Max Keiser: Hi. I’m Max Keiser. Welcome to “On the Edge.” It’s time now to go to Boulder, CO to speak with Rick Ackerman of rickackerman.com. Rick, welcome back to “On the Edge.”
Rick Ackerman: Thanks, Max.
Max: Rick Ackerman, Barack Obama has been re-elected. What impact do you expect on equities and commodity markets going forward, if any?
Rick: I think they’re going lower. But I never saw Romney as the answer, since our economic problems are bigger than politics. I still see a deflationary end. We’ve had quite a debate over the inflation/deflation conundrum. My take is that, at some point, we’ll have a hyperinflationary eruption, but in the end, assets all will be deflated.
The stock market could enjoy a brief resurgence in the meantime. Stocks are coming off lows this morning at what I call “midpoint pivots.” They’ve all held. But if they should slip next week, the market could go a lot lower.
Max: It’s confusing for most people, because you have economists talking about deflation. At the same time, you have news reports of thieves stealing roofs off of churches to sell the copper or to sell various metal components, drain pipes, et cetera, because the price of commodities are going so high, which of course sounds like inflation. How do those two reconcile?
Rick: It’s like trying to square the circle. At a theoretical level, I don’t have any problem with the hyperinflation argument. There’s a monetary blowout going on globally now, and eventually the consequences of that – namely, currencies that have been inflated to the point of worthlessness – have to play out.
I’ve also been persuaded that hyperinflation doesn’t have to come through wages and the real economy; it can happen just because people realize one day that their dollars are worthless. At that point, they’ll attempt to exchange them for anything that’s real.
But at the level of actuality now, we’ve got deflation. Austerity is smothering Europe, and the U.S. is headed in the same direction. Any way you cut it, we’re going to have higher taxes next year and less government spending, and that’s deflationary.
Max: Rick, speaking of commodities, Barclays Bank is embroiled in yet another fraud and manipulation scandal, as emails emerged showing that its traders bragged about manipulating California energy markets via Palo Alto. Your thoughts on this story?
Rick: I think the regulators tend to go for the layups. In this case, whenever you have any instance of insider trading – even somebody who bought just a few options – the paper trail is so obvious that it’s easy to catch these guys.
But I don’t know exactly what the crime was. It’s obviously the tail end of Enron — a rear-guard action that was an easy conviction for the regulators.
Max: Of course the Enron traders from the Enron scandal have fanned out across the commodity markets, across the financial world. They have set up shop in new firms. They can pretty much continue to engage in this type of market cornering, marketing manipulation.
This is one of the problems, isn’t it, when you don’t let the hammer down and apply some kind of justice? You’re actually exaggerating or exacerbating the problem, because the rats leave the nest and just create 10 times more firms and do 10 times more damage. Your thoughts?
Rick: Absolutely. We’re never going to get it back, Max. You know that I worked on an exchange floor for about a dozen years. In the technological scheme of things, it was a real throwback. We would convene in the trading pit every day and shout in each other’s faces. These days, that would represent a huge bottleneck in markets that trade zillions of shares every day.
I wrote a piece for Barron’s years ago that predicted that when all of the trading moved upstairs – when it was all electronic, and people no longer came face-to-face to trade – that the last vestige of honesty would leave the game. That’s what’s happened.
Max: Right. So the old open outcry systems made famous in films like Trading Places with Dan Ackroyd and Eddie Murphy, where the traders are in the pits in Chicago and they’re screaming at each other. We don’t see that much anymore, if at all really, because it’s all been replaced by high-frequency trading, trading in millionths of a second.
This has not added to liquidity. It seems as though it’s actually debased the integrity of these markets, done the exact opposite of what the bankers tell us. What do you think?
Rick: Very true. It’s created its own source of liquidity that has nothing to do with markets or even supply and demand. When trading reaches the point where you get your edge by placing servers closer to the point of sale – this is so you don’t lose three nanoseconds trying to bounce trade data off the moon or a satellite – you know that trading itself is very late in the game.
Max: Rick Ackerman, speaking of California, let’s talk about Silicon Valley. One of the stars there is of course Apple Computer. It’s certain to become the most viable company in the world recently, ahead of Exxon Mobil. The iconic founder died last year, Steve Jobs. Stock was still moving higher. But now it’s met some selling pressure. It’s down at one point 20% from the highs, so that would qualify to be in a “bear market.”
What’s going on with Apple? Your thoughts? It is the biggest company in the world, so it does have ramifications throughout the world. What do you think?
Rick: I had been using Apple as a bellwether: as Apple goes, so goes the market. Since hitting $704 not too long ago, however, the stock has come down about 150 points. At $704, everybody loved it. Now, with Apple down big – trading $650 as we speak – everybody hates it; but for real reasons – because of facts that have been out there all along.
For one, the company has just exhausted its entire product cycle. They’ve refreshed all their main products and are looking at perhaps a nine-month stretch where there’s going to be nothing. They’ve also kicked out the guy who developed the operating system for web-based devices. He wasn’t pleased with being called on the carpet for the fiasco involving Apple Maps, an attempt to end-run Google maps. It’s as though Apple can do no right at this point. It’s really odd, because these problems existed when the stock was trading for $704.
Another problem is that an operations guy, not a marketing guy like Jobs, is now in charge. It was Jobs, always pushing the envelope and looking to break the paradigm, that made Apple so strong. Now there’s a question of whether a more stodgy management can bring Apple along.
A developing story concerns whether Apple will be able to dominate the distribution of TV and movies as they have music. Of course, when Jobs was negotiating with the music industry, they were down and out, with the record industry in shambles.
Jobs initially said, “Here’s the deal.” They said, “You’ve got to be kidding. You’re trying to rape us.” He said, “Look, you better take it because you’re not going to survive without it.” So they did.
Now, Apple’s got to negotiate with television, and it’s not a monolith. They’ll have to talk to TV sports, which is not exactly down and out, and with Hollywood, and news purveyors, and everybody else, to develop separate content deals. There’s a big question concerning whether Apple has the juice to do that without Steve Jobs.
Max: Now if you look at an Apple product, it says somewhere in the product, “designed in California, manufactured in China.” This is really a model that people in the United States, people in California, in Silicon Valley, believe is a workable model, that the intellectual property is developed in the United States, the labor is outsourced to China.
But of course there’s been a lot of questions about this, whether or not it’s sustainable, as wages in America has seemed to be drifting down lower to wages in China. China, of course, is developing its own intellectual property.
Is this a sustainable model, this idea where the U.S. is the intellectual property capital and the work is done somewhere else? Additionally, we’ve also had some problems at Apple’s top factory in China, Foxconn. A lot of labor unrest there. What about that model? Is that sustainable and is that being challenged as well, Rick?
Rick: Mike Milken gave a very interesting presentation last night at an event that I went to. He talked about how, in the U.S., there’s going to be demand for perhaps 125 million skilled jobs over the next 10 years or so, but only 50 million Americans to fill them.
Meanwhile, assembly plants in China are bringing their labor force up to speed. Heaven help us if America’s economy declines to the point where wages give us a cost advantage assembling things.
Apple goes to great lengths to promote the idea that they don’t have sweatshops. But suicides have been documented at these plants. There’s a very persuasive documentary that shows that working conditions are horrible.
Of course, we’re leaving a lot of money overseas when they do the assembly. I’m not sure that the U.S. can sustain a high standard of living simply on the royalties from intellectual property.
Max: Let’s go with that scenario for a second. Let’s say that the U.S. becomes a low-cost wage source for manufacturers around the world. Jobs come back to the U.S., combined with America’s recent discovery and exploitation of the hydraulic fracking market – fracturing market, the so-called fracking, and natural gas space, which they seemed to have some success with.
Let’s put all that behind a look at the U.S. dollar. Because when we talk about inflation or deflation at the top of the show as we did, we talked about global trends from these big companies, the biggest company in the world like Apple. So much is tied to the world reserve currency, the U.S. dollar.
You’re primarily a technical analyst, Rick Ackerman. You look at the charts. You have long-term chart memory. What do you see in your charts for the U.S. dollar, going forward?
Rick: The U.S. dollar has remained buoyant, and the dollar index is now above 80, compared to lows down near 70. The dollar has gained — albeit on a misconception, or even a delusion – that it’s a “safe haven.” That’s due to perceptions that the U.S. will remain productive longer than Europe. The problem is that, sooner or later, perceptions must come to reflect the fact that the dollar is intrinsically worthless.
The dollar is really just a form of debt – an IOU, rather than money. There’s nothing backing it. But its strength or weakness tracks perceptions that the U.S. will be able to make good on its debts. Ultimately, and as anyone can see, there is too much debt to redeem –$16 trillion and counting at the federal level.
This suggests that dollar debt will eventually be discharged via hyperinflation. When the dust has settled, the dollar will more directly represent a claim on the income of Americans. At that point, the dollar will be sound again. But relative to other currencies – particularly Asian currencies – the dollar will be weak, and it will therefore be much costlier for Americans to import things.
Max: Of course, Rick, the world is divided into two major blocs, if you’re talking currency. One is paper money or fiat money like the dollar, the euro, yen, et cetera. Then on the other side is gold, the money that’s been around for 5,000 years.
Since 2009, the central banks reversed themselves. They reversed the trend they’ve been involved with for 30 years. They became net buyers of gold. We get reports now almost every day that central banks are buying gold, central banks are seeking repatriation of gold. Germany is nervous about its gold stock. It’s held overseas. Can it get its gold back? People are questioning whether there’s even gold in Fort Knox and has it been leased out, et cetera.
How do you, Rick Ackerman, see this tension – this dynamic between gold and principally the dollar and the other fiat currencies – going forward? Is the central bank behemoth in the market, buying gold, is this going to be a major factor going forward?
Rick: I think the real tension is between East and West. The West has hang-ups about gold. At times, the central banks of Germany and Britain in particular have been big sellers. Although they may be regretting it now, it’s a little late to get it back for cheap.
China is the new model. They don’t have concerns about whether gold is money or not. They encourage their citizens to buy gold privately. It leaves the country blissfully unconcerned about gold’s role in the global economy going forward.
They know that it’s good to have. But they also know that trying to be a quote-unquote financial superpower has no economic value. That’s how the U.S. has thought of itself since World War II, but the whole, delusional edifice is on the verge of collapse.
China doesn’t care about being a financial superpower. They’d rather be an economic superpower. If the Chinese hold gold defensively against other currencies, so be it. The point is, China is just not hung up about gold.
Max: Of course, before the election results – where Barack Obama won re-election – we heard a lot from Mitt Romney. Mitt Romney was saying one of the first things he’s going to do if he were elected would be to charge China as a currency manipulator. Now we’re not going to hear that anymore.
But was there any validity in that charge to begin with? Is there anything there that we should be looking at, Rick?
Rick: Every country is a currency manipulator, Max. Most recently, the best of them turned out to have been Switzerland. Over centuries, Switzerland has favored hard currency. But when you’re in the business of making and exporting precision machinery, it gets very expensive to do business in a hard currency. The Swiss have been amazingly successful at knocking their currency down. You don’t hear anybody in China complaining about that.
We’re in an Olympiad of currency devaluations. For Romney to start talking about China’s currency sins is ridiculous. China doesn’t care. They’ve got more than a trillion dollars invested in U.S. paper, but they’ve written it off in their minds. Meanwhile, they’ll play along, until the financial system collapses, by taking confetti in exchange for real goods.
When the dust settles and we emerge from the Second Great Depression, Asia will be in a commanding position that will be above currency manipulation. Right now, it’s a game that China plays simply because the U.S. needs it that way.
Incidentally, when you hear talk that some of the oil suppliers would like to demand payment in gold, it’s a bluff, because if they did, their oil sales would drop to zero. The only reason the world can afford to buy oil right now is that producers are still accepting [soft currency] in exchange. But if you priced oil in gold, the market for oil would [collapse].
Max: You mentioned Switzerland. I wanted to talk about that a little bit. Just to give a little preview, the financial crisis that really exploded in 2008, investors looking for a safe haven, they went to places like Switzerland and they bid the price of the Swiss franc. So the Swiss bank, the central bank came in. They decided to peg their currency to the euro. So they would expand their balance sheet by buying euros, effectively.
You’re saying this is a huge success. Some people in the Swiss press are saying it’s a problem, because now the Swiss central bank is encumbered with this enormous debt liability, 92% increase on their balance sheet due to the management of the Swiss franc.
Add a little bit more to that, because I think the Swiss franc story is really a pivotal story in this global currency war.
Rick: The Burghers are probably rolling in their graves right now, because Switzerland has brought the Swiss franc down from around a buck-and-a-half to a current $1.05. It looks like they’ve targeted parity with the dollar. That’s a huge hit. They did it using the mechanism that you’ve described. It’s basically saved an economy that is very heavily dependent on exports. For the time being, they’ve decided to join in the global Olympiad of currency devaluations.
Max: Let me jump in here, Rick. The Swiss government has an issue of an exit strategy. It’s similar to let’s say the Federal Reserve Bank that’s taken on trillions in mortgages and toxic paper.
On the surface, it looks like a successful program, until you consider the fact that they have to exit from that at some point. European Central Bank, same thing. The Bank of England, similar. All these central banks are taking in trillions of paper.
If they start to exit – and I want your thoughts on this – if they start to exit, which for the central banks means to begin to liquidate these positions and sell this paper back into the market, you would then have a balance sheet with assets that are crashing, because as you sell, you’re dropping the price down. Everyone’s front-running your trade. You’re committing a lot of damage.
Or am I missing something? Your thoughts?
Rick: There’s no way out, really. The idea of unwinding is hypothetical — a supposed goal of the central banks. But as a practical matter, it can’t possibly happen. It would be like institutional investors saying they plan to exit the stock market. Who would the buyers be?
The sums associated with financial instruments are far bigger than the stock market. The central banks that have been warehousing “bad paper” for the commercial banks are stuck with it.
The thinking is that if we wait long enough, the economy will come back, lifting asset prices. But look what it’s taken just to lift housing a little bit in the U.S. That where the optimism is focused these days. My gut feeling is that it’s not going to end well, and that [home prices are going to relapse].
Max: Rick, finally, you published a guest piece on your site entitled, “America Wages Financial War on Europe.” Tell us about that.
Rick: That was contributed by a guest who goes by the handle “John Jay.” The idea was that America’s biggest export to Europe has been fraud. In a sense, the U.S. has made the world’s banks complicit in a fraudulent money scheme. Everybody’s a player.
The U.S. has been the main beneficiary of this scam because of the dollar’s singular status as a global reserve. It didn’t start out as a fraud, but we’ve drawn other banks of the world – central banks and commercial banks – into the game in such a way that we’ve entrapped them.
John Jay referred to that as a war on Europe. To an extent, it is. The U.S. may be declining as an economic power, but it certainly hasn’t lost its military swagger nor its ability to push other nations around, financially speaking.
Max: Rick Ackerman, thanks so much. We’re out of time. Thanks so much for being “On the Edge.”
Rick: Great joining you. Max.
Max: That’s going to do it for this edition of “On the Edge” with me, Max Kaiser. I want to thank my guest, Rick Ackerman of rickackerman.com. If you want to send me an email, please do so at OnTheEdge@presstv.com. Until next time, Max Keiser saying ‘bye you all.