International Markets Panel: Muddling Through Armageddon

0:00Hello, everyone. I'm Robert Blumen. Welcome to the panel, the first panel. The title of this panel is Muddling Through Armageddon. The theme of this panel will be International Financial Markets and Investing. We are very fortunate to have four outstanding panelists on the panel. You've all heard their introductions prior to their talks today. I will be working from a list of prepared questions and some questions that have been submitted in the question jar. There'll be another panel tomorrow, so if we don't get to your question today, there's a... I promise Jeff will get to it tomorrow. He's asking me not to use up the entire supply of good questions today, so I need to leave some for him. So let's get started. I'm gonna talk a little bit about some of the themes that have come up today Day, and then I'll ask the panelists to start responding and hopefully we'll get some interesting discussion going.

1:01Just to set the stage for how I see the international financial system, it's hard to talk about anything without talking about everything, so I'll start somewhere. The United States consumes far more than it produces and we save very little. The difference is made up by debt. Most of this debt is financed by foreign central banks, in particular the Asian central banks trying to peg their currency exchange rates in relation to the dollar, so they need to constantly in foreign exchange markets purchase dollars with their own currency. A lot of this they do in the process, Professor Hoppe described they print their own currency in order to purchase our debt.

1:47So over time, we've seen a staggering growth in what are euphemistically called reserve assets, which means dollar-denominated debt held on the balance sheet of foreign central banks. It consists mostly of U.S. Treasury debt and agency debt. Agency debt are mortgage-backed securities issued by Fannie and Freddie, which are repackaged home mortgages. So, indirectly, we have foreign central banks funneling money into our housing bubble. Foreign central banks are very generous, they're not asking for much, they're willing to purchase these enormous quantities of debt, very low interest rates, artificially low interest rates as Dr. Shostak has explained, which has led to bubbles in all kinds of risk asset classes in the US market, real estate, stocks and bonds, and as foreign central banks print their own currency to buy our debt, it's driving boom and bust cycles in their local economies.

2:49So it's kind of how I see things. I'd like to start with panelists respond to the following quote from the Financial Times, awash in a sea of dollar debt, the world now finds itself in short supply of tangible goods, and the opportunity cost of not transferring these dollar paper claims into hard assets is too great. Would anyone like to comment? Is that a plausible hypothesis of where the dollars will go? Or on the other side, when, well, I'll stop there. Frank, would you like to address that theme? Okay. Now, I'm not sure whether people will agree with me or the panelists will agree with me.

3:40But the way I look at the value of currency is not in absolute terms. In other words, I don't regard the liquidity, the plentiful liquidity in America, whilst I ignore the liquidity in other countries. We have to look on a relative basis. And as far as my analysis are concerned, what we observe that other countries printing is as fast as American also, right? If you take, for instance, the Eurozone, their money, narrowly defined money supply on average for the last six months was around 10%, right? While American money supply was on average, the Austrian money supply definition was about 6%. Now if you take, contrast it against the real economic activity, we have heard already that the Eurozone is not that healthy at all.

4:26and particularly the largest economy Germany is in trouble or hasn't been performing since the unification with East Germany. So on balance, I cannot really see why American dollar should be in trouble just based from the purchasing, relative purchasing power parity point of view, right? Now we, but so as far as the long-term basis, I'm not that convinced that American dollar has to collapse against something which is also very weak. In other words, what What we have is the following situation. We've got, let's say, Eurozone and America. They're both sick, right? The question now is who is relatively more sick than others? If somebody is more sick than I am, then I'm regarded as healthy, right? In absolute terms, we're all in a big mess, right? So what we should be talking about is whether there will be a breakdown of the entire monetary system.

5:16That's really of interest to me. And moving towards gold, rather than talking about some kind of artificial system, Antony, do you have any comments on Frank's response? Well, one could actually agree with his diagnosis that we have both major areas, economic areas, is being diagnosed as relatively unstable or not to call them in great trouble and it's really a race which one is less unsound.

6:07So how will be the escape? Anyone who watches markets I think has always had the opportunity to observe that things build up over a long period of time and the indicators as we have heard today show clearly to some kind of unstable and unsustainable situation and one just looks at these things in amazement and wonders and things keeping on in the same directions There seems to be an inertia in markets somewhat and then there comes, well, a catalyst or a small event and things change suddenly and you, yeah, well, and you look at things probably in terms of human action one could see this inertia within ourselves that we love our for Worldviews. Yeah, that's where we get used to. And it's a hard process to change our worldviews. And I think it's similar to markets. So, I live right now in Brazil, and for me it was a total surprise how still in love Brazilians are with the US dollar.

7:30It's still for them the greatest currency in the world. So, it was a clash with my worldview. But it will take them, I guess, five or ten years more to change their world view as to the US dollar. So sometimes it takes radical things, radical and shocking events that we just try to build up a new look at things. And we are approaching to that, but nobody is able to tell the reflection point. Well, something that actually I'm pondering that's kind of interesting here. One of the failures Russia went through, really all her history, she's never developed a decent banking system.

8:15This has really held the country back, it's been a big problem, and since 91, you know, they did not make any progress, they still don't have a decent banking system. But what would it be if the U.S. dollar really does begin to decline seriously because, you know, maybe it's good they didn't get into those banks. Maybe they'll be able to withstand a collapse better than any other region in the world. I know certainly their citizens are not up to their eyeballs in debt because they never could get the banks established and start the consumer lending and all the credit expansion. So I don't know the answer to this, but it might be something that will interest us all in the future.

9:01So some of these comments are leading toward a theme that I wanted to cover, which is really the title of this panel. I think we could outline three views that people have about the world economy. One is that everything's great, the U.S. is the destination of choice for all investors and that our trade deficit is a sign of how strong our capital markets are. I think I'm just gonna dismiss this view out of hand. It's espoused by Laffer and Kudlow because the people buying our debt are not buying our stocks and it's central banks who are not profit motivated, it's private investors. So moving, next point in the spectrum would be the muddle through economy, which is a term used by financial writer John Malden. He says, things will be bad, falling real income, inflation, energy crisis, recessions, Crisis, but it'll be kind of like the 70s and we'll get through it somehow.

9:55And then there'll be a third view that the system is unstable. We're heading towards some sort of what we might call a dollar crisis. It would be a currency crisis centered around the breakdown of the current system. So I have a quote from Robert Rubin, that great Austrian economist, the traditional immunity of advanced economies like America to third world style debt crises is not a I'm not birthright. Would any of the panelists like to stake out an opinion on the muddle through to Armageddon spectrum of where you think we're going in the next, let's say, three years? Frank. Three years. Frank. I'm not surprised, for instance, that we know it from the past. Despite all the really good predictions and options and various other bearish kensians, for instance, somehow things were okay.

10:52In other words, again, as I said at the beginning, we shouldn't confuse structural issues, which can be with us for 50 or 60 years, with the daily life. And the daily life again, as long as the kitty is still, there is something in the kitty left, that's what I call the pool of funding. Central banks and various policies of this government central bank, they can get away with murder for a long time. As long, a good example for instance, if you take a company, it's got let's say 10 activities. And three of those activities are losing money. Seven making money, right? So this company will be okay, right? As long as this is the case. God forbid, it will be a reversal now, and we'll have 7 losing and only 3 making profit, then we're in trouble. Now, nobody can tell me today whether America is in this particular situation.

11:39Probably there are still enough entrepreneurs, smart guys, that in spite of all the bad policies, they're still generating wealth. Otherwise, we'll be all in hell of a mess. So, all I can suggest to you that we can, those Keynesian guys may be right for wrong reasons, Chris, you may have something you'd like to say, and I'd like to add for you to consider, Does the value investor care about macro-forecasts or do you just go about your job and look for what's cheap and avoid what's expensive?

12:33Okay. Let me try to answer that by picking up something that Dr. Shostak just said with which I agree. A lot of the points raised from my point of view thus far are imponderables. I wish I knew, but alas, I don't. Very quick homily though, late last year, making a long story short, visited the head of a family firm in a regional part of Australia. This family firm had been in business for roughly 40 years, has no credit rating because it's never borrowed a penny in its life, has a 30-year-plus record of generating cash in the proper sense, in the accounting sense of the firm, consistently and quite well. And it occurred to me in the context of an unsuccessful attempt to invest in this very successful medium-sized family business that come hell or high water, whatever happens to, for example, the Australian dollar, the New Zealand dollar, the US dollar, someone of that experience, someone with that degree of knowledge and demonstrated ability to respond to consumers, will work out some way to do

13:33the best he possibly can under those circumstances. So getting to your question, if one had an extremely firm basis on which to act on the basis of forecasts, that's fine, alas, I don't think that I do. So the effort is incessantly to look at the micro level. If one identifies entrepreneurs of the ilk that I've just described, businesses with the characteristics in which I'm interested, then if you like the hypothesis is that more often than not, irrespective of whatever unanticipated sorts of events, financial markets or economies pass our way, irrespective of all sorts of other things we can't conceive at the moment, there'll be people who, in a sense, with skin in the game, it's a family business, it's their baby, it's their life's work, They'll derive, somehow, by some unintended means, by some unanticipated means, a method to work it through.

14:24So the basic answer to your question is, if I had a firm basis, yes, I don't, so I'll lessen reliance on those sorts of forecasts and concentrate on, if you like, micro-values to the extent which I can identify them. Yeah, I would just add one sentence, and I agree with this again, that the trick here to be, from what I understand, Step in the front of the line. So Chris, suppose you're an Austrian, you have this great theory of boom and bust cycle. Why are you a value investor? And why are there so many Austrian value investors? Why not look for the bubbles, buy them on the way up and short them on the on the way down. Why not, you know, take advantage of that instead of throw up your hand?

15:14Why not short the bust? Yeah, well, go long the boom and short the bust. Follow the feds trail. Okay, my simplistic answer is alas, nobody rings a bell, either at the top or at the bottom, or at least no one certainly, I can't do so reliably. Secondly, to slightly flippantly, but I'm still making a serious point, shorting is a difficult business for several reasons. First of all, you have to identify quite too short, short, easier said than done. Secondly, stretching my metaphor a bit, you have to find someone who's willing to lend to you, easier said than done, on acceptable terms. Thirdly, shorting is a very time-sensitive business. Your shorts can go wrong. So the response to your question is because nobody's going to ring a bell and because shorting introduces even more imponderables than I'm familiar with, my short answer to your question would be it's simply easier, it seems to me, to stick at a micro level. These sorts of businesses I've described

16:08One doesn't encounter them frequently. One does to kick the tires carefully, look under the hoods very carefully. If one has strong grounds to believe that one has a basis on which to invest, then to do so. But it seems to me shorting so many additional imponderables, the ones we've been discussing, that by and large, that sort of naked speculation more often than not will go awry. Okay. So, Anthony, you wrote in one of your papers that debt crises eventually come out because interest payments overwhelm the stream of income that's required to keep the currency pegged. We've seen a lot of emerging market debt crises where their debt is denominated in dollars, and so they devalue and improve their import-export situation, but it makes What are the implications of this debt situation? Is it sustainable or is there an end in sight?

17:20What usually happens in a debt cycle that in the beginning, the current account deficit grows because of the import of goods. So this is the pleasurable time for the economy involved. You simply get more goods from abroad without actually producing something as a counterpart. Yes, so you can really feel richer. One item within the current account accounting of the balance of payments is interest payments. Interest payments are counted in the service balance.

18:06And after a while, of course, when your external debt position is growing, the interest payments are growing. So this is actually the point where you can have, As long as you don't want to have an explosion of your debt, and if the debt really goes into the vertical, nobody will lend anymore. So then you have what we could call a crowding out of the real imports. Instead of having real imports, goods from abroad, the current account deficit is still People growing without receiving more goods. So this is really a bad situation. This is the point where usually the economy starts to tank and foreign investors get their jitters and pull out. Yeah, so that's what we could observe over the past more than 25 years in all these debt crises.

19:09Well, I think we might be in that situation now because the current account deficit has have been growing as currency falls, so what happens next? Well, we are steadily approaching to this crisis point without any doubt and the only question is when it come, it can come anytime, it can take some longer and then we have this need to adapt. But here actually I'm probably a little bit more optimistic and the doom and gloom profits, because we could also observe in all history, actually, that this kind of catastrophic occurrences do not lead to a parallelization of the people.

20:02On the contrary, let's make a scenario, let's calculate with some really shocking, as I I said in my talk actually neither Europe, nor Japan, nor China want the dollar crash, so maybe it will be much more moderate. But let's assume in the next couple of months or by the end of the year there's really some kind of stock market crash and economy tanks. At the same time, yeah, people just recognize this new situation. It is a positive catalyst for People. Okay, I have to reduce my consumption. I have to turn towards other activities in terms of avoiding imports because they have just become too expensive. A new intraburnal spirit will arise. The whole economy will re-shift to the new situation. So, of course, sometimes like these things expecting a decline of the dollar, expecting a stock market crash actually can have some positive effect if it does not get out of control and if the governments, when it happens, do not panic and do the wrong things.

21:14That is the real danger. As to the pure functioning of the business world, a drastic short shock has happened in the 17th century, in the 18th century, particularly in the 19th century. Yeah, they were short and deep, these economic shocks. And after that, the economy was somewhat rejuvenated, yeah? It was only in the Great Depression when the governments wanted to avoid it and wanted to ameliorate it when all these problems occurred and that's the great fear in our mind of the Great Depression. So, thank you, Anthony. Anne, you've heard quite a lot about financial crisis in emerging markets, the World Bank and the IMF.

22:02The difference between those and a dollar crisis is that they had debts denominated in dollars, which they could not print. So how would you see a dollar crisis playing out and how would the IMF and the World Bank respond? Would they put together a bailout package for the United States? Well, it makes no sense for the IMF to bail out the United States because the US is the The Greatest Shareholder of the IMF and the only way to get out is to adapt. There's actually no financial package available for the United States. So, simply put, the United States is not Argentina. You can put together a bailout package for, you could have, so we have to to say it was not put together, and that was a good thing to interrupt this moral hazard process. For the United States, there's actually no lender of the last resort available. It's only the United States itself, which is its own lender of the last resort. And so printing,

23:14and just printing of new money would not really help the U.S. economy because the most terrible thing to hit an economy, a modern economy, is inflation, higher inflation, though that's surely not a way out. It would be a write-down of debt, simply, due to the devaluation of the dollar. The big losers, actually, will be the creditors, yeah, because the... So Anne, would you like to comment on anything Anthony said or on the subject of the dollar crisis in general? Well, I just returned from Ecuador, and they're celebrating their fifth year anniversary of dollarization, and so there are various issues with this.

24:05The greatest quote that came out of that was a businesswoman up in the Otavolo region who I was asking her about it, well how is it five years on, and she said, well, it's not a happy little banana republic anymore, but really price rises, wages did not follow, there have been a lot of problems. But one thing that was pointed out to me was that when they dollarized, their private debt immediately doubled. So, okay, if we go the other way, and the dollar collapses, they could actually benefit, because they would be in on the debtor side, they could actually pay off for a little Ecuador should the dollar go. Is that, Frank, am I correct there? I don't know, look it up. I don't know.

24:50I don't know. I basically view it differently at all, this whole aspect of the dependence of the American dollar and the other currencies in the emerging world market, emerging markets. For me, first of all, we have to take into account one thing, that all the central banks today are operating under the guidance of Mr. Griezmann. Inflate together, they move together, they operate as one central bank. So if the American dollar were to collapse, I can assure you that everything will fall apart. It's not such a thing that other currencies somehow will be strong. I believe that there's no such thing as a strong economy today. And Adrian Day, in his marvelous speech, has shown that he cannot find value in any country in the world today.

25:39Explicitly shown this. That confirms at least from my observation that every country today is in a mess because they're all pursuing a loose printing process, a loose fiscal policy, they're all doing the same thing. So if we were to have again, I repeat, collapse in the American dollar, it means the end of the monetary system that we understand. And if somebody asks what will happen to the price of gold, it will be a meaningless even story because it won't be the price of gold. It will be gold. That's all. Gold will be the money, let's say, right? But there won't be any other currencies. It will have a collapse. So we cannot really talk partially that the American dollar collapses, the rest of the world will be fine. It cannot happen from other aspects. So, should the investor be looking at not diversifying assets among fiat currencies, but holding some gold as a hedge against monetary disorder?

26:32Well, I always believe that people should have gold as insurance, right? But in my analysis, I believe that gold bucks have overdone as far as gold price is concerned. because everybody and in today's session and discussion today I noticed that everybody was talking about the physical aspects of things but hardly anything was mentioned about the monetary aspect. Now you have to bring them together. We also have to remember that we're dealing with prices of commodities in American dollar terms, right? Then it's very important to know what happens to the American money supply as such because we're talking about American dollars and my My analysis suggests that I don't see any fireworks as far as gold is concerned.

27:20We were quite accurate for the last year or so in predicting movement in gold, for instance. We don't see any major fireworks, all other things being equal. I know there will be some kind of major crisis, but even major crisis doesn't work on gold much. But I like gold as an insurance. It's always good. And again, I would stick to what Adrian Day said, try to find quality. Now, whether it's possible to find quality, it's a big question mark, but if you go for it, like the aspect of dividend yield, it's also a problem, because we shouldn't forget that we're all looking at two circles here. One is the tether world circle, the other is the real world. Now the real circle is the most important one. It fits the tether world circle.

28:09All our calculations have been done in the tether world circle, right? In other words, you can analyze a company, it looks very great, right, in terms of its ratios, in terms of everything. But if the real stuff, the one which fits the, which we don't look at it here properly sometimes, shrinks, then the tether world collapses. So, Chris, Frank has just emphasized a point that was made by Adrian that we're seeing global central bank, U.S. exports inflation, every other central bank inflates along with the Fed, assets everywhere are expensive, I have read reports that there are housing Involving Bubbles in Australia. Where does a value investor find something cheap in a world of inflation and rassa bubbles? Where do you look?

29:08Look high and low, and the theme that's been raised, I think, is a good one, that what one finds is less and less attractive. I'll just give you Porte de Muir, or if you like, one of a better answer, that in one respect, and bearing in mind some caveats raised in Australia has overnight cash rates at the moment of 5.25%, which are relatively high by the standards of English-speaking countries. Within that, one has to look. They're relatively small, but there are, on a 90-day basis, sound firms that will lend, or in effect will issue commercial paper at up to 9% or so. So, now, they're not rated in any way, shape or form, but if one looks at them historically, their repayments, these sorts of things would be, if they were S&P or Moody's rated, which they're not, would be in terms of their track records, in terms of their default rates and so on, would be probably close to triple Bs.

30:03The question arises, well, on a 90-day basis, like continually can't find more attractive things on a longer-term basis, in effect, am I prepared to lend on a relatively attractive basis. I've been able to do that. My impression in Australia, more than this country, notes tend to be more of a floating rate than a fixed rate. And the points raised in terms of bonds, I fully agree with the caveat that they be fixed rate bonds. A floating rate gives one, to some extent, a degree of insurance against rising overnight cash rates. So, long answer to a simple question. The best I've been able to do is, in effect, China has emerged as a key player in keeping the dollar game going. They're willing to keep their currency pegged to the dollar and in order to do so they'll print their own on Money and by Dollar Denominated Debt.

31:12This means they're exposed to the full effect of any rising in dollar commodity prices. Frank, do you have any thoughts on how China is driving world commodity prices? Well, in fact, it may sound perhaps controversial, but I don't believe China drives commodity prices, actually. And it may sound very crazy what I'm saying, again I repeat, what determines actually dollar prices is basically the amount of dollars printed. So now what happens is now China happens to have, to get a lot of dollars, right? And somebody can argue now they spend the dollars on commodities, right?

31:57And in fact because every month they have nice services on the calendar count and they're getting a lot of dollars, they spend them. and this really boosts the prices of commodities in terms of dollar terms, and that's really the catch here. Let us say China doesn't exist, or China wouldn't be that important, but American dollars were printed. Somebody else would spend those dollars, and because, again, as I suggested, when money is printed, injected, it first of all goes to one market, then it goes to another market, etc. etc. In other words, when dollars are injected, it seeks undervalued market. So it will find undervalued market. Once it becomes fully valued, the money will stream elsewhere to another market. So irrespective of China, as long as you got the dollars to flow around, they will find the oil market also, because if all the markets are fully valued and oil market wasn't touched, it will be undervalued, and therefore oil prices also will go up irrespective of China.

32:54China, it happens to be that it absorbs the dollars from America through ectoplasm, but China does not print dollars, China does not print dollars. Also, China hasn't got the hold on all the dollars that America prints. China can create relative price changes, let's say they buy all the copper, but then they won't have enough dollars to buy some other commodities. But even if I concede this point, I'll say that they got unlimited dollars, they still don't print them. The printing originates in America. Therefore, price inflation, commodity price inflation, it's an American-made phenomenon. It's got nothing to do with China. China just happens to be that they are spending there. It could be any other country. It doesn't matter. It's not Chinese bank. So Frank, what degree of credibility do you attach to the thesis that China is rapidly industrializing their per capita consumption of all sorts of commodities will be increasing meanwhile many of the commodities have been, there's been a relative lack of investment

34:00in the productive capacity and exploration of commodities so that will be an area that will continue to outperform equities and bonds. Is the industrialization of China a driver of commodity demand worldwide? Well, as I said again, the driver of commodity demand today is the printing presses emanating from Merriman, right? And China happened to have them because they are running current account services, right? They are earning those dollars. But I also suggested that if China wouldn't be the case, it would be Japan or it would be some other country, right? It doesn't matter who.

34:52As long as you got those dollars, they have to come from the United Markets. They would move from market to market and they would come to oil market. So, in other words, is that it's your view that commodity price boom is primarily a monetary phenomenon? Okay, is anyone else in the panelist like to take a position on that? From what I observe in Brazil, China is on a worldwide buying tour, particularly in Latin America, I've heard also in Canada, buying up natural resources in Brazil. They primarily want to safeguard their supply of food and so the dollars that they have accumulated are are being spent, but they are not being spent in the United States. They are being spent, for example, in such countries as Brazil, probably in the future, some deals with Russia too, with Canada, and so on. So this is really an amazing thing that's going on in my view.

36:13And it will continue. So let's put it this way. Japan accumulated the dollar position in terms of an old age insurance scheme, yep. Japan knew that its population would get older, relatively older, home life insurance companies could hardly pay interest rates, so that was the great impulse of Japan to invest in US bonds. And in China, with China, it's totally different. China fears that when the industrialization process continues, it will run into a huge shortage of oil, other natural resources, and food, and therefore we need this surplus, and now this surplus gets being spent, but not for goods in the United States. On the contrary, China has a huge export surplus with US.

37:13I would like to pose another, let's say, angle to this whole issue of China. Let us say that the United States of America has slowed down money supply. It doesn't print $12, right? And Chinese are printing a lot of yuan, plenty of yuan, creating monetary inflation in China. There's a massive aggregate demand increase in China. What will happen to commodity price in the American dollar? We won't move because the amount of dollars is not created any longer, therefore we'll have stable prices in the world commodities in terms of American dollar points. Unfortunately in Yuan terms it won't happen because Yuan is not international currency in this sense, nobody pays a price in commodities in Yuan terms.

38:03And that's really again, I repeat, if we ignore the state of supply of dollars, I believe we are doing injustice to our analysis. So, Frank, would you comment on the Bank of China and their printing of their own currency, is that driving a boom and bust cycle within China, and how will that play out? Well, my view is that China had a lot of pluses, and a big plus was the certain freeing from the dictatorship they lived in and they got some entrepreneurship, so-called quasi-free economy.

38:56This is a massive plus. So they have really generated a lot of wealth. Unfortunately, they're following the blueprint of the Keynesian economics and modern economics and so they also will be suffering and they have suffered in the past also from boom-buzz cycles. Now, the money supply in Japan until very recently was in a region of 20 plus percentage on a year-on-year basis, like M1 for instance, right? And lending also was in the 20s regions. Now, they have decided to move towards so-called selection, selective type of cooling off of the economy, right? And there's no such thing as selective cooling or so-called soft lending. So they have managed to generate some kind of softening. Lending has weakened gross momentum from about 20% to around 14% and we had a slight rebound recently.

39:47But on balance, I believe that they are in the process of economic bust. Also, if there is going to be a bust there, we will not actually know it, because it's still a dictatorship, we have to remember this. And it's very easy to masquerade statistics, we cannot tell for granted all the figures being published there. My good friend Mark Faber says that most of the figures are manufactured there in any case, right? So we don't really know whether GDP is growing by 7 or 12 percent or whatever. That's not important, important is direction, right? I believe they are in the process of bust and I also believe that they will try to go for so-called soft lending, they will not succeed and they may have serious trouble because there is an influx of labor from rural areas to urban areas and this is a major problem for China, they can have like something what happened in former Soviet Union, it's quite possible, they are well aware of all this, so eventually it will blow up because they will try again to inflate a little bit and it will just blow up in their face

40:49This will be the end of the story. Also in China. Nobody is immune from boom-bust cycles. It's impossible. So, suppose China is going through a bust. Their banking system, according to Stratfor research, has mountains of bad debt and would be unable to continue to fund economic investment in China as a bust unfolds. So would a bust in China threaten their ability to continue producing things and sending them to the U.S. on credit? Well, this would be a major blow for many countries, particularly America, America has benefited from expansion of wealth in China by exchanging pieces of paper for real stuff, and that's a great fact, in other words, America was getting something and Chinese were getting nothing, and in fact, those pieces of paper are residing at the Federal Reserve of New York, right, the treasury bond, right, and you know, the moment Chinese will not be in a position to support American real pool of funding,

42:34Any thoughts on how boom and bust cycle, say not just in China, but anywhere in the world will affect things for Americans? It looks like as if boom and bust cycle are definitely different in state-controlled economies and on the one hand, and they're definitely different in economies that are in a creditor Position as in contrast to those who which are in a debtor position. As far as we can trust these statistics, China has a huge creditor position and this in my view allows to flatten any kind of turbulence much easier than in the case where a a country is in a debtor position and so for me it's very hard to to assess the Chinese economy and one respect it has the typical growth takeoff pattern like that happened in in the 50s in countries in South America but on the other hand and there's also a great great difference and this great difference is is in fact the debt accumulation.

43:57Actually, when we look around in a long-term historical perspective, that take-off countries after the industrialization of Great Britain, like Germany and Japan, they did it in the 19th century without foreign credit. They were very early export-oriented. They very early on were surplus countries. And a region that has not developed, Latin America, has initiated its takeoff phase also in the 19th century and it never went anywhere very large and very far because they thought they could grow with debt.

44:47And so I think that probably China is on a different trajectory than some other emerging economies. And the point to compare daringly is the industrialization process of such countries like Germany and in Japan, which also did it, let's say, state-guided, state interventionist form. And so, just without any value judgment, just to give an idea of where we could see a pattern that is really happening. So, a lot of the commentary on the international monetary system is focused on the willingness of China to subsidize exports and essentially send Americans goods as Frank just said in exchange for little pieces of paper, isn't it also going to be true that if they're devoting a lot of their productive capacity to building factories that can export things that Americans would like to buy but can't afford, it doesn't represent a real economic form of growth that will in the end prove to have been a wasteful activity?

46:04To compare it again with the process of development in Latin America, in Latin America they tried a policy to avoid linkage with the world. So without being involved in the global market, they were definitely unable to develop own products that could compete and the way to develop whatever political system you use just in terms of economics is learning by doing.

46:52The only way you can grow a known industry is really to compare with the best, to compare with the best and compete with the best. And that is what Germany had done in the 19th century, Japan had done in the 19th century, and what is doing China now, getting into the world market, Learning Attracting Foreign Direct Investment, Gaining Know-How, yeah? And yeah, learning how to do business. And at the same time, they are feeling relatively safe with a credit apposition which is approaching one trillion US dollars, which is just amazing.

47:38Then again, you have know-how easily available in this area. The foreign Chinese, not from mainland, are going into the country. Hong Kong forms part of China right now and Hong Kong is full of the entrepreneurial spirit. So it's everything in place, in my view. Okay, so they're building factories to produce flat panel TVs and sell them to America for on credit, then you think that's a small part of the whole picture and we should really focus on all the capital accumulation and education that's going on there?

48:24I was told by an expert, I don't know whether it's true or not, that the only thing that The Chinese don't know how to build cigarettes factories and for me it was very surprising because it looks like as if cigarettes factories are one of the most complicated things to build in an industrial way. All other things, all other knowledge is available in part due to foreign direct investment. China is very generous with copying the system, as is, by the way, a country like Brazil. I mean, there is no property right in terms of intellectual property in Brazil as well. These countries are not used to that, and it's just a matter of fact. And China will use.

49:11European companies that I've heard of, they accept it. They accept to be stolen in this way, but on the other hand, they feel in this way that's the only way to gain a foothold in these countries and hoping that by and large things will change in a way. But I think it's hard not to see what is really happening as a major new economic and political and Military Entity is Emerging and another idea in a long-term perspective, China is not in the sense a developing country, yeah?

49:57China like Japan before could count on a thousand and two thousand, three thousand years of Cultural History, yeah, there is some tradition there of knowledge, of science, of poetry and all these things. It has just not been put into industrial production. So the finest of Japanese painting, of Japanese culture could be transformed into transistor radio. And I think it's the same that we have to see in China as it is just an old centuries and thousand years old culture that is now turning to a new way to express itself, just seeing that this is the modern world and that we have to emerge.

50:48And do you believe that the United States can to any extent use political or military What does the theory means to perpetuate a financial system that's not sustainable on economic grounds? To a degree, I believe that's what we're doing now in the Middle East. A while back, I know last spring there was a lot of talk about, oh well, people were really, The administration was really worried about Saddam's switch to a euro-based oil selling system. And, of course, he did make a pretty nice piece of change on that, and it was of concern that, well, these other Middle Eastern nations would notice he made all that money by basing his trade in euros instead of dollars.

51:42But, you know, I don't see that as – I would look at it a little differently. I think the big problem is they've got to get some collateral under the dollar. I mean, they've just pumped and pumped this money, this credit. There's nothing to it. So, you know, to control oil on the margin – well, that's not the only reason, I believe, for our aggression in the Middle East by any means, but it certainly is part of the syndrome. You know, if you don't have this big military and you've been getting all these goods and services for these slips of paper, my goodness, you know, people might want their money back. But you've got a big army, well, maybe they don't want their money back, after all. What would you say if somebody said why the U.S. can afford any sort of military activity, they just print the money or borrow it from the rest of the world and the rest of the I don't believe it can, no. It certainly has gone on a pretty long time, hasn't it?

52:47So what would the end of that look like? I don't know. Look at this Chinese concept of the mandate from heaven in order to govern. You know, this monetary system, the United States has the fruits of it, which we've enjoyed for so many decades, it's not, I mean, it's more complicated reasons, I believe, than just an economic system, or being the largest economy and these deep liquid markets and all the things that are usually cited. There was a certain agreement in the world, I mean, you know, several, a couple of generations of Hollywood moguls and all kinds of journalists and other, you know, we really sold this idea of America.

53:36We sold it all around the world and I think people sort of, gee, yeah, these Americans, they're really sharp. They really know what they're doing. Look at that wealth they've created and, you know, people did defer to us. I don't think that's going to continue. I think the world perceives us very differently and this is also part of what is going to Challenge, this dollar standard. And I don't know at what point they get fed up and quit buying the debt. You know, the economists use this great phrase, the balance of financial terror. So I don't know the answer, but I really cannot believe it's sustainable. So I have a question that was submitted in the question of Jar, is the world moving to to a Five Currency Regime, US Dollar, Euro, Yen, Chinese, Renminbi, and the British Currency.

54:34I think we've heard from Frank on that, that we're not going to go from a system of interlocking fiat currencies to another system of interlocking fiat currencies. The fiat system might simply We are definitely moving towards currency areas. This has been going on since Bretton Woods. Bretton Woods was the first step to create currency, a currency area, that time based on the US dollar standard.

55:20Then the US dollar standard, the Bretton Woods system broke down in the late 60s, early 70s and there was the perspective by the monetaries principally that the free market would take care of floating currencies all over the world that in the end would be stable. But this did not happen. It did not happen due to many factors and so we ended a period in the 70s of terribly fluctuating currencies and all economic areas that were closer united in terms of economic exchange Such, particularly the Europeans, felt the strong, strong, strong need to create specific own monetary system.

56:19Other countries, like in Latin America, resorted to some type of dollarization. So this is the natural thing that we have been experiencing since the late, since the In the early 70s, the creation of currency, union or currency arrangement in different forms. And in this process, the euro is the most advanced. It is a single currency that is made up of different national economies. So in this way, it is different from the United States. And other countries like China right now pegs its currency, the yuan, to the dollar and just wait for part, still part, of a US dollar standard.

57:18Now compare that to the situation of Europe in the 1950s and 60s. At that time, there was the Bretton Woods regime, the German mark was pegged to the dollar, the dollar was pegged to the gold, the French franc was pegged to the dollar, the dollar to the gold. That way, the French franc and the German mark had a fixed exchange rate, so they could do business and the adaptation was only adjustable, adjustable back was the term. So for some time, you could calculate. And this was the basis how to integrate the European economies without the redwood system, this dollar standard system, they would not have achieved that.

58:06And the moment this system broke down, officially it broke down in 73, but unofficially de facto it broke down in 71, the Europeans began to construct various systems of currency union And in the end they felt, particularly after the crisis with the German unification, when the German mark in the first couple of years just was too strong, and so Britain had to pull out of the system at that time, Spain had to pull out, Italy had to, and so on, and only France held together. And so they decided the best way is to create a common currency. Now we have already six years of experience with that, and in terms of currency, in terms of exchange rates, it has been a system that could be called, one can say, it stabilizes the whole thing.

59:06Let's just compare the only alternative up to 1999 for many investors who wanted currency diversification to Europe, when there were fears about US economy, right, they are right now, was to go into the German mark. So the German mark had to bear all the brunt of a revaluation. This has not happened now. So now in the past year, despite all the internal trouble that Germany has due to reunification, which is just a disaster economically, it has been the world export champion. More exports to the world than the United States and Japan. This would not have been possible. So it is a stabilizing element in more and more regions.

1:00:02So, then would you say, is it your view the world can move through a succession of fiat money systems more or less indefinitely and nothing will force their hand to return to a gold backed monetary system? Well, that is a difficult question actually. Who wants among the governments a gold standard, you know? There's just not who among the broader population knows about these things. There's actually, in order to lead to something, you need a movement, so to speak, an intellectual movement, at least.

1:00:52And so, in terms of the gold standard, I do not see that. The central banks nowadays feel that maybe a certain amount of gold is not too bad. And so there are some differences among various central banks. I feel, for example, when we talk about the European central bank, there is a strong gold lobby within the European central bank. The central bank, particularly carried on by the major economies within the Eurozone, France, Germany and Italy, both are high gold holders and they reluctantly sell gold and probably they won't.

1:01:45So you have somewhat of a gold anchor system, but a return to the gold standard whether we like it or not, I'm just trying to be objective in these matters, would be very hard and I don't see the way, and I don't see the movement, I don't see the political pressure for that. So Anne, can the world go from one fiat money system to the next, simply adjusting at the margin, writing off debts, patching it here, sweeping a little bit under the rug there, is that a sustainable path? I don't think it's sustainable. One thing, I mean, I thought what Anthony had to say about the German mark, it was in the euro system was very interesting, and I wasn't aware of that.

1:02:38But I have a lot of problems with the euro. It seems to me it's an artificial currency, all these different countries, different languages. You don't have labor mobility within the system. I mean, Europeans stay put for good reason. What do you do when Austria is going, you know, 60 miles per hour and Belgium is at 5 miles per hour? I see this as ultimately is really a dangerous attempt to unite this region politically. So maybe I'm all wet there. I'd like to know what Frank has to say about that. With the final thought, as far as I understand, 85% of the reserves of the euro are dollars.

1:03:23So therefore, it's something of a dollar substitute. Frank, actually, I want to change the question a little bit. What do you say that U.S. investor comes to you and says, should I diversify my wealth throughout the world or am I just as well off being entirely invested in dollar-denominated assets? What kind of advice would you give to that person? Well, I would again suggest that one should look in his own area and to find out what he thinks precedence quality is. If you see certain things that you like, you just buy it, I mean, it's not sort of like, I'm against the whole idea that somebody must be sort of taking into account how risky a particular asset it is or whatever, the so-called modern portfolio theory.

1:04:12No, one should follow, and that's the nice advice that Mises has given, that any investor who actually looks first of all at risk and thereafter at the quality of assets will never make money in this sense, or actually will go bankrupt. So one needs to operate in his area the way he operates all the time, and if he finds good quality, it doesn't matter where in the world, he should buy. He can find good quality even in the worst country in the world, right? But again, it's up to your own expertise, right? And nobody can come and give you advice just like that. Superficially, one can come and tell you, pay attention to dividend yield, pay attention to price integration, Regulations, but I view it as a superficial type of things and not always helpful at all.

1:04:59One needs to, as Warren Buffet says, go and touch the particular assets you buy. Don't really buy because it looks nice in your portfolio, but go and buy it because you feel comfortable with the management, you know exactly what you are doing and then it's fine. And don't be preoccupied with underlying structural issues because it will start to be preoccupied that the world will end tomorrow, then you might as well live in the cave, basically, you know, and that's my advice. So nobody can come and tell you as far as I'm concerned anything else. So Frank, would you say Austrians, if there's a weakness, that Austrians may get too focused on structural issues that might take a very long time to play out, maybe longer than their investment time horizon?

1:05:47Yeah, I believe that Austrian economics can be extremely useful, and I believe that Austrian economics can be used on a short-term basis also. But one has to be very careful not to confuse structural issues with immediate current-day life. Because Mises also said, look, he says that if you pump money, it sets an economic boom. And then he says eventually it will be buzzed. But he says himself, economists cannot tell you when it will happen. He says it, right? So therefore he suggested that economics shouldn't be seen as a science. It's just a philosophy and not a way of thinking. It's just modern economists created out of science and oversold themselves.

1:06:33But basically, all we can say, keep at the back of your mind, if you observe big structural problems, you say, Sometimes you say, well, it is an issue, right? But it doesn't mean the patient is going to die, right? You know, like a patient comes to a doctor and it tells him, you've got six months to live, right? That's really what I identified. Then all of a sudden, five years later, I said, hey, doctor, I'm still alive, right? You know, that's the story about any setup. Structural issues are important, but if you try to use it in a money-making operation, You can be in serious trouble. So you have to look from Austrian perspective, I believe, pay attention to liquidity, for instance, very important, because liquidity is the main driver. Pay attention to money. Why? Because money is the business that we are. We are buying and selling with money, right? So if you observe that there is a lot of money coming, well, you can try to identify where the money will go. That's a very useful activity. And you

1:07:32You can track a lot of things with this. You can find out whether a particular market will go up or a particular market will go down, regardless of the underlying structures. As long as you know that structure is bad, but the money is still there, well, you can go in and out quickly and you play. Otherwise, you might as well stop, if you wait for structures to eventually. So, Chris, I think you might be taking Frank's advice and focusing on things that are in In your neighborhood, how do you look at the subject of internationally diversifying your holdings?

1:08:28I try. I'll use the phrase kind of a circle of competence, if you like. Others have used that or more eminent and whatnot than I have. I'd have a difficult enough time, or others with whom I work have a difficult enough time keeping up with things in our neighborhood, that's to say, financial developments, accounting in Australia and New Zealand, let alone any other country. That's to say, there's so many hours in the day. There's only so much one can do. In terms of answering your question, it may well make sense for people in part of the world to diversify their assets to other countries. It'll be other people who are far more competent than we are to do that. Can I add just a potential point in terms of the comments other people have made? Why, if you like, are some of the tendencies we've talked about more emphatic, more extreme in English-speaking countries?

1:09:22Yes, the Anglo-Saxon axis of debt-based consumption that you've written about. So why is that? Well, the short answer is I don't know. Let me take a stab at it. Can you say a little more about what it is and then go into your explanation of why? Well, in a very concise way, why is it, for example, that rates of household savings bearing in mind that these things are difficult to measure, why do they seem to have fallen more in places like this country, Australia, New Zealand, Canada and England than say in continental Europe? And there'll be lots of exceptions to that rule but as a crude generalization. Why are some of the excesses we've talked about perhaps more prevalent here or internet bubbles and the like, potential real estate bubbles more prevalent say in this country The Welfare State of Credit is a phrase that Jim Grant has used on numerous occasions and what he means by that is a system of regulation extending from a central bank to bank regulators

1:10:27both public and private, prudential regulators if you like to commercial banks all the way down to consumers. There's another general rule, the extent to which market forces are permitted, that governments permit market forces to operate, English speaking governments tend to do so a bit more for example than European governments. Again, I'm making a generalization there, but as a crude rule, there's something to be said for that. There's a perversity which emerges from that though and basically a big moral hazard that some of the things which, for example, consumers in Western Europe simply couldn't do, they can do in this country, Australia and other English-speaking countries, in terms of the extent to which a bank will permit them to take out gargantuan debt as an individual consumer. Why is that? Well, at least in Australian terms, if you're a bank, you live a very privileged life.

1:11:14You buy both de jure and de facto. You're protected from a foreign takeover. You're protected from a domestic takeover. If you get into real strife in terms of your lending, you're going to be bailed out by a government. So in other words, why shouldn't you push things to extreme? If you own a corner grocery in Australia and you go out of business, bad luck, no one is going to bail you out, you have no one to blame but yourself. If you're a gargantuan bank, then you'll concoct whatever excuse it is, but by and large, support will be coming your way. So in other words, the benefits as they would see it, or excess speculation for excess risk taking, are there for the simple reason that this welfare state of credit has put a floor under the costs which they personally, or the banks in terms of the shareholders are going to have to pay, so the best I can do in terms of that sort of English speaking system, they're sufficiently regulated such

1:12:07that they don't have to bear the consequences of their actions, there exists sufficient freedom of action for them to engage in recklessness. So follow-up on that, there's a quote I'd like you to respond to. This is from Doug Nolan who's a credit analyst, somewhat Austrian leanings. He says, with credit and liquidity flowing in gross excess in the speculated asset markets of the real economy, the system's entire market pricing structure becomes increasingly impaired over time. The current bubble environment makes it very difficult to determine what sound investment entails. Chris, you talked about the value investor is trying to perform some kind of a calculus to evaluate investments.

1:12:58The Mises emphasized that monetary calculation requires sound money. Can you actually do what you do in an environment of monetary distortion? Perfectly, of course not, or as well as one would like to do, of course one can't, but What principles can you bring to bear? What information can you bring to bear? What sorts of criteria in terms of what constitutes a risk can you bring to bear in order to invest as well as you can? By investing, I mean outlaying capital with a reasonably or justifiable prospect of a reasonable return and a modest prospect of substantial capital loss. So to elaborate a bit, and elaborating perhaps from what other people have said, it's no sin to leave capital on the table, or unrealized gains on the table. Some of the quotes you've mentioned there are several years old. I don't criticize the people who have made them at all for making them. I share the sentiments. The inability to time these sorts of things with any, often

1:14:03with any useful degree of reliability means, it seems to me, that an Austrian-inspired investor will leave a fair bit of money on it, or has over the past 10 or 15 years left and a fair bit of money on the table. That it seems to me as an error is far preferable to the sort of mistakes committed by mainstream folks in 99, 2000, 2001, in which that capital, and I'm using that term very loosely, that money is gone. It's not going to return and people who otherwise might have aspired to such and such a standard of living, they can no longer do so given the gargantuan mistakes and overestimations that were made. So Chris, I'm now seeing a linkage to this question from the question jar. Is there a sell discipline associated with the GRAM approach?

1:14:52The short answer is the buy discipline is easier to express in terms of principles than the sell discipline. Selling is more fraught than buying. That's actually an excellent question the best I can do is to say well gee the discipline is not as well defined as the buying discipline it lends itself if you like to leaving money on the table the point that I that I just raised the short answer is no I don't think it does to the same extent as the as the by discipline a gray might is tends to be there'll be exceptions to that a buy-and-holder if the investment remains a sensible one he's going to tend to hold on to it not notwithstanding the fact that prices can rise above, if you like, a cautious estimate of value.

1:15:38So I'll be ambiguous there and say that ideally it would, in practice, but discipline, perhaps because it's not as easy to define or to express in principles, practicing it isn't going to be as easy as the, if you like, the by-discipline. So Frank, I'm interested in your thoughts on how do you determine what is a sound investment in an environment of unsound money? Well, I agree with Chris. I don't think he can establish what sound investment is on this in absolute terms, right, in a unsound environment. But all I would like to add here that my previous comment, when I said that you should be as fast as possible in grabbing money when the central bank prints it, right?

1:16:23So as long as you can get the money before it's eroded, right, and you can use it to your benefit, You'll be doing fine. That's a tragedy with monetary inflation. It's like a race. People are racing all the time and the faster you are, the better it's for you, right? But yet, if you know that it's on some environment and you abdicate from it, then you're in much bigger trouble. Give an example. For instance, I wrote about this once piece that let's say a builder is in the business of building houses, right? and he is an Austrian economist and he knows that what Fed does creates boom-buzz cycles. Now if he were to follow Austrian principles in this sense, literally, then he perhaps would have to abdicate from this whole game and he would be out of business altogether, right?

1:17:08The other alternative is to continue to be in this game, right? And eventually he will be caught also there. And that's where Murray Rothbard said that's the biggest problem with the business cycle, So, whether you understand or don't understand, you'll be caught there, right? You cannot escape it. That's the problem. That's the catcher. That's the tragedy, he said. And he said that's why he was against having central banks. That's why he was fighting against it, because it's like a nuclear bomb is dropping in you. Can you hide against it? You cannot. The only thing you can is try to live at the moment as much as you can. If you observe that you've been attacked by ambassadors, well, I don't say try to join them, but at least try to defend yourself in some particular way. Sometimes you cannot.

1:17:54So Frank, in keeping with the idea of get to the front of the line, get the new money when it's hot off the press, there's a young man I read about in the newspaper this week Look, you know, I mean, put it this way. He's probably not a stupid guy, says, look, I observed the opportunity here. I think, in other words, this corrupt market creates, as Mises suggested, In different type of people, different entrepreneurs, we can exploit corrupt environment. It doesn't mean that... I'm not talking here about ethics now. If we start talking about ethics, again, we should abdicate the whole thing, right? So we shouldn't be ethical being this game.

1:18:46We know that we're participating, let's say, with thieves. Thieves are controlling the environment. Do I leave this environment or not? I'm part of it. So I'm basically, economically speaking You know, ethically speaking, I am part of the crime, if you want, right, because we're saying that anybody who gets the money first, it diverts the real wealth from those guys who didn't get the wealth. I should be feeling guilty, basically. But if I'll be operating this way, then I'll have to live in the cave. Therefore, I'm saying you have to play the game. If you can't beat them, you join them. That's all what you can say, unfortunately. Anne, I'm wondering if this brings up anything from your experience in Russia, in response to Frank's point about when thieves play the game, you have become a thief. Does that bring up anything for you?

1:19:37Yeah, I mean, they made all sorts of adaptations, the Russian people. What was tragic about this, I mean, of course they have to survive, so everyone, you know, they kept working at it, working at it until everybody, even about a six, seven-year period, I would say, had found some little niche, which, a perch from which they could survive and partially at least reconstitute the standard of living they had previously. But then they didn't want anything to change, and that was an unfortunate result. But yes, I think the unsound money, yes, it does empower thieves, and it of course is going to affect the entire culture and society as a consequence.

1:20:29And I guess I have to agree with Frank. You know, you really don't want to go under. You want to prosper, so. Okay, thank you. I think at this point I'd like to take two or three questions from the audience, if anyone has them. You, sir, please, sir. The question is, with so much leverage and debt in the system, when it comes to a bust, Do we see a deflationary contraction?

1:21:24Antony, would you like to offer any thoughts on that? Well, I think the first difference is between financial assets, particularly bonds and real assets. The bond, when it no longer gets honored, disappears, yeah? It's like never value has been created. In the case of housing, it's somewhat different. The house is still there, so the creditor in this matter, the bank will not have its loan as an active on its banking balance sheet, but it will have at least the collateral, the house. So you will have a similar situation as I could observe in the United States in the in the late 80s, early 90s with the SNL crisis, where you had real estate up for a bargain price because the creditors had to clean their balance sheets. So they will suffer too, but there are still assets there. Now with the government bonds, it will be totally different if they have to refinance. Then in a credit crisis, you have the situation that the interest

1:22:38rates will rise sharply, and you have just half of the value, and the potential default in terms of a currency reform, which is something that the history of the world is full. So it would come as a shock to me to think about a currency reform of the United States, but it has happened here before. So it's nothing new, and all countries have resorted to that. and even those countries that have some kind of fame to be more stable countries. So when they enter such a crisis, the government will renounce its debt and create a new dollar, just like it happened in Brazil. Okay, well what would you say the person faced with that Mr. Bernanke will get in his helicopter and start just dropping bales of printed notes all over the countryside?

1:23:31No, that's the inflationary escape and the inflationary escape leads to ever more increasing prices and you cannot escape the bust in order to make the system go, you have to increase the money supply, increase the money supply, increase the money supply, the economy gets more and more distorted, there's a division even in the fine and even the greatest fool will recognize, let's say even a central banker will see that we cannot go on this way, we have to stop that because it's pure insanity that is going to happen. And that's the time for the currency reform. And the history is full of that. Frank, do you have something to say about this? Yeah, I personally would not exclude the likelihood of having price deflation. In other words, How it can emerge, I mean the bubble is the whole economy, all the markets, the way I see it, are sitting on a bubble, on a gigantic bubble.

1:24:33There's no point to exclude property market bubble and everything is covered with it or sits on the bubble. Now, if we were to end this entire bubble, what allows it to exist is the fact that there is something left in the kitty, I'm saying, the real stuff, real stuff. Now as long as the real stuff still can support this overall gigantic bubble, we can continue to have happy inflation if you want monetary inflation and it can last for a long time. I am suggesting that perhaps the kitty is not that great. So if it were to stagnate or God forbid will start shrinking, then it can have a deflation. What does it mean? That all the credit which was created out of thin air through banking system will evaporate will evaporate because banks will not renew loans and all this credit will disappear, all fictitious credit.

1:25:27And the only money which will stay is a very small portion of it, it will be very tiny. And therefore you will have a massive collapse in prices. Now this by itself is not a bad story at all. It will undermine, destroy a lot of artificial forms of life. Unfortunately, if we are all a part of artificial forms of life, we won't like it because we may suffer also. So, in this environment of credit collapse, what is the asset or entity that an investor What can a investor hold on to that will short-term treasury bonds? Is it currency notes? Is it coins or bullion?

1:26:22Well, in the situation of price deflation or such a deep crisis, first of all, we have to realize that such a scenario emerges as a result of massive impoverishment. In other words, first of all, things are coming to perspective and it shows you that you are not as wealthy as you thought you are. Therefore, preferences, individual's preferences, what they can afford, consume and live, will be realistic. In other words, you will have to confine to sectors which are catering towards essential needs of individuals. In other words, in your language, non-cyclicals. Forget about cyclicals if you want, right? But not just non-cyclicals as such, but very simple stuff. And obviously we'll find that in such an environment there will be also a luxury is also here and there. We shouldn't forget that in 1930s, 20% of people were unemployed, 80% were employed.

1:27:10Those 80% did extremely well. They had a very good time. Prices were low, they were accumulating wealth and they did extremely well. So, deflation or price deflation is not the end of the world in the conscious. The process of healing, it's a good start. But if you happen to be part of artificial forms of life, you're in trouble because you were in the wrong business, right? But if you're not, you'll be fine. Anyone else in the audience? So would anyone like to volunteer to answer that? Okay. Let me repeat the question. The question is, would any of the panelists like to disclose to what extent, say, what percent of their portfolio is allocated toward gold?

1:28:01I own gold and gold stocks, but I don't know the percentage. I would say, let's see, gold produces next to nothing, physical gold and or hedge funds, 12%. percent. Okay, Mark, Okay, so I think the question is, can you trust Putin, Anne?

1:29:18Well, I mean, he was born into a communist system. He was raised as a communist, the KGB is the sword and shield of the state and the party. So certainly that is his background. The point I was trying to make, and it's very hard for me as an anarcho-capitalist to support or defend any politician, frankly, but I do see a period of demonization of Mr. Putin ahead. and simply trying to point out that there's a larger story here and I don't, you know, the United States has been so provocative. It's amazing to me the restraint Putin has shown.

1:30:06We've pushed and tugged at that country and really I think until the incidents in Ukraine, he's held back. He hasn't wanted to waste the country's strength in some sort of confrontation. They have a lot of problems in Russia. They really do. And I do think this gentleman would like to solve some of them. Is he the best guy in the world? Do I want to live under his government? No. No, I'm not maintaining that at all. But it would be understandable that when you are a defector, your capital rises if you to make allegations about those left behind. So I think I'd like to wrap up here by asking each of the panelists to suggest a single investment idea that could either be a stock, a bond, a currency, a commodity, an index or even let's say a country and long or short over the next two years.

1:31:08And you don't need to give an explanation, just toss it out and then we'll wrap up. Chris? Can I dodge the question in this sort of way? Of course. For the simple reason that if I had them, I'd hesitate, but nothing dramatically obvious comes to mind. Can I perhaps, though, with a serious intent, leave you with this thought, that investors have to sleep at night, that the actions they take ultimately are predicated towards sleeping well at night and over a series of nights, hopefully for decades into the future, given that intention. The purpose is not to make a lot of money, whatever that means, whatever your criteria are over the next year or something of that nature, but to say, look, given that I want to live to a ripe old age, given the problems and issues that have been outlined, not just in this panel but in the papers today, no doubt, tomorrow as well, are the steps I can take to keep my head above water as opposed to make a quick killing. So I recognize

1:32:11I'm copying the question. It's a good question and I'm copying it because I can't give you a surefire sensible answer. Frank? Well, instead of me be specific about particular stocks or sectors just like that, my view is, number one, that from the current liquidity perspective, I do not see firework in stock market for some time. In other words, on a short-term basis, I cannot see sort of a much going on. Right, it doesn't mean that one cannot find situation and opportunities there, but broadly speaking, it's a bit sort of, it could be very subdued. I still like bonds, treasury bonds, not because of some particular reason, just fundamentals, because I believe that the way the markets are looking at things, economy, let's say if my scenario is correct, from second half of this year may soften, this by itself could be positive on bonds from this perspective.

1:33:07Price inflation, the way they measure, I don't see it accelerating or running away. In fact, it won't surprise me if it starts weakening, and then Greenspan may alter its monetary stance altogether. So I view it from this perspective as mildly bullish in bonds, and I also think that one can take advantage of the inversion in the yield curve that may invert, perhaps, right? So one can pay attention to this also, right? and that's really what I can tell you about. Commodity market, finally, commodity markets. I believe that from liquidity perspective, we're sitting on a possible correction in a few months' time and the best metals, including also gold, I would say. So on a short-term basis, I would be very cautious.

1:33:54Best metals and the Commodity Research Bureau index, that's really what I have to tell you. I'm not warning, I'm just saying that from liquidity perspective my analysis shows that we can have a good downward correction in a few months time in commodities like copper and overall base metals. That's what my analysis are suggesting. And likewise, as far as gold is concerned, I would Well, I don't know about the investment you ought to have right now. My remarks were really geared to alerting you. You're going to have some property problems in Russia. If you're interested, please contact me.

1:34:59in Emerging Markets and probably I would stay away from equities while that is sorted out and Mr. Putin has demonstrated a determination to make good on Russian debt. So you might think about bonds, not right now, but down the road. Anthony. I actually like very much agricultural land in Brazil. In the long-term perspective, giving The growth of China, the interest and the population growth, and it is one of the very rare large, large areas of the world where you have sun and water. And this is a unique combination.

1:35:46I think there are a few other spots in the world of this dimension that have this combination and add to that new technology like large-scale agricultural industry, add to that genetic developments and other ways of technical progress that enters this area. I think you have an amazing value there, which will grow year by year for a longer period of time. I'd like to thank our panelists for their expertise.