FutureMoneyTrends.com: Thank you for joining us at FutureMoneyTrends.com, I’m here with Chris Martenson. You may have seen his work with The Crash Course or read his book The Crash Course as well. My first contact with him, it was about in 2008. I’ve been listening to his stuff, he went on to start a website, Peak Prosperity. When I hear peak prosperity, sir thank you for joining us,
Chris Martenson: Thank you for having me.
FutureMoneyTrends.com: Peak prosperity, it sounds a little depressing. So what is the overall objective of your website peak prosperity, because people can become free members and paid members. What is your ultimate objective through that site?
Chris Martenson: The ultimate objective is we’re trying to create a world worth inheriting. We truly believe that there are extraordinary changes coming, that we’re at a key turning point not just in U.S. history but in human history. And the idea behind peak prosperity is that there are always ways to be prosperous, but we have to make sure we have the right story, the right narrative, in play. And so a lot of our work is really around educating people, is providing context. We have a significant piece of work on there called ‘The Crash Course’ which you mentioned is really a full tour through the economy, energy, and the environment, would be key context that people need to understand where we are in this story. If you get to the same conclusion-ary points that we arrive at when we come through this material, you understand that the next twenty years are going to be completely unlike the last twenty years Now, that’s important if your financial adviser is telling you “do what worked in the past.” We don’t think that’s going to work so well in the future, in fact we believe the whole idea of investment needs to be broadened out to include investments in yourself, in your physical health, in your household, in things where we can identify solid, tangible returns and that’s better than anything wall street can offer at this point in time I think. That’s our point.
FutureMoneyTrends.com: Most people they’re saving for their retirement, they’re expecting this 8% return over the long term, but because of some very fundamental changes in our economy and our natural resources, you have advised people to make some changes to their investments. What are those?
Chris Martenson: Well, the main thesis is this, that given what we’re seeing happening in both the fiscal and the monetary level in the US, but of course this is happening in Japan and it’s happening in Europe, it’s happening all over the world at this point in time. There’s going to be another global moment where there’s going to be an extraordinary wealth transfer. And it’s going to be a fairly chaotic transition, it might happen over a matter of months, maybe a few years. But when the dust settles people are going to discover that they were either on the wrong side of the line or the right side. And if you were on the right side you have an opportunity to protect your purchasing power, to uh maybe even advance it a little bit, but to live a very reasonable high quality life, we’re going to have to make a few adjustments along the way. I truly believe that the living standards that we’ve enjoyed up to this point in time have been subsidized and fueled by a lot of things, not the least of which has been cheap energy, that’s gone. So one of the ideas is we would ask people to invest in and around themselves; around the idea that cheap energy and cheap oil is never coming back. So there’s all kinds of decisions you might make around that including how your home is heated, how it’s insulated, how close you live to work, how you transport yourself, things like that that we think if you can make an investment today that will reduce your future cash flow for energy costs than you are in a position to…that’s an investment. Normally we think of an investment that puts X in, and I get X plus Y in the future. But if you can put X in, and have to pay X minus Y in the future going forward, that’s an investment just as well. So that’s just one small example but we think that the implications of this story literally touch on every facet of life going forward.
FutureMoneyTrends.com: What about like, the suburbs as far as the transition, because the suburbs are a result of cheap energy. So will we one day have you know, as some areas have ghost cities like in China where they’ve built ghost cities or Michigan where it’s now a lot of ghost towns, will we see ghost suburbs? ‘Cause I mean, I’m from Southern California where there’s a lot of desert areas. I don’t know if you’re familiar with California but there’s an area called the inland empire. And it’s a good hour and a half, two hours from the ocean. I’m just trying to give you a reference, or anybody watching this, so let’s say an hour from Los Angeles city. This is way out. And actually Los Angeles is a unique city in itself that its land locked, unlike most of the other major cities that are port cities. So do you think we’ll see actual suburbs where they won’t be efficient and people will just abandon them?
Chris Martenson: We’ve already seen that. So the first example I knew about, if you look at the mortgage crisis and what happened as the dust settling, there was one community that was hit really very very hard, in fact I think it had the highest mortgage default rate, might still; Homestead, Florida. It’s a good distance away from Miami, but this is where people settled who couldn’t afford to live in Miami, who were more of the service class, right? So they’re the plumbers, the firemen, the dishwashers, all these people who were basically servicing the Miami community, but they lived all the way over here at Homestead. Everything was fine until (whoosh) gas spiraled over $4 a gallon, hit $4.50, and all of a sudden people couldn’t afford to commute and the mortgage, so that’s one of the reasons that you saw that community start to fail, and it was literally for that reason that I’m familiar with other communities that are 80, 90 miles away from L.A., but they’re fundamentally a bedroom community of L.A.. They’re very dependent on the price of the transport fuel, and by the way there are no public transport mechanisms usually to get from point A to point B, this is all personal automobile, obviously very sensitive to the price of oil, how that’s going to work out for those communities.
FutureMoneyTrends.com: In ‘The Crash Course’ you cover the demographics which a lot of people look at that and go “wow that is extremely deflationary.” But you actually lean more on the side that we’re going to see a devalued currency, inflation, and rising prices. How do you come to that analysis with the collapse in spending that we’re going to see from the baby boomers.
Chris Martenson: So there’s really only two outcomes here; one is inflationary, one is deflationary. And to buy in to the deflationary thesis you have to believe that they’re going to allow that to happen, they being the Federal Reserve in concert with the fiscal arm of the federal government. So in a deflationary spiral what’s happening is we’re discovering that credit is imploding, people are unable to pay it and service it, so we might imagine it starting today in student loans. We’re seeing a lot of default rates and late payments arising in the student loans. So imagine this is the trigger point. All of a sudden we find that the holders of that debt suddenly have to recognize those losses and now they can no longer service whatever debt they’re carrying, and then whoever’s holding that has to take that, so this sort of mushrooms through. This is what people are afraid of in a deflationary collapse is that it spreads through, basically rinses the system out. The reason I don’t think anybody’s going to allow that to happen is because when that happens institutions are destroyed, social unrest is a possibility as things begin to sort of break down a little bit. Governments get overthrown in the sense that career politicians get chucked and new parties get brought in. There’s a whole lot of disruption for that. The alternative is to just print, and print, and print and see if you can undo that and overwrite it. The fed has been doing that. I believe that they will do whatever it takes to paraphrase Mario Draghi of the ECB, Bernanke and, or his successor will do whatever it takes to prevent that deflationary outcome because that is really damaging. The inflationary outcome is you just print and print and print. So far they’ve been doing that and just shoving money back in to the financial system, but if this is going to go down to the next step, they’re not out of bullets yet. The Federal Reserve has not yet sent me a check, and they wouldn’t do it directly. They would, they would encourage the Federal government to cut my taxes and let the federal government know that they’ll monetize whatever new deficits result from that. And, and that would be another bullet in their quiver. But maybe someday I’ll actually see a check from the Federal Reserve in my mailbox, I don’t know. They’ll do everything it takes to get us down that inflationary path, and this has nothing to do with whether people are ready to spend, want to take on more debt, whether it makes sense to do any of that. If the outcome is either we inflate or die, when we talk financial system stand point, they’ll always choose inflation. This has always been the choice of governments and central banks through all of history. So, I don’t think this time is going to be different, and I think we’re going to choose the inflationary path and we’ll do whatever it takes to get it.
FutureMoneyTrends.com: The question of course on everybody’s mind is always “When?”. I’m sure that’s always the most popular question is “when, when, when?” How, how long do you see this transition. You said the next twenty years won’t look like the last twenty years. Will there be a crisis this decade, a major crisis?
Chris Martenson: Well, we’ certainly have all the conditions necessary for a crisis. You know it’s kind of like looking at an old barn that’s got a lot of dry tinder and some oily rags in it, when will it catch on fire? I don’t know, but it’s got a lot of dry tinder and oily rags piled up in it. You know, 2008 was the warning shot across the bow. When we had our first big financial crack. Actually it started in 2007, that’s where the early pings were coming across, but 2008 should have been the sort of collective waking up around that. But that was really just a crack in something that had been brewing for several decades. And what had been brewing was that we as a nation in the United States collectively had made the decision, on some level, that we were going to borrow at roughly twice the rate that our income was coming in. So you look at total credit market debt growth, 8, 9, 10, 12% per yer depending on which year we’re talking about. Nominal GDP growth, 4, 5, 6, 7%; less. So income is low, borrowing is high, that’s a story that you and I personally can’t run out forever, a nation can’t do it either. That’s what really cracked in 2008, and right now there’s heroic efforts being undertaken to get that restarted again. And I think that’s a mistake, I think that a crisis born of too much debt is ill served by getting us into more debt. I think that the diagnosis was wrong of the Federal Reserve, that this wasn’t credit markets ceasing up, this was a fundamental failure of taking on too much credit in the first place. Be that as it may I have my differences with them, because the Federal Reserve has said ‘oh no no no no, we’re not going to recognize this for what it was structurally, we’re just going to try and paper over it and get us back on that path’, you would think that certain things that should have been obvious failure points in 2008 where we can just look at it and say that and that needed fixing. At the cornerstone of the housing bubble burst thing were derivatives, particularly credit default swaps. AIG mis-structured them. We should say, “wow, learning,” maybe we shouldn’t have so many of those derivatives kicking around and maybe we should have some sort of clearing house way that people are actually not able to just pile up more than they would have to post a collateral for, something like that; like other markets work. Fast forward to today, derivatives are 100 Trillion larger than they were in 2008, we still don’t have a clearing house. We learned that some institutions were too big to fail back then, they’re even bigger today. We saw that sovereign debt loads were very high and starting to crush the sovereign economies, particularly in the southern Europe, United States, also Japan, were starting to, those are even higher today. So my main point here is that we had structural problems that were clearly revealed in 2008 and what we did in every single example I’ve just articulated many more, is that instead of making them reducing the pressures off of those, we’ve increased the pressures off of those. So switch to an earthquake metaphor, we’re on a fault line, it gave way, and what we did is we just applied a lot more pressure to it. I don’t know when faults give way and give us earthquakes, nobody can predict that. You can just say: ‘hey. this thing hasn’t let go, the pressures are building, it’s probably going to release sooner or later and when it does it’ll be worse or larger than the prior one.’
FutureMoneyTrends.com: Someone goes to Peak Prosperty, they watch ‘Crash Course’, they possibly read your book. What is the best thing that they can start doing, actionable, for their lives?
Chris Martenson: Alright, we have four things. Like if you just come to this conclusion like “oh my gosh, you know, the system is potentially not going to work exactly like it has before and maybe I’m even concerned about its solvency and maybe it’s very viability on some level.” Four things make sense when we’re in this sort of economic environment and the first is get out of debt, particularly high interest bearing debt, interest bearing debt. So if you have credit card, auto loans, student debts; anything that’s a really, that’s earning, costing you a lot more in interest payments than you could possibly earn safely out of the market, reduce that if you can. So let’s pretend you’ve done that, you still have money left over, I think you should invest in yourself. These are things around your homes that I’ve mentioned to do. Energy retrofits and investments if you happen to own a home that will vastly reduce your expenditures going forward in the future. There are other ones around health, even emotional resilience, food. The variety of things where we think you can invest in yourself and get a higher quality of life, deliver some excellent economic returns, maybe be healthier in the process, and that’s all wonderful. But if certain things happen in the future those will turn out to be spectacular investments on a return basis. All right, you’ve done all that and still have some liquidity left over? Everybody should invest in some gold and some silver too, slightly different reasons for both of those. One’s a monetary metal, ones the most brilliant industrial metal I know about; could have a monetary role, I doubt it, going forward for silver. But get a little gold, little silver depending on your preferences there’s a whole story there that we have that clearly articulated at Peak Prosperity. And then the last thing, the fourth thing is that if you still have money left over, you’ve got a 401K, you’ve got a trust for whatever sets of reasons, for tax purposes, you wanna have money still in the markets, have it managed as wisely as you possibly can. With people who understand what the real risks are today and where the opportunities actually might be, the old days of index investing, saying “oh just, you know, just buy yourself a nice diversified set of indexes, that’ll get you there.” You know: “Diversification comes from having foreign versus U.S. stocks,” that’s no diversification anymore. The acid correlations are extraordinarily high across these things, I think that if we’re in the low growth environment that I think we are going forward, the worst thing you can be in is an aggregate fund. Bonds or stocks. You’re going to have to be much more selective about where you’re going to have those funds going forward, but that’s just a point of view I happen to hold right now.
FutureMoneyTrends.com: What about for safety purposes in that 4th tier, where you’re debt free, you’ve taken care of your health…What about buying like large companies that have just been around forever. Like an Exxon Mobile or a Coca-Cola. These dominators that in all likelihood, I don’t really see them going away, do you?
Chris Martenson: Nope. Nope. Unless there’s some really spectacular failure of the financial system then it doesn’t really matter which companies you’re holding, you’ve got other things on your mind. But absolutely, I’m a big believer that there’s always going to be needs being met. But it’s going to be fairly more defensive as we look in to this low growth world. So I’m a big fan of actual tangible resources, the more tangible the better. The companies will have actual claims on the resources, water’s going to be a huge thing going forward all across the world, fresh water is in very short supply and it’s only going to get more so as we get in to the next few decades. The UN has projected that we’re going to have to grow twice as much food by 2050. Twice as much as we’re currently growing today. And if you know a doubling feature, one of the features of the doubling function when you’re growing twice as much, and by 2050, it means here in 2013 in the next 37 years we’re going to have to grow as much food as has been grown in all of human history to this point in time. It’s extraordinary implications: Farm, farmland, fertilizers, its huge. All of those are plays. People are going to be confident of that right?And so, yes, companies that are involved in supplying the basics of life are going to do very well as we go forward. I’m less certain about the ones that are involved in what I’d call very discretionary elements. Those do okay when you’re in the middle of a large expansion. We’re in a huge bubble right now, The Fed’s pumping huge amounts of money in. The ECB, bank of Japan; we’re really pumping. When that stops, it will, it always mean reverts, you’re going to want to be away from those liquidity, particularly interest rate sensitive companies, those are to be the ones that I think are going to have the worst times.
FutureMoneyTrends.com: When you made the crash course, did you think we’d still be around everything, you know people are still pretty happy with life overall in the US. You know, gas is three to four dollars a gallon, people still drive their Yukon’s and Suburbans, did you think it was going to happen sooner?
Chris Martenson: Here’s what I didn’t think was going to happen. We had, we had a fairly well recognized tech bubble in stocks, we had a tech bubble in 2000, then we had a housing bubble in 2007. I did not for the life of me think we would get in to a 3rd bubble. And let’s face it: junk bonds in May of this year hit the highest price they’ve ever hit in all of history. All of history. And so that’s not just a little bit of a bubble, that’s the highest bubble ever. The Gilts in the UK, they have 400 years of history on those. Those hit the lowest rate of interest in the entire 400 year series; that means that they have the lowest price ever. We’ve got the most spectacular bond bubble going, and I just didn’t think it would possible to switch from equities, to real estate, to bonds. And by the way, it went larger, larger, larger. That’s the large series I see in here is that we’ve had a series of crises that started in 1994 with the corporate bond market hiccup, transformed in to the LTCM hiccup in 1998. We had the stock market hiccup, we had the housing bubble hiccup, this next hiccup is going to be even larger, there’s a pattern here. The Feds been serially blowing bubbles, thinking that they can outrun the next one, and each one has been a little bit closer and a little bit larger than the one before. My concern is that this next one is going to be very large. It’s will be very disruptive, it’s going to be fairly destructive for a lot of unprepared portfolios, there’s going to be some extraordinary opportunities of course when that bottoms out. But, by not allowing us to bottom naturally through any of these cycles, I think the Fed is just literally forced us a few more rungs up the step ladder. So that when we do have to finally reckon with this, it’s going to be more of a painful fall than an uncomfortable jump.
FutureMoneyTrends.com: In closing, Chris, besides PeakProsperity.com, who do you listen to, who do you read, what are some things that interest you that might interest people who follow you?
Chris Martenson: Well, I’m all over the map with stuff that interests me, because five years ago I thought I was in the information business and I realized I wasn’t. I’m in the belief changing business. We have a national narrative that’s running right now, a global narrative that says we need growth. Any 6th grader with a pocket calculator can tell you can’t grow infinitely on a finite planet. We know sooner or later we’re going to have to square up to the idea that we’re not going to be growing forever. Some people think we’ll get there naturally, that population will sort of level out by 2100, I don’t think we’ve got that amount of time. So I’m very interested in how we reshape the narrative towards something that actually fits and matches the reality of the situation. And so I’m reading things, behavioral economics is really important, evolutionary psychology has been very important, and I’m reading a lot around how markets are functioning right now. There’s a lot to understand because so many changes, so quickly. So I’m trying to understand really what the high frequency trading programs really mean to our market structure, there’s dark pools now that are much larger than they used to be. So there’s a whole opaqueness to our markets. So just trying to stay abreast of the changes that are in our markets which have been extraordinary due to the changes in our technological developments has been a piece. And I’m trying to put all of this together to shine a little bit of a light to help understand where we’re going. It’s been very very hard to predict what is going to happen but you can see the big trends unfolding. Given that, I’m convinced that beyond a shadow of a doubt that there’s some really large changes coming, some really large adjustments, and what I’d like to leave your listeners with is that; making those adjustments on your own terms, when conditions are favorable, the sun shines, people drive Yukon’s, money’s available, you can order something online and the big brown truck of happiness will show up in two days and drop it off on your doorstep, lots are still possible today. What the Greece story tells us is that one year everything is possible, and then the next year everything seems impossible. That’s the nature of running afoul of a financial hiccup in your country. Not saying it’s going to come any time soon to the United States, but it’s no longer a non-zero risk, and there’s simple things that people can do to prepare for that.
FutureMoneyTrends.com: Chris, you’re an absolutely amazing teacher and thank you so much for the dedication that you do, and every word out of your mouth is backed by so much research. Thank you
Chris Martenson: Thank you.