There were numerous interesting, informative and mostly bearish speakers during the latest Strategic Investment Conference held at the end of May. Among them were Lacy Hunt, David Rosenberg, Neil Howe, Jim Grant, Mark Yusko, Gary Shilling, and JohnMauldin (readers can watch video interviews with these speakers on Mauldin Economics’ Youtube channel and their full presentations can be found at the following page) all of whom painted a very pessimistic picture for the stock market but, as Tony Sagami points out, the most alarming comment came from Richard Fisher.
Fisher was president of the Federal Reserve Bank of Dallas and a voting member of the Federal Open Market Committee (FOMC) from 2005 to 2015. He was one of, perhaps the only, skeptic on the Fed board going into the great financial crisis, warning on numerous occasions about the upcoming crash only to be ignored by his wiser peers and certainly Alan Greenspan and Ben Bernanke. He was also ignored in the post-Lehman era by both Bernanke and Janet Yellen.
Among his biggest concerns:
- Government Debt: he is worried about the $19 trillion US government debt (up $11 trillion since 2008) because the Fed has fired all its monetary bullets and can’t expand the balance sheet any further.
- China and social instability: he thinks communist leaders care about production but not efficiency. "They might produce more, but our products work," jokes Fisher. There are entire cities in China with nobody living in them, according to him. Fisher says the biggest problem in China is social stability. "I'm deeply worried about their ability to maintain social stability,” but... “It doesn’t affect us directly.” Another risk in China is that millions of people are pulling their money out of the country.
- Low interest rates don't work: "We had a long period of moderation and low interet rares, which did nothing to adjust." The online countries that adjusted were Poland and Mexico, according to Fisher.
- The failed Brazilian experiment: Fisher said Brazil is a symbol of what's wrong with emerging markets. They lived through the crisis but learned nothing from it.“Brazil has always been a country with potential, and it’s never been realized."
- Raising rates is long overdue: he made the point that raising interest rates won’t ruin the economy. "The debt rollover is what we should be worried about. Yet nobody is talking about it."
- It's all one big Ponzi scheme: “Our government has to borrow money just to pay interest.” Or as Minsky would say, this is the Ponzi finance stage, just before everything goes to hell. "We have a lot of unsound policy in place. It is agreeable, but in my view, it is unsound.”
- The death of the middle class: Fisher says the lowest income quartile has seen an increase in income. The highest quartile has also seen a massive increase in income. The two middle quartiles were flat over a period of many years. “This is why we have such support for people like Donald Trump and Bernie Sanders.”
- A ritalin monetary policy: “We have what I call a Ritalin based monetary policy.” Now Janet Yellen’s job is to wean it. “It has to do with taking the distortions out of the financial markets and letting the markets down easier.” “These are the lowest interest rates in 239 years of history.”
But as Sagami points out, Fisher’s most telling comment came during the Q&A session when he was asked how his personal portfolio was positioned. Fisher’s response: “In the fetal position.” Moreover, he also said that “all my very rich friends are hoarding cash.”
Not some, not many. All.
Which, incidentally may explain why as algos levitate markets on ever lower volume (volume which returns with a vengeance on even a moderate selloff such as today's), "smart money", insiders, retail investors and foreigners continue to quietly liquidate stocks for weeks on end. While it is unclear who is buying, what is clear is that increasingly more are getting out of risk assets and getting into cash.
For the sake of Fisher's friends we hope the cash they are hoarding is physical, and not of the electronic variety. After all, as Greece has shown vividly, it would only take the flick of a switch for the government to lock up, or Corzine, some or all of the $10+ trillion in bank deposits. And ultimately, since helicopter money is coming, even that physical cash will soon be worthless courtesy of near-infinite dilute, and the only monetary asset which would survive the hyperinflationary conflagration of the grand reset, is the same precious metals that have preserved their value through over 5,000 years of human stupidity. Which, ironically, reminds us that just because one is rich that does not make them smart..