far, they’ve made a lot of money but I don’t know enough to say much
42:30
more than that.
42:31
I read that problems are developing, but I have no knowledge, enough knowledge to say
42:39
anything other than that.
42:40
MATT MILSOM: I guess WeWork is the speculation for those issues there, for the float.
42:45
JIM ROGERS: WeWork is not their only asset at Softbank.
42:49
What I read about WeWork, WeWork may be one of those things.
42:55
You remember in 1999?
42:56
I think it was called pets.com or something.
43:00
It was one of those things that was when people talk about the end of the bull market or the
43:05
signal, or the sign that it was over, that may be WeWork now.
43:13
They were printed out in 1999.
43:19
That’s the one that people often bring up, I was not sure.
43:21
I wish I had but they bring that one up.
43:25
Now, if you look at the current bull market, maybe someday in 10 years, we’re all going
43:31
to look back and say, “They rang that bell.
43:35
That bell was called WeWork.
43:38
That was the sign that we were coming to the end.”
43:42
It’s always something that people look back on that it may be WeWork.
43:46
MATT MILSOM: The amount of questioning that browned the IPO pricing makes you think that
43:50
the greater fool game may have just come to a grinding halt.
43:54
JIM ROGERS: I’ve never read the Prospectus but I’ve read a lot in the papers about the
43:58
story, the company, that IPO, the CEO, etc.
44:04
Just I’m sure you have too.
44:05
I read it and I say this is 1929, this is 1999.
44:12
This has all happened before.
44:14
MATT MILSOM: They have nines in them.
44:18
JIM ROGERS: Yeah.
44:20
See, 1899– well, anyway, you read, I read this stuff and I’d say oh, yeah, this has
44:26
happened before.
44:27
I remember reading about things like this in previous bull markets, previous bubbles.
44:33
MATT MILSOM: What brings you to an investment then?
44:36
Is there a sector or there is an idea or somebody pitches to you?
44:38
JIM ROGERS: No, it’s usually– the nature of who I am, I’m always looking or I’m always
44:45
listening.
44:46
If I stumble on something, I’m not out looking like I used to, but if I stumbled on something,
44:53
I often do homework and then I’m in this Russian stock that I’m buying, I stumbled on it.
44:58
The more homework I do, the more I buy.
45:02
I continue but it’s usually I will stumble on something.
45:04
MATT MILSOM: Public, is it a public stock?
45:06
JIM ROGERS: Yeah, it’s a public company.
45:08
MATT MILSOM: Sector?
45:10
Which sector would have been?
45:11
JIM ROGERS: You’re a very good reporter, but I’m not going to tell you because if I told
45:15
you, you would know exactly what I’m buying.
45:17
MATT MILSOM: Okay.
45:18
I’m sure it wouldn’t be that easy to spot.
45:20
JIM ROGERS: There are plenty of disasters in Russia.
45:23
Everybody hates Russia now, so Russia’s on my list.
45:28
Anyway, I will probably buy Russian government bonds and rubles again soon.
45:34
I own Russian government bonds in rubles.
45:37
The yield is very, very high.
45:38
The ruble is hated.
45:39
The Russians are hated, et cetera.
45:41
MATT MILSOM: Any other markets that are particularly hated that you fancy?
45:44
JIM ROGERS: Well, I told you Venezuela but you and I cannot do it.
45:48
I cannot do anything in Venezuela.
45:51
Zimbabwe, I bought a few shares of Zimbabwe, some of the North Korea but that’s illegal,
45:57
too.
45:58
I’m looking, but part of the problem is there are few markets that are hated so much.
46:06
I mean I am buying Russia, it’s still hated.
46:10
Most markets, even Germany.
46:12
Look at Germany hit peak, what, two years ago.
46:15
Been going out since but it’s not cheap.
46:18
It’s not hated.
46:19
Germany still a very large and [indiscernible] economy.
46:23
No, I don’t see many now that jumps off the page to me and says, oh my God, you got to
46:30
buy this disaster.
46:31
I would love to find something like that, but I’m too lazy.
46:34
MATT MILSOM: I’m thinking there’s probably a good places to stop.
46:38
JIM ROGERS: I’m too lazy.
46:41
Very good places to stop buying, I commend laziness to all of you.
46:45
Watch Real Vision and get lazier and lazier, and lazier.
46:48
MATT MILSOM: Jim, thanks for having us and thanks very much for coming on.
46:50
JIM ROGERS: My delight, my pleasure.