Donald Trump’s nomination of Jerome Powell to replace Fed Janet Yellen
Jerome Powell: And beyond the labor market there are other signs of economic strengths. We have; steady income gains, rising household wealth and elevated consumer confidence, which continue to support consumer spending which accounts for about two-thirds of output. Business investment improved markedly last year following two sub-par years and both business surveys and profit expectations points to further gains ahead.
David Scranton: In his first official speech as chairman of the Federal Reserve, Jerome Powell painted a very optimistic picture about the current and future state of the United States economy. His April speech came just a few weeks after Powell and the Fed approved the first of an anticipated three short-term interest rate hikes this year. The question becomes, will it happen? And if so, can the economy and the financial market handle it? It’s time once again to tune out the hype and focus of the facts, facts that matter to you, the income generation.[Break]
Hi I’m David Scranton. Inflation fears, trade war fears, real war fears and role coaster stock market. In the middle of all of it, sits the Federal Reserve for the brand new chairman at the helm. On the very day Jerome Powell succeeded former Fed Sharer Janet Yellen, the dollar fell more than one thousand points. The timing seems to speak volumes about the challenges facing Powell as well as the Fed. Some of which are completely unprecedented. We’ll talk about those challenges and the potential outcome both good and bad.
We’ll get expert insights from out guest Gregory Daco, who is head of US Macro Economics at Oxford Economics and former Ronald Reagan adviser, financial commentator and China expert, Jim Rogers. First, let’s talk about the Fed’s new Chairman and some of the challenges he’s already dealing with less than two months on the job. Donald Trump’s nomination of Jerome Powell to replace Fed sharer Janet Yellen came as a bit of a surprise to many. Yes Powell was a wealthy Republican and a former investment banker, but he’s also quite a departure from some of Trump’s other radical and controversial picks for high level posts. Essentially, he is seen as an acknowledgment by Trump and law makers that the Fed’s leadership transition needs to be smooth and that the simply, cannot risk having a new driver who might make sudden and sharp turns.
The reason is obvious when you consider the delicate state of our economy, as well as the financial markets, as well as the role the Fed has played in creating that delicate state. So in a sense, Powell is charged with landing an experimental aircrafts that was launched nine years ago, in response to the financial crisis. That’s when the Fed under then Chairman Ben Bernanke, embarked on what turned out to be a historically, unprecedented effort to jump starts the economy with Artificial Stimulus. Namely, buying up US treasuries and holding short term rates near zero. Those measures and others known as Quantitative Easing were still in place when Janet Yellen took over the Fed in 2014. But eventually the economy approved enough that she also inherited the job of tapering the program and starting the process of “Normalizing the Fed policy and its balance sheet once again”.
In other words, Yellen began preparing the artificial aircraft for landing. But it’s proven to be a slow process thanks to mainly to two factors. First, Quantitative Easing didn’t really work as well or should we say perhaps as quickly as the Federal Reserve would have liked. Americans’ who had been burned by two stock market crashes in less than ten years, were reluctant to start spending and borrowing again. Companies were slow to hire and wage growth remain stagnant. Number two (2); the stock market basically became addicted to Artificial Stimulus. Part of that is due to optimism over what Easing was supposed to accomplish. But, mostly it was due to one of those historically low interest rates.
They drove a lot of everyday investors up the risk curve, meaning into the stock market, simply by making other investment options appear less attractive on a relative basis, and even though the Feds stopped this bond buying program more than three years ago, the stock market has continued to be driven more by artificial factors than by Economic Fundamentals. First as I said it was the launch of QE programs similar to ours in various struggling European countries. Next of course with the election of president Trump, his promises to slash corporate taxes and create consistent 4% annual GDP growth were of course just music to Wall Street’s ears.
The Trump bump as it came to be known, added another twenty plus percent to the already artificially inflated stock market in 2017 and it continued until the beginning of February of this year, when the market experienced a shockingly quick 10% pull back and as regular viewers know I’ve always liked the Feds over use of Quantitative Easing to steroid use by an athlete. Why? Because Steroid does not only enhance the athlete’s performance artificially, but because their negative effects continue in the athlete’s body long after he stops taking them. That’s why even though the third and final round of Quantitative Easing ended in late 2014 these negative impacts are still being felt in the financial markets today.
As noted that 10% pull back in February coincided with Jerome Powell’s official take over as Fed Chair, coincidence? Well, partly. But it’s also true that in statements of law makers, Powell has taken a more hawkish tone than expected. In senate testimony, he initially suggested there could be as four (4) state hikes this yea, saying the thing we don’t…is to get behind the curve. Have inflation moved up and have it raised rates too quickly and therefore cause a recession. Let’s face it nobody wants to hear the dreaded R- word of course, especially not Wall Street, which of course is anxious for president Trump to deliver on his promised 4% G.D. P. growth. You could argue that they’re dependent upon it in order for growth to finally catch up with today’s over valued market prices.
That’s what makes the situation so delicate and frankly it’s what makes Jerome Powell’s job so incredibly challenging. His predecessor’s policies have created situation of every word he utters has the potential to prompt a market rally or a market panic. This is probably why he has back pedaled a bit on his hawkish tone. In his speech earlier this month to the economic club of Chicago, he advocated a quote “Patient Approach” to raising interest rate further. This speech came just two weeks after the Fed approve raising its key rate by a quarter percent in its March meeting. That is the sixth such raise since late 2015, yet the rate remains very low at 1.5% to 1.75%.
This slow paste to normalization is again because economic growth has lagged behind all the efforts of artificial stimulus and behind the overzealous stock market and as a result inflation is mostly remain below the Fed’s target rate of 2%, and just as significantly long term interest rates have remain low, in part because a lot of foreign economies are not in any better shape than ours. Consequently many are still actively using the kinds of Quantitative Easing measures i.e. economic steroids which we ended three years ago. We’ll talk a lot more about the significance of that later in the show.
But in the end those two factors low inflation and low long term interest rates has made the Feds efforts to get short term rates back to normal, to say the least challenging. Although in a speech, Powell said that they have increase confidence now that inflation will at least reach the 2% target rate this year, and for many reasons inflation seems like it may or may not be as eminent as initially thought, but if it does happen; then how much and how quickly? And, will it coincide with the 4% G.D.P growth and be taken as a good sign by Wall Street? or will investors panic that hire cost can trigger spending slow down , that leads to layoffs and then that domino effects that results in yes once again, that dreaded R-word, another possible recession?
Then the question then becomes how can Powell and the Fed walk this fine line with so many unknowns to contend with? The prospect of a trade war, the impact of the president’s tax cuts, the polarized political climate and the president himself who’s words are the only one that closely watched by Wall Street as Jerome Powell’s. We’ll talk about all that in just a bit and what it means for everyday investors in the Income Generation. Right now it’s time to welcome our first guess. Gregory Daco, head of US Macro Economics and Oxford Economics.
He is responsible for producing the US Macro Economics forecast using oxford economics Propriety Global Economic Model. He tracks and forecast high frequency indicators and oversees the production of US research pieces on Consumer Markets, Housing, Business Investment, International Trade, Labour Markets, inflation, Fiscal and Monetary Policy. Gregory, is there anything you don’t do for goodness sake? “How do you do all this stuff, how do you keep it all together?”
Gregory Daco: [laugh] just demands a lot of work.
David Scranton: A lot of work and a lot of focus, well you’re a young fellow so you got the energy to do it. Welcome to the show.
Gregory Daco: Thank you
David Scranton: So let’s start with the promise from, gosh the election seventeen months ago about obtaining a 4% G.D.P. growth rate. Earlier on the show we talked about the fact that the Federal Reserve has recently increase 2018’s projection to 2.7%, next year is to 2.5% and then dropping after that. So who is right? Are we gonna b able to get over 3%, get closer to 4% or are we gonna be stuck in the 2s?
Gregory Daco: Well I think, this year we’re probably going to achieve a number that’s pretty close to 3% in terms of overall G.D.P. growth. That will be the best performance in quite a few years now. If you look back at last year that would be a significant improvement over the 2.3% advance we saw in 2017. But it will fall short of the 4% target that the Trump administration is looking to achieve and importantly a large part of the growth this year is likely to come from Fiscal Stimulus. We expect about a fourth of the growth this year to actual come from additional Fiscal Stimulus both via a reduction in taxes as well as additional government spending. So the underlying momentum for the economy is actually closer to 2/2.5%.
David Scranton: So you think the Fed was all too conservative with 2.7 for this year, but you think that 2019 might be a step down from 2018 in terms of G.D.P. growth.
Gregory Daco: I think so, when we forecast as economic forecasters, we always say that decimals are a sense of humor; it’s always hard enough to predict round numbers but predicting the decimals are even tougher. So I think a forecast around 3% is a possibility for 2018. I do think that if we look into 2019, where we’re going to see less Fiscal Stimulus from the tax cuts, maybe a little a little bit more from additional government spending the momentum of the economy might actually slow somewhat in 2019 and if we look even a little bit further beyond 2019 into 2020, I do sense that there are signs that the economy might actually undergo somewhat of a slowdown in 2020 now we’re still 18-24 months away from that, but I do think it’s important to keep in consideration the fact that a lot of the growth momentum that we’re going to see over the course of 2018 and 2019 will come from Fiscal Stimulus and the underlying momentum of the economy may not be as strong as the headline numbers appear to show.
David Scranton: Interesting. So we’re gonna take a commercial break, when we come back, we’re gonna talk a little bit about you know what you think the Fed could do to help us out. Is the Fed being too hawkish too dovish? Wonna hear your words of wisdom as soon as we return and for Income Generation viewers. You stay with us, we have a lot more coming up on the show, stay with us we’ll be right back here on the Income Generation.
Bloomberg: Greenspan on Fed’s Rate hike path [excerpt].
Bloomberg: Does the dept and the deficit limit or contract the degrees of freedom any central banker has?
Alan Greenspan: To the extent that it impacts on the money market, which it very always does. That is a critical issue for central bankers to be concerned about.
Bloomberg: Greenspan on Fed’s Rate hike path [End of excerpt].
David Scranton: If you’re ever looking for a reliable source to discuss the challenges of the Federal Reserve, then that man is that source. Former Fed Chairman Alan Greenspan. Mr Greenspan gave his thoughts on the obstacles facing the Fed in a recent Bloomberg interview. One that he focused on quite a lot is the almost 1 trillion dollars Federal deficit, noting that it’s impact on the economy is inevitable, no matter how hard politicians try to convince us otherwise. He said, “Until it becomes obvious that there are consequences such as inflation, the political system doesn’t respond”, and as you just heard Mr Greenspan point out that the deficit is yet another major concern for our new Fed Chairman Jerome Powell as he tries to land this experimental airplane known as Quantitative Easing and to normalize Fed policy once again, and has mentioned in our first segment, part of that normalization process involves raising short term interest rates which were held throughout Zero throughout the Quantitative Easing Era. Powell said the Fed is looking to approve two more rate hikes this year, but wants to see inflation move up and stabilize at around 2% first.
But as Mr Greenspan and others have pointed out, a lot of factors including the deficit that are in place that could potentially push inflation up higher and faster than the Fed would like, as Powell himself has admitted that could force them to quote “raise short term rates too quickly and cause a recession”, the dreaded R-word that once again terrifies Wall Street. So, what are some of these other Inflationary Pressures and how they relate to some of the additional concerns and challenges facing the Fed?
Well a big one is the new tax plan which slashes corporate tax rates and represents a 1.5 trillion dollar Fiscal Stimulus. It’s going into effect at a time when the economy is already, almost near full employment, which more according to most economists it will add significantly to the Federal Deficit, despite the Trump administration’s insistence that the cuts will pay for themselves through G.D.P. growth. As Mr Greenspan said in his Bloomberg interview, the tax plan is not bad in and of itself, but quote “the problem is, that it’s unfunded”. The Fed itself which seem to agree with this assessment, in their statement fallowing their March meeting, the fed slightly raised their forecast for 2018 G.D.P. growth from 2.5% to 2.7% an increased 2019’s expectation from 2.1% to 2.4% however they projected that growth is likely to cool further after that with a 2020 forecast holding a 2% in a longer run measured just at 1.8%.
We’ll talk more about the pros and cons of the new tax laws, where the Fed is concerned with my guest, coming up in just a bit. Another potential landmine for the Fed of course is the ongoing dispute with China and other nations over tariffs and trade policies. If it results in negotiations that lead to a more equitable Tariff System for everyone then great, if however results in a full blown trade war then most likely, not so great.
That could lead to significantly higher prices on a wide variety of goods as well as increase manufacturing cost and a domino effect that brings economic growth potentially to a grinding halt. We’ll talk much more about the situation with China and the potential of a Trade War with our guest Jim Rogers a bit later in the show. Of course another challenge for Powell and the Fed lies in the polarized political climate in Washington DC. The tax reform bill remember was passed without democratic support and so far it’s the only really big piece of legislation that president Trump has been able to get through Congress. If political grid lock remains the norm for other bills and policies relating to the economy, that will only increase the unprecedented levels of uncertainty already facing the Fed and make their job that much tougher.
We’ll find out more about what happens there in November. But regardless of how you feel about him it’s hard to deny that president Trump himself, also increases that area of uncertainty, with some of his words and actions. In a recent tweet for example he wrote quote “Russia and China are playing the Currency Devaluation game as the US keep raising interest rates. Not acceptable. This tweet was interpreted by some as a criticism of the Feds decision to approve that most recent rate hike in March. But others read it differently. But you see It’s that lack of clarity in some of these remarks that make his Presidency quite unique and also makes it a bit more challenging for Powell and the rest of the Federal Reserve. And on that note let’s welcome back Gregory Daco, to get his take on the first two months of Jerome Powell’s being in office at the helm of the Federal Reserve. Too Dovish, too hawkish or as my good friend Jeffery Small would say like Goldie locks, just right.
Gregory Daco: I think overall in terms of Jerome Powell’s approach to policy making, he’s more of a pragmatic. I think that so far war what we’ve really seen is someone that looks at the data, evaluates the data and generally concludes that the economy is doing quite well. That’s the pace of G.D.P. growth is satisfactory, that employment growth remains quite solid and that inflation is gradually moving back towards the Feds objective of 2%, and in the environment, in those circumstances the Fed expects to raise rates currently 3 times for 2018. We think actually they might actually go with four rate hikes this year, given the fact that inflation would probably surpass the Feds 2% inflation target somewhere around December of this year.
David Scranton: Alright so of course now the 800 pound gorilla in the room is long term Interest Rates, you know the Feds can certainly take three more hikes and they can get us up in 21/4 /21/2 range but then, how do we know long term interest rates are gonna respond? We have European countries now with their stimulus; we talked about earlier on the show about Spanish and Italian ten your debt, paying nearly half the interest rate that ours does, but yet theoretically at least a higher default risk. So things are already out of the equilibrium which is why for example the ten year treasury long term interest rate has struggled to go up. What’s gonna finally make long term interest rates cooperate? I am not seeing it.
Gregory Daco: well I think that if we take a broader perspective in terms of the interest rate complex, we see that essentially we have the Fed putting upward pressure on short term Interest Rates, the increases in the Federal Funds Rate and that on it’s own should put upward pressure on long term rate. Now we have seen a very slow rise in long term rates and indeed the ten year yield has taken quite a bit of time to even reach the symbolic 3% mark.
David Scranton: Sure
Gregory Daco: But we expect that with upward pressure on short term rates, we’re going to see long term rates rise. We have to also factor in other factors, the fact that inflation’s rising generally tends to support higher long term rates. The fact that you have wider budget deficits stemming from the combination of the tax cuts and jobs act as well as the bypartism budget act will increase the deficit and therefore put upward pressure on long term rates.
So those factors will keep the pressure on the 10 year yield towards the upside. We cannot forget though that the US remains the reserve currency of the world and that in case of uncertainty around the world whether geo-political or economic uncertainty flow capital flows back into the United States and tend to put down ward pressure on long term yield, so there are two opposing voices at play right now.
David Scranton: So with the thirty seconds or so we have left in this segment, you know what about the flattening of the yield curve, you know two interest rates hikes ago there was a .9% difference between the two year and the thirty year. Now it’s about .65%, they raise rates three, four more times it could be .3%, .4%, isn’t that close to a flat yield curve?
Gregory Daco: Yep, I think we’re getting close to a flat yield curve. What really matters though is an inverted yield curve, where long term rates fall below short term rates, that’s generally indicative of an impending recession and we can’t forget that, that’s not necessarily a sign that the recession is coming up in the next few months, you still will generally have a year maybe eighteen months before a recession actually hits.
David Scranton: When we come back I wonna talk to you a little bit about; the deficit, the national debt, how far can we go with the national debt , can we really grow our way out of it and just keep taking on more and more debt item for item? I wonna get your feedback on that, and also what you would tell average investors, members of the Income Generation and for you Income Generation members, stay with us we have more from Gregory Daco upon our return We’ll be right back.[Break]
David Scranton: Well we’ve discussed one of the Fed’s objectives in moving forward with two more short term interest rate increases this year, is to hit a stable inflation rate of about 2%. Well even though isn’t talked about very much another thing they need is for long term interest rates to cooperate and to move up first. In fact as we’ve discusses before on the show, they’re actively working to achieve that goal through the so called unwinding of Quantitative Easing.
This is also an important part of the process of normalizing the Feds balance sheet. Through three rounds of Easing the Federal Reserve purchased, some 2.1 trillion dollars of mortgage back securities and US treasuries. Starting last year they begin selling those bonds back in the open market. The idea as I’ve explained before is to basically flood the market increasing the supply in order to drive prices down and drive long term interest rates up. This unwinding process is largely why the rate, on attaining your treasury yield jump from 2.4% to 2.7% in January, spooking Wall Street and helping trigger that rapid 10% sell of that we saw back then. You might think of this unwinding process is an attempt to administer an antidote to cure the lingering effects of those economic steroid injections known as QE-1, QE-2 and QE-3, and as we know sometimes an antidote works, but sometimes the antidote kills the patient instead.
So for the Federal Reserve, this is one more big uncertainty and you might also be wondering, if rising interest seem to rattle the market so much, then why is the Fed trying to drive them up. Well, as we’ve discussed before, if they move ahead with their plan to hike short term rates up to 2.1% by the end of this year. The long term rates remain at 3% or so as they are now. They’ll be creating a flat yield curve. Banks and lending institutions depend on a positive sloping yield curve to make money, if it’s not, if it’s flat instead, meaning that the difference between long term and short term interest rates are only marginal.
Then those institutions loose the financial incentive to lend money. In this case businesses and individuals’ won’t barrow won’t be able to barrow, for things like mortgage loans, car loans, small business loans, things that are all central to a healthy, growing economy, and they all depend on a positive sloping yield curve.
Now our regular viewers know that I’m on record for saying that I believe long term rates are gonna have a tough time going up. They just recently broke through the glass ceiling of 3%, that if, has hold for so long, in spite of the Feds unwinding efforts. One reason as we’ve discussed earlier, is that many European country, still have Quantitative Easing programs in place, meaning, they are still administering economic steroid injections and as a result, in countries like Spain and Italy for example their bond yields are generally lower than ours, in fact approximately half although those countries are considered to have a much higher default risk than ours.
That means that a lot of investors are still pouring money into our bond market. Why? Because it’s a better option, to be able to get more secure bonds at nearly double the interest rate and as I put it before, we in the United states, although we may not be doing economically well as we were in the 90s and some points in the early 2000s.
Yes we still the cleanest dirty shirt in the world’s economic hamper especially when it comes to global bonds investors. Now, naturally you know this affects the Feds effort to drive prices up and down because they can’t flood the market when the demands for bonds remain so strong. They flood it but the bonds end up just getting purchased right back. So their efforts to drive up the prices and drive up the interest rates become significantly hindered by what’s going on abroad. Again consider the ten year treasury peak at 2.94 at the end of February, it’s 2.94% and through all of March and most of April it couldn’t break through that rate, in fact it was just this past week that it broke through that 2.94% again.
Well that creates yet another challenge for the Fed. At least it’s a positive sign for the financial market just started to naturally normalize themselves again, even if the Fed is struggling with the process. After years of being mostly influenced by artificial factors, the market is just starting to respond to fundamental realities again. That’s why long term interest rates stabilized as the stock market recently has gone through a series of big sell offs and partial rebounds, followed by more sell offs and more partial rebounds over the last two months.
In addition to that, or maybe as a result of that, something called a Flight Equality has occurred, as many of our own investors here in the US under the uncertainty of equities fled toward the relative security of bonds, once again keeping our long term interest rates down in spite of the Federal Reserve’s efforts and what’s more I believe this trend will continue, creating yet another major challenge for Jerome Powell and for the Feds, as they attempt to land this experimental airplane safely.
Now it’s time to welcome back Gregory Daco. Let’s talk about this deficit and this debt, you know politicians like to tell us you can spend our way out of it not to worry about it as long as we get enough growth you know our net worth as a country if you will is growing and as long as it grows faster than our debt, but there’s got to be an end to this right? I mean, you know our viewers can’t just take on more and more and more debt without worrying about it and even though we are the world’s reserve currency, I mean, can we really do that?
Gregory Daco: Well, I think that if you look at the US position right now, we’re not too far from a position at which we’re not really adding to the debt to G.D.P. ratio and that’s simply because essentially our deficit is as large as the pace at which the economy grows. But if we look out over the next few years especially the next two years with the implementation of a pretty substantial series of tax cuts and additional government spending, we’re going to see an increase in the budget deficit and we expect the budget deficit to go from about 3-31/2% of G.D.P today to about 5% over the next eighteen months.
That on its own will put upward pressure on the debt to G.D.P ratio, which will likely surpass 80% in the coming months and if we look further out with the aging of the population, the need to spend more on an aging population, to spend more on Medical Care, that would continue to put upward pressure on the debt and it could become a real issue for private sector investment for the economy overall.
David Scranton: Yeah Gregory it’s kinda funny, you’re kind of a young fellow, which usually the crusty old salt’s the ones that are more apt to say, be more cynical and say no we can’t keep doing that, so it’ll be interesting, we have Jim Rogers coming up next and I’m gonna ask Jim the same question and we’ll plot you head to head with Jim Rogers, we’ll see what he says. So where do people put their money? You know, members of the Income Generation that watch our show that are age 50 and over, you know, if long term interest rates are going go up to afford the Federal Reserve more room to raise short term rates, you know that’s not the best scenario for a fixed income, but it’s also a bad scenario for equities. If the equity market is pricing in Trump’s promise of 4% G.D.P. growth and you’re only gonna get less than 3% then that’s not good for equities either, so what are people to do? I mean put all the money in Crypto Currencies, cross their fingers and toes and hope for the best? What will you tell average middle aged America today?
Gregory Daco: Well I don’t necessarily know that people should take big risk with new forms of currencies as they tend to carry quite a bit of risk and the return is not always guaranteed, especially in the long run. But I think that if you look out over a long period of time, then it continues to be quite revenue generated to invest in a mixed portfolio, to have investments that aren’t necessarily putting all your eggs in the same basket and so to have a blend both nationally and internationally in terms of where you invest your money in order to in some ways off set the risk that might come from the international global environment or from the domestic environment.
So in the environment I think diversification is really a key element in any investment strategy that looks into the future and I think that while the economy might be close to the end this like I can’t believe we forget that the US economy is very much procyclical and after every up cycle there is a down cycle but is again followed by another up cycle, so we have to remain optimistic about the prospects for growth, the US economy is very much a dynamic economy and I think it remains very much a center that will continue to attract capital pros from the international environment.
David Scranton: Yeah, sound like you’re saying you know it’s ok to be a little lopsided in times when there’s obviously a better opportunity somewhere but especially now when everything is in question. Diversify cross the board be conservative and be smart about it so Gregory, thanks so much for joining us today time flies when you’re having fun. Thank you too, our income generation members, we’ll be back to wrap up today’s show with a grand finally in just a minute.[Break]
David Scranton: Welcome back to The Income Generation, I’m here with my next guest Jim Rogers. As you well know he’s a renowned American Business man Investor Traveler, Financial Commentator and author who’s based in Singapore. His books include Adventure Capitalist and A Bull in China. He’s chairman of Rogers Holdings and Beeland Interest and creator of Rogers International Commodities Index as well as a co-founder of the Quantum Fund. Jim welcome to the show.
Jim Rogers: I’m delighted to be here David; you should not have done all that introduction.
David Scranton: I love you the humility, I could see out the corner of my eye with your hands moving going no no no not me [laugh]
Jim Rogers: I don’t want to hear all that, but any way I’m delighted to be here, I’m delighted to see you again.
David Scranton: Well it’s good to have you, you know, it’s funny because you were on the show somewhere around a year ago, maybe a year and half ago at this point. It’s funny because I tried to push you, I tried to talk about whether China you know was a bubble, we talked about you know their growth rate at 7% being artificially maintained, artificially stimulated and you said, after pushing you trying as any interviewer does, trying to push you into the corner you said “Dave you wonna look at a bubble, look at the debt in the United States, we have a debt bubble over there” and then I kinda chuckled and I said well you got me on that. But, is that why recently you were quoted as saying something about the next Bear Market is likely to be the worse in your life time?
Jim Rogers: Well David yes, all I said was, we’re gonna have Bear Market again, we’ve always had them. Hello Janet Yellen, use to be the head of the Federal Reserve says, we’re never gonna have a Bear Market again so, sorry for chuckling out loud. She says “we’ll never have a Bear Market again”. I know we will. And all I said was the next time is gonna be the worst in my lifetime. 2008 and 2009 we had a problem because of too much debt. But David! You know the debt has gone up many many times and not just in the US all over the world even China.
David Scranton: So what do you say to all the politicians and even some educated government employed economist who say that well that’s ok we can grow our way out of it, what do you say to them.
Jim Rogers: First of all why did we grow our way out of it in 2008-2009 if it’s that simple and second of all I think you should resign.
David Scranton: Well you know It’s funny I say to people to and people say well, the market has another drop I’ll just get out before it drops all the way and I said did you do it in 2008, of course you did and the same thing is true yeah you’re right. So, how long can this go? I mean can it go as long as have the status of the world’s reserve currency? Can it go that long? Or is bit coin for real? Should we buy bit coin in the crypto currencies? I mean what?
Jim Rogers: Well it has already gone on nearly ten years. We’ve already have one of the longest Bear Market in recorded history, not just in the US but anywhere in the world, so I don’t know, can it go on eighteen years, I don’t know. I have no idea but I know it’s got to be getting closer to the end. Interest rates have started to go up, which often has a negative impact on markets, who knows which war Donald trump will start next. Anything can go wrong. On the other hand, I’m not selling short right now. I expect this to go on a little longer. I mean if Donald Trump pulls off Korea for instance, you’ll get a Nobel Prize and the market will go through the roof. So there are still some things that could make it continue.
David Scranton: It sound like you are saying that right now the market is kind of speculative, but you think it has some upside potential based upon optimism, based upon some good yield political news and things like that. But long term, at bear minimum you’re saying we should have one finger on the trigger, you should be careful?
Jim Rogers: There’s no question the market is speculative, there’s no question the market is highly expensive, but by any measure, any historic measure, it’s expensive, but it also could get more expensive. I’ve seen that many times in history, many places in the world but I agree with you 100%, be sure to be careful, be sure to watch News Max, because we’re getting towards the end and one day when the end comes, I mean News Max will probably say it’s time to get out, but most of, or the rest of us will miss it.
David Scranton: But what about---It was just a year and a half ago we were talking about China’s doing and of course now China itself is taking on debt, which is different from before. Why is that happening? And what implications might we see from that for example, in your opinion.
Jim Rogers: For many years, nobody---who would lend money to mousy tongue? For goodness sakes so China didn’t have that for many years. Even in 2008 when it started, they had money saved for a rainy day, it’s started raining, and China started spending the money and helps save the world, but now China, they were so happy and so excited about their success, now they have debt too. Now many Chinese company are gonna go bankrupt, next time around, the ones that deal with the West in a way can have that and the government of Beijing had said we’ll let people go bankrupt which I hope they do, I wish America would let people go bankrupt.
David Scranton: Well the problem is, a lot of the businesses are owned by the government, so doesn’t that debt, let say the fifteen seconds or so we have left in the segment, doesn’t that debt ends up rolling up for the Chinese government ultimately?
Jim Rogers: If they let it happen, yes I mean they might step in like the US government and prevent everybody from going bankrupt. I hope it does wind up in the Chinese government hands, they say they were gonna do it, let them do it, we’ll see.
David Scranton: Well Jim stay with us as soon as we come back, we’re gonna talk about the Trade Wars. So stay with us and you stay with us also, here on Income Generation.[Break]
David Scranton: Welcome back we’re talking again to the friend of the Income Generation Show, whose introduction I have to shorten this time, so he doesn’t get frustrated with me. Singapore based author and investment expert Jim Rogers.
Jim Rogers: Well, David I’m not sure I’m an expert on anything but thank you.
David Scranton: [laugh] The Trade War, the Trade War, so called Trade War. Can we win this? First of all, do you agree with the President that some of the deals we’ve negotiated are unfair and ideally should be fixed? Do you agree with that, first of all?
Jim Rogers: Let’s go back when Trump says Trade Wars are good for America and that he can win the Trade War and that is absolutely ludicrous. Mr Trump doesn’t know History and if he does know History, he thinks he’s smarter than History. Nobody ever won a Trade War, even the people who thinks they’ve won Trade Wars, if anybody ever did, looses, so the answer’s no. we cannot win the Trade War, nobody can.
David Scranton: But you agree that the deals we’ve made in the past are as lopsided as he seems to be saying or he’s just pointing to a few things that are particularly lopsided?
Jim Rogers: Do you think Mr Trump had read T.P.P? Do you think Mr Trump has read any of them that read the agreement; hundreds of people seem to be involved in negotiating these things. Listen they’re bureaucrats and I don’t have much regard for bureaucrats but still, I know Mr Trump has not read them I don’t know why he says they’re no good, I do know the D.P.P has to be---anytime you have free trade/open trade its good for everybody, and I find it interesting that the eleventh countries that stayed with it continued with the D.P. P. and they’re not gonna let us back in as Mr Trump say they will.
David Scranton: Then what’s the best that we can all hope for then in all this Trade War business in your opinion?
Jim Rogers: Hope the best, we hope it goes away. We hope it doesn’t happen the Chinese, they’ve been pretty retrained so far but if get sucked into the thing, it’s gonna get worse; let’s hope that [unintelligible] has prevail. Mr Trump seems to calm down a bit about the Chinese Trade War anyway. Well that’s a different story that’s not a Trade War. If he calms down---look if he can pull that off ---If Mr Trumps pulls up get rid of Trade War, pulls off Korea, etc stock market is going to go up quite a lot for the rest of the year. If he can pull these things off.
David Scranton: So in the thirty seconds or so we have left, tell me, you share the concern that many have that if we really take off China, perhaps they might stop buying our bonds and that will cause interest rates to spike upward? You think that’s realistically a possibility?
Jim Rogers: I doubt seriously they might just re-invest their bonds. We know interest rates are getting higher, maybe one of the reasons, interest rates are at a thirty five year low, thirty seven year lows, of course interest rates are gonna go higher and it’s gonna hurt all of us. I don’t know what’s gonna cause, I do know some of the thing, but China, I’m not too worried about what you just outlined, acerbate if it happens.
David Scranton: Well that’s good news because that will be detrimental if it happens. So Jim thanks so much for being on the show once again we appreciate your time today. We appreciate all of you too our Income Generation viewers, we’ll be right back in a minute.[Break]
David Scranton: I’d like to take this opportunity to thank both of our guests today for joining us on another episode of the Income Generation, I would also like to thank you or new and returning viewers. You know, we’ve tackled a pretty challenging topic on today’s show, but to think understanding all the complicated factors weighing on new Federal Reserve Chairman, is tough, imaging trying to deal with these factors. The top job of staring into the nation’s economy is difficult enough in normal times Bu even 92 year old former Chairman Alan Green spare and the queen in the recent Bloomberg interview. These are not normal times, unlike me Mr Green spin is a student of history and also like me he recognizes all the challenges facing the economy.
The financial markets and our political leaders today are historically unprecedented. Of course as we learned on today’s show that’s partially our own fault. Short sighted, quick fix policies have helped create this unprecedented age of uncertainty, now it’s up to people like Jerome Powell, in his new role as head Chairman to try to normalize this economy and the financial markets again in the midst of all this uncertainty which is sort of liking trying to land this experimental airplane in the midst of a storm.
You know, for everyday investors out of their retirement, it’s important to remember that we’re all passengers on this airplane, and as such I believe there have never been a more important time to reduce your market risk and to focus on asset protection and income. In other words, fasten your seat belts.
Thanks for watching, if you’re close to retirement and you really wonna know how to protect and maximize your money. It’s absolutely essential that you stay informed and up to date and right here is where you can do it on the Income Generation. I’m David Scranton, thanks again we’ll see you next week. Red day to day Scranton new groundbreaking new book; Return on Principle: 7 Core Values to Help Protect Your Money in Good Times and Bad. Discover practical solutions to the financial challenges facing today’s generation of retirees and near retirees.
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