Greatest Stock Bubble In History? GoldNomics Podcast Transcript

Dave: Welcome to episode two of the Goldnomics podcast where we look at the developments in financial markets through the lens of precious metals. Before we start today, I just want to remind all our listeners to subscribe to the Goldnomics podcast on iTunes YouTube or SoundCloud. And you can also stay up to date with all of the developments in precious metals markets by subscribing for our market updates at And you can find a link in the show notes accompanying this podcast.

Today we’re asking the question; Is this the greatest stock market bubble in history? And as usual I’m joined here today by the dynamic duo behind Goldcore, Stephen Flood C.E.O.

Steve: Hello everybody.

Dave: And Mark O’Byrne, Research Director and well known precious metals commentator.

Mark: Hello podcast listeners.

Dave: Now, last month we talked about the major themes for 2018 and one of the phrases that came out of it was, Mark I think it was you that said it, is the idea of the “Everything Bubble” bursting. That’s the idea that we’re seeing concurrent bubbles in stocks, bonds, property markets, crypto-currencies, which is quite an usual phenomenon for financial markets, where nearly all asset classes are trending significantly higher. But at the same time markets seem to be complacent, volatility is low, they keep trending higher with low interest rates, with low inflation, unemployment numbers are good and we’ve seen big tax cuts in the U.S. Why are we going against the flow and calling this a bubble Steve?

Steve: Yes, we are in what’s been termed a kind of a goldilocks economy where a lot of the underlying economic statistics are very supportive of the market and growth and confidence. No matter where you look, it’s looking very positive. But if you look at it from the trough to our current peak, the S&P500 has put in an incredible return of… I think it’s estimated at 270% and even in any historical analysis that is an incredible return.

I don’t know if we’re at the peak of the bubble or not, but I do know that we’re in the bubble cycle because you can see it in the dialogue, in the narrative, in the market. There are an awful lot of people who are getting into the market on the basis of fear of missing out and I think that’s a part of a bubble cycle. And you’re also seeing it in the in the media as well and you’re also getting a lot of people talking about how this time it’s different. We have a massive tax stimulus package in the U.S. and therefore the fundamentals are different now and therefore we can justify higher valuations. I think that’s all part of historical bubbles. You see this narrative play through every other bubble in the past.

So I think in 2018 we’re looking at a year where you’re going to see probably increased stock market height and it might blow off into a parabolic move before it gaps down and that’s not a healthy thing. You know, people need to invest in the long term and I think we’re going to discuss that in this Podcast.

Dave: Mark why are we going against the trend here and calling this a bubble?

Mark: I think if you look at the smart money, again the same people who warned about the first financial crisis are warning about this next coming financial crisis and there are just so many indications that we are in a bubble and the question is, what stage of the bubble are we in? Is this early, middle or late stage? Because these bubbles can go on much longer than people anticipate and sometimes people can be quite early in calling these things bubbles and the bubbles don’t actually burst, it can take a long time because momentum is a powerful thing.

I think we all view it as a bubble and the question is where we are, and how the bubbles may burst….. the “everything bubble”, may burst. But when it comes to stocks, the U.S. stocks in particular, have had massive price appreciation. So if you just look purely in terms of price alone, I mean we’re up three times. I think from 2009 the S&P is up over 170% from below 1000 in 2009 up to 2700 which it is today.

Last year alone the S&P was up more than 20% and just in the first two weeks of 2018, its up more than 5% in less than two weeks. So if you look at the returns of stock market over the long term, 50 to 100 years, they tend to return 7 to 8% per annum. We’re up 5% two weeks and we can get into the various figures that are there in terms of the technical, but……

Dave: It’s been a kind of a sustained run as well. The S&P hasn’t had a 3% pullback since November, 2016 which is phenomenal. And one that I keep an eye on, I think most people would be familiar with is obviously, the Dow Jones average in the U.S. That’s up 30% in a year. I mean is that­­ warranted? What’s underpinning at 30% in the Dow in one year?

Mark: I don’t think it is warranted, it’s due a very serious correction and potentially a crash.  I mean it’s gone up 1,000 points along just in seven or eight days from 25,000 seventy to 26,000.  And President Trump, the president of America is calling for Dow 30,000 and he’s trying to take credit for it. We’re getting all of these the warning signals, they are there.

But the way to evaluate a bubble is actually in four ways; 1) rising prices without improving fundamentals. I think we have that. The fundamentals are fairly good, but there’s a lot of­… Superficially their very good but, if you look underneath the bonnet so to speak, it’s quite rusty and they’re on shaky ground. We’ll get into that.

The next thing is 2) leverage; when you’ve got people using a huge amount of debt to the buy assets, that’s a factor that you need keep an eye on.

3) Political and monetary interventions; so we’ve seen that in spades obviously with the central banks having decreased interest rates to 0% and engaging in quantitative easing. That’s what’s contributed in a huge way.

And the fourth thing is 4)  sentiment, and we have irrational exuberance in spades today. That term irrational exuberance, I think it captures the moment of where we are at. That’s what Greenspan said in 1996 when the Dow Jones was at 6,000 then, and he was suggesting it was a bubble then and it subsequently went well above 10,000. And it didn’t burst till four years later. So, who knows this bubble really could go another two to three to four years.

Steve: There was some research note there recently from one of the major investment banks calling it; “rational exuberance”, as opposed to; “irrational”, on the basis that they think it is historically very high, but it had a ways to run and they saw may be another 10% move this year.

Dave: And what do they see as fundamentally underpinning that?

Steve: God knows, I mean I suppose they’re on the sell side so they’re always going to talk it up and you know you have that bias inherently there. I think they’re looking at the debt markets and they’re looking at the overall consumer confidence and the manufacturing indexes are being very supportive, the housing market is very supportive as well. There’s a number of positive economic indicators that are leading to that goldilocks economy. So we’re not seeing the stresses yet, I think we’re going to see stresses coming out, we’re going to see some money coming off the table.

One of the major things I’ve looked at before is the unemployment rate in the U.S. It’s at 4.1%  and every time, I think I said this last time, every time it hits that point it tends to be at a point of contraction and the market then sells off as assets come off the table. You’re at full employment and then you start having inefficiencies coming into the market and people begin to divest.

Mark: Just one thing on that goldilocks economy, that 4% unemployment rate is quite bogus actually because if you look at the methodology of how they calculate the unemployment figures today, they’ve change radically compared to how they calculated those unemployment figures 20 or 30 years ago. There’s been a different incremental changes over the years in terms of the statisticians in the Bureau of Labour Statistics. In fact a number that I look at is the food stamps number….

Dave:  What’s that, the number of people signing on for food stamps?

Mark: Exactly, to feed themselves, in America it’s 15% of population.

Dave: 15%!?

Mark: 15% of the population, so what they’re calculating is people…. You actually fall off the statisticians numbers in terms of unemployment. They have all these statistical gimmickry where by you actually fall out of the employment numbers after 12 months, because they assume that…. They may say that you’ve gone and created a business or you’ve given up looking for work or you’re not actively trying to find work. They actually take you out of that number. They’re actually not….

Dave: So they’re not accounting for long term unemployed.

Mark: Exactly that 4.1% percent does not account for long term unemployed.

Dave:  So, the 4.1% is only really a number that suggests or underpins short term unemployment.

Mark:  Exactly and there’s a great guy,  we’ve covered him on many occasions; John Williams in Shadowstats, who looks a lot of these statistics and he shows how they’re manipulated in effect. So, it’s creating the impression of a goldilocks economy, but as I said when you look underneath, Goldilocks she’s not as pretty as you would think, shall we say.

Dave: And obviously, the Goldilocks reference there, when it comes to the economy is – not too hot or not too cold.

Mark:  Yes, just perfect.

Dave: Just perfect. And talking about the unemployment numbers, I was reading something and you covered him; Stockman, in the Market Update yesterday and it was very interesting article. I was reading something that he wrote something in the Wall Street Journal and he was looking at various numbers, various figures and he talked about manufacturing jobs and that in the period of 2007 to 2010, there were 2.3million manufacturing jobs lost in the U.S. and in the period of 2014 to 2017, only about 10% of those jobs lost have come back on stream.

Mark: They’re losing the better paid jobs as well. So, you’re getting a lot of casual labour and part time work, McDonald’s jobs, low paid jobs, part time jobs. The quality of jobs are going down as well and that means actually the wages that people are getting for those jobs are not going up. That would be to sign of a true Goldilocks economy, people would feel the wealth effect, and the man in the street would feel wealthy. But the man in the street is not happy, is angry and you can see that with Trump being elected. And in the move… we covered this in the last podcast, in terms of move to the left or right the more extremes that we’re seeing you know people don’t feel wealthy at all and the rich are benefiting from the quantitative easing and the 0% interest because they own assets, but the man in the street doesn’t tend to own assets. They depend on their wage and they’re not seeing any increase in their wages…..and then more job insecurity in huge way.

Dave: Steve, last time you talked about this wall of liquidity looking for a home and you talked about that in relation to basically the “everything bubble”. For those that may not have listened to episode one, can you just give us a refresher on that and tell us how it’s fuelling this stock market rise.

Steve: Leading up to last financial collapse there was an awful lot of excess in the broader capital markets where a lot of debt was taken on in an unsustainable format, and obviously when the assets prices started to correct, and the debt was found to be completely unsupportable, the official sector stepped in and on the basis of trying to cure the market, they tried to cut out the cancerous debt overhang and what they did was, they took all that debt in and hid it away from the market and put it on off balance sheet vehicles, controlled by the central banks and they paid back out on the this debt 100cent on the dollar.

So, they reinvigorated the market, they gave it fresh capital and fresh cash and they said let’s learn our lessons, let’s have safer banks, let’s put in new regulations. But here’s your money back and here, let’s hit the reset button and go again. And so an awful lot of this cash….

Dave: Just to clarify that’s going to be an institution would have bought a bond, originally say for $100 and that bond has fallen in value down to 90, 80, 70, 60 or even lower and then the Central Bank is stepping back in and saying; “I’ll buy that back off you at 100”.

Steve: Yes. So they basically allowed the banks to earn back the original face value of that debt, in the interests of recapitalizing the banks and injecting capital, much needed capital back into the into our into economies.

Dave: Because if they didn’t do this then, subsequently we’re going to be looking at bank collapses. So they basically they had to do this.

Steve: We were looking at a potential depression, which could have lasted for an awful long time and led to massive social problems right across the western world. And so this was unpalatable so, they decided to cure the market and cut out this this cancerous debt. And they did this through quantitative easing; so they would expand their balance sheets, they would issue money out of nothing on one side of the balance sheet and then they would sell it and take on liabilities on the other side – the debt, and they would give that cash… that cash would then make its way to those banks and those private equity firms and they would go out and invest that money.

And the theory being is that once they invest that money, then those companies do well and the benefits of that will then wash down to lower part of the economy, to employment, there’s more employment, more spending, more wage growth and an economy gets back into a virtuous circle. But, really what’s happened is that the higher echelons of society, the asset ownership class, they saw a massive appreciation of their assets and they saw their liabilities dwindling and they paid back debt and they own assets and they rent those assets out and they haven’t necessarily been spending it in new capital projects and so we haven’t had a huge capital boom that you would expect to see an economic recovery. And you haven’t seen the kind of movement of money throughout the economy changing hands as you would expect to see in a recovering economy.

In fact after most recessions you tend to see the velocity of money increasing as people become more confident and have more money in their pocket, but you haven’t seen that at all. In fact you’ve seen the velocity of money dropping to its lowest point in recent history and in fact it’s at 1.47 now if you look at the stats and it’s incredible. So, by injecting all this money into the economy it hasn’t trickled down, so the initial strategy didn’t work and what you’re seeing is one part of the population benefiting from higher asset prices and the other side the economy not getting a wage increase and not getting extra money to spend and more uncertainty as to their prospects.

Mark: Yeah, Stephen’s hit the nail on the head. And that’s the fundamentals. He’s really going in to the fundamentals of the economy, where we are today and the bottom line when you look at the quantitative easing and what they did there, we had a credit crisis/debt crisis. I think it’s better to look at it almost as a debt crisis because, it’s the amount to the debt in the world in 2007/2008 at every strata of society contributed to the initial liquidity crisis and the solvency crisis. But today the debt is actually gone fromit was a 150 trillion pre-crisis, today it is 233 trillion. So it’s gone up over 80 trillion in less than 10 years in this so-called recovery.

If you look at the chart it’s very interesting. And that’s the key thing, the debt to G.D.P ratio, that’s a key measurement of economic soundness and the fundamentals of the economy whether it is really Goldilocks economy, or not. So, Goldilocks is swimming in debt and she’s going to be foreclosed on and be put out of the house very soon and she’s going to be very cold indeed. A picture paints a thousand words, but it looks like when you look at the charts you could always see that the G.D.P. growth would outstrip the increase in the debt. It would be slightly higher and increase

Dave: This suggests that you’re getting a return

Mark: Yeah exactly, and recently it’s gone the other way where by the G.D.P. is sort of over the top of the hill and it’s sort of increasing very slowly, if not topping out, meanwhile the debt is going parabolic. And just in the last year alone, it’s gone up 16 trillion from Q one, the start of Q one 2017 to the end of Q three 2017. So another sixteen trillion in the debt, so it’s clearly unsustainable and that’s why we believe in this “everything bubble” and US stock markets in particular is a bubble. You have to look at different stock markets, some stock markets are undervalued, maybe there’s a reason they’re undervalued, whether in Syria or Venezuela or Russia, markets can be undervalued and they can stay undervalued. But the U.S market looks very overvalued indeed and that’s the key in terms of fundamental driving it.

Steve: Two things on that; I remember a while ago we were talking Mark and you said you know for every dollar of debt that’s issued the amount of  economic return you’re getting is now gone negative. I think it’s like 60 or 70 cents. This is Ponzi scheme territory.

Mark: Exactly we’re not getting a return on that debt.

Steve: Yeah, it’s actually costing the real economy. I don’t have a problem with debt increasing as long as it has a purpose and a function, like when you’re building factories, you’re creating, you’re creating excellent products and services and efficiencies.

Mark: Building capital

Steve: Yeah, building stuff, helping people and bringing population into productive work and activity. But what we’re seeing now is kind of the financialization of our economies, where you have very creative financial products out there which are which are kind of creating a kind of volatility in our daily lives that we’re seeing in our house prices, we’re seeing it in our health care, we’re seeing in our educational costs and it’s transmitting through the economy risks and shocks and it shouldn’t. We should have buffers in our economy that stop this happening.

But one of the main points in terms of all this debt, basically you can look at the debt amount that’s being produced by the central banks over the last years and I think that 20 trillion dollars has been just magic-ed out of nowhere. And you chart that and you look at the actual stock markets and it’s one for one. Literally every dollar of debt that the central banks of have produced has gone straight in to stock markets and that stock market growth really kind of benefits one sector of society, the top 5 to 10% of people and the rest don’t own stocks really. They are on salary, they’re salary slaves. They go from pay check to pay check, they don’t have assets, they rent everything and if they’re lucky at they have some sort of instability in their job.

Ever since 2000, the actual amount of individual prosperity, that you can measure an economy on, for workers has actually plateaued, it’s gone sideways. Whereas corporate profitability has kept rising. And all of this comes down to the intervention of the official sector in the economy trying to cajole or force the economy in to what they want it to be, to be successful, for political reasons.

Dave: I’ll just interrupt you there for a second because we’re being very much focused on U.S. stock markets in the conversation so far, but just to say that this isn’t just a U.S. issue. This is happening—

Mark: The “everything bubble”, affects everybody, but I think the U.S. stock market looks more of overvalued given the scale of the move up.

Dave: But in terms of the quantitative easing that we’ve seen that’s not isolated just in the U.S.  That’s a global issue.

Mark: Of course it’s not, no. The global debt to G.D.P. ratio is 320% and that’s a ratio that would bankrupt most nations. So the world is in effect bankrupt and  talking about the Goldilocks and she’s massively in debt and not only she massively in debt, she’s actually taking out loans to buy stocks and this is contributable, the margin debt is at all-time record highs and I think you’ve looked at some of those figures, Steve haven’t you?

Steve: Yes, if you look margin debt, margin debt is measured and there are some great stats on New York Stock Exchange. It’s essentially the amount of debt that investors are taking out so they can participate in the marketplace and at the beginning of last year it was about 513 billion which is historical high. By the end of the year it is estimated to be around 580 billion, so massive growth just inside 12 months and it’s continuing to go higher.

But even if you look at margin debt… inflation, that’s not inflation adjusted, that’s just beginning of inflation adjusted then you might be lower. But if you look at it as a proportion of the actual capitalization of the market it’s an all-time high and I think the metrics coming around 3% of the market is margin debt and historically it was around 1%/1 ½%. In the last financial crisis, it was just under 1½ % and now it’s at 3%.

So, it double what was an incredible high the last time we had a collapsed. And that just shows a huge fervour, it’s very much part of the bubble cycle where people are fearing missing out and there’s a huge event, the media are talking it up like they’re talking it up in the quarter four 2017, C. N.B.C. and all these guys. There’s an awful lot of very positive commentary coming out of the markets and Trump’s economic stimulus and tax plans and it’s incredible to see and we’ve been here before, but you know we just don’t learn the lessons.

I think for our listeners, where the most important things is to kind of acknowledged that this might be happening and then to decide what exactly what can they do about it and in order to prepare for it.

Mark: Actually, just on the margin; it’s higher than 1929, it’s higher than 1987.

Dave: And that would have been one of the things from the 1929 point of view. That was pin pointed as being the needle, or the pin that burst the bubble.

Mark: Absolutely and I read some I don’t have the exact figures at hand, but I read recently that the move up in the Dow jones from 1924 to 1929 is comparable to the move up that we’ve seen in recent years in the Dow Jones again . There is a mini parabolic move going on and any time you see massive out size performs like that you tend to see a very sharp correction at the very least.

But when you have this level of debt, not just in terms of the speculation using margin on stocks, but that’s a big factor and it’s important to look at that, but just at every strata of society that creates the real risk of a crash. And that’s why I think….. The thing to distinguish the U.S. stock market is that it’s the biggest stock market in the world and the M.S…… so all of the passive guys in the world who are allocated in wealth management firms around the world and financial advisers; they would use the M.S.C.I. World Index as their their way to allocate to stocks.

Dave: A passive investor is somebody who buys all the stocks in an index.

Mark: Exactly, a broadly balanced portfolio, he doesn’t buy and sell and time stocks and doesn’t pick individual stocks or individual sectors or geographies. So they buy the market in effect and that’s the way the M.S.C.I. World operates. More than 50% of that index is actually U.S. stocks so if the U.S. stock market has a very serious correction or crash, it’s going to impact pension funds around the world and they are already under pressure very significantly because of record low yields on their bonds and then the demographic time bomb that we’ve all been talking about for years.

So there’s a confluence of all these factors coming together and we’re only covering some of them, but just to finish out that point. So it’s this “everything bubble”, as well, that’s in the back ground and then you’ve got the problems in the bond market and I do think that this is what creates one the biggest risk that we’ve seen in history, one of the greatest financial bubbles we’ve seen in history. The question is will it get bubblier in effect, before it crashes and the air comes out and then how does it crash, do we get one more wave of deflation and a crash and then the central banks print money and then we get massive inflation, hyper inflation which quite possible or do we go straight into a quite inflationary mode which would see stock markets go even higher.

Dave: One question I’ll ask you guys at this point; from a fundamental point of view are people looking at the numbers coming out of these companies, how are these companies performing?

Steve: This is the nub of the issue and this I think is where we differ from previous market cycles. We’ve gotten too smart for good and generally speaking. Since the development of exchange traded funds or through an E.T.Fs which mimics certain sectors of the stock market, we’ve made it really easy for people to get exposure to certain sectors and there’s been a lot of study done recently…..

I actually when I worked in New York years ago, there were developing E.T.Fs on our desk at the time and it was… I think was called Trebble Q at that time the Spider E.T.F for the S&P500… and it went gangbusters out the door people couldn’t get enough of it. It was really easy and it was cheaper than the alternative which was active managers and these were paid stock market pickers who would go and try and beat the S& P500 index and people said; “you know what I’m happy just with the S& P500 index, so we’re going to buy this exchange traded fund that mimics it.”

And ever since then the percentage of trading of the US stock market that comes from the passive indexers, which we just spoken about and the E.T.Fs has grown and grown and grown and active managers, the guys that are stock picking has fallen and fallen and in fact, I think about 90% of trading in 1990’s was active, now it’s fallen to about 70% and then E.T.Fs and passives have gone from about 10 or 15% up to around 30%.

They reckon about 10% of the market is discretionary traders, fundamental discretionary traders. These are people who are buying and selling, duking it out on the bid offer in the market. And these are guys who are looking at the books; they’re looking at the companies

Dave: They’re doing a bit of price discovery.

Steve: They are trying to figure out and they are trying to price in that news, they’re doing arbitrage strategies, long-shorts whatever it is and they are living on the basis of their capital going up or going down and if it goes down it hurts them. That is a beautiful thing because the wisdom of the crowd comes to bear, there’s a price discovery mechanism there and then the passive guys would hang on those pricings and would trade along with them.

So what we’ve had now is that, the official sector is coming in as a bad actor, I think I mentioned it before in the last podcast and they’re buying no matter what. The E.T.Fs guys are coming in and they’re buying no matter what because, it’s on the list of stocks in the S&P500 or M.S.C.I. and the passive guys are buying as well and so the fundamental guys are being driven out of the market and they’re no longer participating. So the market is just going up and up and they’ve done studies on this and they said; “if you have a company and you’re C.E.O., if you just get listed in the S&P50, the correlation, your growth will go with the index and start to be less about your company and more about your membership of the index.” So, you could be­ doing anything in your company or whatever it is, but it’s less important what you do day to day. It’s more important that you’re in that index and it surprising.

Mark: And added to that the Algos, and the machines are actually following the momentum of all these guys and that’s feeding on itself as well. So that’s another factor that you could cover for a full podcast. It’s an amazing development that has very significant ramifications.

Steve: They are all kind of blind following each other with the lights off.

Mark: One thing on the sentiments just this week the headline came out. I wrote it down here. It was on Bloomberg and I’ve never seen a headline like this, but to me it was like classic sentiment warning indicator that we’re near the top. May not be, but I mean this is a classic. When you see headlines like this, it’s time to sort of reduce allocations. And the headline was; “stock market never goes down anymore”. This was a headline on Bloomberg. I mean the Bloomberg headlines have been getting a little bit more tabloid-like in recent years and I think that they’re trying to get bums on seats but there actually has been a host of others.

I actually typed out Dow 30,000 in to Google News to see what I would come up with and they came up with; “Dow 30,000 by year end”, on Seeking Alpha. “Scent of Dow 30,000”, on The Street. “Dow 30,000, how to get there in 2018”, and indeed we also have President trump talking about Dow 30,000, so who knows, big round numbers they tend to migrate to these numbers and given the degree of irrational exuberance and the momentum that’s there. It could go higher before going to lower.

Steve: I don’t know if we have the time to talk about when this might shift and what might be the straw that breaks the camel’s back.

Dave: One thing that I want us just to address because, I know it can be on the minds of a lot of people who are listening to this. Because when they’re hearing this particularly whether it’s passive indexes, whether it’s algorithm trading, whether it’s potential of a bubble, they’re probably sitting there and thinking; “but I own Apple stocks, I own Google stocks, I own Facebook stocks, I own all the big ones surely they’re good stocks to continue to hold. They’re not going to be affected by what happens?”

Mark: Well they are and they aren’t. This was the argument in 2007 and 2008 with some of the stockbrokers and people said; “well these are blue chip shares that will do well no matter what”. But all these stocks are massively correlated and if you get a massive correction or a new bear market in stocks, they will go down as well and similarly if the U.S. stock market sees a serious correction or a crash… when the U.S. gets a cold or when the U.S. sneezes, we all get a cold. And the other stock markets will be correlated and they will take lead from the S&P 500.

Dave: So, the good the good follows the bad down.

Mark: It does and that’s not a reason to say that should sell all your blue chip shares, but potentially if you are over-weighted or over-allocated to some of these blue chip shares, and  the tech sector does look quite frothy and the FANG stocks have been the sexy thing to own recent years. So if you do own them over allocated, I won’t say sell them.

Dave: The FANG stock for those who don’t know are – Facebook, Apple, Netflix and Google.

Mark: So I think you should possibly take some profits and rebalance your portfolio.  We’ll come to that now in terms of what the real important question here is not whether these markets are bubbles or not. We think they possibly are but we don’t have a crystal ball and they could become much bubblier. The question for people is what we should be doing in 2018 and the coming years to protect ourselves from these various risks that we’ve outlined.

Dave:  When we’ve seen these corrections or crashes or even the crisis back in 07/08 Central Banks had powers in the form of being able to lower interest rates and move into the quantitative easing that Steve talked about. They also have the ability to cut taxes. Now we’ve got interest rates near record low. Some of them have increased slightly, but we’re still near record lows. They’ve got no room left, no fire-power left and that we’ve seen large tax cuts in the U.S. and there was a degree of reluctance to push those through.

Is there much more room for further tax cuts? So, if we’re fiscally hand-cuffed from a monetary policy point of view we’re also hand-cuffed or limited. That really kind of sounds dangerous if we see some sort of correction

Steve: I think they are just going to print money. The quantitative easing

Dave: But can they do that indefinitely and if they do it indefinitely what does that do?

Mark: QE forever!

Dave: Is that massive hyperinflation?

Steve: It’s a Pandora’s Box. If you start at process; it’s always going to be on the table as a politically expedient option. They’re going to go for it whenever there’s a correction and there are job losses, there’s going to people out for blood on the streets, they’re going to force the Central Banks, even if they’re supposed to be independent they’re going to force them to buy and monetize debt and print money. And essentially it will create more inequality, it’ll create more volatility, it will drive out the fundamentals from the market and it just becomes an official sector exercise.

It’s almost socialism really at the end of the day. They are abandoning capitalist fundamentals and market based economies in favour of stability because, essentially they are micro-managing the markets. I will say one thing, another factor driving up the markets is also the search for yield the search for return and traditionally you would have had large sectors of the economy who would have been comfortable with the yield off bonds and fixed income, which were issued on a stable basis. And now you have bond yields negative in many regards, they’re beginning to go up a little bit now and that is the price of bonds so if the price of bonds goes up the yields goes down and vice versa.

So, bonds have been rising in prices as people just throw money into them and they’re accepting less and less in return in fact negative. Some people say; “I don’t want to lose money on my bond investments or my money I’ve saved after tax”, so they start putting it into the stock market and that’s driving up demand for stocks as well.

Mark: cryptocurrency as well, people are speculating to get that return.

Steve: Yes there is a theory that as this wall of money that’s being printed begins to come down into the street inflation is going to rise and interest rates are going to rise as well. And as interest rate rise, there will be less of a reason to own stocks and suddenly stocks will start looking very overvalued and expensive and if they do start to look expensive then you have the smart money will start driving out of those stocks very fast. That could create a run on the market and suddenly you have a freefall.

So now we’ve just turned a corner, suddenly bond interest rates are starting to rise. The 10 year had started to rise, it’s at 2½% percent or more now, it’s going up again and you’re beginning to have original patterns reassert themselves and so if that happens this market looks so incredibly expensive.

Dave: Another way to look at this quantitative easing, the idea of just printing money. If they start to see correction of printing currency

Mark: They can’t print money, gold is money. They’re printing fiat currencies and I said printing money myself, its funny the language we use and that’s important distinction.

Dave: When you talk about printing currency, there’s the way that I like to look at it because if they do print currency and a lot of that money is going to flow back into the stock market potentially, perpetuating this bubble and you’ll have people sitting on the side lines saying; “look at the Dow blowing through 30,000, 35,000 to 40,000”, and really the way to look at it is rather than seeing stocks appreciating effectively what’s happening is you’re able to buy less stocks for your dollar or your euro. So effectively what you’re doing is you’re devaluing the currency and I suppose to bring it back to what we do here. You’ve got a finite amount or an infinite amount of potential stocks and shares, but you’ve a finite amount of gold and silver. So in a situation like that, where there is continuous or perpetual printing of money, you’ll find that your dollar buys the less and less gold or less silver. The other way of looking about is the prices over rises consistently and considerably and the price of gold rises consistently and considerably

Mark: Yeah absolutely, you can have potentially infinite currencies and that’s potentially we’re going in terms of Q.E to infinity and beyond and Q.E forever. There are all sorts of wags who come up with different titles for it and that’s the real risk. And therefore if the Dow 30,000, Dow 40,000, Dow 50,000….. stocks are a hedge against inflation so therefore,  that is likely to happen, people put money into companies that survive and that will try and generate profit. Zimbabwe was the best performing stock market when they had their hyperinflation in whatever year it was, 2010 I think it was.

We have the bank notes, we’re in here in the Vault Room. The banks notes are up there which have the Zimbabwe hyperinflation notes up as much as one trillion Zimbabwe dollars. Their stock market was the best performing stock market in the world that year last year. I think Venezuela was the best performing stock market in the world and the Venezuelans were in hyperinflation.

So, stocks are a hedge against inflation, gold is an even better as against inflation particularly when your fiat currency is being devalued in a massive way. And you get into a hyperinflation scenario. It speaks to the importance of having an allocation to actual physical gold in your portfolio and given these risks I think our rule of thumb was always put 10% of  your wealth in gold and you hope to God it doesn’t work. I think today given these risks, I think it merits higher allocations.  If you can put 40% of your portfolio into stocks and forty percent into bonds why wouldn’t you potentially put 20, 30, and 40% into precious metals? You might put 20% to25% on the gold and 5% to 10% on the silver and then to 2½% in platinum or palladium or something like that.

I believe in higher allocations to precious metals in this environment– that might be on the high side and it won’t be for everybody.  I mean you have to look at people and their age profile, their risk appetite and all these things are very important and take financial advice. Take financial advice in particular, from a financial adviser who understands gold and advises people to own precious metal, because there’s lot of financial adviser who simply don’t understand it and don’t want to understand it.

Steve: As you we’re talking there Mark I was just remembering, I’ve talked an awful lot of clients recently and there they’ve been talking about the cashless society and how that’s going to underpin huge demand for gold because, you won’t to have to a form of money that you can put under a mattress any more. We will be all in with the system and the system is fairly corrupt.

Mark: All your eggs in that one basket

Steve: Yes and if you think about thatwe’ve talked about this word Q.E. But essentially what quantitative easing is or the printing of money by central banks, it’s actually taxation and it’s actually them taxing the money that you have. It’s like a percentage on your pay check. But it’s much more insidious. It is hidden away and you don’t see it and the interesting thing is the people who are doing this and making these decisions are not elected; they’re not elected at all. We don’t have a conversation a debate in the media about what the interest rates going to be or how much you know bond buying is going to happen this month. It’s just kind of delivered to us on a plate and we’re told to accept it and we don’t see it, we don’t feel it right away.

But then when we see the stock market rising and we see the asset rising, house prices going up and we see the cost of mortgages changing and we see volatility coming into our economy based on something happening in Europe or America, that’s the cost of this. I think with  cash leaving the system, or physical cash leaving the system the actual case for gold is a physical form of money that you can hold out of the system and protect yourself has never been stronger and it’s going to increase, the case going to get stronger every day.

Mark: Absolutely, the cashless society… they’re trying to corral everybody into this sort of digital economy and every day we hear news scandal about cyber this, cyber that and hacking here. The most recent one or even the most fundamental thing, that Intel chips that is paramount for most computers and on our devices are vulnerable in some form of malware; Spectre and Meltdown or Meltdown Spectre, whatever it was. And Equifax in the US one of  the biggest companies that actually held the data, very sensitive data of  U.S people in terms of their Social Security, their payment, details of dates of birth, their addresses, they were hacked and every month there’s’ a new instance of this.

It’s showing the vulnerability of this digital economy and digital finance and digital currencies and therefore forcing everybody to have all their money and all the wealth in the system, it’s not prudent actually. You need an ecosystem and by having that diversified ecosystem it actually protects companies and individuals. By corralling us all into this one little system it increases the systemic risk because you don’t have that diversity and that diversification.

Steve: I don’t know if we have time to talk about what people can do with a bubble as it’s forming and how they should invest and the tool kit available to investors. So, I think some of the standard advice we have and we give to clients every day is that you know you do need to have an allocation to gold and precious metals.

Untypically as I said it could be anywhere from 5% to 20% or more if it’s deemed prudent for you and your circumstance. I think you need to be a little bit sceptical about what’s happening out there, you need to be a bit sceptical about what the media is saying, take it with a pinch of salt and ask yourself questions; is it underpinned, is it fundamentally based, watch what you’re hearing and reading about it.

And also the in terms of your own personal self, you should invest in yourself, invest in your education, invest in your job or your company whatever you doing. You should have that specialist expertise about you that makes you very valuable as a member of our economy and that in its own self will help you ride out any kind of extreme volatility in the marketplace. So investing in yourself, in your education you should be diversified in your portfolio as Mark said, some bonds, some equities, some real estate as well as your home. They’re all very important.

Keep an eye on costs, very important in terms of whatever you invest in you know you want to be somebody who Nickel and Dimes. I think it’s something that comes easy to Americans. In Europe it’s something we don’t do as much. We’re a little bit more accepting and when we should really be focusing on costs and getting value for money every time. That’s why a lot of one of our customers come to Goldcore because we are extremely good value for money.

And you also should stay out of cash. Cash is something that people look to in times of crises. It’s not always the best place to be because again you have inflation, you have the money printers and the tyrannical Central Bankers who are depreciating our cash and savings and so cash is not necessary the place to be, hard assets are probably where you want to be and then the allocation to them should adjust up and down depending where you believe we are in the economic cycle. But also read widely, read well and listen to podcasts like ours. And again go back to the very first point educate yourself, constantly the educate yourself.

Mark: Yeah, I couldn’t agree more and just on the education point it’s key because the world is changing so fast you really have to keep up to date with that you know and there’s is so much noise out there and you’re just bombarded with all sorts of information and much of it is disinformation it’s disempowering and it’s all about fear and unfortunately we have to look at these big scary numbers and the ramifications thereof, but we’re not doing it to scare people. We’re trying to empower people and then tell people you know this is how you protect yourself and this is how you will actually protect the grow your wealth and come out the other side.

Our mission statement when we set up the company in 2003 was to protect and grow our clients’ wealth and we’ve done that fairly well over the years and that’s why we talked like this.

One thing on cash, I think, it’s traditionally financial advisers and wealth management they would suggest 5% to 10% allocation to cash. I think in the current climate given the bubble that’s in bonds and stocks you could have a slightly higher allocation to cash, but the key thing is be aware of inflation If it looks like it will take off it own stage and then with the risk of bail-ins and the deposit confiscation which is something we’ve covered quite frequently over the years and a lot of our clients are concerned about that, you need to be very careful about which bank. So, looking at the counterparty risk of individual banks and potentially, some of our clients do this, and I see the merits of increasing this, take some actual physical cash, a small amount, not a huge amount, some physical cash out of your bank, put it into a safe deposit box or vault or someplace safe. A small amount.

Steve: Three months of your expenditure that you would have as a family, you’d have in cash

Mark: I never thought I’d see myself say that on the podcast, I’ve had this view for 2 or 3 years but the more I think about it just gives me certainty it makes absolute sense.

Steve: I think it’s been a fascinating conversation in terms of bubbles and where we are in the stock market and what you can do as an investor going forward. One thing is very important for ourselves is that we get as much feedback from clients who might be listening to the podcast. We are always looking for ideas for the next month as well.  So do feel free to reach out to myself or Mark with your thoughts and suggestions for any future podcasts.

Mark: We had a little bit of feedback on the last YouTube video which was great. The podcast is on YouTube obviously. And whatever way, either you can send us emails or post comment on YouTube or even on the podcast channels. All feedback is greatly welcomed and it will very much guide as tol what topics we cover.

Dave: Great. Gents, that seems like a perfect place to wrap this up for this month as usual I’ve learnt an awful lot from you two yet again. And so as we’ve said before subscribe to the podcast, the Goldnomics podcast on iTunes, on YouTube on SoundCloud and give us your feedback and your comments, anything that you’d like us to talk about in future episodes. We will be delighted to hear anything that you have to say.

So from me Dave Russell, Steve, Mark, thank you all very much for listening.

Mark: Thanks guys.

Steve: Thank you very much.

News and Commentary

Gold Is Heading Towards a Four-Year High (

Gold inches up after dropping from 1-1/2 year highs (

Trump says dollar to get ‘stronger and stronger’ (

ECB keeps policy unchanged, faces questions over euro surge (

Trump Rallies Dollar as Stocks Wobble, Crude Falls: Markets Wrap (

Davos team propels gold price to 18-month high, Trump shoots it down (

Source: Bloomberg

Is This The Greatest Stock Market Bubble In History? Goldnomics Podcast (

It Is Frankly Scary – Bill White Warns Global Financial System Faces “Perfect Storm” (

DataTrek: The 5 Scenarios That Could Crash The Market, And How To Hedge Them (

Why We’re Underestimating American Collapse (

The Dark Side of America’s Rise to Oil Superpower (

Markets Are About to Get Ugly According to These Charts (

Gold Prices (LBMA AM)

26 Jan: USD 1,354.35, GBP 950.21 & EUR 1,087.41 per ounce
25 Jan: USD 1,360.25, GBP 954.35 & EUR 1,095.27 per ounce
24 Jan: USD 1,350.50, GBP 957.50 & EUR 1,093.77 per ounce
23 Jan: USD 1,337.10, GBP 959.10 & EUR 1,091.74 per ounce
22 Jan: USD 1,334.15, GBP 959.12 & EUR 1,087.87 per ounce
19 Jan: USD 1,335.80, GBP 960.17 & EUR 1,087.74 per ounce

Silver Prices (LBMA)

26 Jan: USD 17.40, GBP 12.21 & EUR 13.99 per ounce
25 Jan: USD 17.52, GBP 12.29 & EUR 14.12 per ounce
24 Jan: USD 17.19, GBP 12.16 & EUR 13.93 per ounce
23 Jan: USD 16.98, GBP 12.19 & EUR 13.87 per ounce
22 Jan: USD 17.04, GBP 12.25 & EUR 13.90 per ounce
19 Jan: USD 17.04, GBP 12.27 & EUR 13.89 per ounce

Recent Market Updates

– Is This The Greatest Stock Market Bubble In History? Goldnomics Podcast
– Cyber War Coming In 2018?
– Government Shutdown Ends – Markets Ignore Looming Debt and Bond Market Threat
– Global Pension Ponzi – Carillion Collapse One Of Many To Come
– The Next Great Bull Market in Gold Has Begun – Rickards
– Gold Bullion May Have Room to Run As Chinese New Year Looms
– Digital Gold Flight To Physical Gold Coins and Bars
– Gold and Silver Bullion Are Only “Safe Investments Left” – Stockman
– Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver”
– London Property Crash Looms As Prices Drop To 2 1/2 Year Low
– Gold Bullion Up 1% In Week, Heads For 5th Weekly Gain As Bonds Sell Off
– Gold Prices Rise To $1,326/oz as China U.S. Treasury Buying Report Creates Volatility
– Gold Hits All-Time Highs Priced In Emerging Market Currencies
– World is $233 Trillion In Debt: UK Personal Debt At New Record
– 10 Reasons Why You Should Add To Your Gold Holdings

Mark O'Byrne

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