Jim Deeds: “Prepare For The Highly Leveraged Chain Reaction”

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• China buys oil from Russia & Iran in “Golden Yuan”
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• Asia devouring up the gold the west is willing to sell

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

JIM DEEDS: “PREPARE FOR THE HIGHLY LEVERAGED CHAIN REACTION”
October 10, 2018

“There has been, really, an amazing campaign to unwind people from any belief in real money, and to believe totally in government and government-created debt as real money that we can use every day. And that is scary because if we ever lose the paper money or the credit card – which I think we will, I think there will be a day when the credit cards stop working – I think that will be the biggest shock in the history of America, personally, because people will say, ‘What do I do now?’”

– Jim Deeds

Kevin:Before we get to our guest today, Dave, I was just checking this morning before I came into work on an astronaut who now is in his 80s. He’s one of my favorite astronauts. He has flown – he actually was back with the Apollo program, he worked all the way through the shuttle program. NASA forced him to retire. What I loved about him was, he stayed engaged. This was a medical doctor – he was a glider pilot, he was a jet pilot. He learned new things all the time, stayed actively engaged. He fixed the Hubble when they put the wrong lens in it.

His name is Story Musgrave. I turned to his philosophy, and here is what he said. He said, “Learn new things. Stay engaged. Apply with everything that you can and then keep moving. Move on to the next thing.” I think of our guest today, Jim Deeds. We have known him for years. Your dad knew him before you were born. They were stock brokers in Denver. A regular guest here on the Commentary – what a blessing to have him on today.

David:The nature of relationship as we understand it is just that, that we can be colleagues and also share that relationship of mentor/mentee. We can learn from anyone, and we have learned through the decades, with the relationship with the Deeds family. This goes back 40 years or more. We continue to learn and grow in our understanding and in pressing forward and trying to figure out the world as it is and how we should be responding to it.

Kevin:Jim is a life-long learner. I love that about him. Talking about staying engaged, he does remind me of Story Musgrave, the astronaut. But even more so, he has a need to teach. He will call you, he will call me, and he wants to just share what he has learned, and he wants to share with somebody who cares. What a blessing to have him on today.

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David:Jim, you have spent, I think it is fair to say, decades in the investment markets, and with an eye to the economy and the impact into the financial markets, particular asset classes, I think it would be really helpful just to give us a ten-cent tour of where you started, where you are, and again, a bit of your history and background.

Jim:Good. David, I think it is amazing because when I look back and even think about it for a minute, it has just been an amazing trip in my lifetime, and it has been a lot of fun, and I guess that is what you do in any work that you do, if it is fun, and it is new, and on top of that if you can earn a living, what else could you ask for? I would go back and do this very quickly, just so that you would see I wasn’t driving a cab last week.

What I was doing, I graduated from the University of Colorado back in 1956, I took Architectural Engineering and Business Management, so I had a two-degree course, and actually I was up there six years. The last two years I was married, I managed the married couples dormitory and my wife was teaching, so believe it or not, I started investing in the stock market back in 1954 or 1955. So this has been a long, long trip.

From that point on, life went really quick, and I will give it to you. When I graduated I went to work for Shell Oil out in California for about four or five months, had an ROTC commission with the Air Force, went in the Air Force for a couple of years down in Memphis, Tennessee, got a good idea what that was. Came back to Denver, got work in sales engineering working with architects, Ready-Mix concrete people and builders, and it was a neat time. That went on for eight years. That was back through about 1967 and in those eight years Denver was booming, so it was a fun place to be, it was a fun job, and actually a pretty nice way to earn a living.

But all that time I was investing on the side and I loved it so much that I went in and said, “I’m going to leave architectural engineering and sales. I want to be a stock broker.”

So in 1967 I went to work for Dean Witter when they opened an office in Denver, and that was the start of my investment career. It was really amazing, and of course, since then I was a broker from 1968 through 1972, managed money from 1972 to 1974, went back as a stock broker in 1974 through 1992, then came to work with you and with your dad, Don McAlvany, down in Durango because that seemed to make sense and I will explain later why, in the gold and silver market, and did that up until 1998. And then at that time, 1998, I went to work with Jim Rogers.

So it has been a neat long career, and it has been a lot of fun, and the only thing different in my life from any stock broker you might have known was that I was what you call a position broker. I learned that because I read Jimmy Rogers’ book back in 1965 and I looked at the other investment positions, how people did it. Warren Buffet really made sense to me, believe it or not. In 1965 his stock was about $150 a share back then. It is currently, I think, about $30,000 a share. But Warren made sense because he would buy things when nobody wanted them and he would keep them a long time until they were worth something.

So as a position broker that is what I did, and that gives you a background. My job was to build a position in the stocks one at a time for my clients, usually to hold them two to three years, and then sell that stock and look for the next place to go, and the goal was to double or triple your money in that kind of a system. And you could do it, if you were buying something nobody wanted.

This has a little bit of relationship to today. If you are buying something that nobody wants, if there is a future for it, sometimes you can do quite well with it as an investment. That is just a quick summary of where I have been, and today is the most exciting time in my life. It hasn’t changed (laughs). Looking ahead, this looks like a lot of fun. Does that make any sense to you?

David:Absolutely. The lessons you have learned, some of them the hard way, have never been reserved just for yourself. Whether it is financial lessons or other life lessons, the Jimmy Rogers partnership was very intriguing. Maybe we will have some time to talk about that later. But I think of how you saved Kevin here in the office from losing sight in his eye. You lost vision in one eye, and many years ago shared with him what he needed to know to identify what was going on, a detached retina. And he would not have known what to look for, even though his father had experienced the very same thing. But that conveyance from his father to him never happened.

So what do you watch for today? I think the same is true in the markets. What do you watch for today? What actions does that incline you toward as an investor?

Jim:Again, it all relates back to looking back. If you look back at what I was doing, the whole game – and Jimmy Rogers explained this in his book, and so did Warren Buffet – the whole game, if you are involved in investing, or anything else in life to be honest, is, if you can, instead of talking about today or complaining about what happened yesterday, look ahead about two years. And we will be talking about that later in this interview because we are in a very, very important part of that game at the moment. But you look ahead.

So with my eye, it was amazing, that was 30 years ago. And I didn’t even appreciate – we take so many things for granted. That will come into our conversation today. Your body and how you feel, and what you do – up until you have a problem you take it for granted. When I lost my sight in that eye I all of a sudden realized what a beautiful thing it was to be able to see. And I couldn’t fish anymore like I used to because I couldn’t see the four-pound test leader, but I could take pictures and do photography, so I really had a whole new picture and a new place to go.

And that is how I have tried to live my whole life. If one thing fades away, then what can you find out there that is interesting and might be a lot of fun in the next year or two. And that’s the game, the way I see it. I don’t know if that’s a good answer to your question or not.

David:Yes, looking ahead two years, this is one of the reasons why Doug Noland and I are working together on the Tactical Short. It is one of the reasons why your son and I are working together relating to gold shares. It is one of the reasons why we are interested in, as you said, not necessarily what has happened just in the recent past, or what is happening even today in the present, but with some work of imagination, if you can visualize or try to anticipate what is ahead, that is where you begin to see an opportunity unfold. You have to position ahead for that.

Jim:Right. You just mentioned something that is fascinating to me. How did I ever even land on gold? Why would a guy in architecture do that? I got a book just by accident by William Rickenbacker called The Death of the Dollar. This fits the question you just asked. This was in 1968, I was working as a broker at Dean Witter, and for some reason I take out this book and read it, The Death of the Dollar. It is an amazing book because he went through and said, “We only have a few years left before the United States goes broke.” He explained it all very clearly and straightforward, and it was really a beautifully written book. That is when I got interested in gold.

So when I was a stock broker at Dean Witter I started buying gold stocks in 1969 and 1970. I was buying Campbell Red Lake, I was buying gold mines. The people in Chicago called the Denver office and said, “Why is this guy buying gold? Where did he come from?” I was a position broker, as I mentioned, but from that point on I really believed the story that we were spending more money than we were taking in.

And think for a minute, that was 1968 or 1969. 1971 was when Nixon said, “The gold is flowing out of here so fast as foreigners are turning in their dollars and converting it into gold, that we no longer will exchange T-bills or dollar bills for gold.” We shut the window down for all foreigners as well as people in this country. And then, of course, 1970 to 1980 was just an amazing time. Gold went from $35 to $800. So we were thinking ahead.

Now, what you just mentioned is fascinating to me because Doug Noland has been doing that. I started reading Doug Noland in about 1996 or 1998. An amazing guy who really understands the credit markets, and the credit markets are just a history book repeated over and over again, and I’m sure Doug has said the same thing to you. So once you understand that, you say, “I understand that cycle. The cycle is simple.” And then Doug and I would both say to you, “The only thing tough for the cycle is the timing.” The timing of cycles is next to impossible. As you look at a history book, it looks easy in the history book, but as we live it today, the timing of what we are going to be talking about is always a question mark.

David:One of the interesting parallels that you and I share, and I hadn’t realized this, not knowing when you went to work with Dean Witter, I went to work with Dean Witter in 1999. You went to work with Dean Witter in 1968. Here you are at the end of a bull market that, arguably, started in 1949, ended in 1968, and you had a real rough patch in equities from 1968 to 1982.

Jim:Right.

David:Really punctuated with a recession in 1973-1974. But I started right on cusp of a bear market. I think, to me, it has left a valuable impression, but certainly an important appreciation for risk, and what can happen rapidly in the equity markets. I just thought it was interesting that we came in, both of us, with Dean Witter, there at the tail end of a bull market, at the beginning of a secular bear market.

Jim:In my case, it was really easy because they weren’t managed markets. The Federal Reserve wasn’t anything that we had ever heard of or cared about at that point in time. They weren’t a headline every other day. So what we were looking at – there really was a cycle back in those days which was a presidential cycle. It was a four-year cycle – up and down, up and down, in a four-year cycle – because whenever somebody wanted to re-run for president they tried to have the economy look good six months before the election, kind of like the Supreme Court right now.

So in any event, there was a political influence on the market, but there was a free market. It was fun. And by the time you got there they had already invented the Plunge Protection Team and you had a lot of obstacles and different things to think about than I did. That’s true.

David:It is one thing to say the system is rigged at present, or even just for a period of time, it is another to imply that that will never change. I think we would agree that whether it is via the Plunge Protection Team or other means, there certainly are elevated prices in the asset markets at the end of a deliberate effort. And if that never changes, then we truly are past the point of having free markets.

Jim:Right.

David:It seems to me like the rigging of the system at present really is the confluence of large, leveraged players on Wall Street who are allowed their outsized positions due to a very highly accommodative monetary policy backdrop, and maybe add to that a regulatory environment which has allowed traders to stay well ahead of regulators. Is this a fair assessment that regulators are behind the curve, that leveraged players are pressing for advantages, and driving volatility? Just like Long-Term Capital Management, they were benefitting massively from penny moves here and there because of the leverage involved. Does that go on indefinitely?

Jim:I think the simple answer, certainly, is no. It was the same with Long-Term Capital. Long-Term Capital in 1998 was run by two guys who got the Nobel Prize and probably were as good, supposedly brilliant, in economics as anybody on Wall Street or maybe in the world. They were so brilliant that, as you just said, they ran the leverage curve out to the very point where all of a sudden they had one tiny little mistake, and then the leveraged environment – if you’re leveraged 100-to-1, or 500-to-1, or even 20-to-1, and you make a mistake, at 20-to-1 you can only afford a 5% mistake before you’ve lost all your money. So today, I would multiply those numbers and that leverage by 100-to-1, and you probably would, too.

We’re looking at the leveraged markets, which are huge. The bankers are the focal point of the leverage, and then beyond them comes higher leverage with 10 billion-dollar hedge funds. That’s a lot of money, and one man and one computer operating a hedge fund. And those are highly leveraged, as well. And you’re saying to yourself, “Can they ever make a mistake, or will one of them someday make a mistake?”

The catch with a mistake is, once you make a mistake you have to cover it, which means you have to sell something. And as soon as you sell something which might have a lot of value and a very fine sound being, when you sell that something to get out of your trouble, you create a problem for the next guy who owned that, thinking it was solid forever, and all of a sudden somebody just sold it, and the market is dropping, and he has to get out of what he thought was a treasured investment, as well.

So, I think in answer to your question, I believe that – some people don’t – but I believe we are very, very close to the end of that game, and anyone can explain it in numbers and in zeros because the banks have come up with a way to insure all that, David, so we don’t have to worry about it. It is called derivatives, and they say, “We all sell derivatives back and forth, which are just insurance policies between the bankers and then the hedge funds, and those derivatives now measure 1.25 quadrillion dollars’ worth of derivatives insuring me and my paycheck and my bank account and what goes on in America. And that is kind of a scary statement, I think. I don’t know what a quadrillion is, to be honest.

David:There is beauty in complexity, but it seems like in the financial markets there is also a cusp event where you go from seeing the beauty of complexity and what can be accomplished with it, to the horrors of complexity – a system from which you cannot extract yourself fast enough.

Jim:That’s well said. You’re right, 100%. You probably remember, because when I was writing an article for your dad I came across something from a fellow over in Italy who wrote about how empires come and go. And one fellow you have interviewed since then who came up with the thought that complexity was the answer – that empires, or nations, start at the beginning, build a beautiful system, put it together, everybody works hard, the thing gets more and more complicated as it goes along, but everybody goes along and they have rapid growth. And then at some point in time it seems to cost more and more money just to stay even in a complex society.

I just came back from being in Denver all day. I drove in a string of cars that was at least two miles long on the old Denver/Colorado Springs highway. Two years ago I could have driven down that road at 70 miles per hour. Last night I came home at about 15-20 miles per hour halfway. I think that is probably a good explanation of how complexity does catch up with you, and all of a sudden it either slows you down, or it costs a heck of a lot more money just to get the same thing done.

It would seem like America is approaching that, and I am a very cynical guy at the moment because as I watch Congress and watch the Congressional hearings and listen to what they are doing with the one Supreme Court nominee, they have wasted, in my mind, six weeks, or three months, of Congressional nothingness talking about something so simple as the Supreme Court Justice. And I thought Congress was there to govern and to manage and to plan ahead for America (laughs). Maybe I sound like I have a problem, David. What do you think?

David:Well, I think you are pointing to the fact that they were never intended to be circus conductors.

Jim:(laughs) That’s a good point.

David:They have work to do and it’s not running a three-ring circus. You mentioned Joseph Tainter. The Collapse of Complex Societiesis a fascinating book. I think it is a must-read. I would put it as required reading if you are interested in the financial markets and the ebbs and flows of history.

Jim:It is fascinating, isn’t it? What you have said already a couple of times, you look back in history and all of a sudden it comes right out and shouts out you that that might have been. You can go through the Roman Empire and how it all started to unwind and we might be starting to unwind here. You can certainly argue that with a lot of people. But it’s worth thinking about.

David:What it suggests is that we have seen success in the past, and that you can’t draw a straight line from the past into the future. There are many things that can occur in the interim which cause interruption. And in the case of complexity, it is the cost of complexity that Tainter is talking about. And in fiscal terms, you get to a point where citizens look and say, “It’s no longer worth it for me to participate. I would prefer to migrate. I would prefer to move on.” And so, what he describes as complex, or a collapse, is not really what we would imagine as a 1929-1932 style stock market implosion – that kind of rapid collapse. It’s just that you see the height of complexity reached and then all of a sudden the disappearance of a society altogether.

Jim:I don’t know if this relates or not, but we’re having fun talking so I’ll bring it up. I would relate that complexity to the debt picture in the world today, I really would, because I think a lot about it now, the whole world is living on debt. We know that now. Back in 1985, or in 2000 with the dot.com bubble, every other nation wasn’t in debt like the United States, but today we are. And if you think for a moment, I add to that every day when I use my plastic card. I’ve been thinking about it just in the last couple of days. Whenever I use a plastic card I go into debt at that moment and the assumption on the other end at the filling station is that they will get paid at the end of the month because I’ll pay up on my debt.

So if you thought for a moment, you would realize that the whole world, and 85% of the transactions in America today, are debt-oriented transactions. And then you throw in on top of that the complexity idea that you just came up with, and you would say, “Can this go on forever, or does somebody make a mistake somewhere, and does the whole thing come tumbling down?” Which is worth asking. And the plastic, and the debt, are just a promise of something that people hope they will get in the future, right? (laughs) So it is really interesting, I think, to look at it that way.

The debt in the world is the same way. The Treasury – I just saw it two days ago – for the fiscal year 2018 treasury debt was 1 trillion, 271 million, 158 thousand – it goes on and on – it was 1.2 trillion dollars, which the Fed borrowed $8,172 per American working person. So if I worked and made $8,000 last year and just gave it to the Fed, they would just break even. They are going in that kind of hole for every one of us every year. I think it is the last 8 out of 11 years they have had over a trillion dollars in debt. I think that is a complex system (laughs). What do you think?

David:And it works until something goes awry. And with a system driven by people, and arguably, even driven by smart learning computer programs, there is a variety of assumptions that go into how we operate, and ultimately something does go wrong. That hasn’t been solved. We live in an imperfect world. We’re imperfect people.

Jim:Historically speaking, that is 100% true. Some people always think it’s different this time. The other thing I look at, David, which I know is true, is that we are so far in the trap now, and maybe you have done that yourself at times, if you get far enough into something that isn’t working you just want it to go on one more day, you just don’t want to stop (laughs). You can’t stop.

And I would say, personally, that the world and the United States of America on the debt cycle are into that position right now, the Chinese, and the Russians, and the Germans to some extent, but I think some people are waking up to the fact that they would like to get out of this debt machine if they can. But that is just a very difficult question to see how you would do it and not just upset the whole apple cart. So we are at that point right now where there are some big changes right on the horizon and you are not quite sure where they are going to come from.

David:So let’s talk present tense, and then future tense. You are just back from an annual event that serves to update the gold community about what changes are afoot in the mining industry. It used to be called the Denver Gold Conference, now it is in the Springs at the Broadmoor – a beautiful old hotel. You are there most years. What was different this year, and what does that suggest to you?

Jim:I will give you three quick answers. One, I have been going to the Gold Conference ever since I went to Jimmy Dines’ conferences out in San Francisco in 1973 and 1974. So that’s been a long time. Those were investor conferences where people went to learn how to invest in gold and silver and mining. Then I went to financial conferences from 1980 to 2000, which were mainly all over the world, actually, about people learning what was happening in the world and where to invest. And then these conferences, the ones that we are mentioning now, there is both an oil conference and a gold conference in Denver which were just lucked out because I live here, and they are major conferences, in a year’s time. And in both cases these are producers, so people get a picture of what is happening at the gold conference, and at the oil conference. Each oil company or gold company has 20 minutes to explain what they have done over the year and what they are looking forward to, they have questions and answers and then a break-out room, and so you get a good chance to look at the industry, itself. So they are not touting you on the investment, they are not telling you why you should invest in gold or oil. But in this case the gold conference is basically a group of miners getting together. There are about 500 people there. And I would guess better than half that group are miners. A good number were very large investors. I only met one fellow, and S&P man from Canada who worked for S&P. I didn’t see one analyst – one gold or silver mining analyst – from any major Wall Street firm there. So that is the backdrop. The answer to your question is, let’s go back three years. Three to four years ago, it was fun, everybody was expanding, and by 2012 they thought it would never stop. By 2014 or 2015 when we went to the conferences – we go every year – they were all really trying to figure out how to stay alive. Most of them had over-expanded, they bought too much land, they had too much exploration going on. Several were on the edge of going broke, and did go broke. So that all happened in the past.

This time, amazingly, and this brings us up to date, this year the people at the conference were very quiet and peaceful, and the only people there presenting for their companies, from my standpoint, were in good financial shape. They were in balance. They all were looking at producing gold at $800-900 an ounce and they were saying today that they could break even or just make a little money, and they were all saying, “If we could only get to $1400 an ounce on gold next year or the year after, we’re going to make some real money.” (laughs) For people who are old believers, that is an awfully low number compared to what we think it might go to, which is why I go to these conferences.

There is great leverage in a gold mining stock in a bull market over the price of just a gold coin, but there is also great leverage in a gold mining stock in a bear market going down. It goes down twice or three times as fast as a gold coin goes down. So they are at the bottom of that cycle right now. There was little interest. After each speech there were very few questions. We only saw four or five people even ask a question. So it was the most subdued meeting I think I have ever gone to, to be honest. As far as the people in the audience, they were very quiet.

David:A couple of things that stand out from what you just said. One, that very scarce was the Wall Street analyst there to poke questions at those producers and figure out where the opportunity lies. You are talking about an area on Wall Street that has kind of been left for dead.

Jim:That’s right. You nailed it when you said that. It’s amazing to me, I don’t think I have ever met a research person at that conference from a major brokerage firm. And they have a cocktail hour the first night and you go around and meet a lot of people. So it is really interesting. There is no interest from the major brokerage firms, and maybe never has been, in gold and silver mining.

And maybe that is part of what we want to talk about today, because in America, Gold Money gave a talk in luncheon. Gold Money is based out of London. Gold Money had an interesting talk. It wasn’t wonderful, but it was interesting. Their comment was that in Europe, but more specifically in India and in the Orient, people buy gold, one, because it is jewelry, but two, because they know it is wealth. They wear their wealth on their bodies, which is true, we all know that.

And he said, “In the West, and particularly in America and the Western countries, people have forgotten that completely. All they do is buy gold for jewelry, but they have no tie with it in relation to wealth or money, most of them, at all. I think he is probably right. I don’t know. What do you think of that?

David:(laughs) It was interesting, flying back from Germany and London a week or so ago, I sat next to a gentleman, and his wife sat down next to him, and she had this beautiful gold necklace on from India. I said, “That looks like a necklace I have seen also made in Thailand.” She said, “Yes, it is a similar style. I have always told my grandchildren that if they see the length of my necklace shrinking that something has gone terribly wrong.”

Jim:(laughs).

David:And the design of the necklace is to actually be able to use this in gram quantities to transact business with. I said, “I am so glad you are having that conversation with your grandchildren.”

Jim:That’s amazing.

David:As it turns out, it was not a surprise once I got to know the couple. He had just retired. This was their first trip in retirement, and he had just retired from being a mine engineer and geologist for 40 years. He lives up in Grand Lake and has spent his life between Vancouver and Toronto raising money for various mining projects, gold and silver mines. So yes, they appreciate that you wear your wealth, and sometimes, under the right, or perhaps wrong, circumstances, you might have to use it.

Jim:This is the scariest if you want to be concerned, because I know, and you do, too, that 99 out of 100 Americans today are so complacent and they take so much for granted. It’s just like when I had two eyes, and when I lost that one eye I actually had to change my lifestyle. But you don’t do that. As long as you can see out of two eyes you never give it a second thought. When you get down to one eye it does alter – there are some states right now I wouldn’t be allowed to drive a car in. That’s fun to think about. I can still drive my car here with one eye.

But in any event, we are looking at the same thing in America when it comes to gold and silver and real money. There has been, really, an amazing campaign since maybe the 1970s, or maybe 1932 – who can name when it started – to unwind people from any belief in real money, and to believe totally in government and government-created debt as real money that we can use every day. And that is scary because if we ever lose the paper money or the credit card – which I think we will, I think there will be a day when the credit cards stop working – I think that will be the biggest shock in the history of America, personally, because people will say, “What do I do now?”

David:Jim, this is, again, in anticipation of the future, one of the reasons why we launched our Vaulted program, where you can, on your Smartphone, assuming that we have connectivity, and there are certain aspects of the world as we know it in continuance, you have access to ounces at the Royal Canadian Mint, but can move money back and forth between your regular checking account to pay bills or do what have you. And if you decide you don’t want a large balance of cash in dollars you can instantly move it to kilo bars in the Royal Canadian Mint in any increment. If you want $5 or $10 increment sitting there in gold, this is something your grandkids can have their own savings account, but it is real money.

Jim:That is the other question I would ask you. That is marked-to-market every day, so if gold did double or triple or quadruple, as Jim Sinclair thinks someday soon, then your bank account goes up that much, as well, if you’re holding it in gold, right?

David:Yes.

Jim:That is amazing if people sat and thought about that.

David:It is the most reliable store of value ever, because, frankly, if the price of gold is doubling or tripling, really, that is a commentary on the demise of our currency. And you need that increase just to maintain purchasing power of the things that are most important to you.

This brings me back to something that you were writing and thinking about back in 2002, an article about real things versus just paper assets. That article back in 2002 was highlighting the differences between a deflationary depression and an inflationary depression. Maybe you could tell us what the main take-away was. Here you were, post NASDAQ crash, and in the early stages of a Greenspan reflation. You gave us a little commentary earlier on who you were working with. I think it was Jim Rogers at the time. What was that article about and what was the main take-away?

Jim:Rogers at that time was starting his commodity fund. Jimmy was pretty good at stuff like that. From 2002 to 2006 we had the best bull market in commodities I have seen in my lifetime. That’s when oil went from $20 to $150 a barrel. So it was a pretty amazing time. Back at that point in time there were many analysts, and Bob Prechter was one. I had followed Prechter, and he was very, very good, with the Elliott wave. We worked with him in the early 1980s and he was right on the button every time he did it, and it worked right up through 1987. And then from that time on, in my mind, the Fed, or the Plunge Protection Team started to work off what he was saying and tried to do it in reverse, which made it a lot more difficult.

But the long and short was, he had written a very fine article, and any other good financial analysts at that point in time, you could buy a lot of newsletters and read some pretty interesting people, and they were all the same – “We’re going into a depression, a depression like 1932.” And in that kind of a depression you want to have your money in bonds or in savings or in cash because all of a sudden there are many banks and many bonds that go into default, and if you can keep your money alive your money will buy a lot more. So that was the idea of the depression and the deflationary depression.

If you look at history, that only happens once out of every ten times, and the other nine times when you run into this problem with money and finance, and all of a sudden overdo it with debt and with paper money, you go into a hyperinflationary depression. And that is easy to think about. A hyper-inflationary depression means that all of a sudden the price of things is going up fast, and they are going up because people don’t trust their money anymore. Half of the 100-dollar bills in the world today are outside of America. When people outside of America decide they don’t trust America quite as much they will buy something with those 100-dollar bills and they will be flooding back toward us.

And that means, if they are, the price of what they are buying will be going up and the value of the 100-dollar bill will be going down. If you read what is happening in Venezuela today, 2000% inflation, maybe a million percent inflation next year, which means your money just goes kapoof overnight and the money has no value. At that point you have to say, if that happens, obviously, the bonds have no value and all of a sudden you are in a hyperinflationary depression – two things at once. You can see how that happens because the price of everything that you want goes straight up through the roof, and the price of everything else has no value whatsoever.

And so people chase what is going up and they have no interest in everything else that is going down. So it puts about two-thirds of the people out of work because nobody wants what they have, and the other one out of ten, if they are lucky, a few people have money and can keep on buying, but the price goes up so fast that that is difficult, too.

So if all that happens – that was a hard explanation, it might work, it might not – if all of that happens, prices go straight up through the roof like Weimar Germany. And if they go straight through the roof, you have to say, “If I’m setting money aside today, or setting savings aside today, it might be wise to put it aside in something real, that people will need and use in the future. That’s it. That’s the answer. It’s really fun.

And when you do that, I do it with people now when I talk to them. You say, “What do I need in the future?” Well, the first thing, obviously, is food. Food has to be number one on the list. I talked to people yesterday, that’s why I was in Denver. I said, “Gee, really, if you can’t do anything else, you want to set aside quite a bit of oatmeal, because you can live on oatmeal for a year.” It has everything, vitamin-wise, that you need, and you can have three dishes of oatmeal a day and you will survive. It is very easy to prepare and it’s no problem. So food would be the first thing.

But then, if you have extra money you start looking around and you say, “Well, I might want a gold coin or a silver coin.” Obviously, your dad did pretty well, and you did, too, building that empire. But then, if you go beyond that, you can look at other things, but then start to fit into a barter system. Barter is an interesting word because that means you are going to trade something you have to something somebody else has that you need.

So if I have a shotgun shell and live in Denver, and I need a dozen eggs and I know where the egg farmer is, I can take my shotgun shell out and say, “You’re a farmer, you may need this shotgun shell to protect your farm or to shoot a hawk, and in the meantime I’d like a dozen eggs.” So you then go back into the very simplistic barter system. I don’t know if I explained that very well or not, but that is something that is worth thinking about.

David:That partnership with Jim Rogers focused on real things, the things people need.

Jim:It was just a commodity fund, that’s right.

David:Yes. It suggests that you were more concerned with an inflationary outcome.

Jim:Because we went into semi-hyper-inflation because the commodities went straight up, and that means the dollar went down. I heard somebody yesterday, which is really interesting to think about, who said instead of pricing gold in dollars, you should price dollars in gold. And if you price dollars in gold, in 1932 you could take a gold coin and you could buy 20 paper dollars. Today, if you take that same gold coin that you have down there at McAlvany, and convert it to paper dollars you will get 1200 paper dollars.

If you can twist your mind to think what I just said, you realize that the paper dollar has done from $20 in 1932 to $1200. It has been diluted that extent over that time. So instead of talking about how many dollars gold costs, we ought to talk about how much gold a dollar costs, and dollars are fast becoming worthless (laughs). Did that make sense?

David:Sure. I think when we entertain the deflation as perspective, and we did that with Robert Prechter’s team a few weeks ago on our commentary, I think it is a helpful exercise, and from the standpoint of intellectual integrity and honesty it is very important to look at things from multiple perspectives. But you have been following Prechter for 30 years. You mentioned that you successfully traded using the Elliott wave and Robert Prechter’s advice from 1980 to 1987.

Jim:The Elliott wave is a great idea. I agree. He was really good with it.

David:But the deflationist view concludes with that dominant allocation to dollars, typically in the form of short-term treasury bills. If the view is right you’re kind of the last man standing with the wealth of the world at your fingertips. But what if you’re wrong? What if you’re wrong on the deflationist conclusion?

Jim:If you’re wrong, then saving a dollar bill becomes worthless quick. And if you look at history, look at Venezuela, or look at Argentina, or look at Turkey, or look at Indonesia, that is happening right now, as we speak. Their paper currencies – see, that is the catch, and it is so simple. If you’re sitting at the Fed today and you see this start to happen, that is, that people don’t honor your debt or don’t like your debt, what would you do? You would raise interest rates. We saw a big jump yesterday in interest rates.

If you’re sitting in Argentina today, they are paying 40% interest on their national debt right now. If you buy whatever would be a Treasury bond equivalent down there, the interest rate is 40%. 40% would mean that anything that you had as a bond that you are holding that had a 6% coupon would be tremendously devalued. It might be worth only $200-300 dollars compared to its $1,000-dollar face value. So that is the catch.

And when you bring it up, most governments, when they get into the fix, which is happening as we watch – you can watch Venezuela, which is gone now, or you can watch Argentina, which is the sixth time this has gone around in the last 50 years – they’re doing it again – you can watch a currency disappear and you have to say, “If I don’t have something real, I’m lost.” And if the bond rate goes to 40%, and then to 50%, and then to 90%, then the whole debt structure is destroyed.

And the debt structure in the world, I think, is about, I’ve heard, I don’t know, I’m sorry I don’t know, but I think it is five or ten times the size of the stock market. So you wipe out that much wealth that quick and Bob Prechter would be right. You would say, “Gee, if I still have a dollar it will work.”

But if you didn’t believe in the dollar, and if the governments tried to counteract that by printing and printing and creating, with a computer, money out of thin air, which is what they did in 2008 – in 2008 governments around the world, 2008 through 2015, created about 50 trillion dollars out of thin air to pull the thing out of the slide. Then you can realize that the money can be diluted down to where you are in a hyper-inflationary depression.

David:When I think of the inflation/deflation debate, I’ve never applied Pascal’s Wager, but that is essentially what we are doing. If you’re wrong on the deflationary argument, and you’re in dollar assets and liquid government bonds, you’re wrong and you’re doomed. Everything is gone.

Jim:That’s right.

David:On the inflationary side, if you’re wrong, and you own a real asset, whether that is a farm in production or a piece of gold or silver, if you’re wrong, the outcome is not as extreme.

Jim:You’re exactly right. It could be devalued to some extent, or it may not be, depending on what it is. But if you’re wrong on the other side, you lose everything, which is why it is really an interesting time at the moment because that is right where we are in America, as far as I see. I think that is the other thing I would say to you that we should bring into this, and that is, people have been saying this ever since I read The Death of the Dollar. At that point he said we’ve only got five or six years to go.

I got to know Harry Figgie. Figgie International is one of the most successful and really well-run companies in America. Harry Figgie wrote a book, Bankruptcy 95. I read all of these, obviously, because I am interested. But Harry did the work, sent people all over the world to study hyper-inflation and inflation, how countries ran out of money and what happened. And he said we’re going broke in 1995 and his book was a best-seller. The interesting thing now, because you can look at me and say, “Jim, how can you and everybody else be that wrong?” So I’ve given that deep thought, and I’ll give you the answer.

The answer is, we believed in good and bad, and right and wrong, and we believed in rules. There were rules back then. And it is my opinion at the moment that in financial markets, and I think we can see just recently in government, that they pretty well have forgotten all of the basic rules and it has turned into a game of every man for himself. If you don’t have any rules, then what you and I are talking about is very difficult because you have to make choices based on no set standard that you are aware of. You just have to guess. And then you start to look at history and say, “Well, what are the odds of this versus that happening?” I think that is how you have to do it.

David:I think, again, looking at history, if we are in that place where there are no rules, no measures, and as you say, it is every man for himself, then we are very quickly moving toward a period where might makes right. Because eventually, my interests, and what I need, is going to run into conflict with someone else’s interests and what they need. Maybe need is the wrong word, but want, because greed is a factor here.

Jim:It is so obvious to me, I see that every day on the highway. Every day when I get on – I live here in Monument and go into Colorado Springs – the speed limit says 75. Every car on the road, including me, at my age, and you know my age, 86 years old – at 86 years old, I’m driving 80-85 miles per hour down that road in a string of cars just to stay in the flow. That’s stupid (laughs). I happened to know how your reflexes work when you get older. That’s stupid.

Now, when we hit the construction section, which we always hit, which is between here and the Springs, it says “55 miles per hour, fines doubled.” At that point, yesterday, when we went through that section, most cars were going 75-80, and one fellow went by us at 90. So what scares me the most, David, about everything we see around us is that people all of a sudden don’t really seem to respect, or worry much about the law anymore.

And that is a very concerning thing. We see that in the stock market. The stock market used to be an investment place where I would buy a stock and three years later, if I was right, the company would have grown. We both know that, today, the money in the market is a 10 billion dollar hedge fund that is trading between now and noon to see if they can take the money out of some other hedge fund’s pocket. That’s too bad. What else can I say?

David:I think there are some things that are changing, and I hope it is for the better. It could be for the worse, in terms of an investment portfolio initially, but for the better in terms of the social and political ramifications down the line. Something is changing. We have dollar strength, which is triggering weakness in the emerging markets, we have rising rates which are starting to impact debt rollovers and the structure of that complex system we were talking about earlier. So we don’t know the future, but you are beginning to see signals.

We talked about the 10 billion dollar hedge funds. We have two hedge funds in the past week, both north of 10 billion dollars in assets. They are shutting down and giving money back to investors. One of them stated they are doing so because the markets are now treacherous – their words, not mine.

Jim:Yes, I think that’s right.

David:This is clearly a divergent view from the mainstream media and the average Main Street investor. But does that signal anything to you when a few smart money operators don’t like what they see on the horizon and it is promising to be dangerous, or treacherous, rather than the nirvana which we have had with low rates and excess capital?

Jim:You look at Apple stock. It was $2 in 1994 and now it is $200. It has gone up 100 times. Or look at any number of stocks in the tech sector. Another point that, really, to me, is interesting – on the reverse side of that, which is really worth thinking about, is that Paulson, one of the biggest hedge funds out there, and one of the most successful, the fellow that managed the gold mining section of Paulson funds last year spoke at the conference and gave an amazing speech, a very interesting speech. Then about six months later Paulson announced that they were discontinuing their gold mining and silver mining sector of their hedge funds. They no longer wanted to be there.

Then about two months ago, Vanguard, which is the largest mutual fund in the world, announced that they were discontinuing their gold and silver mining fund and would put it into natural resources, but would no longer focus on gold or silver, it would be more in the natural resource sector. So, this is my old game. You look at when the last people leave the sector that you think might have some future value, and say to yourself, “Gee, if they all went home, then the sellers are gone. The biggest sellers who might show up have gone. Somewhere in the future we might find a buyer.” Interesting to me.

David:You wrote me a note a few weeks back and in it you said that, “everything I wrote about in 2002 can be multiplied by 100. Something very big is around the corner and not 1 in a 100 American people can visualize it, or is ready.” You went on to say, “I wish I was 50 years old. I would like to be working with you.” Would an explanation of why you want to be 50 and doing what we are doing help our audience appreciate the kind of opportunity that you see unfolding?

Jim:I love change, and I love opportunity when no one else sees it. That is what I have done all my life, and it made a living for me. So I’ve never seen it at this point, ever. No matter whether we talk about NFL football – you can watch football four or five out of seven nights of the week. The whole country has gone into very, very focused and narrow ranges of interest. And to me, that is setting up an amazing opportunity.

I don’t know how this turns out, either, but I do know with this much change, and in my view, the whole culture in America has changed in my lifetime. I believe that, for sure. And I believe the biggest changes came about, first through television, where people could sit and entertain themselves at home through television. And then recently, the change with the magic boxes and the cellphones is huge! You see six people go to dinner and sit at a dinner table and they are all looking at their cellphone, at their little magic box, and they don’t even talk to each other.

So the culture in this country has changed dramatically, and all I know is that you can either really get depressed with change, which is easy, or you can say, “If it changes this much, something big is going to happen.” And I said to begin with, if you can figure out what people will need and use in the future – and the fun of being in the investment business is helping people position themselves so they can sleep at night. And you are trying to help people get through the day, and get to the next day. And I know that is what you and your business down there do. And that’s the fun. Is that an answer to you, or not?

David:It is. It is. When you say that what you saw in 2002 with your concerns about the difference between inflation and deflation, and the probability that, in your view, the higher probability, of an inflationary outcome, how do you translate that into practical positioning in this day and age? Here we are 16 years after you wrote that. How do you reflect on what you wrote on 16 years ago, and what do you do in light of that?

Jim:I think everybody gets a different answer, to be honest with you, but I think we are 100 miles further down that road. I don’t think we can go back. I’m an old guy now, and all of a sudden I realize that you never can go back. In Denver yesterday the traffic was unbelievable. I wouldn’t live in Denver for a million dollars today. I’ve told people if you told me to go to New York tomorrow for a millions bucks I wouldn’t go because I happen to really enjoy what is around me, the world around me, and I don’t want to just be in a big crowd.

The answer to your question is that you realize that we are in a very precarious and fragile position in our lives, even though we take it each day for granted, and assume every day is going to be the same, day after day. And yet you know down deep that there is a chance that may not happen. I don’t care whether it is a storm, or a semi, or a tornado or a financial crash worldwide. There is a chance for something really big to happen. So if that were true, you would say two things. You would say, “What will I need, personally, for myself and my family. What would have the best chance of survival?” Obviously, if you look at sculptures and art, the prices, I know paintings that were $3,000 in 1968 that are worth $200,000 today. So I guess, looking back, that must have been a good place to put some money, into art. I watch people with their collector cars and I can’t believe what is happening there. I don’t understand it. But I know what has happened to the price. I wouldn’t say that is what I would do today. But today I would be looking first at how I can help people around me because I want to be employed. My son always says, “The biggest problem, dad, is cash flow.” He has a family, he’d like to have some cash flow. I could go into long distance talking about that. It could be as simple as starting a plumbing firm. I don’t know anything about plumbing, but I know that when people’s plumbing goes bad they have to have somebody else come and fix it. So I think that is going to be a pretty good place to be in the next five years. I’d like to have five plumbers working for me and I just answer the telephone. I think I could probably make a living. Now, that’s a dumb answer.

Silver and gold? Silver and gold coins go back 5,000 years, and silver and gold coins right now are being collected and hoarded by Russia and China because they want a silver and gold money-backed system. Right at the moment, the yuan is being used to buy oil from Russia, and from Iraq, and when they pay people in Russia and Iraq with the yuan they have the option at the moment to take that yuan right into a Chinese bank and convert it into gold.

So they have already moved – China is the biggest energy consumer in the world, ahead of us now. They buy their oil and gas from those two countries and they pay them in yuan and they immediately convert into gold. I think that tells you where were are going in the future. We are going back to real things.

David:I think it also suggests conflict because you are talking about a system that we have benefitted from, centering on the U.S. dollar and the U.S. debt markets. And to the degree that you see a shift in control, or a shift away from our control toward greater autonomy, those two countries, in particular Russia and China, moving away from the strong arm and long arm of the U.S. Treasury Department, there are underlying tensions there that ultimately will express themselves.

Jim:I look at it – it’s just simple in my eyes. You look back at America and why we were so strong and so good. Of course, we were the major factor in World War II, and from that point on the dollar was supreme. The dollar was a gold-backed currency, which meant foreign countries could convert their dollars into gold up until 1971. So it was the strongest. And most of the countries around the world because of the war were bankrupt, or broke, so the dollar became the standard of the world, and worked up until 1971.

Then in 1971, when we went off the dollar standard, we were really up in the air for a minute. Henry Kissinger was a brilliant guy. He went to Saudi Arabia and said, “Let’s make a deal with you that we will price oil in dollars from here on.” And he made the deal. And so OPEC, from that point on, all the oil countries said, “We’ll sell oil to anybody in the world, but we take our pay in dollars.” It’s so simple, it’s scary. So still, the dollar was then kingpin of the world when it came to money because everybody would have to convert their currency, whether it was a pound, or a rand, or whatever it might be, into dollars before they could buy oil. So there was always buying pressure to buy the dollar in order to get oil, and to sell the local currency in order to get dollars.

That is coming to an end as we speak right now. That is the exciting part of what we are talking about. In the last two years, that all has started to change. China and Russia, both, are going back to a gold-backed currency. It’s obvious. Russia had their reserves, as every other nation did, in treasury bonds, and that is how they saved their money because it was the strongest place to save money. Russia, in the last few years, has sold all but about 5% of their treasury bonds and converted all that money into gold.

Now, I’m not here loving Russia, I’m just telling you the real world. We were the kingpin of the world because the world did its business in dollars, and there is great strength in being the banker. It would look like, in the next two to three years, or maybe even sooner, there will be a direct change in that and the dollar will no longer be used in international commerce like it has been. 98% of the commerce was in dollars. It won’t be that way five years from now, I’m quite sure of that. If that is true, then nobody will need the dollars that they used to need to do these things, and therefore, what is a dollar worth? 120 trillion dollars of future debt obligations for Social Security and Medicare. Interesting, huh?

David:It’s fascinating because where we started the conversation is by talking about the things that we take for granted. And in our financial system we take the dollar for granted. We take our currency, the base of all of our transactions, for granted. We have assumed dollar stability. What you just said – I’m going to quote you on this – “It’s so simple, it’s scary,” how easily it works. But if it’s that easy, how it works, how easy is it, also, to change?

Because it’s so simple, it’s scary. We do have a system that is very complex. It is based on a few very key, fundamental elements. And those fundamental elements are shifting, even if to a small degree today, actually, in a complex system it doesn’t take very much of a shift to have significant major ramifications.

Jim:Well, as you said earlier, everything is leveraged, to a great degree. We are in the midst of the biggest change that you and I, or the world, will ever see as far as I am concerned, because the whole financial system is ready for a change. You look at America, and it was the American empire. I’m sorry, most people wouldn’t know what that meant, or wouldn’t want to say so, but it was true. We had the empire and we ran the world.

If you look at that, it happened with two things. We ran the bank, so we had the money everybody had to use, and everybody had to stay with our money. Number two, we had the biggest defense department and the biggest army in the world, and the most up-to-date, and it ran the world. It scares me because the complexity thing you mentioned shows up with Trump, and it is too bad that it did. He was proud of the fact that he got 700 billion dollars for the defense department to spend this year. And I have also read since then that there was already 300 billion in the pipeline. So on defense, for the year, we are going to spend a trillion dollars. That has gone way beyond the point of no return.

And then the scariest part of all is that that is two or three new aircraft carriers which some people would say, “I’m not sure that is current with what is going on in outer space or weaponry.” Anyway, that is a whole different subject, but it all adds up in dollars and cents, and complexity as well, and we seem to be losing – well, you can’t spend a trillion dollars a year on defense. It doesn’t make any sense anyway.

David:I think one of the things I appreciate about our conversations, both on the line and off the line, is that although you have been in love with the game as it relates to money and investing going back to the 1950s – 1954, 1955, and then professionally from 1967 forward with Dean Witter, you don’t love money. The game is interesting to you, but the love of money is not something – why would you waste your life loving something that does not love you back? (laughs)

Jim:That is the most important thing you’ve said all day (laughs). And I was blessed. See, I think that’s a blessing. There are several blessings in life. One of them is, we have four kids. We have one daughter who, most of her life, she is 55 now and doesn’t do it as much, but she always looked over her shoulder at what other people had. I was blessed. I never did that, David. It’s a blessing. I had nothing to do with it, God gave me that. I just didn’t happen to look over and say, “Oh, he’s got more than I do.”

I can’t believe what a gift life is, honestly, and what a gift life has been to Barbara and I and our family. And money was way down the pike. I earned a living so we could go out and go fishing or go hunting or so we could enjoy our life at home and have something good to eat (laughs). And money and power were never my focus. Interesting. But that’s a blessing.

I think some people really do – the people I talked with yesterday at lunch were really neat older people. They said, “Why are they doing what they are doing on Wall Street?” I said, “It’s money and power. There are some people who are born with an instinct that they want more money and power.” You look at the Clintons – I don’t want to badmouth anybody, but you look at the Clintons, and I think they really enjoy money and power. Would that be not fair to say?

David:Sure. I think one of the advantages that you have in life is not only the legacy you have created, but the legacy you believe in is oriented toward different intangibles – love, integrity, what you have shared generously, whether it is in this program or with your clients through the decades. You are a teacher. You valued giving more than taking. And power and money oftentimes is about taking, not giving.

Jim:I was just, again, blessed with parents, because for some unknown reason I realized that if you could do something that people needed and wanted, you would get a reward sooner or later. I just know that. I know that. That is in my being. If you can help people around you – I know, and I watched it in business. Some people would work two, three, five, or 20 years at something that didn’t seem to make much sense but they thought it was helping other people, and sure enough, it all showed up and they had a pretty nice life. And on top of it, they had a great satisfaction of accomplishment, which is a heck of a lot better than just trying to add up your payroll each day.

David:As always, we enjoy having you on the Commentary.

Jim:Good ideas, I hope. If they help anyone, that’s wonderful. And it’s fun to talk with you because you have some great thoughts, and I hope you stay with it.

David:Thank you, Jim. You were one of the earliest contributors to the Commentary almost 11 years ago. I enjoy going back and listening to the archives. Those were some of my favorite conversations. I appreciate you being willing to continue to share, as you have through the years.

Jim:We have fun. Thank you very much.