Washington, DC -- (ReleaseWire) -- 11/03/2015 --BENNETT: John Rubino publishes the financial news site DollarCollapse.com and is also the author of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and Main Street, Not Wall Street. John is here today to discuss underlying system fragility, which has become so acute that central bankers are convinced that they must now forcefully react to any fledgling market risk off dynamic. John, welcome to Financial Myth Busting.

RUBINO: Hi, Dawn. Good to talk to you.

BENNETT: Global market bubbles have reached the point where their message to central bankers is direct and, I think, unmistakable: they must keep expanding monetary stimulus, or it's all just going to come crashing down. The public has no choice, and so-called free markets are anything but. Do you believe that market bubbles are what's dictating ongoing monetary accommodation?

RUBINO: Well, yes. To understand how we got here, you have to go back a couple of decades to the 1990s, when there were a series of kind of mini-crises. Russia got into trouble, and Mexico defaulted, and there was the Y2K thing. The Federal Reserve in the US got in the habit of reacting to each of those crises by flooding the system with new money and lowering interest rates, and that sent a message to the banking system that you can do anything you want to if you're a big bank. Take any risk you want, lend money to anyone you want, and the government has your back. And so the system started to spin out of control. We started to borrow more and more money and increase the leverage of pretty much every part of the society. And so the succeeding crises, each new crisis that came from each new bubble has been bigger and bigger, and now we're at the point where the central banks of the world have no choice. They have to inflate or die. Either they bail us out of whatever new bubble happens, or the whole global financial system implodes. And that's basically what happens when you borrow too much money. There's nothing mystical, magical about the process that's been ongoing here, as a society. The developed world is a lot like a family that's been maxing out a series of credit cards to buy a lot of new stuff. And that worked beautifully until there are no more credit applications in your mailbox, and then the repo man comes and takes all your stuff away. Well, the global financial system is at the point where the repo man is coming. We've borrowed way too much money, we can't pay our debts, and now all we have to look forward to is a series of crises, as this excessive debt is worked off, one way or another, so you're seeing the governments of the world and the central banks of the world panic. Every time there's even a little squiggle in the stock market or whatever, they announce new quantitative easing programs, or governments increase their deficit, or whatever; they do something to placate the markets, because they know they can't let markets be markets anymore, because markets fluctuate, and if they go down this time, and if we have a garden variety bear market, that could blow up the whole financial system. So we're at a very fragile, very scary point in modern history. We've never been here.

BENNETT: It's also worth noting that the stock market strength continues to narrow, and what that means is the broader market, especially this week, really badly lagged, especially against big tech. And in the financial management world, desperate for relative performance, that induced market rallies, compelled market participants to jump in headfirst, and it's very dangerous late cycle financial market dynamics.

RUBINO: Yes, only this is a cycle of cycles. We're at the point where everything is so much bigger that it's not a four or five year cycle that we're looking at; it's a major circular trend. We're at the end of basically a 70 year credit bubble, and when this thing blows, it's going to blow big. But what you're saying about the stock market is absolutely right now, because most companies are reporting lower earnings. We're in what they call an earnings recession, where earnings are dropping instead of rising, and that's, to an extent, masked, like it was towards the end of the week, when a few big tech companies, like Google and Amazon and Microsoft, reported really good earnings. And they're almost unrelated to the overall economy, because they have developed technologies whose times have come. And when a technology's ready for dissemination to the mass market, it doesn't matter what the economy's doing, everybody's going to want that iPhone or whatever, and so they're going to buy it. And so these companies don't really reflect the health of the economy; they reflect their specific technologies that are just brilliant and have to be had by everyone. But most regular companies, like Wal-Mart, McDonalds, and big banks are reporting falling earnings. You know, you can't have rising stock prices with falling corporate earnings, at least in the long run. In the short run, the central banks of the world can manipulate liquidity and it has to go somewhere?

BENNETT: Talking about Wal-Mart and its carnage, I mean the stock really plummeted, I think, the most it's ever seen in 17 years. They slashed earnings guidance, they blamed wage hikes. Talk about the significance of what has happened there with Wal-Mart and what that should mean to our listeners.

RUBINO: Well, Wal-Mart and the U.S. corporate sector in general has been making lots of money in the last couple of decades by squeezing their workers. So wages have been going down at the same time corporate profit has been going up, and that's a trend that can't go on forever, because you totally impoverish your workers. And Wal-Mart and a lot of other companies have really done that. So many Wal-Mart workers are on public assistance now; it's one of the big scandals of the economy. So workers are demanding a bigger piece of the pie lately. There are movements for higher minimum wages around the country, and that's a political winner now, because so many people are frustrated by how little money they make. And you see these protests in front of McDonalds, where people are demanding $15 starting salary. Companies are starting to have to give in, starting to have to pay their worker a reasonable amount of money now, and that's cutting into corporate profits. That's a long term trend, which isn't going to reverse this year or next year, because the process of people just getting back to a normal living wage is going to take a really long time. And meanwhile there are other problems for U.S companies, because the dollar is very strong, for one thing. And that makes it harder for a U.S. multinationals to sell stuff they make here to Europe or Japan or whatever, because we're pricing our stuff in dollars and it gets more expensive as the dollar goes up. So you see all these companies are reporting bad numbers and they're blaming the strong dollar for it. That also isn't going to change any time soon, because the Federal Reserve here, our central bank, is threatening to raise interest rates, which would make the dollar stronger, where everybody else in the world is cutting interest rates. So if anything, we'll probably see a stable to stronger dollar in the year ahead, which means an even bigger bite out of corporate earnings. Add it all up and it looks like a tough few years for American corporate earnings, even in the absence of any kind of a crisis. They're just not going to make as much money going forward, which makes the stock market more and more risky, because if people decide, 'Well, corporate earnings are going to go down for the next three or four years,' people extrapolate the present into the future, and why own stocks in those circumstances? So you could see a really big hit to the stock market, if that mindset takes hold. And there's going to be a pretty good reason for it to take hold if corporate earnings keep dropping.

BENNETT: John, you've been writing about third quarter earnings, and about how almost every company is underperforming, and those that aren't are largely doing it by borrowing money at zero interest rates and buying back their own stock. As much as I think it sounds like more people will want to do that, what's going to happen when the next bubble pops? Is this one of the places we're actually going to see deflation?

RUBINO: Well, see, that's another trend that can't go on forever, right? Because you have these companies borrowing huge amounts of money for next to nothing and using it to buy back their stock. So at some point, they either have so much debt they become really unstable, or they've bought back all their stock, and in effect, they've gone private. So you can't get to that point, so at some point before that, the trend of buying back stock to pump up the share price has to end, and I think we're getting pretty close to that, because even though companies don't have to pay very much to borrow now, they've still borrowed so much that their interest costs are starting to go up, and that's eating into earnings. It's becoming counter-productive; they actually lose money now if they borrow more from here, and their earnings actually go down. So they can't continue to buy back stock, because it doesn't do them any good, earning-wise. Once it stops, then we're looking at their real earnings, not their financially engineered earnings thanks to stock buybacks, and those numbers are pretty grim. To take just a few examples lately, well, Wal-Mart, as you mentioned, had a horrible most recent earnings report, but Goldman Sachs reported 18 percent lower revenues in the most recent quarter. Morgan Stanley's profit was down by 42 percent, and it goes on and on. Intel, the chip maker, saw its profit drop by 6 percent, but underlying that, the number of chips it sold fell by 19% in the last quarter.

BENNETT: Another company people should be talking about is Caterpillar. It's seen 34 consecutive months of declining global sales, and 11 consecutive months of double digit declines. I'm wondering; does that mean we're in a global industrial depression? You've got to ask yourself that, because typically Cat kind of represents world revenue, world production.

RUBINO: Yeah, it represents the mining industry, the oil extraction industry. Those are the guys who buy the biggest moving machines. And those two sectors are in depression. We know oil prices have plunged lately, and that's made it uneconomic for oil companies to spend a lot of money finding new reserves, because their old reserves aren't paying enough money to finance it. And a big part of the commodities crash is due to China. Now, they, in 2008, 2009, responded to the last global financial crisis by borrowing tens of trillions of dollars, the most anybody's ever borrowed in one five or six year stretch; that's what China did. And they built out their infrastructure; they built roads and bridges and airports and whole cities. And so they bought natural resources from everywhere in the world, pumped up the prices of those things, and led everybody to build lots of productive capacity in those industries. That's when Cat boomed, because everybody was digging new gold mines and starting new oil wells. But that was too much capacity. China can't keep borrowing like that, and so now the demand for commodities has just fallen off the table. So yeah, that sector of the global economy's already in depression.

BENNETT: Actually, to put it into context, the great financial crisis resulted in 19 consecutive months of sales declines for Cat, and now they're on currently 34 months, and it doesn't sound like they're going to be having any pick-up. It's pretty telling; these companies are actually telling a story, but it doesn't seem like the press is picking up on it.

RUBINO: No. It takes a long time for people to change their minds, and once they do, it takes a long time to change it back. But we've had basically a boom market in financial assets, stocks and bonds, for going on seven years now. That's a really long time for things to go up, year after year after year.

BENNETT: For no reason.

RUBINO: Yes. So people now think because it's been doing this for such a long time, that that's the environment, that's just how things work, stocks always go up. And so you need a year where they go down for people to realize, 'Oh, okay. I see, they go up and they go down,' and then you get a more realistic analysis on the part of most of people of the world, and that's possibly coming. I think the major equity indexes in the US are flat to downsliding, even after the nice pop towards the end of last week because of Google and Amazon. So if we have a down year this year, then people will start looking more critically at corporate earnings and government finances and corporate balance sheets. And the conclusions that they're going to come to are pretty grim, I think, because all of the numbers are horrendous, all the underlying numbers.

BENNETT: You know, John, I believe gold is a good place to put your assets during this time of so much uncertainty, but it gets a bad rap, on the CNBCs of the world and the like. What's your take on gold price and its lackluster last few years?

RUBINO: Well, it had a huge boom market. It went up for, like, 12 years straight, and so it's natural that after that you have a pullback, so a 30 percent, 40 percent, 50 percent pullback is completely normal in a boom market. And I think since gold is basically the reciprocal of financial assets—you know, if we're printing off a huge amount of new dollars, then the value of gold in dollars should go up, because the supply of gold stays the same. That's the way it's worked for 3,000 years. So over time, as the world's governments continue to inflate away their currencies, you'll see precious metal, like gold and silver, go up. Can't know whether it's going to happen this year or next year, because the short-term timing is completely unpredictable.

All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.

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.