Wasington, DC -- (ReleaseWire) -- 01/29/2015 --BENNETT: Chris Martenson is an economic researcher and futurist specializing in energy and resource depletion, and he is also the co-founder of PeakProsperity.com. Chris's insights are in high demand as he's not an economist, but was trained as a scientist. He completed both the PhD and post-doctoral programs at Duke University, and was one of the early econobloggers who forecasted the housing market collapse and stock market collapse.
MARTENSON: Dawn, it a real pleasure to be here with you today.
BENNETT: Friday's jobs report mirrored almost every job report over the last couple of years. Jobs on net were created, but the labor force participation rate remained pretty miserable, and wages didn't budge. Why is this 'recovery' failing to generate middle-class wealth like recoveries are supposed to do?
MARTENSON: Dawn, that's easy and we have to understand why, as this is really important. It's because the Federal Reserve has specifically targeted savers and people living on fixed incomes as the people who are supposed to donate to making the big banks' balance sheets all healthy and to donate their savings to the federal government, and they do it through a very specific program where they give us zero percent on our saved money, and then fine-engineer an inflation rate that's higher than that, so that just crushes people slowly over time. It sits in every statistic that I look at, whether that's food stamp usage, decline in real median wages, or the level of discontent people have at the poll, you name it. People—the vast majority of the people in this country, Dawn, are unhappy and rightly so as their wealth is being taken from them by an active program and it's being transferred to somebody else. That's the program we're under and it doesn't feel good. People don't like it and until we talk about what's actually happening, I think we will continue to come up with the wrong ideas about how to go about fixing it.
BENNETT: This is really about inequality, and I've read a research report about how upper middle class Americans are rapidly losing ground to the top one percenters, who average five million in wealth, over the past three years. Does that statistic sound right?
MARTENSON: It's absolutely right and it's not a mystery. It's often talked about in our press as if it's mysterious, but it's the result of an active program. In 2008 when I put up my crash course for public viewing, one of the things I said was that we're going to get into a financial accident, the Federal Reserve is going to print money, at the rich are going to get richer. This is something they know as well as I do and trust me, their Research Department is bigger than mine. This is a well-known feature of the program the Fed is running. But, here's the thing they never talk about -- is that when those rich get richer it's not by some bolt of lightning we can't understand. That wealth was transferred to them. So the Federal Reserve specifically said we do not trust the little people, the average people, anybody up to basically upper-upper-middle-class who has been rich, we don't trust them with their money. We'd rather transfer it to corporations, we'd rather transfer it to the financial elite, we'd rather it to Washington, and that's the program they've been running. The problem, Dawn is that you can run that program for a little while and then you get in trouble with it. And I think the trouble is going to begin soon.
BENNETT: We know what's happening here in America, but how does our middle class rank globally? I've heard that even the middle class of fiscally broke Greece is doing better than ours.
MARTENSON: Yes. There's a number of statistics we just don't measure up on. So if we came here from Mars and looked at America and said, would we recreate it exactly as we see it, we might see, you know, scenarios for improvement here. And one of those certainly is in income distribution and part of the reason for that is that I pay -- when I add it all up -- I'm pretty close to 50 percent of my wealth gets taxed in one form or another. So when I add all that my property taxes, my federal taxes, the fees, the surcharges, the things that are hidden everywhere, and on top of that, I still have to pay for these extraordinary health insurance bills, and I have to pay for tuition and all of this. There are people in Europe that also pay 50 percent, but they don't have to pay for health and education which is an extraordinary bill, for me, where I am in my life. So when we look at it all on balance, Americans are paying a lot more and receiving a lot less then people in other countries and that leaves us down the list in terms of what we get versus what we give.
BENNETT: Where does the real problem reside? If it is our fiscal policy, how do we fix it?
MARTENSON: Well, Dawn, I think we have to start with understanding clearly what the problem is. If we don't understand the problem, we'll get the wrong diagnosis, and we'll apply the wrong solution. So the first part is just understanding where we are. And here is the problem. When people say, 'Chris, tell me in three words why we had that fiscal accident in 2008', I will say, 'Too much debt.' Starting in about 1980, our country in total, not just at the federal level, but across the whole nation, was accumulating debt at twice the rate our underlying income was growing. So, if we look at that as debt to GDP, we see the debt fighting like crazy, GDP is growing a lot more slowly. Well, look, if I as an individual can't make my credit card debt go up at the twice the rate of my income before I get into a mass of trouble, we can't do that as a nation. That's what we've got and we should have had a discussion then and said, 'Wow. We ran up a lot of debt. How do we actively de-leverage, how do we walk away from that. The Federal Reserve said not on our watch. We are going to everything we can to 'repair' the credit market. We're going to enable the federal government to pick up the borrowing flack where the private sector fell off. That's the trouble we got in, so when people ask me today, 'What kind of trouble do you think we are in?' I will say, 'Listen, every single thing I track, that was a warning sign in 2008, is larger and more in danger territory today than it was then. No lessons learned.
BENNETT: Do you think this policy is blowing air into a giant bond bubble right now?
MARTENSON: Absolutely. No question. We can track that in junk bonds, which are these horrible, crummy bonds that you need to get 12 to 16 percent return on because frankly they're crummy prospects. You're looking at collapsing yield curves all across. In Germany, three years out in their bonds, you're getting a negative return. That's extraordinarily high price that you're paying for any bond and so I see an extraordinary bond bubble that's out there. It's all across the world. It's in Japan, it's in Europe, it's in corporations. It's in our junk pod, in the covenant-like loans that we are seeing get issued. It's everywhere. So yes, we have a huge bond bubble and it's going to be very painful when it bursts.
BENNETT: How should U.S. investors prepare for that? What is a practical thing for them to do to defend themselves?
MARTENSON: Well, you know, it's one of the things we're marketed to in this country, where you say you have to be fully invested all the time, and your job is just to figure out, am I in bonds, or in stocks. The first thing is to understand that sometimes the best move is to take your chips off the table, go get a drink, right? If you don't think the cards are running, right, just walk away.
BENNETT: Yes, I agree.
MARTENSON: So for me, that is a legitimate position to be in if you have concerns, to build a cash position, and that's fine. As well, we need to start broadening what we talk about as investment. People can take their money, invest it in their own houses around energy efficiency and certain solar technologies and they can see double digit returns, if not triple digit over the life of the investment. So start thinking like a business. Businesses invest today to reduce future cash flows. People can do that in quantifiable ways. Put it in a spread sheet and do it. So there are plenty of places I see still to invest, but genuinely putting the money into the bond markets, or the stock market, I think that's highly dangerous today.
BENNETT: Let's talk about Japan. They did something extraordinary. We quit Quantitative Easing 3, which I call QE 4 because it was just kept going, on Wednesday. Then the Bank of Japan actually started their QE program and it's been very damaging to the yen, even for the short period of the time they have done it. Can you comment a little bit on that and what it means to American investors?
MARTENSON: The first thing is, American investors should view Japan as a way of understanding what's happening to them over here because of our own quantitative easing. So in Japan, Mr. Kuroda, the Governor of the Bank of Japan, opened up a whole new round of quantitative easing and it was specifically designed to drive the yen lower. Now, if that works like a charm, what happens with that is very interesting. Toyota gets to come out and say, 'Well, because we sell cars in foreign markets and our currency is now weaker, we record more of our currency when we bring those profits home—that's what the weak currency does. And so they go, yeah, we have an extra billion dollars of profit. Meanwhile we hand it over to the people of Japan who have to buy imported food, imported fuel, and they are experiencing that weaker yen as a really damaging thing to their personal finances. And the message here is that the billion dollars of extra profits that Toyota recorded was a transfer from the people of Japan because when you weaken your currency, some parties win, some parties lose, some parties get wealth transferred to them, but some have it taken from them. So the Japanese investors and savers were told very clearly here are the stock at the table and it's a mystery to me why anybody in Japan is holding any of their wealth in yen at this point as the message was loud and clear: the Bank of Japan is going to ruin your currency, they're going to take your wealth from you, because they think they're smart enough to know that a billion dollars in Toyota's hands in better than a billion dollars in your hands. That's a decision that officials are making and it's a really big experiment. It's really a social experiment because when you decide to destroy the currency of a nation, you're eroding its most primary building block of trust. That's the trust we have in each others' currency. And once you start eroding that, there are things that happen that I don't think you can go to school to learn about. It's an experiment and that's what's really happening over there.
BENNETT: They have been doing this experimentation since the 1990s, and more statistics have been coming out since the Bank of Japan announced that they were going to start quantitative easing. My understanding is that bankruptcies are up almost 140 percent over in Japan. Did you see that statistic, Chris?
MARTENSON: Yes, I did. I did. So what's happening is that they're really putting lipstick on a pig.
MARTENSON: What they do is they print all this money and then the stock market goes up. And by the way, the Bank of Japan has just dropped any pretense. They are printing money and buying your stock indexes with it. They weigh it directly into the equity markets rather than just trusting that they'll buy a bunch of bonds, get better cash at the bank and trust that the banks will get that money to the equity markets. That's what the Federal reserve is doing. But both of them have decided that if they get really expensive bonds, that bid up with the price of bonds that yields really fall, that's a good thing. If the equity market go up that's a good thing. It's sort of a the tail wags the dog mentality because all you have to do is wander over into the real world, you get up in Main Street, and you find out what bankruptcies are up. People are finding general business conditions very hard and it turns out that you can print all the money you want but what you cannot print is prosperity. It's what the banks are theoretically targeting, but all they are doing is creating an ever larger wealth gap, is creating bubbles in assets and by now, Dawn, we should have had that conversation with them and said, 'Gosh, guys, you've been printing for six years, how do you sell them?' And we are not having that conversation yet, but you and I can have that conversation and guess what? It's not working and they are doing more of it. They are like that loser at the card table who says, 'Time to double down.'
BENNETT: Governments are supposed to be taking care of their citizens and to me, it looks like Abe and Yellen are instead destroying their citizens' savings and their businesses. Why is that happening? What is the purpose and the benefit to them?
MARTENSON: Well, I think the first thing we have to drop is this idea that central banks are there to serve the people of the nation. They are there to serve their main clients and they are there to preserve the system and their main clients are the banks that are the stock owners of the cartel. Unfortunately, that's simple to see and the first thing that Federal Reserve, its most important thing—it always talks about caring about unemployment, and watching inflation. Those are all secondary measures. What they are watching is the amount of credit creation in the banking system.
BENNETT: Chis, do you think there is a correlation between the hit that we are all taking to our savings accounts and the number of seniors re-entering the job market?
MARTENSON: Absolutely. This is a very predictable outcome for the program that the Feds run in that they are taking from savers and fixed income retirees and they are transferring that wealth to those who are most over-leveraged: that would be the Federal government, plus the banks. And so it's an active program of transfer and it doesn't mean that you go and study this at economics school. They don't talk about it much, but it is an active program and that's what they are doing.
BENNETT: Bernanke and Yellen have always said that their policies are there to help savers, that they're trying to preserve an economy that helps making and saving money possible. If their programs are actively attacking savers, why are they saying that? Is it dishonesty, or are they really just clueless?
MARTENSON: Dawn, it's a complete mystery to me because, you know, Yellen just came out and gave a big speech the other day and said, look at this wealth inequality thing, expressed puzzlement as if it was a complete mystery that she's describing and then said, you know what it probably is? People need to be more entrepreneurial, you probably need to invest more in your kids, and it looks like if you had wealthy parents that inheritance would be an important part of this dynamic. I was just like, 'Oh, right, you're blaming the victims, because of the government actively eating the wealth, you guys, you screw it up.' That's crazy talk and she's not that dumb. That was really a disingenuous, awful sort of a speech for her, where she basically said, not only that we don't care about your stuff, but we're going to try and blame you for any perceived difficulty you have. Ouch, that's just awful.
BENNETT: Let me change tracks here for a while. I want to talk about gold. On Friday we had a 3.3 percent rally. That was the best day since September of 2013, almost 14 months. When I talk to traders, some of them claim this is due to short covering. A rise of 3 percent, 37.40 points. Do you agree with that?
MARTENSON: You know, the price of gold is largely dictated in the paper, or electronic markets that exist around the Comex market. The paper market can do what they do for odd reasons. You've got look at what's happening fundamentally. The amount of gold that is going from the West to the East, in China and India it's extraordinary. We have never seen flow this large in any of the data series. I'm a big believer, Dawn, that gold eventually has a fundamental floor to it. We're there at this price right now and these mines are going out of business but from the supply/demand stand point, I couldn't be more positive that the price needs to be higher. What's happening in the paper markets fundamentally, I think it's a yes, people should use these prices as a gift. I certainly take advantage of that myself.
BENNETT: But there is a scarcity of gold, and silver, out there. Gold forward contracts are at the most negative they have been since 2001. As someone who is an investor in gold, what does that mean to everybody out there? What should they be doing?
MARTENSON: So from a trading stand point whether we look at the short interest, or the gold offered forward rates that sit negative or if we are looking at who's actually short in the paper market, I have never seen a more technically bullish set up than we've got right now. It just speaks to the fact that there are real shortages starting to show up, and silver, my gosh, I want to be a Rip Van Winkle investor. I want to buy this stuff, I want to wake up in ten years and know I've done well. This is one of the favourite prospects because we need it for every industrial process out there, it's going to be in massive industrial short supply. I love it to death and it's non-substitutable. Silver has very precise applications and boy, it's disappearing rapidly. I love it.
BENNETT: Chris, I want to talk about something that scares people away from buying silver and gold. Did you hear about that dumping of $1.5 billion in gold futures? It typically happens at the same time. They go up during the Japanese trading breaks for lunch, which makes me think the Japanese are doing it to help make the yen a little stronger, to make the Japanese people feel little bit better. Are we going to be seeing more of that? Those types of hits have been causing gold to drop 25 dollars a day.
MARTENSON: Yes, I've seen these and what we see is it will be in a single one minute trading window, causing thousands of contracts to be dumped. Basically, it's a bid that blows the whole bid stack out so everybody who had been in for gold, basically gets just taken out. And those are called destroying the bid stack. Somebody is doing that specifically to move the price of gold lower. That's not the best execution strategy.
BENNETT: Thank you, Chris. This has been Chris Martenson. You can see his work at PeakProsperity.com.
All data sourced through Bloomberg
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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 or firstname.lastname@example.org