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my view is that the world has been in a depression since 2007 and will remain so for an indefinite period of time and when you say that people are wait a second yeah we know the definition of a recession the technical definition of a recession is two consecutive quarters of declining GDP Rising unemployment there's a few other bells and whistles there's a little bit of subjectivity to it the National Bureau of economic research or The Unofficial but widely followed referees on when you're in a recession and when you're not well we're in the expansion uh so like wait a second how can we be in a depression if we're in the 10th year of an expansion and the answer is that people don't really understand the definition of a depression they assume intuitively well if a recession is two quarters of declining GDP and depression sounds worse it must be six quarters of declining GDP well we haven't had that but that's not the definition of a depression the definition of a depression is a sustained period of below Trend growth with no particular tendency to collapse or getting back to trend in other words obviously United States but you can apply this more broadly to the world if Trend growth is three three and a half percent and that's probably the long-term potential of the United States you can higher nominal growth with inflation but we're talking about real growth if trend is three three and a half and you're running it two that gap between say three and a half and two that's depressed growth so yes you have growth you're not in a technical recession but you're in a depression because you're not getting back to that Trend and people say well two percent three percent is one percentage Point who cares now that Gap is huge and because of the compounding effect think of it as a wedge here's the trend line here's the actual line that wedge gets bigger so we're 10 years out we've left five trillion dollars of potential growth on the table that's the output Gap or the growth Gap the difference between depressed growth and Trend growth that's how much wealth has been lost because of this depressed growth but being objective using the numbers I mentioned we're in a depression we're going to stay that way the United States is Japan you know Japan had the famous last decade well the last decade was 20 years ago started in 1990 through 2000 Japan's now almost at the end of their third lost decade if something doesn't change either in terms of policy or a collapse something gets worse but absent that we're going to remain in this kind of punk two percent growth as far as the eye can see you know people say oh well the headwinds demographic technological productivity psychological Etc haven't changed and there's no reason to expect they'll change so combine this world depression because what I just described is true of Japan it's true in Europe not so true in China but China is a special case there's a lot of they cook the books you know they're seven eight percent growth that they've been printing cut that in half because 45 of that growth is infrastructure most which is wasted so if you apply General accepted accounting principles made them write off all that wasted investment they'd be a lot lower than it appears but the whole world is caught in this trap meanwhile debt is going up faster than the growth is debt good or bad well it depends that can be good if you can afford it you can pay it off and you can use it for productive purposes it's bad if you can't afford it it's not sustainable you're using it as a substitute for real growth and it's all going to crash and burn so you can't understand debt in isolation you have to understand debt relative to income and that debt to GDP ratio which is something I spent a lot of time looking at the GDP is kind of chugging along not going up very much but that's going like this the debt to GDP ratio is getting worse it looks like we're heading for Global debt crisis not quite there yet but it could happen sooner than later very little doubt that the FED is going to tighten in the Baseline scenario for the FED is straightforward they're going to tighten four times a year every March June September and December unless one of three pause factors applies the plus factors are disorderly decline in stock markets employment starts to go down they basically lose jobs their unemployment's going up the third one disinflation or deflation spins out of control right now none of those three parts factors applies the the stock markets they're going sideways but they're not crashing you know depend that doesn't care if the stock market goes down 15 in six months they do care if it goes down 15 in six days that's disorderly and that's the kind of thing where you would see the FED pause but that's not happening right now job growth is strong inflation is ticking up I don't think it'll spin out of control but we're out of that disinflation danger zone so none of the three plus factors applies therefore you should expect the FED to just keep raising but there's no doubt that the FED is over tightening because in addition to trying to get interest rates back to normal they're also reducing the balance sheet they're trying to normalize the balance sheet but now the FED has a dilemma which is what are they going to do if the U.S economy goes into a recession as I said we're in the 10th year of an expansion you know the old cliche expansions don't die of old age it's true but they do die and history shows that it takes about four percentage points of cuts 400 basis points in other words for the FED to get the economy out of a recession well how do you cut interest rates four percent the answer is you can't you cut them to zero and then you're stuck you're at that zero bound and the evidence is good that negative rates don't work so then what do you do we're going to put some money again modern monetary theorists would say yes I disagree and I think the FED disagree has been as shown by their own actions and trying to reduce the balance sheet so what the FED is doing they're trying to raise rates get the balance sheet down maybe two trillion a little bit less so that when the recession hits they can run the Playbook again they can cut rates and if necessary do QE but here's the Dilemma can you normalize interest rates and normalize the balance sheet without causing the recession that you're preparing to cure that's the conundrum I think the answer is no I think that actually in trying to tighten to get ready for the next recession they're probably going to cause the recession there's no data there's no time series that tells you how this is going to play out except during QE what did we see did not see a lot of inflation but we saw asset prices blow up stocks real estate you know other asset categories they all went up a lot so it seems at least the kind of first order intuitive that if you print money as the prices go up if you destroy money surprises are going to go down so what the FED is doing they're destroying money reducing the money supply so they're really double tightening in addition to the four rate hikes a year this reduction in the balance sheet is probably equivalent this is an estimate probably equivalent to four more rate hikes per year so they're actually tightening probably going to throw the economy into recession the pet has never forecast a recession they have a terrible forecasting record this will happen before they know it of course we all know that stocks will go down so based on that I'm not bullish on growth I'm bearish on stocks people say well gold hasn't gone up a lot it's true I'm surprised it hasn't gone down more given the tightening environment that we've described so gold has actually performed fairly well given the environment now what I do expect is in time as this signs of recession emerge yield curve inverts growth slows job creation slows down not a full-scale recession or crash but just enough warning signs and the FED reverses course all of a sudden they do pause at one of these meetings Gold's going to Skyrocket because that's an admission at that point the fed's throwing in the towels say you know what we really can't escape the room we can't get back to normal because when we try we sink the economy and we have to back off them that's when gold will shine and no pun intended because it'll be very clear that the FED cannot get out of this easy money mode one thing I never do I never make a forecast or make a claim without backing it up there are people out there that are dime a dozen you know this is going to crash if this is going to go up or growth is great or so whatever that's fine but you need to back that up with some kind of analytics some kind of data some kind of analysis that you can do and I always do that and I'm always happy to kind of drill down on that so the methodology I use is quite different from what Wall Street forecasters use first of all just spend a minute on what Wall Street does and what most analysts do because it's badly flawed it's no surprise that you know every year the FED does a one-year forward forecast so in 2009 they predict 2010 2010 they predict 2011.
so on same thing for the IMF same thing for Wall Street the they are off by orders of magnitude year after year I mean how can you be wrong by a lot eight years in a row and then have any credibility and again the same thing with Wall Street you know you see these charts the chart will show the actual path of interest rates or the actual path of growth and then along the timeline which is the x-axis they'll show what people were predicting at various times the predictions are always way off the actual path there's actually a good social science research that shows that economists do worse than trained monkeys in terms of forecasting and I don't say that in a disparaging way here's the science a monkey knows nothing right so if you have a binary outcome up down high low growth recession and you ask a monkey they're going to be right half the time and wrong half the time because they don't know what they're doing so you're going to get a random outcome economists are actually wrong more than half the time for two reasons one their models are flawed number two what's called hurting or group Behavior an economist would rather be wrong in the pack than go out on a limb and maybe be right but if turns out you're not right you're exposed there are institutional constraints people want to protect their jobs you know they're worried about other things and getting it right so the forecasting Market is pretty bad the reasons for that they use equilibrium models Capital markets are not an equilibrium systems so forget your equilibrium model there's the efficient market hypothesis which is all the information is out there you can't beat the market markets are not efficient we know that they use stress tests which are flawed because they're based on the past but we're always outside the past you know the future could be extremely different if the next Crisis is worse there's nothing in that history that's going to tell you how bad it can get and so they assume prices move continuously and smoothly so price can go from here to here or from here to here but as a Trader you can get out anywhere in between and that's where all these follower Insurance models and stop losses come from That's not how markets behave they go like this they just Gap up they don't hit those in between points where they gap down you're way underwater or you miss the profit opportunity before you even knew it so in other words the actual behavior of markets is completely at odds with all the models that they use so it's no surprise the forecasting is wrong so we talked earlier about business Cycles recessions depressions and that's conventional economic analysis that's really thinking in terms of growth Trend growth below Trend growth business Cycles Etc collapse or financial Panic is something different a financial Panic is not the same as a recession or return the business cycle they can't go together but they don't have to so let's talk about financial panics as a separate category complexity Theory shows that the worst thing that can happen in a system is an exponential function of scale scale is just how big is it now you have to talk about your scaling metrics are you talking about the gross notion of value of derivatives we're talking about average daily volume on the stock market we're talking about you know debt we could be talking about all of those things this is new science so I think it would be years of empirics to make this more precise but the theory is good and you can apply it in a sort of Rough and Ready way in other words if you triple the system the growth went up by a factor of 10 5 50 Etc there's some exponential function associated with that so you know people think well gee in 2008 we learned our lesson you know we got debt under control we got derivatives under control no debt is much higher debt to GDP ratios are much worse total emotional value gross national value derivatives is much higher now people look at the bis statistics and say well the banks actually gross national value derivatives has been going down which it has but that's misleading because they're taking a lot of that moving it over to clearinghouses so it's never been on the balance sheet it's always been off balance sheet but even if you use the footnotes that number has gone down for banks but that's only because they're putting it over clearinghouses who's guaranteeing the Clearinghouse knows the risk hasn't gone away it's just been moved around so given those metrics that derivatives concentration you know the fact that the five largest banks in America have a higher percentage of total banking assets than they did in 2008 so there's more concentration that's another risk factor taking that all into account you can say that the next Crisis will be exponentially worse than the last one that's an objective statement based on complexity Theory so you either have to believe that we're never going to have a crisis and I'm like well you had one in 1987 you had one in 1994.
you had one in 1998 you had the.com crash in 2000 mortgage crash in 2007 Lehman in 2008. don't tell me these things don't happen they happen every five six seven years doesn't mean it happens tomorrow but nobody should be surprised if it does so the point is this crisis is coming because they always come and it'll be exponentially worse because of the scaling metrics I mentioned who's ready for that and that was the problem has never gone away we just get bigger bailouts at a higher level what's bigger than the central banks who can bail out the central banks there's only one institution one balance sheet in the world that can do that which is the IMF the IMF actually prints their own money the SDR the special drawing right you know SDR it's not strawberry daiquiri on the Rocks it's a special drawing right it's World money that's the easiest way to think about it they do have a printing press and so that will be the only source of liquidity in the next Crisis because the central banks if they don't normalize before the crisis and it looks like they won't be able to they're going to run out of Runway and they can't expand the balance sheet Beyond a small amount because they'll destroy confidence where does the liquidity come from the answer is it comes from the IMF so that's the kind of global monetary reset the monetary apocalypse
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