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it's like a disease that happens over and over again there's a process everything that happens has a cause and by understanding that process and cause you know the red flags and with those red flags you know how to calculate whether people can pay their debts back and how the dynamics going to work when there's a certain rate of debt growth that is unsustainable and that there's going to be a problem paying it back you can see that you have a problem when you start to have a debt problem and you're close to zero interest rates that means that the central bank the federal reserve's ability to deal with that won't work you'll hit zero and then you enter a new world okay the last time that happened was 1928 to 19 29 30 31 that's what happened what happened in 2007 and nine was the exact same thing a debt crisis too much debt and you hit zero interest rates and out of luck and then what happens there's a classic way of dealing with that is that the central bank has got to print money and go buy financial assets and so that's what all the entities did and so by being able to watch it day by day as to how they went about doing that allowed us to navigate the crisis so that we could see the rates of deterioration and then the actions taken to end that in much the same way as the federal reserve ended it in 1932 1933 for the same reasons now that printing of money causes financial assets to go up in price puts money into the economy and produces the type of reaction that we've now seen in terms of that economy and those markets then we're at the stage of the cycle where we are now and what happens classically is that those financial purchases help those who have financial assets more than they help those who don't it causes a greater wealth gap and very classically that causes populism and then you move into a situation that's very similar so being able to see mechanically how that dynamic work allowed us to navigate it well the early part of the debt cycle is the great part of the debt cycle because the borrowing of money is being put into assets that are going to be able to pay back that debt and grow and asset prices go up then you enter the bubble stage when everybody is extrapolating that because it happened in the fast because those assets went up they're going to continue to go up and they're going to continue to rise and to pace to borrow money to do it but they're not able to actually pay off their cash flow the top of the cycle usually happens when the bubble exists and also the federal reserve or the central bank begins to tighten money to slow that bubble at the high part of the cycle so as we take a look at that we are approaching more of the top of that cycle i don't think we're there yet i think we're in the seventh inning when you have that tightening and then you have the uh down i'll call the depression phase that depression phase happens because you hit zero interest rates and because they're less effective in monetary policy that's why 2008 was like it was in much the way 1930 was and so that's the depression phase in my opinion on this long-term debt cycle we are relatively late in a longer term fed cycle we're relatively late in a business cycle that doesn't mean imminent i mean i think there's two or three more years probably in this i'm not sure for sure but we are then going to have a downturn at some point downturns always come recessions always come and what we have is a situation in which the capacities of the central banks to reverse it are more limited because interest rates are close to zero at zero in europe and japan and also the effectiveness of monetary policy quantitative easing is largely behind us because they have put that money in and those asset prices have risen we also have another issue which is the wealth gap and the populist issue which is i think worse than it was back then they set out a path for tightening interest rates to raising interest rates and the rate of tightening and every track that they set out they didn't adhere to in other words they tighten monetary policy much more slowly than they projected and also the market projected and that was appropriate i think that they're questioning their own decisions appropriately when you hit zero interest rates you have a different type of debt crisis you have more likely to have a depression so i think the period that we're in is very similar to the 1935-1940 period let me just explain that in a minute 1929 to 1932 we had a debt crisis and interest rates hit zero 2007 to 2009 we have a debt crisis it hit zero then in both of those cases there's only one thing for central banks to do and that is to print money and buy financial assets they print money by financial assets in both of those times that pushes financial asset prices up puts a lot of liquidity in and also contributes to a greater wealth gap because those who own financial assets benefit when those who don't own financial assets as a result in both periods of time of the wealth gap and the economy not improving for a large segment of the population we have populism so the last time say when was populism popular it would be in that period of time that populism issue is an important issue so as we look forward and we say when the next downturn comes which will happen probably in a couple of years we're going to have a different type of downturn very similar to the one that happened in 1937 to the 1940 period we are in the part of the cycle now that the fed and of the central banks in varying degrees are beginning to tighten monetary policy asset prices are sensitive to monetary policy because the duration of those assets is lengthened central banks have to be very careful not to raise interest rates much faster than is built into the curve but with that populism we have an issue so if we think about what the next downturn will be like the downturn i think will be very different than the one in 2008.
it'll be one in which i think that the social and political problems will be great because of that wealth gap in populism i think there'll be more conflict i also worry about the effectiveness and monetary policy in reversing that because monetary policy has interest rates and we can't lower interest rates as much and it has quantitative easing the purchases of financial assets to push other financial assets out and get what put it into the system and that is at its maximum so when we have a downturn we're not going to have it to be as effective i think also the downturn in our form of debt crisis won't just be debts it'll also be pension obligations health care obligations unfunded obligations so i would say two years out is when i'm worried about and i would think that's for these various reasons all of these obligations will be a problem to be funded and i think it'll be more back there of a dollar crisis than it would be a debt crisis and i think it'll be more of a political and social crisis when we have to sell a lot of treasury bonds and we as americans will not be able to buy all of those treasury bonds and if interest rates rise too much the way it usually works is that constricts credit we borrow less and that creates a weakness in the economy so instead because we'll sell to foreigners from a foreign perspective when they look at it they care not about inflation they care about currency depreciation when they look at the interest rate so if a currency goes down the bonds become cheaper i think the federal reserve at that point will have to print more money to make up for the deficit have to monetize more and that'll cause a depreciation in the value of the dollar you easily can have a 30 depreciation in the dollar through that period of time i just do the calculations and the fiscal stimulation that we're having is coming at a higher rate of capacity utilization a higher rate and so we're getting that stimulation at the late part of the cycle and that's a stimulant that will last feeling good is not an indicator of the future bubbles are made of euphoria by the way so they feel the best right what i'm saying is that right now the fiscal stimulus is coming in and that's good um productivity is enhanced by corporate tax cuts and a lot of money is going to the companies there they have lots of cash that is good for the time being if you do when that stimulus passes through and then diminishes but the borrowing doesn't so the borrowing will be in the marketplace about that time i'm not trying to be precise as to exactly what year or what month that has i think we're nine years into the cycle and the cycles are the cycles the balance of payments the supply demand of credit is what it is and so i'm saying that we're probably in the seventh inning of this game and therefore i'm not particularly worried at the moment but if i was to take um as we get to the ninth inning of the game and the important thing i think is not even what i think about this the important thing is for you and each person to really study how these cycles work investors have a choice of whether they're trying to be active investors in market time which most of them are not going to be able to do well that's a professional's game and it's tough to do it as a professional and then there are emotions and all the things that enter into it so i would say that generally speaking they should not be actively trying to invest or if they do i would not recommend it but if they do then they have to go opposite their instincts you know buy when the blood is in the streets and so when times are good but what i would say is important is to be able to know how to have balance in the portfolio
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