Transcription of interview with James Rickards on September 7, 2015.
Douglas Goldstein, CFP®, Financial Planner & Investment Advisor
James Rickards is the bestselling author of The Death of Money and Currency Wars.
He is also the editor of Strategic Intelligence.
Douglas Goldstein, financial planner & investment advisor, interviewed Rickards on Arutz Sheva
Radio.
Douglas Goldstein: You do talk in your book about the next financial collapse.
In fact, you’ve said it’s going to resemble nothing in history.
In the past, we’ve seen many financial collapses and some of them even recently.
Why do you think the next one is going to be so different?
James Rickards: It’s mainly because of the scale of the system and when I say scale I’m
talking about size, you can measure it a lot of different ways.
You can look at the concentration of bank assets, the interconnectedness of firms in
the financial system, the gross national value of derivatives which now exceed ten times
global GDP.
Round numbers global GDP is about 75 trillion of the initial value of all the derivatives
on the big banks, over 750 trillion, all of this data is available from the BIS.
If you use complexity theory which I do where I’m a little bit heterodoxies that my analytical
methods are different than what central bank is using, what Wall Street is using although
that’s a good scientific basis for it and I’m going to get very good results but using
complexity theory, one of the principles is that the worst thing that can happen in the
system is an exponential function of the scales so if you double or triple the system which
we’ve done since 2008, you’re increasing the by a factor of 10 or more.
So the next time this melts down, I just saw in the recent history that the markets had
melted down every 7 or 8 years so almost like clockwork.
It will be bigger than the central bank’s ability to control that’s why I think it
will be the worst in history.
Douglas Goldstein: When you talk about this with central bankers, what do they respond
to you?
James Rickards: I had a personal conversation with Ben Bernanke recently, I’ve had dinners
and lunches but you know one on one venues or maybe small group of 7 or 8 with members
of the board of governors.
I’ve spoken to regional reserve bank presidents, very senior, very plugged in staff, had monetary
economics so I’ve actually had the opportunity to meet with a lot of top officials and policy
makers and actually some foreign countries around the world and what’s interesting
is that they don’t really debate me when I sort of bring up these different concept
of analyses, I kind of get blank stares of like “What are you talking about?”
Seriously, I mean they are smart.
They are actually probably smarter than I am.
I’ve worked with Nobel Prize winners.
I was part of the long term capital management that was the hedge fund that collapsed and
almost destroyed global capital markets in 1998.
So I’ve had a front row seat on some of these catastrophic meltdowns that almost closed
every market in the world.
I’ve seen that firsthand and these people have 160-170 IQs.
They are twice or three times smart as I am.
So they are not dumb.
They’ve got PhDs and they’ve got the quantitative skills but the problem is they’re using
the wrong models and it doesn’t matter how smart you are, if you use the wrong model
you will get the wrong result every single time.
Just go back and look at the past 20 years or so, they’ve missed the panic in 1994,
the Mexican peso crisis, they missed the Asian Russian crisis in 1997-1998, they missed the
dot com bubble in 2000, they missed the mortgage bubble in 2007 and they’re going to miss
the next one too because they are using the wrong models.
Douglas Goldstein: How likely is that do you feel that some sort of collapse is going to
happen and should people be panicking at this point?
James Rickards: I don’t believe in panic and I do have some fairly calamities projections
and estimates based on my algorithm method.
I’m not personally a doom and gloom person.
I’m very optimistic.
I wake up in the morning.
I go to work like everyone else.
I’m kind of out there but I also don’t want to turn a blind eye or turn away from
what I’m saying or what my little methods are showing.
I do see some fairly catastrophic outcomes.
Now as the probability, I would say it’s about 100%.
I just based that on history on the fact that these systems do collapse periodically, that
as I say risk is an exponential function scale.
So it’s about 100%.
Now, you can’t say these have timing.
It could be tomorrow, possible it could be September 17th if the rates that could start
the avalanche but it could be next year, it could be three years.
These are all possible outcomes and that’s not just kind of guessing as to the timing.
The method itself would say that you can.
It’s like earthquake science.
In fact, the mathematics and the degree distribution are exactly like earthquake science.
Forest fires, solar flares and a lot of other phenomenon, some natural and some manmade
but no one knows when an earthquake is going to hit a fault line.
The predictability of seismologist is close to zero but we know where the fault lines
are, we know how bad it can be and helpless.
Nobody thinks it’s a good idea to put a nuclear power plant right on the center of
the fault so let’s not do dumb things even though we don’t know exactly when the next
earthquake is coming.
So as applied to financial market, I can’t tell you the date when the meltdown will come,
I can tell you the fault lines are there, the tectonic plates are pushing against each
other, the collapse will come and what are you waiting for.
Douglas Goldstein: Right now, these days were sort of in the depths of the beginning arguments
of the next presidential election of America.
Do you think that either party has some solution to the problems that you’ve been making
people aware of?
James Rickards: It makes my life a lot easier because I don’t spend much time on politics.
I care, I vote and I have my preferences.
I’m not saying that I’m completely divorce in the political process but I do look at
the candidates.
I’ve spoken to a number of them and there’s one who I think kind of gets what we’re
talking about.
I would say it would be Rick Perry.
I spent a lot of time with Governor Perry and we had some good conversations and he
has been kind enough to mention my books in our meetings and few of his speeches and campaign
stuffs and so forth.
So I think Governor Perry has some insight here.
I’ve spoken to Rand Paul, I’ve spoken to Hillary Clinton so I’ve actually had
some contact for the candidates.
They kind of get the problem but I do think that in Washington whether you’re Republican
or Democrat, you’re just [skeptic] to a lot of [issue] whether it’s lobbyist.
The banks really own Washington.
I was in a private meeting with senior treasurer officials to talk about what we’re talking
about right now which is risk in capital markets and the right ways to think about it and they
were kind to do so and we spent about two hours behind closed doors with the group responsible
for this.
At one point, I kind of interrupted my own presentation.
I looked at one treasurer official and I said I don’t because the banks own this town
and I expect him to jump out of his seat, be in outrage or something and he just looked
at me and said “You’re right, we can’t do very much.
I think it’s revealing.
I sort of knew it was true but I was surprised to hear him admit it.
A lot of the presses is [skeptic] to the banks.
They spent a lot of money around, there’s a lot of a lot of badges sign because our
found father wanted that constitution that didn’t allow things to happen quickly.
So I guess I’m skeptical that whichever part it went is really going to be able to
do very much about the situation.
Douglas Goldstein: One of the fears that people have is they think the world is collapsing
and in your book you do talk about there are safeguards that people can use and I’m talking
about individual investors not from the government level and you talk about things like gold
and particularly talk about fine art.
It’s good if you can dive in a little bit more and explain why you think fine art is
a good hedge against the collapse in the market system.
James Rickards: I’ve had an occasion to spend some time in New York.
You know in the United States when we talk about old money, we’re really talking about
money that’s maybe 100 or 150 years old so you know the Rockefellers, the Vanderbilt
or the.
When you go to Europe, you run into a few families and there’s one family in particular,
the Colonna family in Rome, they’ve had their money for a hundred years.
That family really kind of immerses wealthy in the political force in the 13th century
so they’ve been going strong for 800 years.
When you talk to families like that and say the family survived the 30-year war and the
war of the Louis XIV and Napoleon and World War I and World War II etcetera, how do you
do it and they look at you and they say a third of third and the third and what they
mean by that is one third gold, one third land and one third fine art and a little cash
on the side for your jet and your yacht and all that but obviously fine art is a big part
of the equation but imagine you’re living in a village in Bavaria in 1620 and Wallenberg
is burning down everything in its path, you can take your painting off the wall, roll
it up, take it in your backpack, grab your gold coins, get on your horse and run away.
After the burning is done, you come back, you should be able to re-establish on your
land, you put your painting back on the wall, dump your gold coins in the table and you’re
good to go and all your neighbors have been burnt out.
So it’s a tried and true way of preserving wealth through very calamitous times.
The thing I like about fine art in particular is it’s not manipulated the way gold is.
I mean gold is absolutely a core asset.
I recommended to have 10% of their investible assets in physical gold not bank contracts
and by the way but actual physical gold coins, coins or bars or whatever suits the individual
but for art a lot of people say “I don’t have $180 million to go out and buy Picasso
and very few people do but the point is there are some well-managed fine art fans out there.
Central bankers don’t wake up in the morning say we really have to see art market today.
I like to see art trade the way gold would trade but for central bank and political manipulation.
So yes have some gold but fine art I think is a good addition to portfolio, land obviously.
I also recommend cash and people are surprised for me to say that and say “Wait a second
Jim, you’re the guy talking about the death of money why would I have cash?”
The answer is you might not have it forever but it’s good to have right now because
first of all it’s a deflation hedge and deflation is kind of running around the world
and it also reduces the volatility of the rest of the portfolio.
Finally, it give you great optionality of things tilt one way or the other because I
think both deflation and inflation are in play.
Once we have a little more visibility the guy with cash is a guy from pivot and take
advantage of those opportunities.
So I think gold, fine art, land, cash all have a role and just my own portfolio has
some private equity, venture capital type investments, and some start up tech firms
so I think there’s a place for that also.
Douglas Goldstein: How can people follow you and follow your work?
James Rickards: I’m very active on Twitter.
My Twitter handle is @JamesGRickards and my website is www.jamesrickardsproject.com.