https://youtu.be/4eVAskRng9Q
Today. We have James Rickards here, author of the new great depression. Check it out on Amazon. It should be out now, but let’s dig right into it because a lot of you guys know who James is and he writes a lot about, bat girl economies. And I thought bringing him on would be a great way to get a little bit of different contexts or different viewpoint on things too.
When you’re reading headlines, how do you take it in? But I guess James, let’s start off with you’re saying that we are in the new great depression. If you can explain that to us. Sure. It’s important to understand the distinction land between a recession and a depression.
A recession has a kind of a technical quantitative definition. It’s two consecutive quarters of declining GDP. There are a few other bells and whistles involving employment, so forth, but two consecutive quarters of declining GDP is a good rule of thumb. There’s actually a body that determines that it’s a national Bureau of economic research in Cambridge.
So the, they call the Boston strikes on recessions. They tell you when to start it when it ended, they said, pardon me? That this recession began in February, , 2020 . I think that’s correct. They haven’t said it’s over, but we can look at the data and. Pretty much see that it was over by probably July a third quarter growth was very strong, not strong enough to get us out of the hole we had fallen into, but but strong enough to end a recession.
Depression is different. Depressions are much more long lasting and people incorrectly assume that well, Jay, if a recession is two quarters of declining GDP depression is versus depression must be 10 quarters of declining GDP, like a really long recession. And that’s not the definition of depression.
Is you can have growth in a depression, but the point is it’s depressed growth. In other words, it’s growth below trend. For example, take the expansion from ten-year expansion from 2009 to 2019. The economy grew for 10 years. It was the longest expansion in us history, but it was also the weakest expansion in us history.
Average annual growth was about 2.2%. And all recessions are all recovery since 1980 average growth was 3.2%. So in other words, you were growing at a full percentage point less. Than the trend. And so it’s that below trend growth, depressed growth relative to trend. That’s what makes the depression.
That’s what we’re in now. So we had growth in the third quarter. That’s fine. We’ll probably have growth in the fourth quarter, although the data is that they keep revising the data downwards. So that target gets smaller for the full year to 2020. It’s going to be one of the Weakest year as largest negative growth, largest drop in GDP ever recorded.
The question is where are we now? My view is when a second technical recession in. The depression, by the way, this happened in the original great depression from 1929 to 1940, there were two technical recessions. There was a recession from 1929 to very severe. And then there was growth in 1933. It was one of the best years in the stock market.
34, 35, 36. We had growth. But the problem was we had dug such a deep hole. That even with growth, you weren’t back to where you were. So in 1934 or 35, unemployment fell from 25% to 14%. That’s sounds good. Except it’s still 14%. In other words, it’s still so extraordinarily high. And then 1937 38, we had a second recession and that’s what prolonged it and turned it into the great depression.
We’re going through something similar right now. I would we’re going to have a recession. In the first quarter of 2021, the quarter we’re in right now this will be what they call back-to-back recession. We had a recession and pretty much the first half of 2020 and a newest session beginning in the first quarter, at least of 2021.
All in the context of a great depression. So I focus on the depression aspect of it. You can have growth, you can have declining unemployment. There are certainly investment opportunities, but you’re looking at the press growth. You’re looking at prolonged period change behavior. We’re not going to get back to normal or there’s forget about normal.
We’ll live through it. We’ll cut out the other side, but things will be permanently different and that. Affects all kinds of expectations about growth asset allocation. And that’s really what I focus on in the book hit some of these COVID questions here at the end, cause that’s a little bit more of the micro cycle, right?
What we’re talking about today is more of a longer time horizon. So just to understand it correctly, from my perspective, you’re saying depression is you can still have growth. In a depression, but it’s just not at the pace of 3%, 4%, 5%. Correct is depressed growth in other words, right? One, 1%, 2% a year over five, 10 years, that can still be in the technical term, but depression is what I’m understanding.
That’s right. But again got to go back to the 2009, 2019 recovery ten-year recovery. And I said growth was 2.2% trend growth. Prior to that, going back to 1980, it was 3.2%. If you want to go back to the end of world war two, it was more like 4.2%. So that’s the kind of goes, so you say Jay, 2.2, 3.2 it’s only one percentage point.
What’s the big deal. No one percentage point apply to a $20 trillion economy. Compounded over 10 years, that has up to four to $5 trillion in lost wealth. In other words, yeah, we had an expansion, but it would have been $4 trillion greater. There would have been $4 trillion more wealth created. If we had been able to get back to 3.2% at which we did not The same thing is true today.
So yeah, you had growth. The numbers are in the first quarter, going back to 20, 21st, first quarter, GDP was down about 5%, second quarter down about 31%. And the third quarter, it was up about 33% and people go well, okay. We went down 31%. We went up 33%. Aren’t we back where we started? The answer is no, because the 33% was applied.
To a much lower base. In other words, if you start the year at a hundred, say 2019, is your baseline. Just call it a hundred percent of 2019. You go down 5%. And then you get down 32%. Now you’re around 67% of the old baseline. So even if you go up, let’s say 30% or a little higher at 32% that only gets you back to 87.
It gets you to 20 points. You get us back to 87. You’re still. 13 points below 13 percentage points below the old trend. And even if we have say 10% growth in the fourth quarter, which is some estimates show, okay, that gets you another eight points, but you’re still back to 95. In other words, you’re still.
Below 2019 baseline growth. We’re not going to get back to 2019 levels of growth until 2023 at the earliest. We’re not going to get back to 2019 employment levels in terms of total jobs until 2025 at the earliest that’s if nothing goes wrong in the meantime but I expect a number of things would go wrong, including a new recession right now.
Lot of people don’t know lane Yeah. They know that the stock market peaked in a night, October, 1929, and it crashed 89.2% by 1932. So almost 90%. That’s what a real market crash looks like. And then you ask people when did they get back to the 1929 level? When did it get back to the old high and people go, Oh, it must’ve been late thirties, early forties.
No, it was 1954 and it took 25 years. To get back to the old high, the Nikkei index in Japan hit 40,000 in 1989. It’s still not there. That’s, be able to talk about the last decade. We’ll try three last decades. Here we are 30, over 30 years later and it’s still nowhere near the old high.
And so that’s, I would say Japan has been in a depression the whole time. So that’s what depression is look like. They’re multi-year, they’re actually intergenerational You can have growth, but it’s not try and growth and it’s not enough to overcome the damage that was done. So we’re still way below, even with growth in the third and fourth quarters, we’re still well below the 2019 base.
And we’re not going to get to that level for several years, at least. So I think a lot of people understand this as, if you have your stocks drop a bunch where it’s going to almost have to come up twice as much to get to where you were, that phenomenon with numbers. And then you also mentioned something there too.
I think a lot of us, we understand what’s going on in Japan the last decades. Do they have negative GDP growth or is that kind of what you’re alluding towards that you. The U S is going towards, they have both I think the U S is going to resemble Japan. I think it has resembled Japan since 2007.
Going back before the global financial crisis, but I think that will continue. So just use Japan as example, I said during the 30 year depression, which they are, they’ve had a series of technical recessions. Now the recession might last. Six months, nine months a year, sometimes longer.
And then they have growth, but they never get back to trend growth. They never get back to the old level. That’s my point, not Japan’s nitrous in place. And I had a conversation with. He was known in 19 years and said, Mr. Yan, he was the assistant finance minister of Japan. But I was talking to him about this.
So we’re in Korea, about exactly what we’re discussing now, which is that Japan is growth has been very weak within and out of recession with a prolonged depression, but some growth along the way. And he said, yes, but you have to understand that the population is declining. So , if you calculate Japan on a per capita basis, They were actually doing better than on an absolute basis.
Absolute growth has been very weak, but if you spread that growth with a much smaller population, the per capita numbers, they’re actually significantly higher and which is true, just, fifth grade math
so where are you? Ended up as one person knows the whole country and he’s the richest guy in the world? That’s the deal ad absurdum of what he was describing. He was technically correct, but is that doesn’t work in the market? May our population is increasing we’re a country that likes growth.
We like both at the individual level and at the national level. So the idea that we could be satisfied with we growth in a declining population is just, it’s just not going to happen. Could be inappropriate long bout of weed growth. And then the policy question as well.
How do you change that? How do you get out of that? How do you deal with it? Yeah. So if you guys haven’t heard of this term of, changing worlds, demographics, aging, and birth I think that was in. Mr. Rickards last book. She just want to check that out, but definitely a big impact too.
So America’s population is growing. Barely, it’s funny looking at it as a great question. You look around the world. Japan’s population is declining. Russia is declining. Europe is declining. China is flat, but they’re approaching a level where they’re they’re not going to be at replacement levels.
Chris, this is the legacy of the one child policy, which is, we don’t have to do a deep dive on that, but that was one of the great plungers of history and aging rapidly. So Japan is flatline now until recently. United States population had been growing not at a high rate, but faster than all those other countries.
I mentioned mainly because of immigration , the natural birth rate of people in the country was not much better than Europe is at, or slightly below replacement level, but we had enough immigration to increase the population, but pardon me, partly because of policies during the Trump administration that immigration has been truncated.
So we may now be closer to a flat shall we say a population growth. And of course that, that affects output. There are lots of ways to think about GDP, the four part definition consumption investment government spending and net exports. But there’s an even simpler way to think about it.
It get to the same place, which is how many people were working and how productive are they? It’s working population times productivity. Productivity has been flattish, not very strong for reasons that are not entirely well understood, but it’s just the case. And population growth. Here, we’re talking about the labor force not the total number of people, from coast to coast, but how many people are in the labor force that labor force participation has been declining and fell very sharply during the technical recession that we had , in 2020.
If your population’s declining and your productivity is declining, your GDP is not growing very much at all. That is the situation we’re facing in the United States. And also like the way they keep those statistics on who unemployment has been changing to make it look rosier than it really is.
Yes. But I would say there’s another statistic, which is more important, which is labor force, the labor force participation rate, which is down around 61% now. But as recently as the 1990s, early two thousands, it was around 67%. So that’s a six and a half point decline or 10% decline if you think of it as a percentage of the whole that’s a big deal.
That number is the lowest. It has been since the 1970s, when women first started coming into the workforce in large numbers. Now, if you don’t have a job. But you’re not looking for a job. You’re actually not counted as unemployed. The unemployment number we saw and yeah, declined from it was hit about 13% last spring.
It came down to 10 . Now it’s around a seven or so, maybe slightly higher. That’s still high, but it’s a significant improvement over where it was last April, let’s say, but that’s not the number that matters. The number that matters is labor force participation. So what’s happened is.
Tens of millions of Americans have, I’ve left the workforce there and I’m talking to ages 25 to 54. I’m not talking about, a 68 year old who wants to keep working or a teenager, or we’re not talking about disabled. There are perfectly good reasons for people not to be in the workforce.
There are always some, but. We’re talking about able-bodied individuals between the ages of 25 and 54 prime working ages who have left the workforce. If you’re not, banging on the door of the unemployment office is looking for a job. They don’t count, it was unemployed but you’re not working and you’re not producing.
And so I look at that number because to me it’s a better gauge of economic growth
displayed right here. So that’s just simply Google and the labor force participation rate. Kept up by the U S Bureau of labor statistics. And is this pretty much it, this is what makes it hard, right? Cause everybody hears the news headlines and we know they’re always just trying to sell news headline, just like other talking about how collections are horrible, but I don’t see any of that issue happening.
In other words saying that unemployment’s down, but is this really the way they cut through that noise? Yeah. This is a more manual chart than the unemployment rate. Again this is the labor force participation rate. Now you notice you’re heard a lot of talk and last March, April may, about the V-shaped recovery and pent up demand and all that.
And you look at that chart and look at labor force participation while you see the steep decline at the time of the pandemic. Okay. Got it. It came back, but that’s not a B that’s like a half a B in other words, the bounce now it’s flat and going down again. So yeah, you had a little bit of a bounce back.
That was to be expected after the, we got through the original round of lockdowns in in may, in June, she had that bounce back. But then it flat lines and now it’s going down again. And that’s consistent with what I said earlier, which is we’re heading back into another recession right now. Because there’s a new round of lockdowns.
You don’t need a PhD to figure this out. You locked down half the economy, you’re going to get a reception. It’s as simple as that. And the other thing lane is that People go, Oh, the stock market’s at all time highs, my 401k is back where it was or even better, et cetera. There is a major disjoint, if you will, between the stock market indices and the health of the economy, you have stock markets who are back to all time highs, but I look at the S and P 500 and I call it the S and P six, or maybe S and P seven, if you want to count Tesla now.
And that was the S and P 500 is the cap weighted index. That means if you have a larger market capitalization, you count for more, in the index itself? 40% of the index is a Dell seven stocks and you know what they are, it’s, Amazon, Microsoft, Google, Facebook, Netflix, Apple, and now you can throw in Tesla and maybe one or two others, and they’re the ones going up.
They’re the ones that least affected by the pandemic. They’re overwhelmingly digital. Okay. Amazon owns whole foods and Apple has some showroom type stores. But not much, mostly they’re online and they’re selling digital products and advertising and data mining, et cetera. So they were not only unaffected by the pandemic, but did better because that was the only place people could shop or communicate.
But what about the S and P 490? What about the other stocks in the S and P 500? Have a look. They’re all the kind of flat to down there. Yeah. There’s some individual cases that have gone up, but on average they’re flat to down. So we’ve bet our whole economy on so there’s six or seven stocks.
So there’s no. Relationship between how the stock market and the seas are doing and how the economy is doing. When we get back to the economy who suffered the most and who continues to suffer the most small and medium size enterprises. So restaurants, bars, nail salons, dry cleaners Boutique shopping on and on.
There’s a long list and people look down their nose at that and they go, Oh, you’re a small business who cares? You’re not Apple, computer, whatever, sorry. Those small businesses are 45% of GDP and 50% of all jobs. That’s half the economy right there. If you crush it, you’re going to crush the economy.
I don’t care where Apple stock goes. It’ll, I’m not going to short it’ll probably go up more, but you’ve crushed and destroyed half the economy. And we’re doing it again with the new outbreak in COVID cases and fatalities, which are actually higher. Then they were less March and April when everyone thought the world was coming to an end, it’s worse right now with this second wave and it may get even worse because some of the new variants or strange, or whatever you want to call it, it’s not clear that they will be controlled by the vaccine, even if they are.
It’s not clear that the virus won’t mutate further. To escape the vaccine, they call it mutation as escape or the immunity escape. In other words, the idea is that the virus first of all, the scientists and I’m a sheriff is alive or not. I talked about that in the book.
It’s a it’s something, it’s got some RNA in it. It’s got a shell and it exists. We can see it under electron microscope. It’s not clear that it’s alive, but it’s really good. At replicating a cell by taking over cells and cell infection spread. Now, if you create antibodies to the virus, so you can get antibodies through a vaccine and you get hit with a virus, your body can fight back.
That’s what vaccines do. But so the virus think of the virus is trying to survive, right? It, all of a sudden more and more people have the vaccine more and more people have immunity get close to her, to immunity. The virus has nowhere to go. Every time it jumps from one body to the next, it runs into the antibodies.
Or as I say, the vaccine or whatever what does it do? It mutates in ways that do an Enron around those particular antibodies, you need new vaccines, new antibodies to stop it. This is just how viruses behave. It’s been true throughout history. It’s why you get these second waves or in our case remain.
B heading for third wave. So this pandemic is far from over, right? The vaccines. Great. That nice job. The pharmaceutical companies, the Trump administration did a great job of funding it and getting bureaucratic roadblocks out of the way. And it was in redundant record time for something of this magnitude.
That’s all to the good, but it doesn’t mean it’s over because we actually already, with this new UK, South African. Strain or variant could be saying the virus like Houdini escaping from the existing antibodies and finding new ways to infect people. So I want to go back to wrapping up the depression discussion.
So you, you mentioned productivity and the percent of. Labor force participation rate. What is the cause of that? I don’t know if you can speculate. Maybe it doesn’t matter, but what do you think is the general cause of that? Is this people lazier these days or, no, there are a couple of causes.
One is demographics, as I said, the populations aging and not expanding as fast as it used to so that some of it’s demographic people get to retirement as, no reason you can’t work it. 68 years old. Bernie Sanders has gone strong and he’s just getting close to 80. But the point being that is a time when people retire and check out, then the workforce has to decline and you don’t have as many younger people entering the workforce.
You have millennials now gen Z is coming along, but I’m not quite at that replacement level, but that’s not the only factor. The other factor is Because so many jobs have been moved to China and elsewhere, it’s not just China, but China’s probably the biggest culprit. Where are the the mining jobs, the steel jobs, the assembly line jobs, the skilled craftspeople, et cetera.
You don’t need a nothing wrong with college, but you don’t need a college degree to. To work on assembly line. You need some training and some smarts but yeah, jobs are largely gone. And what have we done replacing them with? We’re replacing them with, the gig economy, barista, Sarah, and by the way, there’s dignity in all work.
There’s not nothing, wrong with being a barista, good for you or an Uber driver, but those jobs don’t have the benefits and the pay scales and the security that we’re talking about. So a lot of people just drop out of the workforce. Drug use is going up. Obesity is a problem.
Diabetes is a problem. A lot of areas are just totally depressed. There aren’t any jobs around people don’t have the resources to necessarily pick up and move. I remember the 1980s, there was a migration from Detroit to Dallas. People just got to you all and moved to Texas and got another job. That’s harder to do now.
Not just the question, having the resources, there are plenty of jobs in Austin, but they’re the high-tech jobs. You do need an engineering degree or something like that to jump on board there. The quality of the jobs the lost opportunities, the depressed area, drug addiction, demographics, all these things come together and people just say, you know what?
I’ll sit on the couch in front of my wide screen TV and watch a football game and maybe. A relative as a job or someone else is paying the rent or you got some a government check or something, but it sounded long-term solution. And that’s part of what we’re going through.
I’ve heard that there is immigration still coming into America and that’s a lot of the blue collar workforce coming in. And a lot of markets there are new. Assembly, plants opening up, Mazda and Huntsville, stuff like that. But , you think it’s more of a paradigm between the coastal markets and more Southern Southeastern States, Florida?
Is there a different between, people moving out of California or no jobs in California. I know homelessness is really bad out there in Washington and a lot of other cities. Yeah. When you talk about immigration, that mean there are two completely different kinds of immigration going on.
There’s legal immigration with, an H1B visa or some other visas. And yeah, if you’re an engineer from India, come on and you’ll get hired, before you’re off the plane. But that’s okay. A limited number. And those aren’t really creating jobs for Americans or creating jobs for Indians who got an engineering degree, but that’s relatively small compared to the whole, most of the immigration is the opposite.
They’re, coming through the Mexican border. They’re pretty much impoverished. And then they’re not all Mexicans, by the way, they’re from Guatemala and El Salvador and Nicaragua, and actually all over the world. If you can get to Mexico, you can probably get into the United States.
Those people are not getting jobs in Huntsville. They’re they’re either dependent on the state or, yeah. Okay. Landscaping jobs waitress jobs maybe babysitters, et cetera. And again, let me be clear. There’s dignity in all work. So I’m not sure. Disparaging prefer illegal immigration.
I’m not disparaging people who do what they have to do for themselves or their families. And I’m not disparaging that type of work. What I’m saying is that those jobs do not have high salaries. They do not have benefits. They’re not going to lead to a particularly a high growth or higher consumption. Maybe in the next generation, that’s fine but not now.
So moving on to the COVID 19, which we know we’re moving into 2021. Where were we? About half time, first quarter. How do you see this playing out this year? The pandemic is getting worse and it may get worse than that depending on how the mutations go, which are unpredictable while lot mutations mean nothing.
They’re like right. A couple sequences change, but it didn’t really change the behavior of the virus and the vaccines still works, et cetera. Some mutations are favorable in the sense that the virus gets less contagious and eventually it can fail entirely. Those are possibilities. The history of pandemics is that in most cases, not all, but the most that the mutations actually get worse.
And then the classic example of that was the Spanish grow which by the way, lasted for three years and especially in 1918. Okay. But it was very bad, 19, 19 and continued into 1920. So that was really spread over three years. And the first way it was kind of March April 1918, which was horrific, but then it seemed to go away in the summer.
July, August, September were much better. It came back with a vengeance in October, 1918, and most of the fatalities were in that October, November, December. 1918 period, and then it faded again. They came back for third way of 19, 19, not as bad. So the, and that’s true of the Hong Kong flu in 1958. And the several other flu epidemics we’ve had recently.
And I COVID is not the flu. It’s a coronavirus, but some of the mutation dynamics are the same. So the point is the place you don’t know, nobody can sit here today and predict. What will happen exactly, but history and biology and virology suggest that, mutations that, as I say, do this immunity, escape that I talked about earlier can make it a lot worse and we seem to be seeing something like that right now.
But even if we don’t, even if. The vaccines where the mutations don’t get worse in this phase, over the course of 2021, it’s going to take a year by the way at best. It doesn’t mean the economy comes roaring back this whole notion. You’re Larry Kudlow and everyone else talking to me. And last April may is I guess, bad right now we’re locked down.
But we’re at least there’s pent up demand. Where the economy is going to come roaring back. As soon as we get through this and a lot of the policy decisions in March and April were based on the fact that we’d be able to remove the lockdowns by July and August. And they were expecting as they say, pent up demand, but that’s not true.
For example My wife and I, we were locked down kinda quarantined like everybody else in March, April and may. And usually we go out to dinner on a Friday night, but we didn’t because we were locked down. Eventually in June, the restaurants opened up and my wife and I went out to dinner.
We didn’t order 10 dinners. We ordered one. And as if we had skipped nine weeks of dinners and then went out, we ordered one dinner. Those other nine were permanently lost. That was not a temporary loss. That was not a timing difference. That was a permanently lost income permanently lost revenue, besides which when a restaurant let’s say had 20, the waiters and cooks and maitre D whatever, and you shut down.
And then you reopened in the summer. You didn’t hire back 20 hard back 10 maybe because capacity was reduced. People still weren’t going out, et cetera. That’s if you even reopened at all, a lot of small businesses did not reopen those. Those losses are permanent. Again, I’m not talking about Apple computer, I’m talking about.
The other half of the economy, which is small and medium size enterprises. And there’s data on all this. I’m not just speculating, and this is all in my book. By the way, in the book it’s got 200 end notes. So you might want to buy it just for the endnotes alone, because I I researched everything.
I read over a hundred peer reviewed papers, and I should more than that. And and all the citations are there. So if I’m saying something, I tell the reader, don’t argue with me, argue with scientists. Cause they’re all footnoted and you can look at the source papers, but we have data on all this.
Now we didn’t have as much data. In may and June when I was writing a lot of the book, but then the publication date got pushed back a little bit because of supply chain problems actually in the printing industry. But that gave me an opportunity to freshen it up in September, even as late as October.
So we have the most recent data and it shows what I’m describing. This is a mess migration. Out of New York, Los Angeles, San Francisco, Seattle, Chicago, Philadelphia, and Baltimore, and a few other cities. And the people are going to, Phoenix, Scottsdale, Miami, Nashville, Portsmouth, New Hampshire Boulder, Colorado, Denver, and a few other places.
And part of the reason is climate’s nice, but there are jobs there, but the taxes and the crime, you didn’t have the kind of rioting and destruction that you saw in New York and Seattle and Portland you don’t see that in Phoenix and some of the other cities I mentioned or Miami for that matter.
So whether it’s high crime, high taxes, density, functions, lost jobs or whatever, there is this massive migration, which is interesting because. In certain sectors, residential real estate is doing extremely well. Usually residential and commercial kind of move together based on interest rates and economic cycles.
They can go up together or down together in a recession. But right now there’s is a bifurcation residential real estate in the destination, cities and suburbs is going up very strongly. Commercial real estate is nowhere near the bottom. It’s just going to get worse. At least through 2021, probably even longer.
veteran, you mentioned in your past book the move towards the urban Exodus. I like that idea. That’s why we try and stay out of the city core out to the more suburbs investing in those multi-families out there. And I think, with the pandemic, I don’t know if you want to expand anymore, the big cities are mostly blue.
Mostly bird moving up to the red States any other kind of newer developments on that? That’s, I don’t really I don’t really get into politics. I say in the book, the virus is not a Republican or a Democrat. The virus just wants to kill you. So the virus, you need to understand epidemiology and virology and what’s going on, but yeah.
It by itself. It’s not political. Now you can politicize it if you want to. And a lot of people have but I would simply make the point that the reason commercial real estate is down. Across the board, even in stronger cities like Miami and Phoenix, that’s suffering. And clearly the exit of cities as I call them New York and Seattle and others is suffering even more.
A lot of that has to do some of it has to do with crime in the streets and the mayors and all that. Yes. But a lot of it has to do with the work from home environment, which very few large companies would have said. No two years ago, Hey, I think everybody can work from home. We’ll figure it out. We’ll get some software or whatever nobody was saying that but in the pandemic and the shutdown last March, they had no choice.
You had to work from home, because of the lockdown, it turns out it worked pretty well. There are pros and cons. We all get a little tired of living on zoom, a little bit. Personal contact is socializing is a good thing for your mental health, but that aside from a purely business point of view, the work from home model still works.
So if you had 10 floors of a, Midtown office building prime location in New York, And they’re vacant because everyone’s working from home. You’re not going to go back to 10 floors. You might go back to two floors. You might have a locker room. Not like we had in high school, but yeah, a nice facility with a lot of attractive office space where people can basically reserve the office.
So you’re working for him. You call up say, Hey, I need an office and a conference room two days next week. And you book it as yours. You come in, you open your locker, there’s a laptop and a sport coat and a tie or whatever you need. Nice scarf. And you go sit in the office and you do your business, and then you go back and work from home.
If that’s the environment where everyone, it’s not quite like a, it’s a kind of office Sharon, but it’s not, we works in the sense that everyone’s crammed in together. You could have a nice facility, but if it’s always temporary and always rolling over. You only need two floors instead of 10 floors.
So first of all, that’s slams the landlord, but the ripple effects are huge because it’s not just that it’s okay, what about commutation? What about public transportation, food trucks, restaurants, cleaning staff, maintenance, staff shopping is so all the things that surround people coming to cities and working in fairly dense environments, that’s down 80%.
And it’s not coming back because the model’s not coming back. We’re a long way from the bottom. I understand what the stock market’s doing. I would say again, B seven, not the S and P 500 and query whether that’s a bubble, I don’t want to go short Tesla right now. You probably get the getting run over by an 18 Wheeler, but I don’t want to buy it either because I do see it as a bubble, something that’s going to reverse fairly.
Severely wants this new stage, two of the recession sinks in, but again, commercial real estate and small and medium sized enterprises, including a lot of retail, which has half the economy have been slammed and are not coming back quickly. So our listener base is pretty smart.
They don’t just read general headlines on, people are moving out of the cities. They understand somewhere in the pilot, there is an emerging market out there that is doing better than the rest. Any particular emerging markets in America that you like or. Yeah. As I said, we already talked about residential real estate and the target cities, I would say again, Nashville, Miami, Phoenix, and others as attractive 10-year treasury notes are set to rally and we’re probably going to get to a negative yield to maturity and yield matured in a 10 year note is set by secondary market trading.
So that has nothing to do directly with the fed funds policy rate, which is Yeah, with basically an overnight rate. The fed can stay at zero, not go negative in terms of the policy rate, but there’s nothing stopping 10-year treasury notes from having a negative yield of maturity. All it takes is, secondary market trading.
I’m a seller, you’re a buyer. There’s this triple coupons associated with. The tenure note, the minute you pay me a price, that’s greater than the present value of the coupons and the principal. You’re going to have a negative yield to maturity. Now that’s okay. There might be a lot of reasons to do it. One might be that you think rates are going to go even lower so you can sell to somebody else at the higher price.
The other thing is, if you’re a foreign investor, you can lose on the dollar denominated, yield maturity, but make money on the currency. If the dollar gets stronger against the Euro. Based investor can make profits in Euro, even though the cashflow in dollars was negative because you have higher exchange rate.
So there’ll plenty of reasons for it. And we see this all over the world. Buns are a negative buns, Japanese government bonds, awesome. Bond markets have negative deals to mature. There’s no reason to doubt the treasury, no market can’t do the same thing. If it does, you’ll be looking at huge capital gains because right now the.
Yield to maturity is about 95 basis points. So if you go up from 95 basis points to, let’s say negative 50 basis points, that’s a huge capital gain because the interest rates go down prices go up. And so that’s how you You capture your profits. So that can be large. I like gold. For about 10% of your portfolio, there are opportunities and alternatives.
Again, we talked about residential real estate funds, but I think natural resources, water, agriculture, some other sectors will define this also room for a big allocation to cash. And people go, wait a second though. Why would I want cash? It has no yield a couple of things. Number one if you had deflation.
And I think right now, deflation is a greater danger than inflation. If you have deflation, even with zero return, your real return could be. 2%. It could be your best performing asset because in deflation prices are dropping. So you’re not getting returned a nominal return on your cash, that the cash is worth more because the price has dropped.
So there’s a real gain there. But number two and probably more importantly, cash has huge optionality. If you have cash. That’s the functional equivalent of not the money call option on every asset class in the world. And we’re going to need greater visibility and you need to be nimble to decide what to do.
So you can have some investments today, but if you go all in. You say why? No. I want to be all in residential real estate or all in some alternative funding, whatever it may be. And you find out six or eight months from now that OJ to places worse than I thought, maybe inflation’s worse. And I thought maybe this particular sector is not so hot.
It can be very expensive. If not impossible to get out of. Those asset classes. Try getting your money back from Henry Kravis ahead of schedule. It’s you know, good luck. So the point is the person with cash can be more nimble because as we get greater visibility, you have no impediments to the pivot.
You can pivot here or there, depending on where the opportunity lies. And that’s valuable. The most people, a lot of experts will say, you know what? The fed printing all this money. It’ll be leading towards inflation, right? $3 trillion, $4 trillion in the last few months. Pop the stock market. And that’s one of the ways it’s shown its ugly head, but you’re saying the complete opposite it’s deflation that’s coming.
Maybe why is the whole inflation story? Not true, first of all, it hasn’t been true for 13 years. Go back to 2009, between late 2008 and 2009, the federal reserve expanded its balance sheet from about $800 billion. Two something just under $4 trillion. So they increased it by the 300% and it was like, Oh my goodness, they’re printing all this money.
We’re going to get inflation. We never got inflation. We didn’t have inflation for 10 years. We still don’t. The money supply has nothing to do with inflation. Milton Friedman was wrong about that. The Austrian school was wrong about that. The Neo Keynesians are wrong about that. Inflation is not caused by money printing.
Inflation is caused by velocity of money and it was this, the turnover of money. So you can take the fed balance sheet to 7 trillion. My friend, Stephanie Kelton, she’s the big brand of modern monetary theory. They say, why can’t it be 10 trillion? The answer is, it could be 10 trillion, but it’s not necessarily inflationary unless you get the turnover.
So I’ll give you a simple example. Let’s say I go out to dinner and I tip the waiter and the waiter takes the tip money and takes a taxi or an Uber home, tips the driver. And then the driver takes the tip money and puts gas in his car. My $1 had velocity of three. It supported $3 of goods and services that, the restaurant tip the taxi tip and the guests.
But what if I stayed home? And watch TV. Then my money has philosophy of zero. I didn’t spend my money. There was no turnover and I remind people $7 trillion times zero. Is zero in others. If you don’t have velocity, I don’t care how much money you print. If you don’t have velocity, you don’t have an economy.
Velocity has been dropping for 22 years. It started to drop in 1998. It’s been coming down ever since our head larger spikes down and the 2008 global financial crisis and the 2020 pandemic collapse. the clear line has been going steeply down and it’s still going down.
So my point is, And we need inflation. Inflation is not good in some ways, but you can’t print your way out of a liquidity chap. You can’t borrow your way out of a debt trap. The only way to get out of it is with inflation.
And the only way to get inflation is to change the psychology because it’s not controlled by my supplies control by how people feel. And right now they’re. They’re savings. Savings rates are sky high is precautionary savings. People feel it, prices are going to get lower, so they defer consumption.
Now I’m talking about consumer price inflation, which is what the fed looks at and what’s policymakers. I got a few, if you think the stock market is a place, I can call it an asset bubble. Yeah. Stock prices are going up. That’s not inflation as. Economists and policymakers understand it.
Those are just asset bubbles and they are happening. So the money has to go somewhere. I’ve heard of people got these $1,200 checks last. Think around last June, may and June, they’re probably going to get another $600, in the next month or so. What are they doing with the money?
Some people were paying the bills, but a lot of people are investing in stocks. You’ve got all these newbies, they’re on Robin hood, their first time investors. They don’t really know what they’re doing, but they know that stocks only go up. They’re not spending the money they’re investing in the stock market.
They’re just in plating the bubble, not doing anything for the real economy, which would come from spending. And there’s something to be said for savings. But that’s what people are doing, the saving the money and investing the money. They’re not spending it. So the money printing doesn’t work.
Yeah, no, that makes total sense. The money’s out there, it’s just, the government needs have to try and find a way to incentivize throwing it into the real economy. Getting abundance mindset for consumers. That’s right. And there is a way to do it, which I talked about in the conclusion of the book.
Not to tease it, but yeah, it’s out there. What I tell people is that policymakers don’t. I understand that. So I explain it clearly. I give two historical examples, two different presidents, one Democrat, one Republican of the 20th century who pulled this off successfully. So it does work.
There is historical precedent for it. Central bankers have forgotten it if they ever knew, so they should read my book. If they want to know how to get in place and get out of the debt trap. But the point I make for the reader is even if the central banks don’t do it, even if the government doesn’t do it, you can’t, you can personally go on a gold standard one, a hard assets standard and and benefit personally, preserve wealth and make money.
Even if the government doesn’t find a right. So I guess the, I was going to ask you about the Biden camp or anything coming down the pipeline, but it may not matter, if they have another couple of rounds of stimulus checks, this money is just being diverted to the stock market. It’s just not getting to where it needs to go.
That’s exactly why I’m proud to say, I barely talk about politics at all in the book, but partly for the reason you mentioned, which is it doesn’t matter. Monetary policy doesn’t work because of declining velocity, fiscal policy deficit spending doesn’t work it because the debt to GDP ratio is so high that we’re through the looking glass that what people are doing now is they’re saying, look, I don’t know how it ends.
It could be inflation. It could be higher taxes. It could be a debt default. There could be a number of different scenarios, but they’re all bad. And so I’m just going to save more, spend less on a precautionary basis to get ready for that day. When other, inflation kicks in or I have to pay higher taxes or whatever.
, and that pressure by the way, is 90% debt to GDP. Right now, the debt to GDP has gone up from a hundred, 6% pre COVID to around a hundred. 30% today. So this is for the United States. The U S is now in the same league as a, Lebanon Greece, Italy there’s your club. So my point being we will have large deficits.
We will have more deficit spending. We will have more debit. It doesn’t work because we’re through the looking glass. We’re through that 9% critical threshold where now behavior changes and people don’t spend the money. So monetary policy doesn’t work because of philosophy and psychology fiscal policy doesn’t work.
Because debt to GDP ratio is too high and people are getting ready for bed ending. So it, Trump Biden administration, they’re going to pursue the same policies. You can print money, but that’s not stimulus. You can run deficits, but that’s not stainless. I always tell people stop calling it stimulus.
You can call it deficit spending. If you want, you can call it money printing if you want, but it’s not stimulus. It doesn’t stimulate anything. Yeah, no. Very interesting. For the guy under a few million dollars net worth, what would you be suggesting at this point for their portfolio?
Yeah I think I have about 30% cash, but sounds high to most people, but we already explained that I’d have 10% gold or gold mining shares. There’s room for a residential real estate. We talked about that you need the right fund manager but there’s a way to do that. Some for alternative investments, I’ve some money in some venture capital and startup type companies they’re risky, but they can be.
Very attractive, depending on the management again, and the business plan this one for listed equities, but pardon me, and have more than about, Oh, 20% or so in the stock market, people say to me, Jim, yeah, you’ve got 10% in gold. How can you sleep at night? And I go, you’re 90% in equities.
How can you use sleep at night? Because that’s really the risky asset class. Yeah. That’s something, I don’t have any paper assets personally, we’re always trying to move people to alternative assets. It’s either, do they take the money in their home equity or they take their money in their stock holdings or mutual funds?
And I’m like, I don’t know if it were me, I’d take it out of the stocks, but look, that’s just, who knows. but thanks James. For coming on. Folks get his book, the new great depression, winners and losers in a post pandemic world found on Amazon and yeah. Thanks for coming on.
Appreciate it. Thank you.
