Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock.
Steve Eisman: Inequality was cause of Financial Crisis (10:17)
Steve Eisman: They made money because of their leverage (debt ratio) and they mistook their leverage for genius (12:19)
Steve Eisman was one of the few who predicted the 2008 financial crisis, and he made his name by foreseeing the collapse of subprime mortgage market.
Michael Lewis portrays him as one of the heroes in the bestselling book The Big Short and Steve Carrell plays an outspoken version of him in the Oscar-winning movie of the same name.
EFN:s Katrine Marçal meets Steve Eisman at Claridges hotel in London.
they’re all getting screwed you know you
know if they care about they care about
the ballgame or they care about what
actresses went into rehab I think you
should try medication no no we agreed if
it interferes with work you hate Wall
Street maybe it’s time to quit I love my
job you hate your job I love my job
you’re miserable I love my job I love my
mark Steve Iseman welcome to the offense
I’m glad to be here so you’ve been
portrayed in a book and in a film what
did you prefer I would say they were
both fairly accurate as the way I was
back then and let’s just leave it at
that okay okay so I’ve heard that some
Brad Pitt’s almost caladium in the film
it’s not true I got a phone call from
Adam McKay who was the author director
of the movie in November of 2015 to say
that he was writing the movie and that
there was a possibility that Brad Pitt
would play me to which I responded that
the only thing Brad Pitt and I have in
common is that we both have really good
so being one a few people who sold the
financial crash coming how did it feel
to have see this big disaster unfold and
not being able to do anything about it
the analogy I use it’s a little bit like
Noah in the ark yeah so you know Noah’s
on the ark he’s okay and that he saved
his family but he’s not exactly happy
hearing everybody screaming outside
that’s was sort of my experience all
right did you think the financial market
potential market from the financial
sector would get back get back to
business and get back to some kind of
normal as quickly as it did no I didn’t
expect it would it would happen that
quickly you know a lot of that was the
fact that the government backstop the
system and once the become a backstop
the system it was what the financial
markets did come back but the banking
system has been changed so in the book
and the film it becomes very clear that
you’re you betting against the subprime
mortgage market is not
just a trade but it’s kind of a moral
crusade are you still on this moral
crusade I’m not because a lot has
you know dodd-frank I think really fixed
a lot of things leverage has come down
enormous ly the Consumer Financial
Protection Board has been put in place
to protect consumers I the world’s very
different from what it was pre-crisis
hmm but now many of these things are
threatening I mean Donald Trump has
promised to repeal vast parts of the
dodd-frank act for example it’s not
something I’m in favor of I think that
will be a big fight you know it’s
possible the industry is going to get
deregulated to a degree we’re not going
to go back to what we where it was so
for example you know Citigroup used to
be levered 35 to 1 today its levered 10
to 1 I feel if we go into some type of
deregulation maybe you get 2 to 3 turns
more leverage it’s not something that
I’m personally in favor of but I don’t
think it’s a calamity hmm so do you
think with Donald Trump be president
today if more than one banker had gone
to jail for the financial crisis it’s an
excellent question and the answer is I
don’t know you know I don’t know
I’m cold about it I’ve thought about it
I think there’s a definite very strong
sentiment that it was wrong that nobody
went to jail I’m not going to say if
that sentiment is right or not but
there’s definitely a very strong
sentiment in the country that that’s the
case and I think people are very angry
that nobody did go to jail again I’m not
going to say whether that’s right or
wrong and if people had gone to jail I
think that would have soothed some of
the hangar that was seen in the election
so it’s possible that impact of the
election but it’s impossible it’s
impossible to say right so now taxes are
going to be can’t and Finance regulators
because the populace to campaign against
Wall Street 1 correct correct okay so
what do you do with investment then I
hear you you are investing quite a lot
in bank stocks well I mean there’s
there’s two issues there’s what I think
about finance the financial system and
what I think about financial stocks and
the two don’t necessarily
correlate so with respect to the
financial system I think that what’s
been done has been a good thing but it’s
been very intense bank the dodd-frank
act and the Fed forcing people to
de-lever to de-risk etc so from a
financial system I’m very happy I could
say very strongly the United States
financial system has never been held
this healthy in my lifetime but it’s
been very painful for financial stocks
because as you de-lever and do risk you
make less money and therefore it hurts
your stock price so the last six years
or so have been extremely painful for
financial stocks especially banks as
they’ve de-levered and dearest well if
we’re going to go into world where we’re
going to deregulate and leverage is
going to go up at least some just
reverse the story
so therefore financial stocks should do
well right okay
like I said financial system financial
stocks but you are not necessarily the
same an interest rates in America are
going up yes that’s very good for banks
so America is kind of moving from a
monetary stimulus to a fiscal stimulus
with something but it’s like that’s
something I’m in favor of yes I think
it’s a good thing the infrastructure
investment yeah that’s right until not
believe that quantitative easing is a
successful strategy why not there are
too many negative impacts for from it to
I mean look it was a noble experiment
there was no fiscal expansion there was
no other game in town so I don’t blame
the Fed for doing it the idea was that
lowering rates would cause people to go
up or out on the risk curve and vest in
the economy and really the other thing
happened was they went out on the risk
curve by buying back their own stock
they didn’t really invest in the economy
and with lower rates that hurts consumer
because they makes us money we pay the
money in the bank so I haven’t you know
when we started the monetary policy of
us growth was one-and-a-half to two
percent and after we did it it’s one and
a half to two percent so in my view
quantitative easing is a failure
alright so in November you said to the
Guardian in Europe but Europe is screwed
you guys are still screwed referring to
their non-performing loans in the
Italian depends of the country yes
are we in Europe still screwed well my
wife wish I hadn’t said that
yes so okay oh we in big trouble not big
it depends on the country you know Italy
has a very large non-performing loan
problem I don’t see the Italian
government doing anything to really
solve that problem if they like before
Christmas that was a nasty suppose that
was just monte de Paz yeah and you never
like to say monte de Partie because it’s
such a great name and the world’s oldest
bank as the world’s oldest bank correct
and I don’t you know you could try and
Simmel to deposit ten times fast it’s
very hard but it’s not really solving
the problem I mean this is something
called a Texas ratio which is a ratio
that bank analyst Achon myself compute
which is non-performing loans divided by
tangible book value plus reserves
basically the numerators all the bad
stuff divided by the money you have to
pay for the bad stuff and one of the
great lessons about bank analysis is
that one in Texas ratio gets over a
hundred percent the bank is done and in
Italy the two largest banks are in paisa
and you credit and their Texas ratios
are at ninety percent and every other
Bank in Italy is over 100 percent so I
don’t envy Italy the problem ok famous
ahma is the country there’s the bigger
than I think it won’t come and I think
the problem with the banks generally in
Europe is that they are still under
capitalized and they they are they do
not make enough money per dollar
employed basically European banks don’t
charge enough for this
services they never have and they’ve
tried to make up the difference with
leverage and in a world where you have
to use less leverage that model doesn’t
what about Deutsche Bank quite the same
well don’t you make sort of the poster
child for that let’s think about this
this way so today if a bank has a 1%
return on asset and is loved or ten to
one the return on equity is 10% that’s
the simple formula so you know Citigroup
for example doesn’t even have a 1% ROA
but they’re not that far off but
Deutsche Bank today has a 30 basis point
ROA they need to improve their
profitability by more than three times
there’s no way Georgia Bank on its own
can improve its profitability three
times the entire European banking system
has to be price you know how that’s
going to ever happen I don’t know but
until it does your paint banks it could
be a problem
they’re going to be a problem so you’ve
been in here in London for a few hours
now and you must have realized already
that the only thing people talk about
here with breakfast yes
so what financial risks do you see
coming from brexit big question is a big
okay what will happen in March I have no
idea you have no I really have no idea
honestly I don’t think and more
importantly anybody else has any idea
that it’s going to be an adventure a not
so it’s going to be a fun adventure but
it’s going to be an adventure so you
said that we’re very bad at dealing with
crises that develop very slowly and you
put the blame on the big financial
crisis of 2007-2008 on income
distribution really do you see that
changing at all I mean let me explain
that yes because it’s not intuitively
obvious how the two are connected so you
know my thesis is that one of the
underlying causes of the financial
crisis it was bad income distribution so
you know when I say that people’s eyes
generally clays are like you know what
are you talking about
but I think that there’s a
cause-and-effect relationship in that
you know starting in the 90s when income
distribution started to get really poor
in the United States rather than focus
on that and what the solutions worth of
that problem let credit get democratized
that was the euphemism for will will
make loans to people that we didn’t make
loans to before so rather than get
people’s incomes up they let them lever
themselves [take out more debt] and one of the ways people
lever themselves was by taking out loans
on their homes and loving themselves
that way and so I think one of the
causes of the subprime mortgage crisis
is that you know post dodd-frank hard to
get a mortgage loan yeah you know
incomes have only started to start
growing again we’ll have to see what it
does the new administration can do
so it don’t Frank it’s harder to get a
loan but well it’s hard to get a
mortgage why although I don’t think that
I caused a defect of dodd-frank I think
it’s more of an effect of all the fines
that were imposed on the banks for the
mortgage crisis and so the banks I think
not unjustifiably are kind of worried
about making mortgage loans that they
might they might not should or should
not make so the financial crisis what he
said the main problem was the products
the tools available or the culture ah I
would say is one of the unsung aspects
of the financial crisis that people have
definitely not written that up about
which is psychology yes and what I mean
by psychology is you have an entire
generation of Wall Street executives who
grew up in the 90s in the early aughts
who really only had one experience which
is they made more money every single
year now what they didn’t really notice
was that as they were making more money
every single year the leverage of their
various institutions was increasing
every single year
now they thought they were making more
money because it was them but really
what was happening as they were making
more money because their institution was
becoming more levered and really what
happened was they mistook leverage for
I wrote that sentence by the way I read
that I do it’s a good son it’s a good
sentence I don’t write a lot of good
sentences but that’s definitely one of
them tweetable yes it’s very good right
if I tweeted I would tweet listen I am
so let’s imagine you went to a Wall
Street executive in circa 2006 and you
said to the CEO of you know pick the
name of your institution and you’d say
dude listen the entire paradigm of your
career is wrong you have to de-lever so
did you ever have a conversation like
that I did I’ve never told this story
before there’s like AI now it can be
told story okay um so the day is
February 2008 and I have a meeting with
the head of Risk Management and one of
the big Wall Street firms we won’t name
them anyone else today but it wouldn’t
matter because I would have had the same
it would have been the same conversation
with any of them
given what was discussion one so I sit
down with a head of risk management of
one of the big farms it’s one month
before Bear Stearns almost to the day
and I say to him you have got to de-lever
and you’ve got to de-lever now because
Armageddon is coming the point of it is
the direct that’s almost a direct quote
I used the word Armageddon and he looks
at me and he says you know I hear what
you’re saying but you know we at X we
can be much more levered to the bank now
back then there was a bank based in
Detroit called net city it was a
medium-sized regional bank and it had a
lot of subprime mortgages so it was a
bit of the topic of the day and so I
said to him you know do you know what
happens if knacks City goes down and he
says no what happens I said nothing the
regulator’s come in they seize the bank
they pay off the depositors they fix the
bank they sell the bank the government
takes something of a loss end of story
do you know what happens if your firm
goes down planet earth burns who should
be more levered and he looked at me like
I was speaking ancient Greek like he
just it was so outside his paradigm it’s
like he didn’t know I was talking about
and I realized it was over that there
was no way these guys were going to do
what needed to be done before the world
blew up but I think we’re going to see
someone to go to jail right
I mean you can have to break up the bank
partido I don’t know I don’t know I have
a feeling in a few years people are
going to be doing what they always do in
the economy tanks they would be blaming
immigrants and poor people it’s not X
equate from you is that Hollywood’s a
great quote it’s a great mark it’s not
yellow it was written by Adam McKay with
the author and director and but did you
think in those terms back then oh I
always think in those times always
thinks in terms of disaster yes why is
that just I have a very strange DNA do
you see this paradigm changing at all
this culture I was told check it steady
change they’ve been beaten to a pulp
you know the dodd-frank gave much more
power to the Fed to regulate the banks
that power was put in the hand of
Governor Daniel Tarullo and I think he’s
done a tremendous job of de-levering the
banks in the United States you know I
would say the CEOs of the bank’s fought
him kicking and screaming but I’d say in
the last year or two they gave up and I
know you said before that Europe’s done
not as good of a job with that that’s
correct why well it’s what your starting
point so you know just pre-crisis
Citigroup is levered thirty five to one
deutsche bank is lowered over 50 to one
so today’s Citigroup is levered ten to
one and deutsche bank depending on how
you calculate is probably levered twenty
five to one so everybody’s leverage is
lower European banks have always been
much more levered than US banks so
they’re still more levered they just
left levered than they were right not
they’re not de-levered enough to my taste
but that again we gets back to the Paula
Mills they’re not profitable enough per
dollar employed so the regulator’s in
Europe let them be more levered I think
it’s a mistake but that’s the way the
systems it works okay and everyone’s
asking you what the next one of the
crisis is going to be so I don’t have a
dick I know I’m not going to ask you
money I will ask you that question I say
you know everybody’s trying to pick the
next big short and I’ve done that
already I’m in no rush
okay thanks a lot Steve Eisman thank you
Trevor Noren, managing director at 13D Global Research and Strategy, discusses how the concentration of wealth and corporate power is shaping his macro perspective. He sees the past three decades of industry consolidation as root causes of the problems that the American economy currently faces: stagnant growth, increasing wealth inequality, and a QEdependent stock market. Noren predicts that this trend of consolidation will reverse, and he sees significant investment potential in gold, small cap stocks, and companies leading the decentralization movement. Filmed September 26, 2019 in New York.
Real Vision CEO, Raoul Pal, examines via Skype the recent turmoil with an international cadre of outspoken experts: monetary economist George Selgin, George Goncalves of The Bond Strategist, Scott Skyrm, executive vice president at Curvature Securities, and Dr. Z. Barton Wang of Barton Research. Join Raoul on this voyage of discovery as he discusses repo and more with some of the sharpest minds in finance. Filmed on January 31, 2020, in Grand Cayman.
< 8 min: I tend to agree with the Fed that the current repo operation is not QE, but that having a standing repo facility handles high demand (like at the end of the month)
There are multiple factors that combine to increase liquidity demand.
12 min: The balance sheet is never going to go down.
13:30 min: The Fed and Treasury don’t appear to be talking. One theory is that Mnuchin is trying to force the Fed’s hand
17:26 If we have a recession, we will see genuine QE that no one can deny.
I worry that they will resort to QE even if there isn’t a recession.
- corridor vs floor system
~19:30 There is a lot of leverage that keeps asset prices high and liquidity is necessary to support this.
I’ll all for the Fed providing liquidity, but there should be a penalty rate
20:10: I agree that QE will happen and it will arrive quickly.
The next QE will be done in such a technical way as to “bore” the public.
33 min: The Equity Markets believe they are doing a version of QE.
(QE) is like a calibration thing.
They are going to have to steepen the curve.
44 min: Most of the Hedge Funds that want cash want it first thing in the morning, but other players come in later (New York time)
48 min: Is excess leverage behind this?
55:50: So what you’re saying is that they can’t run such a large deficit. In a recession they could run a larger deficit.
1hr 01 min: To me, it smacks of leverage (from hedge funds)
1 hr 04 min: Why is the (Fed) balance sheet affecting equities?
According to Basel 3, Banks need assets at the Fed to participate in Repo market
- A lot of banks weren’t able to participate in the repo market,
- This affected the hedge fund’s ability to use leverage from borrowed repo money
- The repo market is the liquidity factor for leverage
- Higher repo interests spikes (2% -> 10%) caused the hedge funds to liquidate their positions
- The equity rallies are a direct consequence of the Fed Repo Liquidity
- Hedge funds are using the liquidity
The Fed is now going to be permanently involved. They messed up and now are going to oversupply, which they don’t view as a big problem.
1 hr 10 min: Treasury Securary Mnuch announced ..
They have tons of ammo to dump money into the economy right before the election.
Bond yields are collapsing.
If the US Dollar Collapses, European and Japanese will not be able to play in Equities so much and Equities could fall.
- Euro Dollar funding depends on Basel 3 regulations
1 hr 14 min: A steeper yield curve helps foreign buyers of Treasuries
- This means that they will likely have to cut rates (given corona virus and deficits)
- They will probably be forced to cut rates soon.
Bonds give better signals about the economic cycle than Stocks.
1 hr 18 min: It all depends on Treasuries (for equity) they have so much cash they can flood the market with $40 billion any time they want. Their action is the biggest contributor to volatility.
Is Mnuchin essentially using this as an economic weapon in his ability to micromanage the economy? (before the election)
I don’t know but he has a lot of ammo. It looks suspicious. We should ask him in his press conferences.
If he decides he wants to put money in his checking, there’s nothing the Fed can do about it without blowing up the markets.
This is unprecedented except during the financial crisis.
Treasure has become the marginal provider of liquidly and that who we should watch.
The Treasury General Account is the “nuclear weapon”.
There is a potential dollar collapse in the future. Markets can’t get enough dollars.
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.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
The strength of the dollar is going to cause such chaos in the global monetary system that
the safe haven that gold has always provided, I think, is going to become into higher demand.
And there will be a point where they rise together.
This isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying, go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different than what the typical person thinks.
I’m really happy to be able to come onto Real Vision today, because I haven’t been this
excited about markets in a very long time– not because I think everything is going to
be easy, and things are fine, but really, because I think everything is bad, and it’s
going to be very hard.
But I think that it’s also going to present a lot of amazing opportunities for those who
can kind of see through the fog of what the markets are going to do over the next year
to two years.
Now, I’m sure over the next 30 or 40 minutes, there’s going to be a few of you out there
who agree with what I say.
But I know for a fact that there’s going to be a lot of people who disagree or who maybe
agree with part of what I say, but who are going to disagree with a lot of what I say.
And there’s also going to be some people out there who absolutely disagree with everything
And that’s fine.
What I’m asking you to do now is, at least for now, let’s put aside challenging me, and
just actually listen to what I say and think about how I might be right.
And if it turns out after you’ve actually thought about it and more than for a minute
or two, and you still want to have a conversation to discuss it, I’m more than happy to do that.
We’ve seen a nice bounce in the dollar after losing 10% to 12% on the dollar over the last
12 to 18 months.
So I think it’s a good time to discuss this.
I really think the dollar move higher is really just getting started.
Now, that doesn’t mean that there’s not going to be starts and stops, and in the short term,
it’s probably due for somewhat of a pause or even a short pullback.
But one thing I want to get across to people is this move is only just getting started.
The dollar, in my opinion, is going to go much, much higher over the next year to two
And so as I get into what the actual dollar milkshake theory is, it really comes down
to the fact that I think the whole world is really one trade right now.
And it’s the trade on the dollar.
Everything wraps around the dollar.
I’m going to talk about gold after a while, but I think even gold– all roads go through
So even though I’m very bullish gold long-term, that road also goes through the dollar.
And so at the end of the day, why I think the dollar is so important is because whether
you’re talking about a company, whether you’re talking about a family, or whether you’re
talking about a country, everything comes down to cash flow.
Everything investing ultimately comes down to cash flow.
And if you don’t have enough supply of cash, then you need flow of cash coming through
to keep operations going.
And I really think that’s where the whole monetary system is right now.
And that’s really the heart of the dollar milkshake theory.
And so I’m going to get into that as we go further into the conversation.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
But I think the road to badly is much different than a lot of my peers think it is.
To get really into the theory, we all know that the central banks of the world injected
$20 trillion of new money into the global economy over the last 10 years.
And I kind of title this as this is the milkshake that all the different countries created.
They pushed down on their syringes, and they injected this tons of liquidity into the market–
euros, yen, pounds, yuan, dollars.
And they created this soup or this milkshake of all this liquidity out there.
But now, while the rest of the world is still pushing down on their syringes, the United
States has– we’ve gotten this monetary policy divergence, where we’re not using a syringe
We’re no longer injecting liquidity.
In fact, we’ve swapped out our syringe for a straw.
And so as we lift up on our interest rates, that sucks that liquidity to the US domestic
It sucks that liquidity up into our domestic markets.
And I think it’s going to push asset prices higher.
In other words, we’re going to drink the milkshake that the rest of the world is still mixing.
So the implications of this milkshake theory are several, and I’m going to try to walk
through them step by step.
But they really kind of all happen at the same time, and they all kind of go on at the
So while I’m going to try to walk through this linearly, I don’t want you to think of
it as necessarily a progression.
One might happen before the other.
They might happen at the same time.
But it’s really this soup.
It’s this milkshake that we’re dealing with.
So there’s three main implications of the theory, and the first part of the theory is
that the US dollar is going to strengthen.
And when I say the US dollar is going to strengthen, I don’t mean that it’s going to
strengthen a little bit.
I mean it’s going to strengthen a lot, and I hesitate to use the
word “supernova,” but it has the opportunity to really break out to incredible highs.
The second implication is that this dollar strength is going to lead to all kinds of
trouble in the global marketplace, specifically in the international markets and the
And finally, the third implication of this is it will ultimately react into
a currency crisis.
And we’re already starting to see the beginnings of that.
The monetary system is just not designed for a
So the implications of a strong dollar are really profound.
It really comes down to the flow that I was talking about earlier, but it’s the monetary
policy divergence as interest rates differentials eventually pull flow into the dollar.
Now, that hasn’t happened for a while.
The first part of the year, it didn’t look like
interest rate differentials mattered.
But you’re starting to see with a two or three-month lag that it actually does matter.
We’re also in a period where there’s not only this
increasing demand for US dollars due to the flow into the higher interest rates, but
we’re also– it’s compounded by the fact that we now have a situation where supply is
So you have increased demand with contracting supply.
That’s through the quantitative tightening that the Fed is
The other thing is that demand for dollars– there’s a lot of talk about a lack of
demand for dollars.
There is an incredible amount of demand for dollars just to pay
the interest on dollar-based debt in the world.
Now, a lot of people will focus on the $20 trillion that the United States government
And that is a problem.
I’m not going to deny it.
But the fact is that there’s another $20 trillion outside the United
States, either through direct dollar loans or the shadow dollar market, that
international entities own.
Oh, and those are dollar-based demand that they need as
And so if you add up all the dollar-based debt in the world, and if you just assume
that all that debt has the same rate as the US Treasury, which is 2.3%, which is
There’s no way that that’s what all these different loans are actually made
at, but if they did, there’s over a trillion dollars a year in demand for dollars just
to pay the interest on the dollar-based debt.
And that stays the same, whether– even if people totally move away from the dollar and
never borrow another dollar going forward, there’s still a trillion dollars
in demand to service the existing dollar-based debt.
And the reality is it’s probably twice that high.
It’s probably $2 trillion.
Now, another reason is that– we’re getting into a period where the dollar is going to
go higher– is that the US debt ceiling is now gone.
And we’re at a place where the government is providing fiscal stimulus.
And this provides increased demand.
And what I mean by that is a year ago, we bumped
up against the debt ceiling, and we could not issue new bonds.
And so the checking account that the US government, that
the Treasury has at the Federal Reserve, had about $500 billion in it.
And they drew that down to less than $100 billion.
So they pushed $400 billion out into the system.
That created supply of dollars, and that’s part of the reason why the dollar dropped.
That’s completely flipped now.
Not only is the government not pushing that $500
billion or $400 billion out into the market, but they’re actually entering the
dollar market to get funding.
They’re selling bonds in exchange for dollars.
So you have a situation where the supply of dollars is
no longer increasing, and now you have the biggest buyer in the world– the US
government– entering the dollar market, buying dollars, competing with everybody
That’s a recipe for price to rise.
Another part of the cash flow back to the United States theory is the US repatriation
after the new tax bill.
A lot of people didn’t think that even if they passed it,
governments– or I mean corporations– wouldn’t repatriate.
But we are seeing a repatriation.
And I think one thing a lot of people forget is it’s not just US corporates
repatriating cash back to the United States.
Foreign banks, foreign entities can also send cash back to United States, and they
can get that higher interest rate on doing it.
Now, if you don’t think that’s possible, just go look at the breakdown of the reserves
of the Fed.
Over half of the reserves, bank reserves at the US Fed, are from
So not only are they going to do it, but they’re already doing it in
a big way.
Now a fifth reason that the dollar will gain some of this flow coming from around the
world is that as the dollar does get stronger, it creates chaos everywhere else.
And so the dollar will start to get flow just from
a safe haven demand.
And we’re actually starting to see this already.
We’ve got problems in Turkey.
We’ve got problems in Italy.
China has just recently come out and said they’re probably going to have to
lower their reserve ratio requirements and provide stimulus at some point over the
So we’re already seeing that the strong dollar is impacting other markets.
And I don’t really have time to get into the whole euro
situation, other than to say that the euro is
just– I mean it’s really a disaster.
I really don’t know how else to say it.
It’s just not a currency that is going to be able to function
They have all the same problems that we do.
Their balance sheet is bigger than ours.
They’re still providing stimulus.
They don’t really have a way to draw down the stimulus.
And they’ve also got the political problems on top of it.
So as people real– and they’re overregulated.
The number of regulations that have gone on in the EU in the last two years are
dramatic, and we’re already starting to see the impact that that has on corporations.
So I think all of these five combined are really going to push the flows back to the
So one of the arguments that I often hear is that, what if people just leave?
What if they default on the dollars that they owe
and just go off to a new agreement that they’ve created?
Would that cause chaos?
It would absolutely cause a lot of chaos.
But is it possible?
Yes, it’s absolutely possible.
And that’s one of the reasons, by the way, you should own gold, because you
never know what could happen.
That said, one thing you have to realize is if these people default on their dollar
loans, and they leave, and they go somewhere else, in a debt-based monetary
system, it’s not just the debt that leaves.
It’s not just the obligations that leave.
Money disappears as well, because in a debt-based
monetary system, when debt gets defaulted on, money evaporates.
And if money disappears, that means supply falls.
So if you think about this like a musical chairs example, and we’ve got a number of
digital or paper participants swirling around the limited number of monetary base
dollars that actually exist, if some of these players decide they don’t want to play
anymore, and they leave, and they default on that debt, that’s fine.
But when they leave, money disappears as well.
So the chairs disappear as well.
And if the chairs start to disappear at the same
rate that the obligations disappear, if you get supply falling even faster than demand,
price still rises.
So I don’t buy that argument that they can just walk away and
that there won’t be any chaos and any implications involved with that.
Another thing I would say is even if they do raise rates, and it does cause a recession,
well, then, that means the US is now in recession, and the rest of the world’s biggest
customer now have a cold and cannot buy all the goods from those other countries
that they were selling before.
So that has a knock-on effect to EM, and I actually think
it hurts EM and international more than it hurts the US.
So even if that does turn out to be correct, I don’t think that that’s necessarily
Now, the big one that I always hear is that the Fed is going to have to– again, they’ll
have to– they can’t keep raising rates, so they’ll have to reverse course, and they’ll
actually have to implement QE again.
And that’s not going to happen either, in my
And the reason that I don’t think that that’s going to happen is because the
whole point of QE is to provide artificial flow from somewhere outside the current
That’s the whole point of buying the bonds to get that injection.
When the Fed would buy bonds, they would inject currency
into the system.
So if you can get that injection of currency into the system from somewhere other than
the Fed, then the Fed doesn’t need to provide it.
And this is the heart of the dollar milkshake theory.
The rest of the world is still providing an incredible amount of
stimulus into the market.
But we’re the only ones with a straw.
Everybody else is pushing the liquidity out into the market.
The Fed has a straw, and they’re sucking up that liquidity.
And as they suck up that liquidity, that is an injection from outside the
domestic market into the market that allows the flow to keep happening.
And that is no different than QE if we were doing it ourself.
Just because they’re operating QE out of Tokyo or out of Frankfurt doesn’t mean that
those dollars or that liquidity– the euros, the yen, whatever– stays in those domestic
In a global marketplace, all those assets can flow to the US, and I think that’s
what’s going to happen.
And that is literally the heart of the dollar milkshake theory.
It doesn’t really matter who provides the QE.
What really matters is who captures the QE.
And with our higher rates and relatively better economy than the rest of the
world, we’re going to capture that QE.
One of the other arguments that often gets made is the fact that if the Fed continues
to raise rates, then it’s going to invert the
Now, I can’t argue with that.
If you look back at history, whenever the yield
curve inverts, it almost always does lead to a recession.
But what many forget to put forth when they put forth this argument is
that the length of time from when it inverts until when it goes into recession is typically
18 to 24 months, and that goes back on several occasions as well.
Not only that, but what happens during that 18 to 24 months is typically a speculative
And that leads to the blow-off top.
And if you think about it– and I can’t prove this– but if you think about the typical
yield curve that a bank would want, they want a very steep curve.
They want short-term interest rates and high long-term interest
They want to lend long, and they want to pay short, and they make that
Well, if that’s great for the banks, that’s probably not great for the speculators.
But if you reverse it, and you get into an inverted
yield curve, that’s not good for the banks, because they’re having to pay short and lend
long, and they’re upside down.
But if it’s bad for the banks, who takes the other
side of the banks’ trade?
Well, that’s the speculators.
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
And that’s why I don’t think that an inverted yield curve– I don’t think it’s
negative for the dollar, and in the short term, I
don’t think it’s negative for the markets.
OK, so where does all this lead?
What does this dollar milkshake mean to us in the
Well, I think what it means is that we haven’t seen the blow-off top yet.
I still think it’s coming.
I think equities are going a lot higher.
And again, this isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different
than what the typical person thinks.
And I think that as we get into this inverted yield curve, as we get into problems
around the world, as we have currency crises, the United States is going to be seen
as a safe haven.
And all roads go through the dollar.
And when that money flows into the dollar, it eventually goes into US
And I think it’s going to push equities to all-time highs.
I also think that it’s going to have a big impact on bonds.
Now, I’m of the opinion that interest rates are headed higher.
I don’t necessarily think that bonds are going to
crash, but I think they are going to break.
And I think that that is going to have a big impact on assets as well.
Now, there’s no doubt that there’s going to be some
moments of pure panic and terror along the way.
I’m not sitting here saying that bonds are going to fall, equities are going
to go up, and it’s all going to be smooth.
I don’t think that at all.
I think it’s going to be really frightening at points.
But I think rates are headed higher.
And when you think back to the fact that there’s been a 40-year bull market in bonds, that
means somebody could have invested their whole life for 40 years and been a fixed income
investor and made money quarter after quarter, year after year, decade after
They have never really lost money on bonds as long as they were buy and
Sure, along the way, maybe they did some trading of bonds where they
lost money, but essentially, nobody has lost money in bonds in 40 years.
Well, now we have interest rates heading higher.
We seem to have broke out of the chart of truth.
Will we retest?
Will there be some moments where bonds rally?
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.
If you have made money on something for 40 years in a row, and then all of a sudden,
you wake up, and you’ve lost money, it’s kind of like the turkey at Thanksgiving.
They have 364 great days, but that 365th day is kind of a nightmare.
I think that can happen in bonds.
And as funds flow out of bonds, I think a lot of that’s
going to flow into equities.
And so all of this– again, I’ve kind of walked through this
linearly, but this is really all going on at the same time.
And as we’ve got a period where interest rates are headed higher, I
think around the world, as bonds start to break– not crash, but as they break– and
funds start to flow out of it, as dollars flow–
as funds flow into the dollar and push asset prices up, I really think we get into this
George Soros talked about it in his book, The Alchemy of Finance.
You get into a place where dollar strength begets more dollar
strength, because as the dollar strengthens, it causes all kinds of problems
And as the yen gets into problems, people seek out safe haven back
into the dollar.
Now, gold will, obviously, I think, be a beneficiary of this.
But I don’t think people around the world are going to sell everything
they own and put all their money into gold.
In fact, we don’t need them to put everything into gold.
They can just put a little bit into gold, and gold does really well.
But I think the dollar is going to be the big
beneficiary, and I think, again, as I’ve said many times, all roads go through the
So of course, as always, I have a lot to say about gold.
I think the first thing I want to get across is that my thesis on gold has not
Everybody should own gold.
It should be part of everybody’s portfolio.
And I’ve said for a long time that gold is going to go to at least $5,000.
That hasn’t changed.
Gold is going to go to $5,000, and the reality is it’s probably going to
go a lot higher than that.
But you know, for anybody that’s trying to put me– peg me down
as far as time and price, I’ll say $5,000.
Now, I don’t know if I’m going to necessarily tell you exactly when, but I still
think gold goes to at least $5,000.
The only question is when.
But part of the other thing is that– part of the reason that gold will go that high
is because it will be at least part of the solution
when this horrible system that the central banks have created eventually comes down.
This dollar milkshake theory is not one in which the dollar remains the world reserve
I think we’re going to get to a place where the dollar gets so strong, they’re
going to have to come to some new kind of Plaza Accord or some kind of a system
where they dramatically reduce the dollar.
But it’s not going to be that we reduce the dollar, and people are mad at us.
I think the world’s going to beg us to reduce the
value of the dollar, because the strong dollar, quite honestly, it just breaks the
entire monetary system.
It breaks international markets.
It breaks the emerging markets.
And it actually is, in the long term, not great
for the US market either.
But it doesn’t mean it’s going to happen right now.
So I think over the next couple of years, the dollar goes much, much stronger.
I think initially, that breakout is going to
surprise a lot of people.
I think it’s going to create a lot of chaos, and it will ultimately
be that chaos that makes gold go a lot higher.
I tell people all the time that a lot of the typical gold theory is that dollar gets
inflated away, and gold goes through the world, goes through the roof.
And there is that view.
But there is nothing that is more long-term bullish for gold than a strong dollar.
Before we get into that, let’s talk about a little bit why gold, quote, unquote, hasn’t
worked for the last several years.
Well, the reality is I think gold has worked for the
last several years.
Many of us in the gold world got it wrong as far as timing when it
would work in US dollar terms.
But if you’re not a US dollar investor, and you lived in
Cyprus or Russia or Argentina or Venezuela, gold works just fine.
Gold did what it has always done for 5,000 years.
It’s provided a safe haven when things got bad.
And the reality is that things did not get worse here in the United States over the last
five or six years.
And as a result, gold has not performed as it has in those other
But it doesn’t mean that gold isn’t working.
I think a lot of the pain and a lot of the frustration with those in the gold world that
are feeling the frustration from gold not having done anything are those who bought
gold as a speculation, not as insurance, or it’s those who told themselves they bought
it as insurance, but really bought it as a speculation or a get rich quick scheme.
If you bought gold as a hedge against the rest
of your portfolio and the rest of the world blowing up or all the spinning plates that
the central bankers have going crashing, then gold is still working, because the reality
is the plates have not crashed yet.
There’s no doubt that they will, but they haven’t yet.
And so gold hasn’t needed to do anything.
But gold’s been around for 5,000 years.
It’s always been, at least from a market perspective, a currency and the last currency
of resort, and that’s not going to change over the next 5,000 years either.
So if you’re a gold investor, and you have it in your
portfolio, and you didn’t put all your money in gold, you’re probably just fine.
So now there’s also many people in the gold world who will say that the only reason
gold hasn’t worked for the last five years is manipulation, that the decades long gold
manipulation scheme between the central banks, the governments, and the
commercial banks have worked together to keep the price of gold low.
Now, even if you take that view, the fact is you are still
wrong, because if you– this is not a new theory.
This manipulation theory has been out there for decades.
Anybody who’s spent more than five minutes in the gold world
knows about this theory.
So if you bought gold five or six years ago, four years ago, whatever it is, and you
were wanting it to pay off much quicker, and it didn’t, because you think it’s been
manipulated over that time period, well, the only reason you would have bought it
four or five years ago is not because it wasn’t manipulated.
You knew it was manipulated.
The only reason you bought it then was because you thought that the
manipulation was going to fail.
And the reality is the manipulation hasn’t failed.
If you subscribe to the view that gold has been manipulated
lower, then the manipulation is still working.
And so I think it would help a lot of people in the gold world if we would just admit
that we’ve been wrong for the last five years.
I didn’t think that the monetary authorities could keep the plates spinning
for another five or six years.
I thought it would come down much sooner than that.
I was wrong.
The plates are still spinning, but it doesn’t mean that gold has failed.
It just means we got timing wrong, and I think the fact that if you say the words, “I was
wrong,” it’s very freeing.
It actually takes a lot of pressure off you, and you can actually
then move on to the next step and say, well, why was I wrong?
Why did the gold not go up?
Why are the plates still spinning?
And I think that will help prepare you for the next five or six years.
So now let’s talk a little bit about the dollar milkshake theory and how it applies to
Well, I think it largely depends on where you’re sitting and in what currency
You know, if you’re an international person or entity, and you
are not denominated in dollars– I don’t know if you’re in euros, or you’re yen, or
you’re yuan, or bolivar, or whatever you are– I think you can probably pretty much
back up the truck and buy over the next couple of months.
I think the dollar is going to get a lot, lot stronger.
But if the dollar gets a lot, lot stronger, that means a lot of
these other currencies are getting a lot, lot weaker.
That means gold, in those terms, is probably going to go a lot, lot higher.
It would not surprise me at all if these other currencies of gold rises 15% to 30% over the
next 12 to 18 months.
I think that could easily happen.
So I think determine where you’re at and which currency you’re denominated before
you just say, gold is going up or down.
I think that’s a very important point to make.
Now, I think it gets a little bit more complicated if you’re a dollar investor.
I have said for over two years now that I think eventually,
we’re going to get into a situation where dollars and gold rise together, and
I still firmly believe that.
The strength of the dollar is going to cause such chaos in the
global monetary system that the safe haven that gold has always provided, I think, is
going to become into higher demand.
And there will be a point where they rise together.
Now that said, for those of you that heard me say gold’s going to $5,000 earlier, I
want you to keep those positive feelings that you had when I said that, because I
don’t know that it’s going to happen over the next five or six months.
In fact, I think there’s a good chance that gold goes lower
in the short term.
It might not, and if it goes higher, I will embrace the break-out,
and we’ll be on to probably another five or 10-year bull market in gold.
But I’m just not sure that it’s going to break out yet.
We had another great opportunity this spring to break out, and it didn’t happen.
And I think with the move that the dollar is going to make over the next six to 12 months,
I think it will be very challenging for gold to break out initially with that.
And so I think if you are a US investor or a dollarbased
investor, I’m not saying that you should sell your gold.
The gold theory is still very much intact, but I’m just not convinced
it’s going to break out right now.
So as far as gold and the dollar rising together, I know that seems kind of
But at the end of the day, I really don’t think it is.
They’re both currencies, and they’re both measured against
all the other currencies in the world.
And so I think in the same way that the yen and the euro could rise together, dollars
and gold could rise together against a number of different fiat currencies.
Again, I don’t think that– I’m not even sure that
the dollar bulls have a proper appreciation for
how much damage that the dollar bull market is going to cause.
Again, the design of the monetary system was just not built for
a strong dollar.
And when it gets going and rocking and rolling, it is going to cause all kinds of
And that should be very good for gold.
When markets start melting down, and when chaos starts to happen, and confidence
starts to get lost, and you can feel the panic in the streets, that’s typically
great for gold.
And so whether or not things panic and break down in the United States,
if they panic in Europe, or if they panic in
Africa, or they panic in Asia, that’s a good opportunity to provide a chaos trade, so
to speak, or a safe haven trade.
And I think dollars will benefit from that, but gold
will benefit too.
And again, we don’t need everybody to sell everything they own and go buy gold.
The gold market’s very small on a per capita basis.
We just need the rest of the world to put 1% or 2% of their assets in gold, and
So we don’t need a mass exit out of fiat currency into gold for gold
to do very well.
The other reason that gold and the dollar can rise together is that we talked about
gold being a small market.
Well, if the dollar is rising a lot– and I mentioned other
currencies would be going down a lot– if those investors do start seeking out gold,
if Europeans start buying gold en masse, or the
Asian continent starts buying gold en masse, that can have dramatic implications
for supply of gold.
And so again, we don’t need it to be really big for it to impact.
And that’s another reason why, even though the dollar may be getting a safe haven
trade, that gold can get a safe haven trade as well.
And once we get to a place where the dollar and gold is rising together, I mean then
it’s just really rock and roll time.
I mean that’s just where the gold really starts to go
And then I think in a couple of years from now, whether it’s 2020 or 2021, after
the dollar has caused all this damage, the global authorities will have to get together,
and they will either have to, at that point, weaken the dollar either through QE or
some type of Plaza Accord, or maybe they introduce a whole new monetary system,
whether it’s an SDR or whether it’s a combination of a basket of assets.
I don’t know what it is, but what I know is that the monetary system, as it’s currently
designed, has a dramatic flaw.
And that dramatic flaw is about to be thrown a real
curve ball with the dollar getting stronger.
And that should be good for the US dollar.
It should be good for gold, and it should be good for those who are prepared.
A lot of people say that nobody sees the fact that the dollar has this problem, that
they have all these liabilities, all these unfunded liabilities, that our trading partners
are wanting to move away from the dollar.
I just don’t think that’s the case.
I think a lot of people see that this is a problem.
I think a lot of people want to leave the dollar.
I think there’s a big mistake in saying that this is a small problem that a few
people have discovered and that they’re going to profit wildly when the dollar gets
thrown by the wayside.
I go to meetings all the time.
I talk with investors all around the world all the time.
I can’t remember a meeting in the last couple
of years, where it either wasn’t brought up already or that I didn’t bring it up about
the dollar and its status in the world, that everybody around the table wasn’t familiar
with the issue.
Never once has anybody said, well, what are you talking about, “leaving
Everybody starts nodding their head, and everybody starts putting their
two cents in.
I think a lot of people have talked– or I think a lot of people have thought about this.
I don’t think this is some small issue.
I don’t think anybody’s come up with a real answer, but I don’t think it’s an issue that
nobody knows about and nobody discusses.
Now, even though I don’t think gold has got it wrong over the last five or six years,
and while I don’t think gold has stopped working, per se, I think gold is doing exactly
what it has always done.
Again, I think, as I alluded to earlier, I think we’re the ones that got it wrong.
Now, why did we get it wrong?
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?
We got that wrong.
It was inflationary to asset prices.
Real estate went higher.
Equities went higher.
Some commodities went higher, but some commodities
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
And so the fact that $20 trillion pumped into the economy was going to
create hyperinflation– it didn’t happen.
We got that wrong.
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
into the same hypocritical arguments that the traditional Wall Street does.
I have a lot of friends in the gold world.
I have a tremendous amount of respect for them.
Most of them are my friends.
If you’re in the gold world, and you’re not my
friend, I think it’s probably because we didn’t spend too much time together.
But I do think that we can do ourself a lot of good
by kind of taking a step back and really trying to understand why gold didn’t do well
over the last five years.
Just admit that we got the timing wrong.
There’s nothing wrong with that, because just because we
got the last five years wrong, it doesn’t mean that we’re going to get the next five
I mean, in fact, I’m pretty sure we’re going to get the next five years right.
But I think in order– for credibility’s sake or to be
able to take a step back and be objective and
try to really understand why gold didn’t break out in dollar terms over the last five
years, I think it’s important to just acknowledge that we missed something along the
Now, somewhere else where I think you can see it is in equities.
Now, at the beginning of the year, I said I thought that
equities were going to go higher.
I thought they might very well have a 5% or 10% correction
before that happened.
I said I thought it would be nice if we had it.
It would be helpful.
Well, we got it.
So kind of be careful what you wish for.
But if you look at equities, both the S&P and the NASDAQ are both in a wedge
And I think they’re kind of near the bottom of that wedge pattern.
I’m not saying it’s going to be a straight line, and
it’s going to be easy, but I think we’re going to move higher to the top of that wedge pattern,
and I think we’re going to break out of that wedge pattern.
I think equities are going higher.
I think the Fed’s going to continue to raise rates, and I think this
dollar milkshake theory is really going to get
So again, I’m really excited about where markets are headed, not because I think
things are going to be easy.
I actually think they’re going to be hard.
I think they’re going to be scary.
But I think they’re going to be fun, to be honest.
I think they’re going to present a lot of great opportunities.
And I think if you have a plan for how to get through it, I think the opportunities
are actually pretty incredible.
I think one thing to remember is never be closed off to any ideas.
I always consider everybody’s arguments that they send back
I’m happy to think about them.
It doesn’t mean that I’m giving up on my own opinions, but I think one of the
most important things to do over the next couple of years is keep an open mind.
I think we’re going to see things happen that
many people just don’t think can happen.
And I think that for those who kind of stay nimble and have a plan, there’s going to
be an opportunity to make some good profits in the years ahead.