Washington, DC -- (ReleaseWire) -- 10/04/2016 --DAWN BENNETT: Doug Eberhardt is a 30 year plus financial market veteran who's written two books on investing. His first book, published in 2010, was called Buy Gold and Silver Safely. His second book, which has come out this year is called Illusions of Wealth. It's this book that has really pulled in my focus. Doug, welcome to Financial Myth Busting.
EBERHARDT: Thanks for having me on, Dawn.
BENNETT: Illusions of Wealth has a great title, I think. So much of today's investment world is preoccupied with accumulating as many dollars as possible and in their mind they think that's what's going to make them wealthy, but rarely is anyone taking a step back and considering real wealth and what it actually means in today's world. Can you explain why you think that what many people view as wealth is actually just an illusion?
EBERHARDT: Sure. When you look at wealth, you look at it as assets that you own and if there's a time that you need to use that wealth, meaning exchanging it for cash, there's some liquidity issues that may rise up and many people are not aware what those liquidity issues might be. There's what's called 'John Exter's Pyramid' which is a perfect representation of where you stand with your wealth depending on what assets you have and the liquidity with each of those will be dependent upon who you have as a buyer for that asset and that's one thing that many people don't consider when they do their investing.
BENNETT: How do you recommend amassing real wealth? Can you give us an idea of how to take paper wealth and turn it into something tangible? What are examples, in your mind, of real wealth today?
EBERHARDT: The most liquid real wealth asset would be gold and silver, and I don't say that to push gold and silver upon people, but I do think it sits at the bottom of that Exter's Pyramid but it sits outside of the pyramid because it has no other liability associated with it whereas every other asset has some sort of a liability from liquidity down to will it be something that you'll be able to find a buyer for. For example, real estate. If you own a nice house and you have all this wealth accumulated and you want to sell that house you have to have a buyer for it. And if you don't have a buyer for it, how long can you sit on it before you need to turn it into cash, and then maybe, if it's a down-market, get much less than what you think you really own and value for that asset. So there's a lot of things that go into what real wealth is but it's liquidity again that is the most important part because if you can't liquidate it then you really don't have that wealth.
BENNETT: In terms of liquidity, do you have an opinion about what's going on with Deutsche Bank? I mean, that could be a very illiquid moment for the world based on their derivative exposure. And I don't know if it's insolvency or a lack of capital that could kill this bank off.
EBERHARDT: It's their derivatives exposure that's a major issue. If they have issues with their bank and it spreads to banks that are associated with them then it's just like the 2007/2009 financial crisis. Europe didn't really go through the liquidation aspect to their problems but the U.S. did. So Deutsche Bank is one of the largest, if not the largest, in Europe and for them to have the issues they have and their stock keeps hitting record lows outside of last Friday, you know that there's problems going on and that will spread just by default.
BENNETT: Since Deutsche Bank is suddenly experiencing this sharp 'liquidity event', do you know how much liquidity does Deutsche Bank even have access to as of this moment to offset this event? I don't know if this is an easy answer. I just wonder if we're going to be able to sidestep this event because otherwise I think it's going to push this bank into the grave along with the hundreds of institutions that are connected to it.
EBERHARDT: Well, it's a very good question, and one thing I wrote about in the book—and I write about primarily the U.S. banks, and I do dive into European banks and the issues there as well as China—and the one thing that you'll find is we resolved our financial crisis by throwing close to $7 trillion at it. There's going to be money that comes from somewhere. It will come from central banks, the IMF, whoever is needed to help out any bank no matter what country they're in, especially the larger banks. That's one aspect where they have an advantage through central banks, through a printing mechanism or in this case a credit mechanism where they can just pull money out of thin air and take care of the issues. Sooner or later, though, there has to be a credibility problem or a leak in the system that's cracking and that's where, of course, the gold and silver side comes in.
BENNETT: Do you think that's happening now? Merkel actually came out last week and said they're not going to bail out or bail in Deutsche Bank.
EBERHARDT: Yes, that's talk in the sense that I don't believe it. It was kind of surprising to me to actually hear that. Usually they're like, 'Everything is fine and we're just going to go along and let things be the way they are,' but Merkel surprised me and I don't know why she said what she said but it really goes against what I usually hear when it comes to banks.
BENNETT: I know a solution should be physical gold and silver but, fascinating to me, last week gold and silver didn't run as strongly as you thought it would given the beginning of the event at Deutsche Bank. Do you think we're going to have one of those situations like we had back in September of 2011 where the central banks actually pushed down the value of gold and silver in order to give the illusion that the fiat currency in the developed western economies was actually stronger it was?
EBERHARDT: I do, actually. I sell gold but I'm dollar-bullish, which really goes against most people's thinking when it comes to gold dealers. And the major reason is what makes up the dollar is primarily the euro, which is 57.4 percent, and I'm more negative on the euro. I know you've had Jim Rickards on the other day talking about the dollar crash and all that September 30th, and what happened is that it's really euro-negative. The dollar only lost a little bit in that switchover from the SDRs, the Special Drawing Rights for the IMF, when they added the Chinese renminbi to it and it wasn't dollar-negative. If anything, it's dollar-bullish overall because the representation of what's going on in Euro at Deutsche Bank and everything else is going to by default push the dollar higher and it's perception that matters in this case. Do you want your money in something that is going down or something that's going up? Overall, the perception is that dollar is stronger than most of these other currencies.
BENNETT: Let's talk about part of a potential solution, although we know that that could backfire like it did back in September 2011. Can you talk about how you approach holding physical gold and silver versus precious metal ETFs as well as miner stocks more generally? I mean, do you think it's important to be weighted as heavily as possible towards actual physical possession?
EBERHARDT: With physical you have control of your wealth and with ETFs you have banks that are involved that are the custodians. The only thing that's insured with ETFs are the actual banks, not your physical metal. So I'd rather have control myself. I think that ETFs are perfect for trading short-term trends but they are not representation of real wealth in my opinion because you can't liquidate them and turn them into actual physical metal and that's one of the biggest drawbacks that you have with that. When you have control of your wealth with physical silver and physical gold you can store that in your house somewhere. My recommendations are always, 'Buy a little safe and put some petty cash in there, but have a bigger safe hidden somewhere else.' Criminals aren't that smart. You take them to the little safe and they run with the money.
BENNETT: You also in your studies talk about triple-leveraged exchange traded funds. For those of us who don't understand that, can you give them a little bit of the definition? Why are they worth following so closely in your opinion?
EBERHARDT: I think they're very good for catching a shorter term trend. They're not long-term assets that you would buy and hold by any means because they do deteriorate over time. But I do think they're good for short-term trends, one to three days, and you can get right up if you catch the trend at the right time. For example, from a gold mining stock or gold mining ETF, that will go three times what a normal gold miner individual stock might go. So that three times leverage can give you instead of 1 percent return in a day or three up to 5 percent to even over 20 percent in that short amount of time and that's the trend that we try to jump on with our ETF trading service.
BENNETT: Are there any triple-leveraged ETFs out there that are gold and silver bullion-related? In other words, they aren't the paper or the mining version of the gold, they're actually backed by precious metals.
EBERHARDT: Well, yes. Again, these are not actual individual ETFs that have the metal set aside. They're derivatives of those. So there are some out there. They're not triple-leveraged; they're double-leveraged. We don't trade those because we want fast action. I suppose I could but I follow 46 of them that give us the most action and that's all that matters to us.
BENNETT: Most people who invest in ETFs are in for a long position, and you seem to favor a more activist approach to the ETFs in your portfolio. What exactly is the data you're trading on? What goes into whether your decision to go long or short on a particular ETF?
EBERHARDT: We wait for the trends to develop and I have a few proprietary ways of doing that. We wait for a weekly trend and that's where your best chances of profiting are. Once that trend hits then it will typically last a little bit longer than a few days. It will last a week, two weeks, sometimes a month, but we're not always in it that long. What we do is we have some trading rules and my number one rule is keeping a stop if you run. The second rule is taking profit, so if we're up 10 percent or more on trade I'll typically take half off. So there's guidelines as to when to get in. There's guidelines as to when to get out as well.
BENNETT: Do political situations play into your forecast? I mean, do you have one strategy if Hillary begins to pull away or another if Trump happens to start pulling away or are you anticipating a major correction ahead regardless of who's elected come November?
EBERHARDT: It's a very good question. You would think with the title of my book—Illusions of Wealth—that I'm a fearmonger or something like that. I'm not whatsoever. I'm bullish in a lot of different areas and I give in the book many ways to profit outside of ETFs and when it comes to politics it can be summed up in one scenario. We have a Congress that gave us a budget a couple of years ago that called for nine more years of spending and the tenth year coming in under budget, and they called this a balanced budget but it's adding about $5 trillion more over the next 8 years to the national debt which is already over $19 trillion. So no matter who's elected, and they promise this or that, there's more debt that's coming and there's nothing they can do about it because Congress has already voted again.
BENNETT: This week Janet Yellen testified on the Hill, and basically admitted that she's not going to be raising rates before the November election. This led her to being asked about Donald Trump arguing she's intentionally juicing the market to help Hillary get elected. She took offense to that and said that, of course, the Fed is totally independent of politics. Are we really supposed to believe that?
EBERHARDT: That's another good question, Dawn. And when it comes to what the Federal Reserve does and says, they say they're independent but they are elected individuals and they want to keep their job. And I do believe that if you're going to not shock the market the best way to do it is to keep things status quo. As to raising rates, I said back in December that the Fed was one-and-done and that space on the data that I read and the data that I put into this book, and I can read the data pretty well and I think most people who look at the economy and see all the negative information or economic data coming out of it can read it as well, but the Fed always talks about raising rates. The market trades on what the Fed says now, it doesn't trade on reality, and that's one of the problems I have with it.
BENNETT: This week we also saw Wells Fargo's CEO on the Hill where he received quite a lashing, most pointedly from Senator Elizabeth Warren, over a scheme that happened at Wells Fargo where thousands of the bank's branch workers set up fake accounts under customers' names so they could pocket promotional payouts. Are you surprised how actively these workers were targeting their own customers? At the same time, I couldn't help but think that this sort of thing would never happen in the smaller community banks if we didn't have Sarbanes-Oxley and Dodd-Frank which have made them all but extinct.
EBERHARDT: I agree on the smaller banks. I'm much more in favor of those than the larger banks. I wrote about the top four banks, Wells Fargo being one of them, in the book and how they have been sued since the crisis—10 lawsuits each at least in the tens of millions of dollars, over a hundred million dollars combined—and they have no moral hazard. They will do whatever they want to do and get away with it with no repercussions coming towards them. Wells Fargo is the first one to really go this route and I know California and I think Illinois have pulled out and it's just a snowball starting for them and their troubles. Yeah, having your money in smaller banks would be much preferred than these larger banks.
BENNETT: By the way, I don't know if you heard this, Deutsche Bank is now being accused of that by Italy for setting up fake accounts under customer's names so they have another layer of issues.
BENNETT: Can you tell everybody how to access your research?
EBERHARDT: Sure. It's illusionsofwealth.com and we just do wonderful jobs in helping people understand what constitutes wealth in today's world.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett 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 her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
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.