How To Prepare For Economic Uncertainty

Video length: 00:40:11


Maurice Jackson: Today we will cover equity markets in a clever, simple way to hedge your portfolio. Joining us for conversation is Chris Marcus, of Arcadia Economics.

Who is Arcadia Economics, and what is your underlying thesis?

Chris Marcus: Arcadia Economics is what I started after leaving Wall Street back in 2012 where I was sitting on the New York Stock Exchange when everything was imploding in 2008 and 2009. Eventually I started reading Austrian economics, realizing that things actually work quite a bit differently than we were told. I really left to share what I saw, which on one hand, I think is incredible, because if you’re giving the real version of how interest rates affect the markets and all these things are interconnected, it sometimes may be of a longer perspective. But it reminds me of Grays Sports Almanac in “Back to the Future,” where if you can understand that if the banks do this with the money supply, then you can get what’s going to happen.

Obviously, a lot of tricky things are going on now with so much manipulation in the market, but that’s what I write about on Arcadia Economics and for Miles Franklin, with my main thesis being that I think we’re very close to seeing the historic stock bond and real estate bubbles that have been inflated with the historic past decade of Fed monetary policy. It sure seems like we’re coming close to the end of those, which fortunately, I don’t think has to be this scary apocalyptic Armageddon that it’s often phrased. Instead, if you do understand what’s happening, you can put things in place and be prepared for that. And certainly, we can talk more about that today.

Maurice Jackson: I certainly appreciate that there’s a certain amount of responsibility that we have in the media to make sure that we don’t use scare tactics. We’re not financial advisors or financial planners, but we’re here to do our very best to make people aware of situations that are occurring that may not be in the mainstream media, and how they can protect themselves in a wise and prudent way. We brought you on the show today to discuss some developments that you see occurring in the equity markets that have your attention at the moment. But before you begin, is your narrative important for only U.S. investors?

Chris Marcus: No, I think it’s relevant for people across the globe to the degree that whatever country you’re in, if you want to trade in U.S. markets, I think that’s something that’s great about the world today. That we have the internet and we have all these different financial products so that people can go out and express what they’re seeing and what they want to trade. So, to the degree that people in foreign nations want to trade the U.S., that’s relevant. Yet, of course, to the degree that the dollar is the world’s reserve currency. All of these banks are interconnected.

We saw last week with Italian bonds going bad, then we’re realizing a lot of the European banks are on the bonds and Deutsche Bank’s getting downgraded. So, it’s not just the U.S. alone. In fact, it’s fascinating thinking about how of all these different pieces are interconnected. I know there’s this tendency to call the U.S. the prettiest pig on the block. And people are saying, “Well, you can’t take money out of the U.S. because all the other sovereigns are in worse shape.” Which it’s actually interesting to think about. Because if you add in the unfunded liabilities, the debt to GDP here are dwarfs what the Argentina has, who’s currently undergoing their own currency crisis right now.

It’s fascinating. There’s so much bias and momentum that we’ve all been programmed with. The dollar being the reserve currency, yet we passed $20 trillion in debt. The projections now just talk about $30 trillion as if that’s already decided; there’s no plan for cuts. I believe there was a Wall Street Journal alert today saying that Social Security finally dipped into a deficit, add in that we have a missing $21 trillion from the government with a money supply that’s supposed to be around $4 trillion. So, if someone wants to make the argument that Europe collapses first, or Japan runs into trouble first or even China, where as much as it is producing goods, which is certainly a good thing, and it is lending a lot of money to the U.S.

I hear there is still a lot of extra credit going around China as well. My guess is that perhaps in the next coming years, we’ll see all of these paper systems facing pressure, which is why I talk and write so much about gold and silver in the cryptocurrency market. And at least some of the places people can go, they want something that can’t be printed based on whichever politician is put in there.

Maurice Jackson: Which is saying a lot, because you’re coming from Wall Street. For you to have a strong, profound appreciation for precious metals, that is not common. But the reason I asked the question, is this centric to only U.S. investors, it sounds to me, and you correct me if I’m wrong here, that is there a potential for a contagion. And if there is a potential for a contagion in Europe, then capital flight, and the capital flight seems to be everyone wants to come to the U.S., and that’s why I asked that question here.

Chris Marcus: We saw that a couple of weeks ago when Italy had a problem with the banks. Just after the U.S. yield, it spiked above 3%, shot up to I think the top was 3.11. Yes, these are all going to be interconnected, especially the rising interest rates in the U.S. have put a lot of pressure on the equity markets. And you see some of the other foreign central banks raising rates as well. I think that’s one of the tricky things where people are often wondering which one is going to go first. Is it going to be Europe that’s going first and then sparks the U.S., or will it be a U.S. problem that sparks elsewhere?

I sure wish I knew the answer to that one, yet you see how interconnected these are. So, if just like in 2008 when interest rates went up, started popping the bubbles, you had trouble in the U.S. stock market and the U.S. mortgage and housing markets, which was a problem in the U.S., yet quickly spread across the globe. And there’s some degree to which there’s the future and we’re humans, so we don’t know exactly how it all unfolds. But certainly, the conditions are in place there exactly as you said, for that contagion to spread. So, while it may start in one versus the other, it’s set up to affect all in a very powerful way that I think people should be aware of.

Maurice Jackson: You add contagion, capital flight, the debt, then you have unfunded liabilities. And now we add one more thing here. Does Arcadia Economics believe that we’re in a trade war? And if the answer is yes, is this the beginning and what is the ultimate result?

Chris Marcus: It’s interesting because there’s what is reported and then what might actually be happening. So, on the surface, at least to the degree that we see Trump in China slapping tariffs back and forth, yes, that’s begun and is happening. I find it odd, foreign policy, especially with China being the largest creditor of U.S. financing, and it’s almost baffling, where you see China basically giving every indication possible, or they keep poking. But this time we’re fighting back, which started with the Petro-Yuan. Last week there was news of a possible yuan-denominated precious metals contract, which is for people who are not big fans of the Comex and the short paper that’s going on there.

Certainly, if it follows similar adoption, Maurice, have you caught that apparently the people are using the Petro-Yuan contract, the market share is actually been growing quite a bit?

Maurice Jackson: No, I’m not aware of it. But it really is interesting that that is actually a new development, because that’s really what’s kept the U.S. currency afloat (Petro Dollar).

Chris Marcus: Certainly, if you had a similar pattern like that with a precious metals contract, and then add to that what I caught yesterday, apparently 14 African nations are holding a meeting to discuss using the yuan as their reserve currency. Which, you get small stories along the way, although that one that we’re now having open meetings that the yuan as a reserve currency. It seems to me as if China’s saying, “All right, you can start a trade war if you want, but you’re not going to bully us around anymore.”

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