AN EQUITYMASTER AGORA RESEARCH PUBLICATION

29 August 2016

‘‘ Economics is extremely useful as a form of employment for economists.

’’ – John Kenneth Galbraith

The Last 40 Years Were An Exception

Welcome to the first edition of Inner Circle. We’ll start
out today with a premium letter from Vern Gowdie • IN THIS WEEK’S ISSUE:
(available only to his subscribers). Vern is a highly
respected contrarian, long-term thinker, and veteran • How 750 Experts Missed the Elephant
financial planner based out of Australia…and he is an • India’s Demographic Dividend or
influential member of Vivek Kaul’s global intelligence Disaster?
network.
• Should Warren Buffett Consider Buying
Warren Buffett once said:
Gold?
If past history was all that is needed to play the
• Russell Napier Calls “Bull Market” for
game of money, the richest people would be
librarians. Gold

That’s exactly the crux of Vern’s recent letter. He
offers a brilliant perspective about how the last 40
years were an extraordinary, rare period in economic
history. And unlikely to be repeated soon. He warns…
Whether we recognise it or not, our expectations
and perceptions have been created by four
decades of exposure to this extraordinary period
of financial engineering.
I would particularly like to draw your attention to the
world population growth charts that he has used to
explain why the past is unlikely to be repeated in the
coming years…and why policymakers, economists, and
central bankers have zero incentive to save you from
the impending global economic collapse...
So, whether you a serious long-term investor, a
businessman, or just someone who cares about the
future financial well-being of his family, this letter is a
must-read.
Vern clearly establishes the relationship between
population growth and economic growth. So, you
may be inclined to draw a corollary that India’s
• Global Intelligence Roundup
growing population…particularly the largest and
expanding working age population should play out
in India’s favour. But will India really be able to claim
its demographic dividend? I have penned some of my
learnings from a book I recently read.
Thereafter, we’ve included excerpts from London
Investment Alert. Tim Price believes that markets in
stocks and bonds are fundamentally overpriced – and
that we are approaching a correction. Like Vern, Tim
too goes back in time to explain why the best time
is behind us. It’s a stance contrary to what Warren
Buffett maintains…and also the reason why the
legendary investor doesn’t like gold. But maybe it’s
time for him to rethink his view on gold.
Russell Napier, a leading expert on financial crises
and market crashes and author of Anatomy of the
Bear: Lessons from Wall Street’s Four Great Bottoms,
is calling for inflation... He converses with Merryn
Somerset-Webb, editor- in-chief of MoneyWeek
magazine, explaining why he sees a long-term bull

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market for gold in a special interview. Warm regards,

And to conclude today’s issue, we have a Global

Intelligence Roundup on the future of the European
Union and Britain. As per legendary speculator Doug
Casey, Brexit will initiate, or accelerate, three major
trends.
Read on for this week’s full issue... and please send
us your feedback. Tell us what you like – and what we
should change.
Ankit Shah - Research Analyst
Editor, Vivek Kaul’s Inner Circle
Note: Monday, 05 September 2016 is a public holiday
on account of Ganesh Chaturthi. As such, the second
issue of Vivek Kaul’s Inner Circle will be published on
Tuesday, 06 September 2016.

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How 750 Experts Missed the Elephant
This month I want to stand back and
slightly change perspective.
Billionaire bond trader Bill Gross’
June newsletter (here) made me
realise just how rare the past 40
years have been in financial terms
(emphasis mine):
‘…my take from these observations is that this
40-year period of time has been quite remarkable
– a grey if not black swan event that cannot be
repeated. With interest rates near zero and now
negative in many developed economies, near
double digit annual returns for stocks and 7%+ for
bonds approach a 5 or 6 Sigma event, as nerdish
market technocrats might describe it. You have
a better chance of observing another era like the
previous 40-year one on the planet Mars than you
do here on good old Earth.’
For those not financially inclined, Gross’ newsletter
can be a tad technical. So I’ll try to put it in non-
technical terms for you: The returns generated over
the past four decades are as rare as ‘rocking horse
poop’. And that’s pretty rare.
A 5 or 6 Sigma event — which means deviation from
the average — is almost unheard of.
To provide some context, the US housing bubble, and
subsequent crisis (that led to the GFC [global financial
crisis]), was considered a 3 (possibly 4) Sigma event.
Remember that, before 2008, the US property market
had never before had a nationwide meltdown. Even
with this background, this one-off event still only
registered 3 or 4 on the Sigma scale.
A 5 or 6 Sigma event is HUGE!
The past 40 years have been a fantasy land.
Whether we recognise it or not, our expectations and
perceptions have been created by four decades of
exposure to this extraordinary period of financial
engineering.
We know the root cause behind the creation of this
fantasy land has been the continual accumulation of
debt, combined with the continual reduction in the
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Vern Gowdie, The Gowdie Letter
cost of that debt (lower and lower interest rates).
And we know who the enablers of this experiment in
credit creation driving economic growth are — the
central bankers.
From the outside looking in, you’d think the lights
would have to go on sooner or later for the esteemed
economists in the employ of central banks. That
surely they too can stand back and look at the
monster they’ve created and call it quits. That
continuing down this path is only going to make a
really bad situation even worse.
But as I ponder these thoughts, I’m reminded of
something my mother used to say: ‘There are none so
blind as those who do not want to see.’
How many PhDs does it take to screw
up an economy?
Do you know how many people with PhDs are
employed by the US Federal Reserve?
20? 100? 200?
Not even close. Try 750.
750 academics. And how many saw the subprime
mortgage crisis coming? A few, at best.
But seriously, who is going to argue with your boss
(Ben Bernanke at the time), especially when he says
with a straight face at a news conference (March
2007): ‘[The] problems in the subprime market seems
likely to be contained.’
Imagine tapping Ben on the shoulder after that
interview and saying ‘Sir, I think the proverbial is going
to hit the fan. We should take corrective action now!’
By the way, this is the same Ben Bernanke who has
since authored a book titled ‘The Courage to Act: A
Memoir of a Crisis and Its Aftermath’. The man has no
shame.
It’s now 2016; how many of these 750 PhD academics
are telling Janet ‘enough is enough?’
Again, there would be a few dissenting voices. But
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they are not audible enough to be heard.
It’s my guess the institution grinds them down. Go
along to get along is the creed they live by… provided
they recognise what’s good for them.
My forlorn thinking used to be that, with all these
smart people in the Fed’s employ, you’d hope
somewhere along the line a common sense approach
would eventually prevail.
This was mere wishful thinking.
The system has a self-reinforcing feedback loop.
According to Wikipedia:
‘Bernanke taught at the Stanford Graduate School
of Business from 1979 until 1985, was a visiting
professor at New York University and went on to
become a tenured professor at Princeton University
in the Department of Economics. He chaired that
department from 1996 until September 2002…
‘Yellen was an assistant professor at Harvard in
1971–76 and a lecturer at The London School of
Economics and Political Science in 1978–80. She
was an economist with the Federal Reserve Board
of Governors in 1977–78. Beginning in 1980, Yellen
has been conducting research at the Haas School
and teaching macroeconomics to full-time and
part-time MBA and undergraduate students. She
is now a Professor Emerita at the University of
California, Berkeley’s Haas School of Business,
where she was named Eugene E. and Catherine M.
Trefethen Professor of Business and Professor of
Economics.’
University students are indoctrinated into Keynesian
groupthink by the very people who end up in charge of
this financial Frankenstein.
They study and work in an incubator where the
principle philosophy is an ardent adherence to the
belief that credit creation is the sole means to achieve
economic growth.
Those who question this ‘orthodoxy’ can pretty much
kiss goodbye their careers in government and aligned
institutions.
Can you imagine any US president appointing a Fed
chairperson who preached a doctrine of austerity and
prudence…that tells the government to get its house
in order? Me neither.
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Going along to get along is why we’ll continue on
this path of financial, economic and, in some cases,
personal self-destruction.
Occasionally, influential outsiders do look in and ask
the obvious question.
In November 2008, the Queen visited the London
School of Economics and asked a professor, Luis
Garicano, ‘Why did nobody notice it [GFC]?’
His reply: ‘At every stage, someone was relying on
somebody else and everyone thought they were doing
the right thing.’
If that somebody else is another Keynesian disciple,
then you have a situation where ‘if everyone is
thinking the same, then no one is thinking at all’.
Dissension should be welcomed. But in the hallowed
halls of the Federal Reserve, bucking the trend is
certain career death.
So (almost) all the PhD-qualified academics play the
game.
And for good reason. Because if they actually practice
what they preach, they’ll have mortgages, credit
cards, car loans, student debts, interest free in-store
credit and a personal loan for good measure to pay
off. Therefore, they need their employment, health
coverage and pension plan.
Don’t rock the boat. Just go along with the
groupthink…there’s safety in numbers.
For 40 years, Keynesian groupthink has created
a period in history without peer. Sustained above
average economic growth. Record levels of debt.
Rising property and share values. The lowest recorded
interest rates ever. The greatest level of money
creation.
Most people are completely oblivious to all this.
It has happened so gradually that each additional
billion dollars of debt, each notch down in interest
rates, and each tick up in property values is now all
part of a pattern they’ve become accustomed to.
What I call conditioning.
The point is that the experiment is not going to stop of
its own accord. The economic scientists are not going
to shut the doors of the lab and declare their life’s
work in academia a miserable failure. That verdict will
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be delivered by the market. decisions on yesterday’s performance numbers. The

probability of tomorrow being a repeat of yesterday,
This experiment is going to end with a BANG, not with
according to Bill Gross, is more likely to occur on Mars
a whimper.
than it is on Earth.

Another newsletter I religiously read is the one

Tomorrow is not yesterday published by GMO (Grantham Mayo van Otterloo).

Tomorrow is a new day. The weather could be
different. Your health may be better or worse. Your
mood could change. Some new information creates
change in your life.
That is the uncertainty and excitement of life.
Tomorrow brings its own promises and challenges.
Yet, when it comes to investing, nearly everyone
thinks tomorrow is going to be a repeat of yesterday.
For example, if markets are up 20% annually for a
couple of years, you can bet your bottom dollar that
funds flowing into share related investments will
increase substantially. Conversely, should markets
fall 20% annually for a couple of years, money will exit
even quicker.
Sadly, far too many people base their retirement
Jeremy Grantham is simply brilliant.
His firm, GMO, has for years produced forward
forecasts on various asset classes. Over the last
decade, GMO’s forecasts have an accuracy reading of
93.6%. That’s a pretty impressive track record when
you consider they’re looking seven years into the
future.
How can they be so accurate? Their basic premise is
‘reversion to the mean’.
Markets — in all asset classes — have provided
a treasure trove of performance data. Informatio
gathered through booms, busts, wars, peace time,
periods of prosperity, and times of hardship.
Each data point is a reflection of the prevailing social
mood — euphoric, optimistic, balanced, cautious

Source: GMO
*The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward-looking statements based upon the reasonable
beliefs of GMO and are not a guarantee of future performance. Forward-looking statements speak only as of the date they are made, and GMO assumes no duty to and does not under-
take to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may
differ materially from those anticipated in forward-looking statements. U.S. inflation is assumed to mean revert to long-term inflation of 2.2% over 15 years.

Proprietary information – not for distribution. Copyright © 2015 by GMO LLC. All rights reserved.

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and downright depressed. With enough data points
you can define what constitutes an average pattern
of behaviour…after all our perceptions (created by
yesterday and what’s happening today) determine the
price we are prepared to pay for an asset.
Given that the last 40 years have been such an above-
and-beyond the average period of performance, it is
only logical to expect tomorrow to be different from
yesterday.
According to GMO, the real (after inflation return) from
large US stocks will be minus 2.3% per annum.
In dollar terms, a $100,000 investment that loses 2.3%
per annum for seven years will be worth $85,000.
Admittedly, this forecast is for US shares. The
Australian market may fare a little better. But in my
experience, the US market is the conductor, and
Australia tends to dance to the tune it sets. Even if we
do manage to buck the trend, I would expect we will
not stray too far from the US lead.
I appreciate I’ve mentioned this before, but the seven-
year journey from $100,000 to $85,000 is not going
to be linear — meaning it won’t happen in an orderly
straight line.
It’s possible the $100,000 could fall next year to
$40,000, before spending the next six years working
its way back up to $85,000. Or the $100,000 could
go to $120,000 next year, then collapse 60% or more,
spending the remainder of the period zigging and
zagging its way up to $85,000.
Markets have gone on many a twist and turn to
prove the 93.6% accuracy of GMO’s forecasting
methodology…but not one of those ways was ever in a
straight line.
What we think we know is this:
1. It appears we have an overpriced US market that’s
ripe for a period of mean reversion.
One final point for consideration
about our future
Here’s a simple quiz for you.
There are two countries — let’s name them ‘Have’
and ‘Have Not’. Each has a population of one million
people.
In the land of Have there’s a standard societal pyramid
— large base of children and productive under 65
year-olds supporting a much smaller apex of older
(economically unproductive) citizens. The land of
Have has an average income of $65,000.
In the land of Have Nots, the pyramid is becoming
inverted — a declining base supports a growing apex
of older (economically unproductive) citizens. The
land of Have Nots has an average income closer to
$40,000.
Which economy would you expect to be the better
performer? It’s not a trick question. Of course, the
land of Have is in a much stronger position to achieve
economic growth.
At best, the Have Nots will likely stagnate or, more
probably, go backwards.
Let me declare upfront I have nothing against older
people…I am fast approaching that realm. However,
from an economic point of view, older people
contribute far less to the productivity of an economy
than those who are working.
By way of example, Japan is a nation with a declining
population, a growing number of older people, and a
truckload of debt. These factors are all playing their
part in Japan’s economic woes. Woes that no amount
of money printing, market fixing or lowering of
interest rates have been able to fix.
The following graph on world population growth —

2. Central bankers are unlikely to change course;

therefore, the prescribed course of treatment is
likely to be ‘more booze for the alcoholic’.

3. Past performance is most probably not the best

indicator of future performance…especially when
that past performance has been well beyond the
norm.

Source: Economica.blogspot

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births minus deaths — provides another clue on why And on that last point, we look at where the declining
the past is unlikely to be repeated in the coming years. population growth is coming from.

The Mother of All H & S Patterns covers the period 1973 The big driver over the past four decades was in the
to 2012…40 years. (By the way H & S is technical speak red zone: the BRICs — Brazil, Russia, India, and China.
for Head & Shoulders.)
Population growth from these countries is in steady
Population growth invariably leads to economic decline over the next 30 years.
growth. More people require more stuff — food,
clothing, shelter, transport, electricity, financial
services, and on it goes.

However, the right hand shoulder is slumping away.

Projected growth is in decline. Does this then
translate into a decline in economic growth? Less
demand for stuff?

Most likely.

Which feeds into the narrative of why markets must

revert to the mean. Underlying corporate earnings Source: Economica.blogspot
are likely to be adversely affected by a softening in
demand.

If we look at the population growth numbers with an

overlay of how they are constructed — over 45s and
under 45s — it only strengthens the argument that
demand is going to be softer in the coming years and
decades.

The majority of future growth will come from boomers

staying around for much longer than the previous
generation.
The population growth for under-45s has collapsed.
Boomer readers can identify on this graph exactly
when it was they crossed over from the under to over
45 section…personally my transition was in 2004.
Lower birth rates and a slowing death rate is not the
way to build the traditional population pyramid for a
productive economy.
Demographic trends are not something that can be
turned on and off with a switch. These numbers are
baked into the cake for decades to come. This pattern
is not going to change anytime soon.
With a steadily increasing percentage of retirees to
workers, governments are going to be forced to make
decisions…some more difficult than others.
Source: Economica.blogspot
The same declining trajectory is predicted for the
wealthier OECD countries.
The majority of future global population growth is
forecast to be from the poorest nations on Earth.
Perhaps one or more of these will be another China.
However, among this group I cannot think of another
nation of one billion that’s awakening from an
economic slumber.
Will governments — in search of a population base
broad enough to support an expanding apex —
increase their immigration intake?
Even if they do, it’s not as easy as it sounds. Quantity
is not quality.

Reduce benefits, such as welfare and healthcare. Bringing in more people to join the welfare queue only
Increase taxes, both income and consumption taxes. adds to the problems they’re trying to solve.
And increase the immigration intake. The current anti-refugee and immigration sentiment

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that’s influencing British, European and US polls
indicates that, even if there’s a need to shore up the
population base, the political will to do so may or may
not be there.
In the foreseeable future — especially if economic
conditions worsen and unemployment rises — it’s
unlikely any government is going to run on a platform
of ‘more immigration’. Therefore, the shrinking
productive base problem, and the impact this will have
on economic growth, is being pushed out to sometime
in the future. And, as is usual with these difficult
decisions, it’ll be foisted upon the political class only
when it’s staring them in the face.
Based on these graphs, it’s fair to say future
population growth is not going to be the same as past
population growth.
So what do we have?
The past 40 years has been a truly extraordinary
period of time.
There’s been nothing like it in terms of economic,
financial, technological and healthcare progress.
We have lived through a purple patch in history. We
should recognise it for what it is…a period that is
unlikely to ever be repeated in our lifetimes.
Debt and demographics have played a large part in
this truly historic episode.
But nothing remains constant.
The once lean debt levels are now morbidly obese (and
growing more so on a daily basis).
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Demographics are changing. Boomer youthfulness is
but a memory. We have a society migrating towards a
mix of more elderly and less youth.
Technology — like never before — is on the cusp of
permanently destroying jobs by the millions.
There is a massive trend change coming. The $64,000
question is ‘when?’
Oh how I wish I had the answer to that one. But I don’t.
Timing was never my strong suit. Which is why I wait
patiently in cash.
The one thing I am almost certain about is that the
trend change is going to create enormous upheaval in
peoples’ lives.
People have been conditioned by 40 years of
Keynesian doctrine and experimentation to believe an
economy and financial system functions in a certain
way, and that central bankers have the cure for all
economic ills.
This is a falsehood that few recognise.
They think tomorrow is going to be the same as
yesterday.
It most certainly will not be. The dynamics are all
wrong for that to happen.
There will be — as there always is — a reversion to
the mean…and how mean, and downright painful, that
reversion is going to be.
I wish I could tell you when, but I can’t.
Your patience may be tested for a little while
longer…750 PhD academics are not going to go down
without a fight.
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India’s Demographic Dividend or Disaster?
I’ve just finished an excellent book,
The Making of India, by Akhilesh
Tilotia. It inspired me to write
about India’s perilous demographic
situation. The country is at an
inflexion point. Today’s decisions
will determine India’s destiny. We
could either join the ranks of the developed nations
or languish as a lower-middle income country, as the
World Bank classified us recently.
Wait, what’s a demographic dividend?
It’s when the number of economically active youths is
high compared to the overall population. According to
census data, India had a baby boom between 1981 and
2001. This cohort is the basis of India’s demographic
dividend.
Post 2001, the number of children born in the country
has been steadily falling. The number of children born
between 2001 and 2011 was almost exactly the same
as the number born between 1991 and 2001. Thus,
India’s population growth rate has peaked out. The
number of children born will reduce significantly in
each passing decade going forward.
This means the next ten years are crucial. All these
baby boomers are now old enough to enter the
workforce. The net annual increase in India’s workforce
due to the demographic dividend is about 12-15
million.
So the question is - will they secure employment? This
is where the story turns dark. Tilotia has used numbers
from the Planning Commission (now Niti Aayog) and
has describes the stark reality. The Indian economy
has created only about 6.5 to 7 million jobs on average
every year since 1983. But job creation over the last ten
years has been only about one million per annum. The
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Ankit Shah - Research Analyst, Equitymaster
conclusion is inescapable: India’s economy is growing
without creating jobs.
This jobless growth is reflected in an economic
term known as employment elasticity. In simple
terms, employment elasticity is the ratio of growth
in employment to the growth of the economy as
measured by Gross Value Added (GVA). In India, it’s
fallen consistently - from about 0.16 in 1994 to
almost zero in 2010. Is it any wonder that Rahul Bajaj
recently quipped that India’s employment elasticity is
negative?
The reasons are not hard to find. The blame can be laid
squarely on two factors: the abysmal quality of India’s
education system and inflexible labour laws that don’t
allow for retrenchment.
Corporate India has got around this problem by hiring
contract labour. These jobs apart from being low-
paying, also don’t encourage labour productivity. Thus,
contract labour does contribute meaningfully to the
country’s growth.
India’s education system famously overproduces
engineers when the demand is for workers with strong
vocational skills at the lower end of the value chain.
About 1.5 million engineers will graduate in 2016. To
put this in perspective, the numbers for China and
the US are 1.1 million and 0.1 million respectively. This
explains why the starting salaries of engineers are
similar to the incomes of taxi drivers.
There are no easy solutions. However, we are certain
that unless these two major hurdles are not cleared,
India’s demographic dividend will turn into a
demographic disaster.
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Should Warren Buffett Consider Buying

Gold?
Tim Price, London Investment Alert

With hindsight, 1981 was the best of
times to be an investor... Less than
two years earlier, BusinessWeek had
published its infamous “The Death of
Equities” front cover. With hindsight,
that cover should have read “The
Birth of the Strongest Bull Market in
History”.
In 1981, five-year US Treasury bonds yielded 15%.
(They now yield 1.2%.) Stocks were reviled. You
couldn’t give them away. It was a great time to be an
investor. You just didn’t realise it at the time.
“The [US Federal Reserve] has no end game.
The Fed’s objective seems to be getting by
another 6 months without a 20% decline in the
S&P and avoiding a recession over the near
term. In doing so, they are enabling the opposite
of needed reform and increasing, not lowering,
the odds of the economic tail risk they are trying
to avoid. At the government level, the impeding
of market signals has allowed politicians to
continue to ignore badly- needed entitlement
and tax reform.”
I agree with Druckenmiller.

The legendary investor Sir John Templeton once
observed: “The time of maximum pessimism is the
best time to buy, and the time of maximum optimism
is the best time to sell.”
1981 was that time of maximum pessimism. Almost
anybody with the constitution to buy either stocks
or bonds enjoyed some of the best returns in market
history... But right now, we’re living in a “mirror
image” of 1981 (see fig. 1). And if 1981 was the “best of
times”, how could 2016 be a good time to invest?
That’s how Stanley Druckenmiller, lead portfolio
manager for the legendary Quantum Fund alongside
George Soros, recently explained his view at a swanky
investment conference in New York:
Central banks today have no endgame. They lurch
from one failed experiment in stimulus to another. All
objective evidence suggests that this stimulus has a
very short-lived impact on the financial markets and
none whatsoever on the productive economy.
Western companies are borrowing money just so they
can buy back their own stock. This desperate exercise
in financial engineering isn’t limited just to the US...
Here in the UK, GlaxoSmithKline made £1.9 billion in
cash from operations in 2015 but paid out £3.8 billion
in dividends.

“[In 1981] we were setting up for one of the greatest

bull markets in financial history as assets were priced
incredibly cheaply to compete with risk-free rates...
the 15% hurdle rate forced corporations to invest
their capital wisely and engage in their own structural
reform.

“If this led to one of the greatest investment

environments ever, how can the mirror of it, which
is where we are today, also be a great investment
environment?”
Fig. 1: 5-year Treasury yields (grey) and the S&P stockmar-
Druckenmiller was merciless towards the Federal ket index (blue) since 1966
Reserve (emphasis added):

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The scale of the borrowing is so extreme that our
central bankers are now running out of road (see fig.
2).
This means, for savers, pensioners and those living
on fixed incomes, that if interest rates go lower, their
Fig. 2: Total US credit market debt as a percentage of GDP
since 1920
Interview with Russell Napier: “I think gold is
entering a 20-to-30-year bull market”
Merryn Somerset Webb (MW):
Interest rates are going lower
and lower... and have now turned
negative. Is that a policy you approve
of or one that you think might work?
Russell Napier (RN): No... Negative
interest rates could, if filtered
through into deposits in any
significant way, lead people to prefer
the banknote to the deposit. That
used to be called a bank run. We’re
not there yet. But it could happen.
...The policy was there to make borrowing cheaper,
and it hasn’t done that.
...It’s easy to get inflation back into the system. We
could do it tomorrow morning.
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propensity to save more actually rises – because their
existing savings aren’t yielding them enough.
What should you do in the face of this warning?
Here’s Druckenmiller again (emphasis added):
“On a final note, what was the one asset you did
not want to own when I started Duquesne in 1981?
Hint... it has traded for 5000 years and for the
first time has a positive carry in many parts of
the globe as bankers are now experimenting
with the absurd notion of negative interest
rates. Some regard it as a metal, we regard it as
a currency and it remains our largest currency
allocation.”
Druckenmiller is talking about gold.
I completely agree with Druckenmiller about the
merits of owning bullion today. The savings that I
don’t hold in my fund are invested in gold.
Nobody rings a bell at the top of the market. Or do
they?
Merryn Somerset Webb, MoneyWeek
But it wouldn’t be the policy of central banks. It
would have to be the policy of government. We could
list all of these things coming onto the agenda that
would create inflation. My favourite (in the US) is the
forgiveness of student debt.
...If you were to forgive the $1.1 trillion of student debt,
young people would go and borrow more money. They
would borrow from the banks. And they’d buy houses,
cars, etc.
Direct monetary financing of the government... “QE
for the People”... forgiveness of student debt – those
things will need severe disruption pain before you
would get politicians doing it.
MW: What gets us to the point where suddenly
governments forgive debt and monetize their own
debt, etc.?
RN: Anything that undermines the stability of the
financial system.
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You have to imagine when President Clinton calls her
cabinet to order next year... Let’s say the
U.S. economy is slowing or is in recession. She will
look around the room for answers. If Janet Yellen
suggested more QE, I suspect President Clinton
might look to Secretary of the State Krugman. And
his answers would be somewhat more dramatic than
Yellen’s...
If you read what Martin Wolf is writing in the Financial
Times... if you read anything by [Nobel prize- winning
economist and New York Times columnist] Paul
Krugman... you can see the next set of solutions are
all just below the surface.
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MW: What does that mean for gold?
RN: My view has been that gold would come into its
own in deflation. Because we would begin to have
these conversations about outright monetary finance,
or “QE for the people.” Then, people would begin to
realize that maybe the actions of the government
would be so strong and robust that they would turn to
gold.
That’s why gold is going up. The dollar has been
relatively strong, and gold has gone up anyway.
...I think gold is entering a 20-to-30- year bull market.
I think that’s just started. Because these new policies
will succeed in generating inflation.
 Inner Circle
Global Intelligence Roundup
What does the future hold for Europe and for Britain?
The answer will probably surprise you…
As Bill’s old friend and legendary speculator Doug
Casey writes:
“In principle, the idea of the European Union sounded
good. All the signatory countries joined a customs
union so goods and people could flow freely.
“The idea was to both increase general prosperity and
decrease the chances of another war.
“It sounds very Libertarian – in principle. But in
practice, it turned out very differently. And may wind
up doing the opposite of its intended purpose.
“Some have said that Britain shouldn’t Brexit because
it will cause chaos.
“There’s some truth to that – but not because what
Britain did was in any way destructive. Its decision to
leave the European Union is best compared to that of
passengers on a sinking ship who are the first ones to
board a lifeboat.
“Any chaos that occurs is the result of the EU’s flaws,
not Britain’s exit. It is as though you had a 100-story
building which was about to collapse. It is better to
arrange a controlled demolition than wait for it to fall
at a random time.”
Doug reckons Brexit will initiate, or accelerate, the
following three trends:
1. The euro will cease to exist
The Esperanto currency was doomed from the
beginning. It was not just an “IOU nothing,” like the
U.S. dollar, but a “Who owes you nothing.” It’s not even
backed by a specific government’s taxing power.
How to profit?
I’ve put on long-term futures contracts, long the
British pound vs. short the euro. My rationale is simple.
Britain will benefit from exiting the EU, attracting
capital and strengthening the pound – which is down
13
11% against the euro since Brexit.
The euro, meanwhile, will approach its intrinsic value –
zero – at an accelerating rate.
2. A truly major banking crisis
Central banks, which are the arms of their
governments, have taken interest rates to zero and
below to encourage borrowing and to make it easier
for governments to service their debt. This policy has
encouraged businesses to take on debt.
It’s an idiotic and reckless experiment that will end –
likely in this cycle – with bankrupt central banks and
governments bailing out bankrupt commercial banks
and businesses. Just the way they did in 2007–2009.
Except this time, the situation is much more serious.
How to profit?
Don’t own European companies, stocks or bonds, and
banks in particular.
Even though they are already down considerably, they
are going lower and are excellent candidates for short
sales.
3. A panic into gold
You’ve heard this story many times before here. But
it’s truer than ever as we approach a genuine crisis.
There are no stable paper currencies anywhere in the
world. The dollar has been strong only because it’s
liquid. Liquidity is good. But here we are talking about
liquid like nitroglycerin.
Hedge funds will start buying gold in size. As will
central banks, who don’t want to hold each other’s
paper. As will individual investors.
Right now, few people even think about gold, much less
understand it.
How to profit?
The answer is gold. I expect we will see it well over
$5,000 this cycle. Silver should do even better in
relative terms. And gold stocks have explosive upside.
 Inner Circle

Inner Circle Strategic CounCIl

Bill Bonner Vivek Kaul

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Charlie Morris Merryn Somerset Webb

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