Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 92 March 2020

Jim Rickards and Alex Stanczyk, The Gold Chronicles March 2020


Topics Include:

*Opening salvos of Global Financial Crisis II (GFCII)

*The entire precious metals complex (gold and silver) has been cleaned out globally

*The best time to act has past, now is the second best time to act

*The global run on precious metals is probably less than 5% of the population, when the majority catches on to damage done to USD the demand could be historic

*Price dis-connect between paper and physical gold price

*How price discovery in the gold market is resolved *What happens when the Swiss refineries open again

*The effect of key relationships with Swiss refineries on access to gold and silver

*Mining output dropping due to mines getting shut down reduces available supply of gold

*US Unemployment Claims hitting record levels, 3.28M claims in one week

*Fed injecting capital into system trying to prevent liquidity freezes (Ice-9)

*Why we are entering the next Great Depression

*In comparison, during “The Great Depression” Dow Jones dropped 89%

*The Great Depression played out over 3 years, we are a third of the way there in 3 weeks

*Consequences of Supply Chain Shutdowns

*Why the US could lose up to 50% of its economic output by the end of the downturn

*The social and political consequences of QEternity *What happens when complex systems collide

*Regarding mass migrations and unrest, watch South Africa and Mexico

*Full Spectrum Warfare – Financial, Biological, Cyber, Social Engineering, Kinetic

*What are the chances we will see kinetic warfare

*Why China could be eyeballing Taiwan during the crisis

*How the Covid-19 numbers out of China are questionable

*CARES Bill – Whats in it

*Whats happens to gold if we see massive deflation (Great Depression II)

*The two ways gold is revalued in a massive deflation

*It took 25 years for US markets to recover from the Great Depression

*Jim: “Be wary of suckers rallies”

*Practical things people can do during this crisis

*Spoiler – Jim’s new call on the US Presidential election and how the crisis has changed the probabilities


Listen to the original audio of the podcast here

EP. 92 The Gold Chronicles: March 2020 podcast with Jim Rickards and Alex Stanczyk


Physical Gold Fund presents The Gold Chronicles with Jim Rickards and Alex Stanczyk offering insights and analysis about economics, geopolitics, global finance, and gold.


Alex: Hello. My name is Alex Stanczyk. Welcome to episode 92 of The Gold Chronicles. Today is March 27, 2020, and I have with me my friend and colleague, Mr. Jim Rickards. Welcome, Jim.

Jim: Alex, it’s great to be with you.

Alex: Before we dive in, I’ll let you know that you may access the archive of our podcast transcripts we have done going back several years at If you watch this podcast on YouTube, please take a moment to Subscribe, Like, and feel welcome to comment. We’d love to hear from you.

For those of you who are new to our podcast, Jim Rickards is a Wall Street Journal and national bestselling author who is a well-known and respected expert in geopolitics and a number of other subjects. He has a ridiculous number of degrees and professional credentials I won’t go into, but you may want to go to to learn more about that.

The first time I ran across Jim was around 2010. I think I saw you on Bloomberg talking about gold, and I was thinking to myself, “Who is this guy? This Wall Street pedigreed guy talking about gold. Isn’t that forbidden by Wall Street code? You’re not allowed to talk about gold. What’s going on with that?”

Later, I picked up Jim’s book, Currency Wars, and I realized very quickly that I need to get to know him. If you haven’t read his books, I encourage you to do so. They include Currency Wars: The Making of the Next Global Crises, The Death of Money: The Coming Collapse of the International Monetary System, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos, and my personal favorite, The New Case for Gold – yes, I’m biased.

Jim, the audience is by now already familiar with coronavirus as well as that we are probably in the opening salvos of Global Financial Crisis II. I’m just being honest and calling it what it is. We don’t have to rehash a lot about how we got here, so let’s discuss where it goes from here. Seriously, how bad is this?

Jim: It’s bad. I think that’s pretty well known. The questions are: how bad, what’s the right way to think about it, how long will it last, and what will the impact be. Those are all big open questions. We can address all of them to some extent, but I think “bad” is a good place to start.

By the way, Alex, thank you for mentioning my books. I’m very grateful for that, and the readers generally like them. The thing about the books is they include some history, some analysis, and some science, but there is mainly a lot of prediction and warning, i.e., here’s what’s going to happen, here’s how it’s going to happen, here’s the impact, etc.

I do a lot of public speaking, interviews, and so forth, and over the years, one of the questions I get asked most frequently is, “Jim, I hear you and understand what you’re saying. I agree. Could you call me the day before and let me know? I’ll sell my stocks to get some gold and all that.”

My response is, “Well, a couple of things. I’m not going to know the day before. I can tell you what’s coming, give you some idea of the order of magnitude, but I won’t necessarily know that day. If I did somehow know the day, I’d probably be a little busy myself. Beyond that, what are you waiting for?” In other words, if you agree with the analysis that something like this is going to happen, why would you wait until it happens?

It’ll be too late. By the time everyone wakes up, 30% of wealth and stocks will have disappeared, which did happen in the last few weeks, and the price of gold will soar. We’ll get into this a little bit more, but right now, if you’re not the Central Bank of Russia, the price of physical gold doesn’t matter. You can’t get any. I can explain that in a lot of detail, but call a dealer and try getting some right now. You can’t do it unless you’re dealing with a well-established relationship.

The irony is, you warn and you warn, but everyone is like, “Thank you, but I’m going to keep buying stocks.” Then it happens and they’re like, “Oh, gee, I should have listened.” That can’t be helped. Human nature is what it is, meaning you can’t change it. So, when you tell people or suggest to them that they ought to buy gold when it’s $1100, yeah, $1200, yeah, $1300, yeah, $1400, $1500, all of a sudden it hits $1600 and everyone’s like, “Get me some gold.”

Guess what? It’s exactly what I said – dealers are not returning calls, the US mint is backordered and not taking new orders, the Royal Canadian Mint is closed, and Swiss refiners still have some output but can’t ship it to the United States because of all the transportation bans.

Brinks has the vault near JFK that’s one of the largest depots of gold in the world outside of the Federal Reserve or the Bank of England, and they’re working half shifts because of coronavirus. Brinks has an alternate facility in Salt Lake City, but they got hit by an earthquake and closed because they have to assess the damage. So, when it rains, it pours. An earthquake is not correlated to coronavirus, but Murphy’s Law. If I ever catch Murphy, he’s in trouble.

Alex: Let’s strangle this guy Murphy, right?

Jim: Yes, as soon as I find him, he’s in big trouble.

Alex: What’s amazing to me is that we’ve had this global run on metal and the whole system is cleaned out. The fact that Swiss refineries have shut down makes it even worse. We’ll probably talk about that more later, but what is fascinating to me is how small a fraction of the human population understands what’s happening right now to have cleaned out the metal complex.

In my estimation, I’d say it is way less than 5% of the population buying the gold.

Jim: Oh, yes. Maybe 1%.

Alex: If that’s the case and we’ve already cleaned out the metals complex, what happens when we start to have problems in the U.S. dollar and people really get switched on to it? It just blows my mind where that could go.

Jim: You’re absolutely right, Alex. We’ve said this a lot. I said when you most want your gold, you’ll be least able to get it. It won’t be about price anymore.

Another interesting disjunction is that people say the futures price and the physical price have diverged. My response to that is yes and no. The futures price is what it is, but it’s not gold. They’re paper contracts linked to the price of gold somehow, someway, but they kind of set the price of gold. That’s not gold. If you want to get physical bullion, a dealer will do spot plus commission.

For spot, refer to the COMEX. It is what it is. For commission, the discount dealers are kind of 2% and another dealer might be 4%, which is higher, but there may be good reasons to be dealing at the higher commission price. Now the commissions are 10% – 15%.

Alex: Yes, they’ve blown completely out.

Jim: Correct. If gold is $1600 and the commission is 10%, add $160, so that’s $1760 for your gold. Is it two different prices? Well, all in, yes. When you count the commission, it is even though that’s really spot plus commission. The 10% commission is five times the normal commission. There is this disjunction even though the way its quoted is spot plus commission, so check out the commission. That’s a reflection of the fact that you can’t get it at all.

As an interesting legal footnote, if you’re a dealer or the man or anybody selling physical gold, it’s actually illegal to sell it for delivery more than 28 days forward. The reason for that is, if your delivery is more than 28 days forward, you’re classified as a futures contract. That’s the difference between the physical. I can deliver to you in one or two weeks, but if I deliver to you in two months, I’m technically a futures contract off exchange, so I’m probably violating the Commodity Exchange Act. I think people – not me, but some regulars – are turning a blind eye to that for the moment, but even dealers who take your order might tell you that you have to wait a month or longer to get the gold.

Alex: At retail, the whole complex is cleaned out.

Here’s a question that came up from one of our viewers. How do we get back to price discovery? Price discovery in the market is broken. One of our colleagues in the industry recently said it’s discovering the price of something, but it’s not physical gold. What is it? How do we get back to normal?

Jim: Again, any contract you make – whether it’s a futures contract, an ETF, an unallocated forward under the LBMA rules or a phone call when a guy takes your order with “I’ll get back to you” – none of those are gold. None of those are physical bullion. They’re contracts, and contracts can be terminated. People can claim force majeure or people can just not show up.

We’re in an environment where you don’t just have to worry about the price and availability; you’ve got counterparty risk. How do you know the person you’re buying the gold from is going to be there when you give them a credit card number? What if they disappear?
I’m not suggesting that’s widespread. I know some very honest, reliable dealers out there who will tell you the truth. They’re the ones who will say, “Thank you, but there’s no gold.”

The answer is, sometimes you don’t get back to normal price discovery. We’re seeing that right now in the stock market. We all know what the stock market has done this past month; it’s dropped over 30%. There was a little rally a couple of days ago, but it went back down again. You get into these big up days and down days, but even accounting for the rallies, it’s certainly down about 30%.

So, what’s going on there? Well, the stock market is trying to reprice.

Alex: As far as price discovery just in the gold markets, I think people are wondering how we fix this. From my perspective, I’m really curious to see how this is going to work out at the refinery level. In my experience in my entire time in this industry, we’ve never seen the refineries close. In fact, as far as I’m aware, they didn’t close through wars, and they didn’t close through the London Gold Pool. This is a really unique event, so I’m really curious to see what happens when they open.

I suspect it’s all going to be deals based upon people they know they trust, just like you said. I think they’re going to be wondering and looking at whether these people are going to stay solvent or not, their counterparties, and they’re going to be doing direct deals. We’re probably going to end up – when I say we, I mean Physical Gold Fund – with what we call refinery spot pricing that’s going to be based upon their book, not the futures market or any of those kinds of things.

Jim: Correct. PGF is one of the funds that has longstanding, positive relationships, a trusted counterparty. You can pick up the phone and they’ll take your call, but if you’re calling from out of the blue or they don’t know you or you’re a fund that started yesterday, they won’t take your call. They’ll say, why waste our time?

Without mentioning names, you and I met with the head of precious metals at one of the biggest refineries in the world several years ago. What we were told at the time was that this particular refinery was working 24 hours a day. They were working triple shifts and could not meet the demand. China wanted more, but they said, “Okay, we’ll sell a lot to China, but we’ve got our longstanding customers, Rolex or Cartier or whoever needs the gold. We can’t cut them off.”

Three years ago, they were at capacity and turning down orders,. Now, they will not pick up the phone unless it’s you or Central Bank of Russia or some very established account. Even then, it may be hard to get.

As to when things get back to normal, it may not be anytime soon, because this feeds on itself. There’s a recursive function. People who didn’t want gold or turned up their nose at gold for years suddenly want gold. “I can’t get it? Well, now I want it more.” So, it feeds on itself.
Alex: That’s the whole world right now.

Jim: One thing I’ve observed is that mining output is flat. I’m not saying it’s disappearing, but mining output has not increased in six years. It’s running at about the same level of several thousand tons a year, but it’s not going up. When you have a fixed supply and skyrocketing demand, you learn in the first week of economics that that makes the price go up.

Alex: Yes, prices are going to have to rise to clear, especially with miners shutting down. A lot of miners are shutting down because of coronavirus. That’s only going to feed into the lack of supply in the system. It’s basically going to have to come from either scrap or people who own it who are willing to sell it, which means that right now, a lot of people are probably willing to and the only thing that’ll change that is the price.

Jim: Correct. With the liquidity squeeze and seeing as the thing – when I say thing, I mean starting with the pandemic – it runs through the economy.

Capital is scarce. The Fed’s printing trillions upon trillions of dollars just to keep the lights on. You can call this helicopter money if you want, but it isn’t really. They’re just trying to keep the commercial paper market, the muni market, the bond market, the currency swaps at foreign central banks, and the repo market open.

Alex: They’re trying to prevent Ice-9.

Jim: Yes, they’re trying to prevent Ice-9, but this is not like extra money. This is a massive amount of liquidity injection just to keep things from getting worse. Where’s the capital going to come from for miners to expand? They might have very attractive opportunities, but capital’s going to be scarce, coronavirus is an impediment, there’s a transportation shutdown, and borders are closed.

I spoke to a major gold dealer a few days ago. Like yourselves, he’s mainly into a physical gold fund and is a guy who is well regarded and plugged in, so his phone calls do get returned. He told me a lot of the things we’re discussing right now. He said your dealer might have a little bit of inventory, and if he has some, he might sell to you out of inventory, but he’s not replenishing, and they’re all going to run out of inventory very soon.

Alex: Yes, I can see that.

Let’s move on to the next topic I think a lot of people are wondering about. Last week, the unemployment claims came in at 3.38 million for the week. Here’s a serious question: is this the next Great Depression?

Jim: The answer is yes. I think we’re already there. The data is going to trickle in over the months ahead, so April 28 or somewhere around the end of April, we’ll get the first quarter’s GDP. Bear in mind that the first quarter ends on March 31st. It you have an awful March, but January and most of February are okay, that’ll be bad, but it might not look as bad as it’s going to get. April is going to be horrific, and second quarter GDP, but we’re not going to get that number until the end of July.

We’ll have plenty of data between now and then, because it is already coming in. You just mentioned one of the data points. By the way, I forget if it was 3.1 or 3.3 million initial claims last week. The previous high was 700,000. This is not just, “Oh, it got a little worse.” No, this is four or almost five times the worst on record. That’s how bad it is.

You’re going to see GDP drop. These are all estimates, but at least 5% or more in the first quarter – bearing in mind you had a good couple months in that quarter – it’s going to drop. Take your pick, 20% maybe in the second quarter.

We’ve never seen anything like this since the Great Depression. You’ve got to get 2008 out of your head. That’s not the baseline, that’s not what’s going on. This looks like 1929. That’s where you have to go to see anything like this. What happened in 1929? From 1929 to 1932, July of ’32 specifically, the Dow Jones index dropped 89%. Let that sink in. It’s down 30%, but what if there’s another 60 percentage points to go? That’s what happened then.

Unemployment went to the mid-20%, around 25%. World trade shriveled, etc. Banks were closed. The President woke up one day and closed the banks for eight days. I’m not saying those exact things are going to happen, but I’m saying that’s how you have to think about this in terms of what’s going on right now.

There is one big difference, however. The difference is that everything I just described about 1929 played out over about three to four years between 1929 and 1933. What we just saw played out in about three weeks.

Alex: Everything right now is accelerated.

Jim: Right. There’s never been anything like this.

Alex: Speaking of that, let’s talk about what’s happening in logistics supply chains.

There are all kinds of small to medium businesses throughout the U.S. economy and the world economy, but I’m talking right now just about the U.S. as an example. Most of the U.S. is in voluntary lockdown. Everybody’s doing the stay-at-home thing, small businesses are closed, and nothing is being moved around unless it’s essential services, etc. I don’t know how many small and medium business are closer to bankruptcy every day this continues.

A lot of these businesses will not be starting up again when people are back to moving around. We’re going to lose huge portions of logistics supply chains throughout the entire economic system in the United States. What’s the worst-case scenario with all of that?

Jim: There’s a worst case and slightly better case, but I think the worst case deserves a lot of consideration.

I saw an interview the other day with Wolfgang Puck and another famous chef. Of course, they’re pleading on behalf of the restaurant business. They said that what you have to understand about restaurants is it’s not just the bartenders and the servers and the people in the kitchen. Yes, they all get laid off, they close the doors, and revenue goes to zero, but it’s that supply chain – the farmer, the fisherman, the butcher, the truck driver.

All the people who supply the restaurants have gone to zero because the restaurants closed. That’s an important part of the economy, but that’s just one slice. Doctor’s offices are closed, dentists, lawyers, accountants, manufacturers, on and on. There’s no need to recite the list, because the list is basically everything you can think of in the economy.

Alex: Everything and everyone.

Jim: That’s the bad part. Now, here are the questions everyone needs to think about. Number one, how much will it drop? The answer is unprecedented in U.S. history. Number two (and this is important), when will it come back, i.e., how long will this last? That’s a big question. And number three, what will the recovery look like? Will it be the famous V where it goes down sharply but comes back sharply, or will it be what they call a U where it goes down, pokes along at the bottom, and then comes up? Or the worst outcome maybe is the L where it goes down and just stays there so you have some growth but not much and you don’t get back to trend.

Thinking about that, you have to ask yourself further questions. We have huge losses, got it, but are these permanent or temporary? Let me make that distinction.

My wife and I usually go out for dinner on a Friday night. We didn’t go out last Friday, and we’re not going out next Friday, so those dinner bills are lost to the economy. Who knows, but hopefully by May or June or something, things will get back to normal and we’ll feel like going out to dinner. But when we go out to dinner, we’re not going to have three dinners; we’re going to have one dinner. The two dinners are permanently lost. That’s a lost economy that never comes back.

If I was out to buy a car and I decide to put that off until August when things look better, that’s a timing difference. That’s a temporary difference. The GDP still got the car, but it was shifted from the second quarter to the third quarter.

So, what’s the mix? Well, 70% of the U.S. economy is consumption and 70% of that is services rather than manufactured goods. So, 70% of 70% is 49%, 49% of the U.S. economy. Those losses may be permanent. Not all of them will be, but I would weight the losses more to the permanent side than the temporary side even though some of it will be timing differences. That’s the first thing.

Now, the second thing. I love talking to people who are twice as smart as I am, and I just got off the phone with somebody in that category.

Alex: Is that even possible? I didn’t know that was possible.

Jim: They’re around, and I try to find them. You always want to be the dumbest guy in the room if you can.

They’re working on what’s called continuity of the economy, which is a little bit more on the national security side. I was explaining on the phone the same thing we’re explaining to our listeners now in terms of permanent.

Remember 2009 – 2010 and what we were hearing from the government, Larry Kudlow, CNBC and all that. Remember the famous green chutes? We never saw the green chutes. It was more like brown weeds. The U.S. economy never got back to the pre-2008 trend. The trend growth in all recovery since 1980 (which is a particularly favorable period) is 3.2%, but trend growth in the last 11 years since 2009 to 2020 is 2.2%.

This is not Trump versus Obama. There’s actually very little difference between the Obama economy and the Trump economy in terms of what we’re talking about. The 2.2% growth is a full percentage point lower than the pre-2008 trend. We never got back to trend. Yes, we grew, but it was a recovery that was technically the weakest recovery in U.S. history.

If you think a percentage point is not a big deal, try applying it to a $20 trillion economy compounded over ten years, and it’s a very big deal. With one percentage point, we’re talking about $5 trillion of lost wealth. That’s the difference between 3.2% and 2.2%.

Alex: That is nothing in comparison to what’s just been lost and what will probably continue.

Jim: That’s my point. Even when we have a recovery, what do we hear now? They’re not using green chutes anymore. Secretary Mnuchin and Larry Kudlow, who’s now a government official, are now talking about pent-up demand. There is no pent-up demand. Again, use the car example maybe but not the movies, the restaurants, and the concerts, etc. that were skipped.

There’s no pent-up demand for that. You’re not going to get two or three, you’re going to get one when you get back to normal. We could be looking at the kind of recovery where we’ll hit bottom and start growing again, but the growth could be sort of 1.8% or 1.9%, not even the old 2.2%.
We’ll coin a phrase on this podcast: this is the new new normal, which is not great. As far as stimulus is concerned, we’ve seen the Fed blow past the old benchmarks.

Alex: Actually, let’s come back to the Fed balance sheet in the CARES Act, but I want to cover that towards the end of the podcast. We’ll also talk a little bit about what people can actually do, because I know people are really interested in that right now and are very concerned. Some people are angry, some people are frightened, so we’ll get to that.

There are two things I want to cover when we hit all that. One of them is I saw a really cool interview the other day with a guy by the name of Jeff Booth. I believe he’s a technology billionaire of some sort who wrote a book called The Price of Tomorrow: Why Deflation is the Key to an Abundant Future. In this interview, he stepped through some socioeconomic consequences for the way the Fed and the government have been operating; the fact that every time we have a problem, instead of just letting capitalism do its thing, we basically inject all kinds of money and blow the bubble even bigger.

I know you do Twitter, and lot of people who follow us do Twitter. I’ve heard a term coming up more and more on FinTwit called financialism instead of capitalism. The moral hazard of that is basically crony capitalism where central banks print, the people closest to the money get richer, and everybody else gets poorer. That’s step one.

Step two, this further drives the wealth inequality gap and causes a greater divide.

Step three, people end up voting for those politicians who are saying, “It’s not your fault, it’s their fault,” whoever they are. It ends up breaking society because of the polarity, and it leads to possibly revolution or war because people are that upset. Do you have any thoughts on that?

Jim: I think that’s a very good analysis, and I think that is next.

I spent a lot of time working with complexity theory. I didn’t invent it, it was invented in the 1960s, but I’m one of the pioneers in applying it to capital markets where it has not been used. In a complex dynamic system, they’ll throw up what are called emerging properties; things that surprise you. Even if you knew everything in the system – which you never do – you couldn’t infer what comes next.

Sometimes complex systems crash into each other. My model for that is March 2011 and the Fukushima event in Japan. What happened? Tectonic plates are one complex dynamic system, and there was an underwater earthquake. It caused a tsunami, and that energy was transferred to hydrology, which is another complex dynamic system.

It could have hit an isolated island, but it didn’t. It crashed into a nuclear power plant. That’s radioactivity, another complex dynamic system. In that Fukushima plant, there were three meltdowns and two hydrogen explosions. What happened next? The Tokyo Stock Exchange crashed, because they were worried about the shutting down of the Japanese economy at the time.

My point is, tectonic plates or seismology, hydrology, tsunamis, radioactivity in a nuclear power plant, and capital markets are four separate, normally uncorrelated complex dynamic systems, each one of which is extremely challenging to analyze. But here, you had four of them crashing into each other in rapid succession.

We’re seeing something like that right now with the pandemic. Epidemiology is an interesting science. It’s like half biology, but once you get past the biology, it’s really just applied mathematics. I don’t claim to be a biologist, but I can do the math.

That one complex dynamic system crashes into the economy, which is a complex dynamic system, but now that’s affecting politics. This will have an impact on the presidential election, and beyond that.

What’s next? Then you get into social disorder and social collapse. I’m seeing signs. I tell my national security colleagues to watch South Africa and Mexico. They’re big countries with important economies. They’re emerging markets, but they’re important economies uncomfortably close to being failed states.

Venezuela and Syria are failed states, but what about Mexico? It’s already more than halfway there with the cartels and the collapse in the price of oil which they’re utterly dependent on. Now throw in a coronavirus.

Alex: And overwhelmed hospital systems.

Jim: Throw in overwhelming migration from Central America. Now, where are you? There are geopolitical aspects of it, not to mention the whole China/U.S. relationship, which I would say is beyond fractured. I would say there’s a new cold war. There already was, and now that’s made that.

Alex: There are verbal war drums going on right now.

Jim: Correct. Of course, you have to look at the economy, but you can’t stop there. You have to go beyond that. I’ll give a funny-sounding example. I grew up in New Jersey and have a lot of family I go back to visit often. Anyone who’s from New Jersey knows that there are two states, North Jersey and South Jersey, and they’re completely different. They don’t like each other, and everyone’s okay with that.

Coronavirus showed up in Cape May where my family lives, which is as far south as you can get. They did the forensics and found patient zero. Patient zero was a New Yorker who had a summer house and wanted to get out of New York. He went to his summer house and started to spread the virus in an otherwise remote part of the state.

Well, they’re just about ready to get out the pitchforks. They’re like, “Hey, you New Yorkers stay where you are. Don’t bring the virus down here.” They want to close the Egg Harbor Bridge. Now, hold on. You’re talking about different states worried about border-type issues, so I don’t want to overstate it. Maybe it’s partly humorous at this stage, but not really.

Alex: I saw a video where there are all these Syrian migrants moving through Turkey trying to penetrate the Greece border. It looked like a scene out of a medieval movie. Under cover of smoke, they were carrying siege ladders to the wall in groups. When you said Mexico, the image that came to my mind is Mexicans trying to cross the border en masse.

Jim: We’re not that far from that. What’s interesting is that the Syrian migration through Turkey into the European Union predates the coronavirus pandemic. Not by much, kind of contemporaneous, but it wasn’t caused by that. It had to do with Turkey being upset at NATO for not backing them up against the Russians in Syria.

They said, “Okay, if you don’t want to support us clamping down on the Kurds and all that, we’ll just turn on the immigrant faucet.” Now, the Syrians are going to get into Turkey if Turkey lets them, but then Turkey abuts Greece, Bulgaria, and the European Union.

The European Union has the Schengen Agreement that says once you get into an EU state, you can go to any other EU state without border controls. It’s not about getting into Greece; it’s about getting into Germany. Once you get to Greece, you can go to Germany, no questions asked.

It starts out that Turkey wants to threaten to flood the European Union with Syrian immigrants because they’re not happy with the treatment vis-à-vis the Russians. But all of a sudden, hold on. Who’s doing coronavirus tests on the Syrian refugees? By the way, Europe is breaking down in the sense that nationalism is back. The French are saying they’ve got to close the border with Spain, or Germany is saying they’ve got to close the border with Austria.

They’re putting up border walls, at least legally, inside the EU. Leave alone what you’re talking about, which is the way of us here. It’s getting nasty out there. Again, it’s an example of how these response functions and complex dynamics start crashing into each other, and that’s exactly what’s happening.


Alex: Switching gears, over the years you and I have talked a lot about Full-Spectrum Warfare. For those not familiar with that term, Full-Spectrum Warfare means financial, biological, cyber, social engineering, and one might say, kinetic warfare – the whole spectrum.

I’ll run a quick scenario by you that’s been bothering me. The United States is in a very vulnerable situation, I’m just going to be straightforward. I know I’m not the only person thinking about this, and I’m sure in the Pentagon, they’ve gone through all these scenarios already.

You’ve got a virus that’s crippling the American population, we’ve got the financial crisis which is crippling America financially, and we’ve got a prolonged shutdown of businesses which is going to wipe out substantial portions of the U.S. logistics system, because once those companies are bankrupt, they’re just out of business.

If I were to create a worst-case scenario, the Russia/OPEC oil war drops the price low enough and the U.S. shale industry is underwater, so they all start going bankrupt. That’s how the U.S. is oil independent, so then the U.S. would no longer be oil independent. Hospitals are completely overwhelmed because of coronavirus, the economy has crashed, and logistic systems are busted.

If I was China, Russia, and maybe even Iran, would that not be a perfect time to go kinetic or maybe even wait until U.S. service members are infected and sick as dogs and then go kinetic? There have been reports of Russian Navy activity near the UK. There’s a lot of heightened movement of troops and whatnot.
It’s a perfect opportunity. It’s probably the weakest the United States has ever been in my lifetime. What are the good reasons China or Russia wouldn’t want to do something like that? Are there good reasons they would or are there good reasons they won’t?

Jim: Kind of both, but a lot of good reasons why they would, and it’s already happening. For example, the other day there was a report about one of our aircraft carriers. This means an entire aircraft carrier group that has all kinds of support vessels, destroyers, cruisers, and submarines, and all kinds of stuff with it.

Forgive me if I get the name wrong, but I think it was the Theodor Roosevelt. If it was another vessel, so be it. We don’t have that many, about 11 aircraft carriers in the Nimitz class. Now we’re getting the new Ford class carriers, although I think there’s only one in service.

We only have about 11 of these aircraft carrier groups. Alex, you’re from the Navy, so you know this better than I do. At any point in time, two or three of them are getting maintenance, in dry dock, laid up or getting maintenance. One or two are on kind of R&R, because you’ve got to give the crews a break.

There are really only about four of them deployed at any one time. You always have one in the Western Pacific, one or two in the Persian Gulf, and one somewhere else, maybe in the Med.

The one that’s in the Western Pacific (I believe it was the Theodor Roosevelt) had a huge outbreak of coronavirus. They sent it first to San Diego and then said, “No, we’ve got to get out of here.” That vessel is going to Guam and is out of service, it’s offline. They have to test the entire crew and clean the entire vessel. Again, these aircraft carriers are so big, you can put the Titanic in the hold.

The point is that our primary aircraft battlegroup for the Western Pacific is offline. I’ll leave it to the Navy to get something else out there, but if you were China, what better time to mess with Taiwan? And you say, why would you do that?

It’s the case that the Chinese have been lying about the impact of coronavirus in China. In economics, but applicable here, is something called Goodhart’s Law that says when a metric becomes the object of policy, it loses meaning as a metric. In other words, once you have a number and that number becomes important to how people perceive you, you start manipulating the number and analysts can no longer rely on it.

That’s the case right now. If you use the John Hopkins Dashboard, China has about 81,000 reported cases of coronavirus. The U.S. just passed them and is around 83,000. I trust the U.S. number. Everyone agrees we have more infected than we know because we haven’t tested everybody. That’s fine, but I think the U.S. number is highly accurate. The Chinese number is just a lie. There is very good reason to believe that that number could be ten times higher; they might have 800,000 cases.

Alex: Sure, or 100 times higher.

Jim: Right. There’s some basis for that, so it’s not just speculation. When you squash the truth in one place, it tends to pop up somewhere else. You just have to be looking.

Take the Chinese Ministry of Telecommunications. You might say, “Who cares? What do they have to do with coronavirus? They report monthly cell phone use.” It’s been reliably reported that Chinese cell phones online went down. Last month, 21 million cell phones went out of service, and the Chinese said, “That’s because people weren’t paying their bills.” No. Those people are either dead, disabled, in hospitals or they’ve been rounded up.

One way or the other, that gives you a better idea of the order of magnitude of this. China has come up with a number, and curiously, it doesn’t go up much. They knew the U.S. would pass them, and now they can point a finger at the United States and say, “Hey, we did a better job than you guys.”

Alex: I don’t know that anybody believes China’s numbers.

Jim: No one believes it. This is how taking intelligence training and bringing it into capital markets can be very valuable. I always say if you had to solve a problem and you had all the data, a smart high school kid could do it. The hard problems are the ones where you don’t have all the data and you have to use inferential methods and other techniques.

The week of February 23rd to the 29th was the first week the stock market really crashed. It went down 3000 DOW points that week. Since then, we’ve seen it go down 3000 in a day, but that was the first shockwave, if you will.

The Sunday before the Monday opening, I sent a Tweet and said, “The stock market has been holding up and going up, which it was prior to that, based on improvement in the Chinese data. But everyone knows the Chinese data is a lie. Which is it?”

Since the data was a lie, it meant the stock market had to crash. I said the stock market is going to have its day of reckoning based on the fact that we were getting good data out of Italy, and it was horrific. I trust the Italian data, not the Chinese. All this to say the market was rallying on Chinese lies, but the lies were being revealed by reliable Italian data. Once that sank in, the market was going to crash, and that’s exactly what happened.

MIT economists don’t like to use anecdotal data. Sorry, but there’s another name for anecdotal data, which is the truth, as in here’s what’s happening at street level. It’s eyewitness data, and just because you can’t put it into an MIT closed-form equation doesn’t mean it doesn’t count.

Alex: It’s not a peer-reviewed paper; it’s somebody who’s seen it with their own eyes.

Jim: Right. That’s what we have to do in highly uncertain times with very imperfect data. Let’s get back to the original thread, which is that China is in much worse shape than anyone realizes or they admit. It’s a tried and true technique of dictators that when you’re in trouble, go start a war, because it gets everyone’s mind off it. Since the U.S. aircraft carrier battlegroup has just been disabled, what better time to start a war?

Alex: Our next topic is the CARES Act. I love this thing. Have you read it?

Jim: They throw these names around. Is this the big $2.2 trillion package?

Alex: Yes. It seems like it’s full of pork, but I’ve only seen parts of it. I haven’t read it.

Jim: It’s 1100 pages. Just to be clear, I haven’t read the actual bill, but I’ve read some very good expert summaries and have a pretty good idea what’s in it. There’s a fair amount of pork, but here’s what I would say: First of all, just a quick footnote. It’s $2.2 trillion, but in that $2.2 trillion is $425 billion to recapitalize the Fed.

In one of my books, The Road to Ruin, that came out in 2016, I describe having dinner with one of the members of the Fed board of governors. I said, “I think your bank is insolvent,” meaning the Federal Reserve, which it was at the time because interest rates were a little higher and meant they had mark-to-market losses on their ten-year notes. They don’t mark-to-market, but if they were a hedge fund that did, they would be insolvent.

This board member said, “No, we’re not. No one’s done that work.” I said, “I’ve done it, and I think others have done it.” She kind of harrumphed and said, “Well, central banks don’t need capital.” Here’s a governor of the Federal Reserve, we’re sitting next to each other at a small dinner, and she said central banks don’t need capital. I said, “Well, tell that to the American people.”

It turns out they do need capital, and they’re getting $425 billion from the Treasury. Here’s the point: because they’re a bank, if you pop in $425 billion of capital, they can leverage it 10:0. That’s $4.2 trillion of additional balance sheet.

Take the $2.2 trillion, knock it down to $1.7 trillion for the Fed money, then add approximately $4.5 trillion for the Fed money printing. This is a $7 trillion helicopter drop, not $2.2 trillion. This is $7 trillion of new money.

Forget stimulus. There’s nothing about this that stimulates. This is just to keep the lights on. It’s filling holes.

The Fed has sequentially guaranteed, propped up or bought out commercial paper, money market funds, corporate bond market, muni market, primary dealers, central bank currency swaps with the ECB, Bank of Japan, etc. They’re doing what they need to do to keep the lights on, but none of it is stimulative. It just keeps it from getting a lot worse.

As far as the money the Treasury is spending under this bill, there’s $50 billion to the airlines and $10 billion to the Postal Service. Go down the list and you’ll see cruise ships, theme parks, auto industry, etc. They’re all getting some money, but it’s just to make up the losses. There’s no stimulus, there’s no net new spending in this. This is, “Oh, well, you closed your business. Here’s some money.”

The Small Business Administration is just handing out money, but there’s a condition. If I give you the money and you fire your workers, you have to pay it back, but if I give you the money and you don’t fire your workers, you can keep the money. It’s a grant.

That makes up for a couple weeks of payroll or maybe so you can pay your rent for the next two months. I’m not saying that’s unimportant, but it’s no more than one to two months of makegood pay. None of it brings the economy to a higher level. It just keeps the economy from sinking to an even worse level.

What happens when that runs out? The V people say it’s down and up, but I don’t see it. One of the reasons I don’t see it is, first of all, what we talked about before, which is a lot of these losses are permanent, not temporary. You’re never going to make them back.

Secondly, and this is where the economists fall down, they don’t take into account the psychological aspects, meaning you can give people money, but what if they don’t spend it? Some people have a high marginal propensity to consume, but a lot of people are going to put the money in the bank. They’re going to save it or pay down debt, which is the same thing. It improves your balance sheet.

What they’re saying is, “Thanks for the money. If I haven’t lost my job, how do I know I’m not going to lose it next month? How do I know there’s not going to be another epidemic? How do I know there’s not going to be a rebound of this epidemic? I better save it.” If they save it, velocity is zero.

I like to remind people that $5 trillion times zero is zero, meaning if you don’t have velocity, you don’t have an economy. All this Austrian, NeoKeynesian Multiplier stuff does not apply. There are also other reasons why it doesn’t apply.

Alex: In that effect, we’re probably looking at L shaped with a really slow recovery after that.

Jim: Maybe an L with a little downward slope. Best case, you’re looking at a recovery maybe in the third quarter with a lower compound annual growth rate than we started with. Call it the new new normal. It’s not good.

Alex: There are two potential scenarios: a really bad deflation depression-like scenario. What happens to gold? The other option is hyperinflation, but let’s talk about that after what happens to gold. You and I have talked about this before, but for people who haven’t heard it before, if they just can’t rescue the thing and have to get inflation, what does the government do? What is the last resort?

Jim: I know the answer. I can get you all the inflation you want in about 15 minutes. The government doesn’t understand how and is not desperate enough to do it, but it can be done.

Before this podcast, I was on a call with my friends in the national security community. We’ve gone through some of the things we’re talking about regarding Taiwan, South Africa, Mexico, and the Great Depression. They’re all relevant. I said the greatest threat to national security might be deflation, because what does deflation do? It increases the value of debt. The real value of debt goes up.

We’ve got $22 trillion of national debt starting out. If they throw on $6 trillion of additional national debt, we’re expanding the national debt by 25% in a matter of months. That’s all the debt since Washington up 25% in a couple of months. Debt to GDP ratio is going up.

Deflation increases the real value of debt. Cash is actually one, because the real value of cash goes up. Now, what about gold? Everyone says, “I understand gold goes up in inflation. Show me some inflation, and I’ll show you a higher price of gold, but surely, the opposite must be true – deflation means a lower dollar price for gold.”

That is not true. The greatest period of sustained deflation in the United States was 1927 to 1933. The price of gold went up 75% from $20 an ounce to $35 an ounce. Gold performs very well in deflation. It obviously does well in inflation, but people don’t understand why it performs well in deflation.

There are two reasons for it. One is if you’re on a gold standard, and the other one is if you’re not on a gold standard, which we’re not at the moment. If you’re on a gold standard when deflation overwhelms you and people are saving, they’re hoarding cash. They’re not spending, they’re not lending, so there’s no velocity. You’re desperate to get prices up, you want prices to go up and they won’t go up, so you can devalue the dollar against gold.

That’s what Franklin Delano Roosevelt did in 1933. When I said the price of gold went up from $20 to $30, it did because he said so. He was the president and we were on a gold standard, so that’s what we did. But that was not a gift to people who owned gold. In fact, he actually confiscated all the gold before he did it.

Alex: Yes, he took the gold first, then he raised the price.

Jim: That’s the ultimate inside trade. Nice going, FDR. The point is, nothing happens in isolation. When the price of gold goes up 75%, guess what? Corn, oil, wheat, energy, agricultural goods, produce, wages, and everything else goes up, because it has to be a blanket across. It worked, by the way. During the middle of the Great Depression, 1933 was one of the best years in the history of the stock market, because what FDR did worked.

He did it on purpose and it worked. Richard Nixon did it by accident, but it also worked. When Nixon broke the convertibility of the dollar to gold on August 15, 1971, the price of gold went from $35 to $800 an ounce by January 1980. In nine years, we had roughly a 2500% increase.

What happened? The price of oil quadrupled, the price of housing doubled, and interest rates went to 15%. In other words, FDR and Nixon – one purposely, one accidentally – grossly devalued the dollar against gold, and we got massive inflation as a result. It wasn’t a response to inflation; it was actually intended to cause inflation, and that’s what happened.

We’re in the grip of deflation right now. The data hasn’t shown up yet, but it’s happening all around and is going to get a lot worse. If we were on a gold standard, somebody would go to the president and say, “You need to devalue the dollar against gold.” Bingo.

We’re not on a gold standard, so what happens? The price of gold also goes up, not because the government is forcing it but because people are looking at the dollar saying, “Get me out of here.” You don’t have a PhD in economics, but the Fed’s balance sheet went from $800 billion to $4.2 trillion between 2008 and 2014. Try $5 trillion, $6 trillion or $7 trillion. That’s what’s happening in front of our eyes, and people are going to say, “Get me out of here. Get me a house, land, commercial real estate, gold.”

Alex: Hard assets.

Jim: “Get me out of the dollar and get me into hard assets. I don’t know what’s happening next, but I don’t want to lose my money.”

Alex: I saw an article from Goldman Sachs where their head of commodities globally was banging the table calling gold the money of last resort and telling everybody to buy it. It’s amazing what’s happening.

Jim: You and I were suggesting people buy it at $1100, so we’re about four years ahead of Goldman.

Alex: It’s amazing. Everything we’ve talked about over the years is all happening right now.

Okay, so practical applications. What can people do? Let’s break this down into chunks. The first chunk is the average person. They’re living paycheck to paycheck and have no assets. All this stuff comes down, everybody is recommended to stay home, and they’re probably thinking, “How do I pay rent? How do I buy food?” Do you have any thoughts for those people?

Jim: Yes. Go down to your local bank and get a Small Business Administration loan right now. They’ve got on the order of $100 billion through the Small Business Administration for small business.

Small business is defined as anyone with less than 500 employees. You don’t have to be a local shipping company. You can be a flower shop or a pizza parlor. A lot of people either don’t know this because they haven’t heard about it, or they don’t think they somehow qualify. You qualify. There’s a little bit of paperwork, but this is literally happening in real time. There are two criteria for it. One is to maintain payroll and two is to pay the rent; the two most important expenses that businesses have. Here’s the deal: you get the loan; if you don’t lay anybody off, you can keep it; you don’t have to pay it back; it’s a grant. If you lay people off anyway, you have to pay it back.

The interest rate is rock bottom. It’s a long-term loan, but as long as you keep your employees, you can keep the money. What are you waiting for? Make sure your bank is an SBA approved lender, but they all are.

Just to be clear, the banks get a 5% origination fee. If you take a $1 million loan from the SBA, the bank gets $50,000 as origination, so they want to give you the money. The government wants you to have the money. People are afraid about it, because it is not like a normal loan. They say, “Oh, they hate me. I’ve got to fill out all these forms,” but they want to give you the money and they want to do it as fast as possible.

Alex: I saw this crazy article last week about a guy who started an airline he called Bailout Flights, and he requested $10 million. There were like 25 new airlines started just last week.

Jim: Look, some people have better lawyers than others, but I’m telling you, I don’t care if you’re a flower shop or a pizza parlor; you qualify based on payroll and rent. And if you don’t fire your employees, you can keep the money. It’s the only kind of loan where the bank’s actually on your side. The banks are guaranteed by the government, so they don’t care about your credit, because they’re backstopped by the government.

Alex: Is there anything else the average person can do? The one living paycheck to paycheck wondering about paying rent and buying food.

Jim: Have a look at your 401-K if you have one. I don’t think the stock market’s hit bottom. A lot of people are nibbling, we’re off the bottom. Of course, your typical financial advisor who’s usually thinking about themselves, not you, is saying, “Hey, ride it out. It’ll come back.”

In 2008, it went down by about 60% or 70%, about two thirds. Did it come back? Yes, but it came back by 2014. Six years is a long time to break even, which is what happened, and there were opportunity costs associated with that, because you could have been in other asset classes.

I said at the beginning of this that this is more like 1929 when the stock market crashed. Do you know when it regained the 1929 level? 1954. It did come back, but it took 25 years, and I guarantee you that a lot of those people in 1929 were dead by then.

You can get out, go to cash, and maybe a slice for gold. I’ve always recommended 10%, so don’t go all in. What if the stock market starts to go up again? Well, watch it. If you really see that and it’s not just a two-day bounce or something, you can still jump in. If you miss a little bit at the beginning, think of it as the price of a put option. You avoided a worse outcome.

Alex: That’s people with some assets, hard assets. Now, small and medium business owners that are not in the USA and can’t go get a loan. Any thoughts?

Jim: SBA loans, yeah, good luck. It depends on the country. Canada is mailing out checks. Some have nothing, and others have programs as good or maybe even better than ours.

Alex: Closing up with our last thoughts, I’m going to open the floor to you. What do you want to talk about?

Jim: People say I’m a doom and gloomer, but I’m not. I’m a realist, a pragmatist, and I have pretty good analytic models. I’ll mention a couple of things.

Number one, you have to reset the outcome of the presidential election at 50-50. That’s a reset. I had Trump as a 74% favorite about six weeks ago, which he was based on the model. I don’t make it up, but it was conditional on no recession. The odds of a recession at that time were less than 20%, so Trump’s odds were 80% or higher or somewhere in that neighborhood.

Well, now the recession’s here. Actually, we’re in a depression. Does that mean Trump has zero chance? No, the reason is that no one blames him for this.

Alex: Some people are blaming him for this.

Jim: Okay, but they were not going to vote for him anyway. Most Americans are a little more fair minded. They’re not going to judge Trump by the fact that this happened, because it wasn’t his fault. They’re going to judge him by his response, by his leadership. I reset at 50-50 and I’m watching it, but that means Biden has a 50% chance.

Number one, the market has not repriced for a President Biden. They’ve kind of repriced for coronavirus, and they’re trying to reprice for the economy, but it’s a moving target. The market has not even had time to think about a President Biden, but that’s another leg down if that gets a little traction, which it is.

Number two, just be wary of what they call sucker rallies. They said the stock market was up three days in a row last week, the greatest three-day rally since 1931. That’s true, but the market bottomed in 1932. Your three-day rallies don’t get you off the bottom necessarily.

Help your neighbors. That’s probably the best thing we can all do. We’re all in this together. It’s a cliché, but it’s more than a cliché; it’s an important reality. Maybe I’ll leave it at that.

Alex: Do you think Biden has dementia?

Jim: Biden has pretty clearly exhibited a cognitive slowdown. That’s not a good thing in a presidential candidate.

Alex: The optics are not good on that, no.

Jim: You can’t think of a more stressful job, and he’s not fit in my view. I’m not a doctor, but it’s pretty obvious.

What’s going on is the democrats didn’t want him, but he powered through against a much weaker field. Then they had to want him because they needed to run Bernie Sanders off the road, which they did. You can’t have a communist as your democratic nominee. Mission accomplished as far as destroying Sanders, but now they’re like, “Oh, this is who we have?”

Here’s a wildcard, but maybe not so wild. Of course, everything on the democratic side is highly manipulated by the Democratic National Committee, superdelegates, and changing the rules. That’s why Tulsi Gabbard couldn’t get on the stage, etc.

This is what they’ll do: they’ll keep Biden on his resuscitator or whatever, but they’ll let Bernie get just enough delegates that, combined with Elizabeth Warren for example, he won’t get the nomination on the first ballot. He’ll have more delegates for sure but fall short of the first ballot.

Once you get to a second ballot, it’s jump all. All the pledged delegates are released. So, 700 superdelegates come in from the sidelines to do whatever they want, and they’ll pick Andrew Cuomo.

Alex: You heard it. Jim, as always, thanks a lot. I really enjoyed today’s conversation. Stay safe up there.

Jim: Thank you, Alex. You, too.


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