- Why does James Rickards say that this crisis will “resemble nothing in history”?
- How can individual investors protect themselves?
- What is the similarity between these predictions and earthquake science?
- Why is investing in fine art a good idea?
Follow James Rickards on Twitter on @JamesGRickards and at: www.Jamesrickardsproject.com
Watch The Death of Money on YouTube.Read the Transcript
Interview with James Rickards
Will there be another stock market crash, and what will be its effects? James Rickards, author of The Death of Money, presents his views and the reasoning for his belief that the next financial collapse may be on its way.
Douglas Goldstein: You talk in your book, The Death of Money, about the next financial collapse. In fact, you’ve said it’s going to resemble nothing in history. In the past, we’ve seen many financial collapses and some of them even recently. Why do you think the next one is going to be so different?
James Rickards: It’s mainly because of the scale of the system and when I say scale I’m talking about size. You can measure it a lot of different ways. You can look at the concentration of bank assets, the interconnectedness of firms in the financial system, the gross national value of derivatives which now exceed ten times global GDP. Round numbers global GDP is about 75 trillion of the initial value of all the derivatives on the big banks, over 750 trillion. All of this data is available from the BIS [Bank for International Settlements].
If you use complexity theory, which I do, where I’m a little bit heterodox is that my analytical methods are different than what central bank is using, what Wall Street is using, although that’s a good scientific basis for it, and I’m going to get very good results. But using complexity theory, one of the principles is that the worst thing that can happen in the system is an exponential function of the scales. So the next time this melts down, I just saw in the recent history that the markets had melted down every 7 or 8 years so almost like clockwork. It will be bigger than the central bank’s ability to exert control. That’s why I think it will be the worst in history.
Douglas Goldstein: When you talk about this with central bankers, what do they respond to you?
James Rickards: I had a personal conversation with Ben Bernanke recently. I’ve had dinners and lunches, but you know one on one venues or maybe a small group of seven or eight, with members of the board of governors. I’ve spoken to regional reserve bank presidents, very senior, very plugged in staff, had monetary economics so I’ve actually had the opportunity to meet with a lot of top officials and policy makers, and actually some dignitaries from foreign countries around the world. What’s interesting is that they don’t really debate me when I bring up these different concepts of analyses. I kind of get blank stares of like, “What are you talking about?” Seriously, I mean they are smart. They are actually probably smarter than I am. I’ve worked with Nobel Prize winners. I was part of the long-term capital management that was the hedge fund that collapsed and almost destroyed global capital markets in 1998. So I’ve had a front row seat on some of these catastrophic meltdowns that almost closed every market in the world. I’ve seen that firsthand, and these people have 160-170 IQs. They are twice or three times as smart as I am. So they are not dumb. They’ve got PhDs, and they’ve got the quantitative skills, but the problem is they’re using the wrong models and it doesn’t matter how smart you are. If you use the wrong model, you will get the wrong result every single time. Just go back and look at the past 20 years or so. They’ve missed the panic in 1994, the Mexican peso crisis, they missed the Asian Russian crisis in 1997-1998, they missed the dot com bubble in 2000, they missed the mortgage bubble in 2007 and they’re going to miss the next one too because they are using the wrong models.
The Likelihood of a Financial Collapse
Douglas Goldstein: How likely is it, do you feel, that some sort of collapse is going to happen, and should people be panicking at this point?
James Rickards: I don’t believe in panic, and I do have some fairly calamitous projections and estimates based on my algorithm method. I’m not personally a doom and gloom person. I’m very optimistic. I wake up in the morning. I go to work like everyone else. I’m kind of out there, but I also don’t want to turn a blind eye or turn away from what I’m saying or what my methods are showing. I do see some fairly catastrophic outcomes. Now, as to the probability, I would say it’s about 100%. I just based that on history, on the fact that these systems do collapse periodically, that as I say risk is an exponential function scale. So it’s about 100%.
Now, you can’t say these have timing. It could be tomorrow, possible it could be September 17, but it could be next year. It could be three years. These are all possible outcomes and that’s not just kind of guessing as to the timing. The method itself would say that you can. It’s like earthquake science. In fact, the mathematics and the degree distribution are exactly like earthquake science. Forest fires, solar flares and a lot of other phenomenon, some natural and some manmade but no one knows when an earthquake is going to hit a fault line. The predictability of seismologists is close to zero, but we know where the fault lines are. We know how bad it can be and helpless. Nobody thinks it’s a good idea to put a nuclear power plant right on the center of the fault so let’s not do dumb things even though we don’t know exactly when the next earthquake is coming. So as applied to the financial market, I can’t tell you the date when the meltdown will come. I can tell you the fault lines are there, the tectonic plates are pushing against each other, the collapse will come, and what are you waiting for?
Douglas Goldstein: Right now, these days, we’re in the depths of the beginning arguments of the next presidential election of America. Do you think that either party has some solution to the problems that you’ve been making people aware of?
James Rickards: It makes my life a lot easier because I don’t spend much time on politics. I care, I vote, and I have my preferences. I’m not saying that I’m completely divorced from the political process, but I do look at the candidates. I’ve spoken to a number of them, and if there’s one who I think kind of gets what we’re talking about, I would say it would be Rick Perry. I spent a lot of time with Governor Perry and we had some good conversations, and he has been kind enough to mention my books in our meetings and a few of his speeches and campaign stuff, and so forth. So I think Governor Perry has some insight here. I’ve spoken to Rand Paul. I’ve spoken to Hillary Clinton. So I’ve actually had some contact with the candidates. They kind of get the problem, but I do think that in Washington, whether you’re Republican or Democrat, you’re just skeptical to a lot of the issues. The banks really own Washington. I was in a private meeting with senior Treasury officials to talk about what we’re talking about right now, which is risk in capital markets and the right ways to think about it. We spent about two hours behind closed doors with the group responsible for this. At one point, I kind of interrupted my own presentation. I looked at one Treasury official and I said that the banks own this town. I expected him to jump out of his seat, be in outrage or something, and he just looked at me and said, “You’re right. We can’t do very much.” I think it’s revealing. I sort of knew it was true, but I was surprised to hear him admit it.
A lot of the press is skeptical about the banks. They spent a lot of money around because our founding fathers wanted a constitution that didn’t allow things to happen quickly. So I guess I’m skeptical that whichever party wins, it won’t really be able to do very much about the situation.
What Are the Safeguards for Investors?
Douglas Goldstein: One of the fears that people have is they think the world is collapsing. In your book you talk about safeguards that people can use. I’m talking about individual investors, not folks at the government level. You talk about things like gold, and particularly about fine art. It’s good if you can dive in a little bit more and explain why you think fine art is a good hedge against a collapse in the market system.
James Rickards: I’ve had occasion to spend some time in New York. You know, in the United States when we talk about old money, we’re really talking about money that’s maybe 100 or 150 years old - the Rockefellers or the Vanderbilts. When you go to Europe, you run into other families. There’s one family in particular, the Colonna family in Rome. They’ve had their money for hundreds of years. That family is immersed in wealth. They were a political force in the 13th century, so they’ve been going strong for 800 years. When you talk to families like that, and say the family survived the Thirty Years’ War, the wars of Louis XIV and Napoleon and World War I and World War II etc., you ask them how they did it. They look at you and say a third, a third, and a third. What they mean by that is one third gold, one third land, and one third fine art and a little cash on the side for your jet and your yacht and all that. But obviously fine art is a big part of the equation. Imagine you’re living in a village in Bavaria in 1620, and the enemy is burning down everything in its path. You can take your painting off the wall, roll it up, take it in your backpack, grab your gold coins, get on your horse, and run away. After the burning is done, you come back. You should be able to re-establish yourself on your land. You put your painting back on the wall, dump your gold coins on the table, and you’re good to go. But all your neighbors have been burnt out. So it’s a tried and true way of preserving wealth through very calamitous times.
The thing I like about fine art in particular is it’s not manipulated the way gold is. I mean, gold is absolutely a core asset. I recommend to have 10% of investible assets in physical gold, not bank contracts, but actual physical gold coins, coins or bars or whatever suits the individual. For art, a lot of people say, “I don’t have $180 million to go out and buy Picasso.” Very few people do, but the point is there are some well-managed fine art opportunities out there. Central bankers don’t wake up in the morning and say, “We really have to see the art market today.” I’d like to see art trade the way gold would trade, with no central bank and political manipulation. So, yes, have some gold, but fine art, I think, is a good addition to a portfolio, and land, obviously. I also recommend cash, and people are surprised for me to say that, and they say, “Wait a second, Jim. You’re the guy talking about the death of money. Why would I have cash?” The answer is you might not have it forever but it’s good to have right now because first of all it’s a deflation hedge and deflation is kind of running around the world. Also, it reduces the volatility of the rest of the portfolio. Finally, it gives you great optionality, as things tilt one way or the other because I think both deflation and inflation are in play. Once we have a little more visibility, the guy with cash is a guy who can pivot and take advantage of those opportunities. So I think gold, fine art, land, cash all have a role. My own portfolio has some private equity, venture capital type investments, and some start up tech firms, so I think there’s a place for that, also.
Douglas Goldstein: How can people follow you and follow your work?
James Rickards: I’m very active on Twitter. My Twitter handle is @JamesGRickards and my website is >www.jamesrickardsproject.com.