the largest household expense for most American Working Families is tax greater than shelter greater than food greater than energy and greater than Transportation combined so the idea that a measure of the purchasing power of the dollar doesn't include tax wow you know it's 40% of the household expense of so-called middleclass households um that's pretty crazy hey welcome to this video I've got my friend Rick rule as a guest again Rick how are you doing uh the better for being on with you Mike thank you thanks
okay so uh just before we started this recording here uh we were talking about natural interest rates and Jim Grant uh can you know I haven't kept up with this as much as I should uh everybody I don't know if you always have this feeling but I've always got this feeling that I'm running as fast as I can and I just cannot catch up with everything I guess last Point first uh one of the joys of being 70 now is that I don't try and keep up on all topics I sort of ration ration my time
and uh effort and pay attention to that which I either really like or I feel is really important there was a bunch of stuff probably for both of us Mike that we were in our 30s uh decided was important that probably wasn't and ration rationing our time uh much as we would prefer that our government rationed the expenditure of our money uh I I think turns out to be part of the wisdom of age I know that's where you not where you started the conversation for but it was an interesting segue yeah well uh you said
the government would like us to ration our money with its currency first of all but uh they would like to take an enormous portion of it have us ration our expenditures but then they will not ration the expenditures of the stolen capital from us yeah it's an interesting point you make I was looking in various uh sort of social media Outlets this morning and a couple things struck me one was a discussion out of Canada uh where the person who runs the Central Mortgage and housing Corporation of
Canada uh admitted that the government's supposed plans to build 3.5 million houses was a lie and I thought back about how many of these lofty goals had everything to do with being elected and maintaining faith in government and not very much uh involved in the meeting of the goal uh about five minutes later there was of course a disc discussion about bracket creep uh the fact that inflation is really a tax uh as the purchasing power of your capital gains uh savings and income declines with infl inflation you
pay more tax and get pushed into higher rates if the tax code was actually about Equity of course uh these rates would be index to inflation so I think we can do away with the sense uh that it's about anything other than the fact that the government wants the money but the thing that really piqued my interest this morning was a discussion coming out of Jim Grant who's one of my absolute favorite observers you know I love Jim he he's the one who coined the phrase I think around government bonds return free risk yes he
is the interest rate that's paid uh is so far below the purchasing power uh the diminishment of the purchasing power of the security that the 10-year bond is an example uh ultimately is a way to uh to uh take uh a portion of your purchasing power every year for 10 years and so there was there was really a lot to learn this morning in the news I'd love to talk about any interesting back in the 80s treasuries were called certificates of confiscation right right They confiscated yeah and you know we've we've talked
about this before but maybe for the audience who hasn't listened to our conversations before we should go through a little arithmetic uh the important preamble to the arithmetic is that I don't and I don't think you do believe that the CPI uh is really a measure of inflation I coined the term the CP li My First book yeah you're with Jim Grant I mean listen it first of all it's hedonistically adjusted right which means that a bunch of big thinkers tell you what your computer's actually worth
which is different than what you paid for it and they tell you what your house is worth which is different than what you paid for it then of course what it's inconvenient they don't include food or fuel yeah a car cost less than it did back in the 80s yes yes anybody who looks at me knows I like to eat so an index which doesn't cover food and fuel is from my point of view strange but the strangest thing of all to me is that the CPI doesn't include tax the largest household expense for most
American Working Families is tax greater than shelter greater than food greater than energy and greater than Transportation combined so the idea that a measure of the purchasing power of the dollar doesn't include tax wow you know it's 40% of the household expense of so-called called middle class households um that's pretty crazy so if you take that as a preamble I did some probably inaccurate calculations about the deterioration of the purchasing power of my own savings against the basket of goods and services
that I consume mostly tax uh and what I believe is that the purchasing power of my savings is declining at about 7% compounded fully loaded Williams Shadow stats of course would come with a higher number but I don't need to use a higher number to make the point so let's get back to the arithmetic the US 10-year treasury pays you what 4.3 I think currently uh in a currency where the purchasing power is declining at 7% compounded that's pretty ugly math what the government is saying is that they're
going to take away 2.6% of your purchasing power a year for 10 years a promise which I'm certain that they'll keep um but that sort of bothers me I mean it bothers me personally but the truth is I've been lucky I've worked hard I don't have much to worry about in my life it bothers me a lot more for younger people uh it bothers me for people who don't at least understand uh Mike the nature of what's happening to them uh I I I think it's bad economics but I also think it's a
moral uh and I I I love the chance that you give me to talk about it well it is immoral and uh most people do not under you know most people are sort of confused and wondering what is going on and uh I'm I'm so glad that you introduced this equation into it that you introduce tax into the equation I should say uh because I'm going to use that from now on uh this is really important uh I would encourage John Williams also to come up with a a CPI that includes uh the tax brackets and the fact that
you know the average income uh is being pushed into higher and higher tax brackets all the time when they've got inflation not only does your dollar purchase less but you have to ask for a raise eventually if you're a salaried employee you have to ask or or if you're on a wage you have to ask for a raise and get more to be able to live the same lifestyle except that pushes you into a higher tax bracket so a lot more is being taken for you know it's it's a vicious spiral uh and it's out of
control does this at all seem sort of like an end game to you the stuff that the government is doing there is no uh constraint or restraint when it comes to their spending the deficit spending and so on um it seems like they've completely lost their minds to me and you talked about the immorality of the whole thing so I I guess I guess the voters have lost their mind um the voters are uneducated though on how economics works this is one of the main things when they vote for things they don't understand exactly
they they're presented with one half of the equation and that's what they're voting for they don't know they don't understand the other half of what they are voting for and that half is well how are you gonna pay for it I think you're generous with the fractions uh I think that the voters are very good at feeling yeah uh and they respond to narratives well and I don't think that they're so good at arithmetic uh I think the voters are probably fairly bad about thinking now
they can be excused for this in the sense it's much more fun and it's much easier to feel uh and much more difficult uh to think when the voters think about inflation if they do think about inflation first of all they think about the CPI which as you suggest is a lie uhuh uh the second thing uh about inflation is that oddly uh it benefits the rich more than anybody else uh a period of low interest rates like we went through lower interest rates which we went through for 40 years uh and high at least replacement
cost inflation benefited old fat bald Rich guys like me I had access to credit I had the education to understand how to apply the credit uh I bought real assets uh and my cost of capital was below what it would be in a normal set of circumstance at the sort of circumstances at the same time as the replacement value of the assets I bought you know things like almond Groves apartment buildings increase uh I ironically these government programs if you are clever enough to dodge them uh worked out very
well but not in the way that either the politicians uh I I think or the voters uh intended them it's interesting to see now that uh Jim Grant suggests the conundrum that the natural interest rate uh which is to say the interest rate which would attract private Capital relative to the deterioration of the purchasing power of the dollar is quite high and there is some fa some some threat of a failed auction treasury auction which means that uh from his point of view the probability uh is that
the nominal or false interest rate stays higher for longer than other people believe he also says that if that doesn't occur uh if there is a Fed pivot that uh it will have a profound impact uh on faith in the market uh and perhaps uh an impact on Market liquidity I'm not not saying this is going to happen Jim Grant is better at stuff than me you know I'm I'm just a credit analyst not an interest rate analyst but it really truly is an interesting conundrum and I think it's something that all of your
listeners need to take into account uh with their own actions which is the reason why I was so eager to have this discussion today hi I just wanted to take a moment and thank you for subscribing and mention that if you'd like to help our Channel please pleas consider my company goldsilver.com the next time you buy precious metals we're one of the most trusted names in the industry our prices are sharp delivery is fast and we have an insiders program where you find out exactly what I'm
doing with my own Investments thanks for making goldsilver.com your dealer and now back to the video yeah well you know I I need to uh start reading some Jim Grant again because I haven't for a little while but when it comes to interest rates uh he probably is the expert on it you know you mentioned uh programs that uh don't necessarily uh work Milton fredman used to say programs should be judged by their results not by their intentions and all of those voters going into the voting boots are always uh you know
they're being sold a bill of goods uh based on intentions and and you said feelings uh so what happens if the natural if the natural interest rate stays High it keeps the fed from reducing the nominal interest rate you're saying so interest rates will stay higher for longer against the federal reserve's uh best judgment or or their own choice I don't know if they do have best judgment I think that's something that escapes them but um uh so with interest rates higher for longer uh what do you see as the
result well I I I I think continues to do an interesting thing to the bond market if that's what occurs uh there's a lot of people who are advocating buying bonds now for capital gains purposes rather than for income purposes oh hoping that uh the interest rates R yeah um I've never bought bonds for gain for capital gains I I've always bought them for secure yield but that's interesting and I'm probably not smart enough actually to answer to your question uh in terms of what happens my
own suspicion I remember once in conversation at dinner with Jim Grant about the U the Delta between um the natural interest rate uh and the manipulated interest rate and he said that in history uh private investors have demanded between 250 and 400 basis points uh real return that is to say a return uh above the rate of deterioration of the value of the currency that would imply if you agree with my ballpark assessment that the deterioration of the dollar is clipping along at about 7% uh a 300 basis point real
return 10% interest rates suggest a 10% riskless uh interest rate uh traditionally things like 30-year fixed mortgages have traded at 1 150 basis point premium to the so-called riskless rate which would suggest a first mortgage rate in the 11 and a half percent rate that would certainly take care of the problem of affordable housing Mike yes it would so you know um we we do have a problem in commercial real estate right now that could end up being the trigger for the next Crisis there's so many things out there that could end
up being the trigger but right now refinancing uh commercial properties uh there's all of these Office Buildings all across the country that are 50% full uh you know they've never had vacancy rates this High and the when you and the loans on them uh tend to be five seven or 10 years there's there there is no 30 years from my understanding for commercial real estate uh and and so um there's a lot of refinancing coming up coming due there was just a building in New York that in 2019 was sold for 65
million and it just went for 16 million uh and uh you know largely because of this Dynamic uh the the buildings are valued based on the rental income not based on the the the actual uh construction materials and and you know uh location and so on it's it's uh you know the cash flow that comes out of the building is the owner going to be able to service the debt on the building and so that's how the bank is looking at it so all these owners their uh re their refinancing is coming up they have to do
it now they've got to do it at this far higher rate but is the bank even going to want to refinance this this building if the cash flow is down to where it's suggesting that they're not going to get paid and then if they do do it at What premium are they you know over what they would if if it was a normal situation it's already going to be you know much much higher interest rate than it would have been back in 2020 2018 2019 uh um and so the premium for this extra risk that they would demand uh
would put it up in the range of that 11 and a half percent that you were just talking about so um what do you in interest rates higher for longer um until there is some sort of giant crisis and once we get back into crisis mode we go back to zero instantly right is that I'm not smart enough to tell you uh I I just think that it's qu it's a question that each of your listeners needs to ask themselves um and it is a question where I think it's increasingly urgent that your listeners consider in
the context of their own portfolio I mean listen I'm a believer that markets work our mutual friend Doug Casey once said that bare markets don't change the value of anything they change the price and they in in Doug's um very very Politically Incorrect fashion He suggests that they return Goods to their to their natural owners uh from the weak and the stupid to the strong and the wise now somebody who bought a building for $65 million and has to sell it for 15 or 16 the person who bought it for 65
doesn't feel so good about the transaction the guy who bought it at 15 or 16 he probably doesn't feel so bad uh and as a consequence of the cost of capital for him at the 16 million doll valuation that allows rents to fall so the tenants probably feel good about it too it resets property tax much much much lower which I think is great but the government might not like so much but if you think about all of this in the context of your own portfolio that's what becomes important yeah think as an
example Mike and I hope not too many of your listeners are part of this group there's a whole generation of Americans whose thoughts of the future were generated by the LA last 40 years a period that was very benign with lower interest rates and uh this whole generation of Americans among other things has turned into what I so inelegantly call yield uh people who buy Investments based on the amount of distribution it gives them to sustain their current their current lifestyle and many of these people have been lured
into so-called high yield ETFs and these high yields are obtained by taking short-term credit risks you have these high yield ETFs that are extremely liquid and are owned in 10,000 or $20,000 chunks by Middle America the problem is that the underlying assets uh overthe counter bonds are highly illiquid and if we have uh any of the sort of constrained credit Market that you describe uh if we have the sort of liquidity squeeze that we had in 2008 which I don't think is unlikely and you have Middle America
bailing out of these high yield funds which are very liquid and the fund manager trying to sell the underlying assets which are highly illiquid I think we described this you and I in a previous conversation uh as owl bonds which is to say bonds where when the portfolio manager calls calls the broker and says to sell the broker says too to who and I say this not to get your audience to laugh but rather to consider what's in their portfolio a and what assumptions went into buying it if the whole assumption was yield you need
to wonder what the probability is that you continue to enjoy that yield in the next 10 years where the circumstances that you're confronted with are very different than the circumstances that you were confronted with over the last 40 years that's the point I think of the discussion that you and I are having yeah you know um that's the reason I'm such a fan of monetary history uh and uh keeping in mind you know having a planning scenario uh in the back of your mind that fits a uh a financial and
economic model that we haven't experienced in our lifetime you know that fits the Great Depression for instance um and and then you're ready if you've got that in the back of your mind and you sort of know how to Pivot You' you've re rehearsed that uh in your head uh you'll be ahead of everybody else uh so you know I look at all of these when I was writing my book I had to look at a whole bunch of different uh Financial indicators and uh you know the you know the real estate bubble that we're in the
stock market bubble that we're in the bond bubble that we're in and uh trying to think of what is going to happen in the future now we're going into an election year and so they want the the the powers that be want everything to go as well as possible but the pressures and the warping of the economy that has occurred all of the pressures that have built up to me feel like a PR cooker on the stove about to explode and um I don't do you think that uh that you know uh the 2008 financial crisis uh
occurred uh during an election year and uh uh it it it they weren't able to like shove that off into the next year uh so um do you think think that that something could happen in 2024 or do you think they can put it off until 2025 and if it does happen with the warping that we've got how bad do you think it'll be you know if you if you give a pretty good salesman like me the use of the word could I can sell you anything what I what i' prefer that your listeners thought uh or thought
about was is there a probability or a strong possibility that that would occur and if there's a probability or strong possibility is your own personal balance sheet your portfolio does it take that into account right is it you feel coming into 2008 did you have sufficient liquidity so that when a liquidity crisis hit you had the ability to take advantage of the situation or were you taking advantage of by the situation people need to look at their own portfolios we've discussed liquidity
before people say well I I don't want to have savings because as you say the interest that I earn on my savings doesn't match inflation my suggestion to those people is that the uh purchasing power decline that they suffer with interest should be considered an option payment uh on having the liquidity to take advantage of a 2,000 day circum rather than being taken advantage of yeah it's the different it's it's taking a look at your portfolio and if this happens then do you want to be the
victim or the Victor right right right something that people need to keep in mind and I'm not one who says necessarily that we are going to have a liquidity crisis anytime soon uh I actually personally believe there's a probability of it but as you and I have talked about before uh Doug Casey and I between us have called 17 of the last three declines so I'm always concerned I'm a credit guy you know but think about this Mike and I I hope your audience thinks about this when when we went into 2008 debt
government debt on balance sheet not off balance sheet on balance sheet liabilities of the US government uh were about 25% of GDP in other words the government still had the ammo to push on the string recourse liabilities of the government now full recourse uh which is to say on balance sheet liabilities of the US government now exceed 100% of GDP so the necessary ability of the government to uh print and spend their way out of a circumstance is materially diminished I'm not trying to say that
the confidence in the US econ economy doesn't exist to the extent that they wouldn't be able to do it but it would be much much much more challenging from my point of view just because of simple arithmetic debt as a percentage of GDP has quadrupled which means that the financial flexibility has probably declined concommittant now you as a commentator and your audience I suspect as a consequence of them following you as a commentator uh necessarily needs to include gold uh and precious metals related
investments in the conversation uh I I am fond of saying I don't own gold because I think it might go from 2,000 to 2200 I own gold because it might go to 6,000 or 7,000 or 8,000 I remember well uh the period 2000 to 2010 uh gold at the beginning of that Epoch had been written off completely and it was selling for 250 260 bucks an ounce by the end of the decade uh it was selling it what $1,850 an ounce yeah uh an even more impressive statistic I think is that in the face of what I see a society be being between the
rock uh of uh higher nom interest rates uh and a liquidity crisis that the market share of gold and precious metals related assets is less than one half of 1% which is to say one half of 1% of all the savings and investment Assets in the United States are in precious metals or precious metals oriented assets the four decade mean according to JP Morgan Chase is 2% I I believe I Believe In 1980 it was above 5% wasn't it JP Morgan didn't have access to the statistics but they estimated that it was between five and
six per. but let's throw that out as an outlier just for fun because we don't need it for argument okay if precious metals reverted to mean demand for them would quadruple and that's precisely what I think is going to happen the the uh demand versus PR it doesn't mean that doesn't mean that the price will qu quadruple if the demand quadrupled and you have a fixed amount of ounces uh the the the ratio between demand and price is a nonlinear uh thing you should see prices go up much greater than a factor of four
if you assume that prices are set on the margin uh the margin between supply and demand not aggregate supply and aggregate demand what you say is true but again again uh I don't need that to make my argument to your listeners I just need to say I just need to say that most Americans need to own more of it rather than less H and the consequence of that is that a price Target is higher not lower it it I don't think that investors uh unless they're extremely knowledgeable and extremely
hardworking should be overinvestment because the truth is it's an in insurance policy where a small premium buys a fairly large payoff a circumstance where 10% of your net worth uh is in precious metals and precious metals related assets uh if past his prologue with regards to the price performance of these assets during tough economic uh times the performance of this 10% of your portfolio in Precious Metals will offset uh if not eliminate the deterioration that you would see in a whole host of other asset classes and
that's the argument I'm trying to make here uh if you consider physical gold itself as an insurance class uh and other precious metals related assets like high quality gold stocks uh as Investments the performance that you get out of this sector means that a fairly small proportion of your uh portfolio fulfills the insurance function that gold has filled for investors for 2,000 years and that's what I'm advocating Mike okay well that's excellent I I you know I believe that everybody should
start a core position uh in Precious Metals I love the liquidity of it and then there does seem to be at least unless we go into an extremely deflationary uh you know collapse uh there seems to be this enormous support under the gold price if it drops too much governments come in and buy uh it it will be China gobbling up any excess Supply uh if it uh it it just seems like the risk reward ratio uh between uh the the potential upside for gold right now versus how much downside risk there is and the fact that you know if there is
if it if it did go down a little bit it's temporary because it even if there was extreme deflation that scares the hell out of the out of the central banks and it would be followed by big big inflation because they they have to if there's deflation they got to take interest rates to zero and create as much currency as possible and we've already seen the result of them creating as much currency as they can it goes to uh you know the Federal Reserve Act uh sort of handcuffs or or ties the Federal
Reserve their risks are tied uh to where they can only inflate the markets uh everything has to be purchased through a primary dealer and so all of the new dollars that are being created by the Federal Reserve go into the financial markets and you see the financial markets inflate and the economy becomes warped uh when they take interest rates down it tends to inflate real estate and so uh their goal will be to get out of any type of deflation because our entire Financial system the monetary system
itself cannot withstand deflation at this point uh you know big deflation and so it just seems to me that the risk reward ratio for gold especially uh you know more so than silver uh is is very very shifted more so so than just about any other investable asset it's shifted toward the way toward the reward with the risk being minimized there's there are buyers that will come in if the price drops and so it seems to have this support under it got any comments on that sure I mean a whole bunch of
comments uh I think that your description of the likely outcome of a liquidity squeeze uh which is to say an incredible injection of artificial liquidity is one that's been proven by history yes I I think that one uh doesn't probably use that as a crutch I think that you need to maintain liquidity in your accounts in addition to having gold although as you point out gold is superb as a form of liquidity it's a volatile form of liquidity and for it to be liquid uh for it to be liquidity you
have to be willing to sell it to buy a different asset class when everything else collapses you know it or borrow against it yeah or borrow against it uh from me from me hopefully um yeah but I I want to return to the fact that it doesn't take a lot of gold it just takes some gold to provide insurance that you're talking about and most people don't get that or if they do get it uh most people confuse themselves with the form that they buy gold in as an example uh although I made the money
that I now invest by speculating in Exploration stocks uh owning a gold exploration stock is not the same as owning gold the gold exploration stocks are looking for gold they don't have any and as such looking for gold you're invested in a management team uh you're invested in the honest y of the individuals that are running the company so it it isn't a direct investment in Gold you hope that they find gold but it's basically a derivative of precious metals precisely the point is that you begin your gold
investing Journey the gold portion of your portfolio by owning Gold by owning the stuff by all means then once you've covered the insurance part invest buy the good gold stocks and if you're willing to work hard and take risks uh and if the rest of your portfolio is covered off prudently then by all means speculate just don't confuse the three activities Insurance investment and speculation um that that's what I'm hoping to impart to to your listeners yeah do you want to tell us about your
uh free service of rating stocks again I do uh if you invest in precious metal stocks or natural resources stocks that's what I do for a living uh if you think that my thoughts have value you can personalize them go to rule investment media.com list your natural resource stocks please as I've said before no pot stocks no crypto all rank your natural resource stocks absolutely for free no obligation one to 10 one being best 10 being worst and I'll comment on individual issues where I think my comments might have
value once again that's rinv media.com and we will indeed rank on a no obligations basis all people's publicly quoted natural resource stock portfolios okay thanks Rick I always just really enjoy talking with you and uh uh so I think this video is running a little long and and uh we'll talk with you next time PE people can tell us whether it went too long or not in the comment section thanks we'll see you next time bye hi I just wanted to tell you about gold Silver's 111 oce silver giveaway
where you can win win win 111 one 1 oz silver bar one 10 oz silver bar and one 100 o silver bar so enter today and win
0 Comments
Post a Comment