Washington, DC -- (ReleaseWire) -- 12/28/2015 --BENNETT: Chris Martenson is an economic researcher and futurist specializing in energy and resource depletion. He is also a co-founder of PeakProsperity and the co-author, along with Adam Taggart, of the new book Prosper!: How to Prepare for the Future and Create a World Worth Inheriting. Chris and I will be talking about the Fed's rate hike and whether it will be as successful as some contend. Chris, welcome to Financial Myth Busting.
MARTENSON: Dawn, it's a real pleasure to be with you today.
BENNETT: In her news conference last week, Janet Yellen, suggested that the market shouldn't overblow the significance of this initial rate hike of 25 basis points. She took great pains to emphasize that, and that the Fed also had a longer term plan to apply small rate hikes, almost reminiscent of the Greenspan gradual increases from 1% to 1.25% between 2004 and 2006. With tongue in cheek, I have to ask: since that worked so well for us before, what could possibly go wrong now?
MARTENSON: Well, what could go wrong is everything. Look, we're not just talking about the potential folly of this 0.25% or 25 basis point hike, Dawn. We're talking about 25 years of increasingly large follies and mistakes that the Fed has been making. And the pattern is clear; you just have to step back and look. We had a little bit of a crisis in the mid '90s and the Fed overreacted and put all this funny money in, and then we got the dot-com crisis, and they overreacted to that, and then we had the housing crisis and they overreacted to that. We are six years into a zero interest rate policy, with money so distorted and asset prices so distorted that people are still giving money to shale companies, who are losing money hand over fist, because they're looking for some sort of yield and there's so much money out there, nobody knows what to do with it. These things always end badly.
BENNETT: Why, after six years, are we still seeing such aggressive policy? Is it because debt deflation, the bad kind of deflation, is lurking around the corner? Is that what's going on here?
MARTENSON:It really is. You know, the Fed is the defender of a system. They don't really care if you're fully employed or how much your healthcare costs or any of that. They talk about that, but they don't. What they care about is if the financial system is happy and healthy, and unfortunately—or fortunately, however you want to look at it—we have a financial system that has to constantly be growing larger and larger or it's collapsing. It doesn't really have an in-between state. And for the financial system to be growing, it means we need more credit in the system, we need more loans being made and taken out by everybody. So really what the Fed is the defender of is a credit market that needs to constantly and continuously be doubling and growing larger and larger and larger. If you think that's unsustainable, you're in the same camp as I am.
BENNETT: Starting earlier this year, but especially during the last couple of weeks, junk bonds were really having a hard time. It didn't seem like the media really cared. Janet Yellen didn't talk about it much. How soon will the markets, or even Americans, finally realize that our Federal Reserve is actually losing control of not only the economy and the markets, but most importantly, I think, the confidence narrative?
MARTENSON: That's a really important point, and something we track at my website, PeakProsperity, all the time is that look, when trouble starts, it never starts at the center. Let's not be watching the Dow Jones for our first clues; you always look at the outside, you look at the edges of the story, and junk bonds are the very edge of the bond universe. They are signaling not just a little bit of difficulty, but since April, those have been quietly tiptoeing out the back door, and now stampeding out the front door. There's real trouble at the periphery of the bond arena; that's where things started in 2007, gave me an early warning that we were going to have trouble there as well. So I would advise your listeners, pay attention to the edges, and into that mix, I would include emerging markets. There's all kinds of damage happening in the so-called BRIC countries, Brazil, Russia, China, and so on, so take a look there as well.
BENNETT: Talking about emerging markets in the world outside of us, central banks across both the developed and the developing countries, which of course includes the BRIC countries, they seem to be running out of options, as they've cut interest rates I think over 600 times combined since 2009 and have printed over $15 trillion, but have yet to generate the expected economic growth that they kept telling us about. Why hasn't this failure produced any change in their chosen course of action?
MARTENSON: You know, that's a great question. I think you have to get a psychologist on to really answer that, because this is no longer a financial question; this is a question of human nature, and Dawn, it's fascinating. Look, we have an entire island case study, which is called Japan. They are the QE masters. They cut rates and injected money dozens of times over the intervening years from their bubble peak in the '80s to currently, and they're still struggling. The history books are full of examples that say, "Look, when you have a diagnosis that can be summed up in three words, which are 'too much debt,' making your money cheaper and spending it into existence doesn't really do anything." We should know that by now. Except it does one thing; it gives us even more debt, so that if a contagion comes, if the dreaded deflation starts, the bonfire now has a whole pile of logs, instead of just a small tinder pile to work with.
BENNETT: But they can't actually stop deflation, right? The debt deflation that we're talking about, they can't stop it now.
MARTENSON: Well, they can try. You know, they did a couple of things that were interesting on this last cycle, right? So what they did was they waded into the mortgage-backed security market, and the Fed took really, really bad, dodgy loans of off the books of a lot of banks, and they took that bad debt and they parked it on their balance sheet. And unfortunately, Dawn, I think they learned from that that the Federal Reserve can go out, buy bad debt, and make it disappear. I'm worried they'll try that again, of course, that short circuit of the creative destruction that you need to have in a healthy economy. But let's be clear; we don't have free market capitalism, nothing close to that, at this point. This is a command and control economy, and I think there's risks in that, because I don't happen to believe that eight people sitting around a mahogany table can instruct an entire economy to nirvana.
BENNETT:Why won't the Federal Reserve and the other central banks let the scales balance?
MARTENSON: They're afraid at this point. I think they've created Franken-markets. They know that the scale and the pace of the coming correction could be so large that it would really ruin systems. Now that we have the after action battle reports from 2008, Dawn, we know, from Mervyn King, Hank Paulson, who was in charge of various things at the time, they said, 'Look, we were within hours of a systemic financial failure. The banking system in the entire UK region was going to go down, and if that went down, dominoes fall everywhere.' So they're scared, they don't know what will happen if this ball really starts rolling downhill, gets away from them, so they don't want to have any sort of a downdraft, which of course the market has correctly interpreted and said, 'Great, we'll just bid everything up.' So I think we're at that uncomfortable stalemate, where the market's thinking the central banks won't let anything go down, and the central banks now know that things are far too elevated to be allowed to go down. But as sure as night follows day, gravity always, always revisits financial markets.
BENNETT: Both the Japanese brokerage house Daiwa and Citibank have talked recently about seeing the most likely, most realistic risk scenario is a meltdown. Are we going to start to see more research houses like this come out and put some version of it out there? Citibank, of course, was very careful how they worded it, but if you read between the lines to get to the bottom line, basically they're saying a global recession will start in 2016 and that the likelihood of a timely and effective policy response seems to be diminishing.
MARTENSON: Absolutely. I think there's a little CYA reporting going on out there, where these big investment houses are starting to say, 'Look, we want to be able to say we told you so.' Everybody who's a serious observer of these markets knows that they're due for a fall, that this fall could be really bad. Anybody who collects macro-statistics knows that the world economy is either already in recession, has been for a while, or is very, very close, and the trends are all saying it will be in recession. So, look, we have over 200 trillion dollars of debt outstanding in the world economies at this time, up 57 trillion from 2007. All that debt was taken out with the understanding that we would have rapid economic growth to rationalize it. We never got it, and now we're very long in the tooth on this "expansion", and we're now slipping into recession. The timing is just horrible, and that is the greatest backdrop to say here's why that measly quarter point raise by the Fed is bad timing. They felt like they had to do it, but I think that's just another pin poking at these bubbles we've been talking about.
BENNETT: You wrote a recent piece for GoldSeek.com called "The Screaming Fundamentals for Owning Gold," and a lot of people look at the price of gold and think it's a non-performing asset. What are the fundamentals you see screaming for attention?
MARTENSON: Dawn, I'm a fundamentals kind of a guy when we get right down to it. Supply and demand - remember those things? They're a little out of favor today, I know.
BENNETT: They don't exist anymore. No free market characteristics anymore.
MARTENSON: I know those things don't matter. But on the off chance that they might, I've been noticing a lot of things, and I go into the base data and I say... Look, if you had told me five years ago, "Chris, I'm going to sit you down in the future and I'm going to show you that the west is losing between 1,000 and 2,000 tons of gold, just to China and India alone," and that they were going to have to be coughing up this gold in ever-increasing quantities, because—weirdness of weirdness—as the price moves down, the people in these eastern countries want more of it, almost like supply and demand and price have an equilibrium point, but that with this massive uptake in demand, which we'd be reaching, 50, 60, sometimes 70 tons a week coming out of the Shanghai Gold Exchange, and then told me that the price of gold had gone down 40%, I would've said you're nuts, I would've lost that bet. Because fundamentally what we're seeing, in terms of price, really shouldn't be happening. But we're seeing that in a number of places; it's not just gold. I see false pricing or mispricing in markets all the time, including flash crashes and little weirdnesses that happen, things the SEC should be investigating, the CFTC should be investigating, clear price manipulation moments, both up and down, odd spikes, all computer-driven. Our markets are fundamentally broken, and I've been watching the price of gold, in particular, undergo what are clearly price manipulative moments, almost always to the downside. And that's been going on for a long time. We can all try and come up with pet theories on why that's happening, but the screaming fundamental is watching price and supply and demand get further and further away from each other. And I'm a fundamentalist, so I believe supply and demand always set the price, at the end of the day.
BENNETT: How big of a role do you believe precious metals should play in somebody's portfolio? Do you consider gold and silver liquid assets, and is it risky to overdo it on security plays, especially in this environment?
MARTENSON: Well, yeah, good diversification's always important. I separate the words gold and silver, Dawn. I hold them both in fairly significant quantities, portfolio-wise, for slightly different reasons. Gold, to me, is a monetary asset, and I believe that it's a tier one monetary asset, like the Bank of International Settlement. And I don't hold gold because inflation is going to be coming some day; I hold it because I'm worried about financial contagion and I'm worried about counterparties not trusting each other. I'm worried about 2008 happening again, only this time bigger. And in that scenario, I expect gold to perform very well, because people are not going to be knowing how to trust any piece of paper from anybody, including the Federal Reserve, those Federal Reserve notes you have at the height of the crisis. Gold in that environment, to me, is a monetary asset. It's going to be like money; it always has been. I'm holding it as a hedge against monetary foolishness. Silver is an industrial play. There's less and less of it coming out of the ground. It's just a fantastic metal. It's got less of a monetary role, but, oh boy, if you want to own something, Rip Van Winkle, say, "Chris--' wake me up in 20 years, '--what's worth something?' then ilver is my number one star, a piece of my portfolio, because again, fundamentals. Look at how many silver mines are out there, how fast they're depleting, what's actually left, and how fast we're using silver for industrial things, for solar panels, for medical devices, you name it. And I love a depleting asset that's right now priced below its cost of extraction, love those sorts of plays.
BENNETT: I actually read a research report saying that 2016 minimally—and again, no promises or guarantees—that they're thinking you could see a hike in silver at up to 33% from its price today.
MARTENSON: That would be a starting point. I could see it going a lot higher. Look, it's so irreplaceable for so many industrial processes, and I'm a believer that we'll have a correction, we're going to have some tough times, but that we will bounce back and there will be an industrial economy in a few years still, and of course silver's going to have just a fantastic role in that.
BENNETT: Tell us about your new book.
MARTENSON: You know, everything we just talked about, the usual question that follows-- somebody listening might say, 'Well what should I do?' Buying a little gold and silver can make sense, but Prosper! is about really all the different forms of capital that you would want to build in your life, so that you could be truly resilient, have a great, wonderful life, live a high quality life. Financial capital is one. We talk about your social capital, emotional capital, living capital, other forms of capital that we've carefully curated and worked with over the years, working with thousands of people, and it's our response to the question, 'What should I do?'
BENNETT: Thank you, Chris Martenson. Prosper!: How to Prepare for the Future and Create a World Worth Inheriting.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.