Erik Townsend: Expect a U.S. Price Shock as Black Swans Come Home to Roost

American investor (and longtime member) Erik Townsend has spent the past several years living internationally, with an eye to which countries may be good alternatives if economic crisis and/or Peak Oil start to materially impact life in the U.S. 

His main observation as an expat? Through its misguided policies, the U.S. has been exporting inflation to the rest of the world, raising prices all over the globe (as an example, Erik cites a $57 chicken pot pie from the menu at a 'working class' restaurant in Australia). 

This inflation is affecting the rest of the world harshly, but is not yet being felt in the U.S. due to our ability to export it as the issuer of the world's reserve currency. Our immunity will not last forever though, and when it ends, a massive upwards spike in prices is going to hit U.S. markets.

On the Global Economy

As far as I can tell, this whole economy is being propped up by stimulus and money printing, really, since 2009. And I think that what is going on is we have forgotten that we are literally changing the I do not know if you want to call it changing the terminology or changing the paradigm but what is going on here is, we used to use words like “solution” fairly accurately. Now as we are just creating these Band-Aid fixes to temporarily put symptoms of problems at bay.

We are calling those solutions, and we are actually behaving and when I say “we,” I mean collectively market participants are behaving now as if the ECB printing money in order to buy some more Greek bonds and put a bid under that market was a solution to the European sovereign debt crisis. And it is obviously nonsense. The ECB printing money just dilutes the value of the euro and causes more reason in the long term for people to flee away from making investments in euro-denominated sovereign debt. So it does not solve anything.

But we have gotten to the point where we are so overwhelmed that the market is thinking in terms of these Band-Aid patches as being actual solutions to problems. And I think as long as that is the case, we are going to continue to apply these Band-Aid patches, which are things like printing more money, until it all comes to a head. When it comes to a head and how it comes to a head, I do not think anybody is smart enough to predict accurately.

At some point, though, we are going to get to a point where we cannot handle any more printed money, and I think that the black swans that have been leaving the market alone for several years are going to come in force.

 On the Market's Willful Blindness

I do not think that we have ever seen a larger basket of major macro structural risks that everybody is aware of. It is not like nobody sees these things. But we have just somehow put them all on the back burner. Do not worry about China. Do not worry about Europe blowing up. Do not worry about Iran. Do not worry about the carry trade unwind in Japan that you have just written about recently. Do not worry about Peak Oil. Do not worry about the domino effect of China and Japan going down, taking out other economies that depend on them.

It is all fine. The LEIs are looking up. And we just seem to be in this cyclical trading mindset that it is going to continue to last until something breaks. And I think that when something breaks, it is going to break big.

On the China Wildcard

I think China has quite a bit of pull here. In that as QE3 happens and I am convinced it is going to happen sometime this year, I do not know when it is going to export so much inflation to China that it is going to be almost intolerable for them.

And I think that we are forgetting that if China says, “Okay, guys, we have had enough of this. If you do any more QE-ing we are going to dump the U.S. Treasury bonds that we are holding and we are going to use the money to save our own economy.” If we see that kind of reaction from China, it really could put a monkey wrench into the plans of the central banks to inflate this all away.

I think that whether it is that mechanism or another one, at some point we are going to get to a hard wall here where you cannot just print money forever without the unintended consequences coming back and biting you.

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This must be old home week.  Dogs back one week, Davos the next.  Welcome.
Great interview Chris and Erik.  I look forward to a continuation of this conversation.  One question.  It seems I hear more and more rumblings about China, Russia and others already dumping US bonds.  Do either of you have any sense of how big that is so far?  And, how will we know when the trickle is about to become a flood?


CB balance sheets as black holes (not to be confused with Black-Scholes) for fictional collateral…
I do like that concept… (as a pure idea, if not as a policy) Chris… :o)

 Also interesting concept from Erik, that the debt crisis is designed to concentrate financial into political/legal power…

 Rehypothecated from the financial frying pan into the political fire…

  To add a slightly unorthodox idea… are the "nations" really competing ? 

Thinking here of the principles of Oligarchic Collectivism…  - Orwell style.

I dunno…

 but by the exercise of doublethink he also satisfies himself that reality is not violated . . . To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink.

 see: "Fedspeak."


 Anyway. Nice interview.


Holy Cow! I couldn’t possibly be more honored than by a first post from such a site legend as Davos. Welcome back my good friend!

Its great to hear from Erik again, and I’m so happy Davos has poked his head up, but the "exporting inflation" idea is shallow thinking at best.
A $57 chicken pot pie is the result of outrageous endogenous credit expansion, not a global currency war.

You can’t blame inflation in China on US monetary policy when the Chinese choose to peg their currency to the USD and pump out bank credit at incredible rates.  

Don’t blame the Fed because you will be taking your eye off the real culprit of inflation; investment banking.


P.S. It’s nice to have some old sparring partners back.


Doug, the Chinese are trying to sneak out the back door. They are putting adverts on tv  encouraging their citizens to buy gold and silver. What are they doing? Converting Paper into something of value. I believe that one of the iron ore mines here in Australia is insisting that China pay for their ore in Yuan.  (ouch!)
I work for the Australian Government. 10 years ago the Government garnished my paycheck before I had a look in and placed those funds in a Government guaranteed fund. Then they changed their minds and no longer guaranteed the funds. Yesterday they sent out a form saying we could nominate whichever fund we wanted.

What does that mean? First guaranteed, then not, and then invited to leave? That does not sound like salad days to me. Let me guess. The fund managers haven’t got a clue where to park the money.

Do the workers care? About beer, yes. My bosses always rush in to shut down any conversation. They think I am a good worker with weird and embarrassing ideas.

I suffer from massive amounts of cognitive dissonance.

Plato, you have got it. Bernankies bubble has a Schwarzschild radius

I am wondering, why is it that QE exports inflation? Shouldn’t the US also be experiencing it? Is it that the deflation from the collapsing economy is offsetting it? Then why have we not seen $57 pot pies in Canada, since our economy is booming on commodity extraction and definitely not in deflation? Does China feel it more because commodities are a bigger portion of daily expenses?
I applied for New Zealand immigration but was rejected. I guess it helps if you’ve actually been to the country… Actually, apparently Chile is one of the best bets right now I think. They dealt with a lot of their corruption issues in the previous decades. We have put down some roots there. I think S America is the best overall place to be. My concern about Canada is that although we have the biggest oil reserve left on the planet and a very low overall population density, we are right next door to the US. I could see us being flooded with millions of desperate American refugees. Maybe we’ll be taken over by the US, actually that sounds almost inevitable considering the way the media is able to justify the most heinous acts to the American population and get them to buy into it…

Nice interview, and some good insights.
I quite agree about the risks. It is interesting to watch how the market herd seems to daring themselves to frolick out in the meadow, despite the presence of sharp-toothed black swans lurking behind the tree line.

And I really love Erik Townsend’s take on agility. I hadn’t really thought about it that way before. My focus has always been about trying to find a way to build up resiliency, when agility is obviously just as important. Thank you.

However, I think the examples of food prices just don’t make sense to me. I’ve been to restaurants that charge a lot for not much ($50 per person, not including appetizer, soup, salad, or dessert), and they didn’t even look that fancy, though they certainly tried to be.

Let’s look at other, ordinary restaurants out of Wellington, New Zealand, courtesy of some Googling and…

Here’s a listing of restaurants under NZ $10 to $20 in the Wellington area:

Here’s a couple of restaurants I noticed:

Sweet Mother’s

Maranui Cafe (PDF)

Now, granted I’m nowhere near as worldly nor as well-traveled as Mr. Townsend. I’ve only made 3 overseas trips out of the U.S. in the past decade. But may I suggest that perhaps to Mr. Townsend what is an ordinary, "middle-of-the-road casual dining restaurant", is to the rest of us likely something above the ordinary.

Thus, I don’t think that a USD $57 chicken pot pie or a USD $31 heirloom tomato salad are noteworthy indicators of exported inflation but of a casual dining establishment’s imported aspirations to ambience. There are numerous other indicators of exported inflation available. I just don’t think the anecdotal evidence here cuts it.




    Erik, you can have a pot-pie at my place anytime, no charge. Looking forward to the Financial Sense interview.

    Erik looking for black swan, Chris postulates perhaps a dark brown would suffice, I’m thinking off-white could possibly do the trick at this stage.


     to have Sherman on the board. 

 Erik Townsend:   "You tell the taxpayers, look, we are buying, we are buying this stuff up. It is not really a bailout. We are just transferring it from the private to a public balance sheet. But do not worry. It is not bailout. We are just buying this stuff for what it is worth. Well, of course, they are actually paying ten times more than it is worth. And then eventually it gets sublimated off of the Fed’s balance sheet—I, I like that expression—in a way that nobody ever really finds out that, you know, that was a bailout."

Erik, we're way ahead of you. It started at $25B in 2008.


Canada Mortgage and Housing Corporation Supports Canadian Credit Markets


$25B credit backstop for banks 'not a bailout': Harper

'Market transaction' will cost government nothing, Tory leader says


Then it moved up to $75B




2009: Special investigation: How high-risk mortgages crept north


2012: Connect the housing bubble dots: There could be trouble on CMHC’s horizon


But don't worry, Canada's banks are the best in the world, eh?

 I have no idea where you were eating Eric but I live in Perth Western Australia and those prices are utterly outrageous. A typical good restaurant meal for 2 costs about $60-$70 Aus. A family pizza costs $20. A Big Mac meal costs $6.
Sounds like you went to some kind of rip off joint or top class restaurant. 

Thank you so much for a clarifying interview. You guys are helping a lot of real people navigate the mess we’re in. My four kids thank you.

Presently I am flooded in, today i watched a black swan with two babies paddle over the driveway. That aside food price inflation is systemic in australia. I have observed 100% approx since 2008. A large part of that is due to the constant floods and cyclones, however a large part is the food price inflation that Erik is talking about. I have noticed an increase in australian food prices, I frequently travel to other cities and I would agree it is happening. I even wrote in a thread on the subject in the asia/pacific forum in the message boards on this site on the subject of australian inflation.I always get a chuckle when anyone talks about black swans. I only have to walk a half mile to watch them swim in the lake beside my driveway.

Erik I have a bridge to sell you.
Your example of $57 pie and intimating it is typical of highly inflated prices in Australia destroys the entire article for me. Here in Perth you could eat for a week on that $57 (our family of 4 - 2 adults, 2 teens - spends well less than $150 /week on food).

Or you can dine out and have steak every night on less than $100 as this guy did:

Our fuel prices have gone up recently in line with yours, but in general inflation is very subdued at about 2%.


Is the economy a mess and how do I navigate its treacherous waters? I watch OIL, and that means the waters are getting really stirred up right now. Frankly, under a hundred and I’m less concerned, and making good coin. Over a hundred and I’m really concerned, and sitting straight up in my chair. Trailing stops, and paying myself a wage. That’s it for me.
GOLD and Silver is my insurance for all other investments.

Erik, was it the best chciken pot pie you ever ate? How about the salad? If the company of your Lady was rewarding then the meal was properly priced. Well, OK, maybe a little pricey. I had campbell’s tomato soup and grilled velveta cheese, butter on bith side that was delicious. Cost $3.79 plus $1.21 tip. $5 bucks and had the time of my life because I woke up after surgery…It don’t get better than that.


 Don’t know where he was eating but it definately wasn’t "working class"I live and work in Sydney, (city) probably the most expensive place in the country and I can tell you if that’s working class prices they’d run out of customers in 10 min. Unless we have a vastly different idea of whatworking class is.  Sounds like exaggeration .

Percisely 1 year ago today, there was an article on FSN that had a section called, "Bernanke’s crimes against humanity, exporting higher food prices to poor nations."  
The $57 pot pie, IMNSHO (in my never so humble opinion), is a "boots on the ground" observation.  Might it be a just a little bit short sighted to say that we agree with ET, or we don’t agree with ET on the point that "Bernanke is is exporting inflation", by predicating it soley on the price of a pot pie?

Big picture from 30,000 feet:

  • 54% [and declining] of all trades globally are transacted in U.S. Dollars.  
  • Joemanc just sent me a piece where Buffett wrote, "the dollar has fallen a staggering 86% in value since 1965."
  • One can also go to the BS, (oops, forgot the L), the BLS and use their CPI inflation calculator to get a trend for the purchasing power of our dollar.  When I do this I always watch CM's chapter 16 first.  It's one of my favorite chapters and probably why I continue to drop the L.
  • The bottom line is that our dollar, isn't a dollar, at best it's a "two-center".  Maybe we should start calling it what it is?  Inflation is the most missunderstood and also the most important topic today, and few get it.  Rising prices are a sympton of inflation, they are not inflation.  
  • High prices are caused by three things, and three things only: 1.) the value of the dollars---2 cents and falling--(use gold not pretty other pieces of paper from other countries as your "value measuring stick") 2.) the price of oil, it is in everything even food. & 3.) supply and demand-for which we have 7 billion people all, for some unexplained reason, vying to eat.
  • As mentioned in the FSN article, we, the 313 million, tend to view the rest of the world, the 6.7 billion through what we see.  What we spend out of our income, verses what the rest of the globe spends out of their income on food is very different.  Link to map that shows that the vast part of the globe (excluding fish) pay more than we do to eat.  Can you fathom paying half of what you earn on food? Link
  • Remember too that even if a country exports a lot of food, it still has to import food it doesn't have or can't grow.  Remember also that these countries are very poor, buying food is really buying gas. 
While I agree with my friend JAG that the bankers blew the economy up, I think ET is correct, Bernanke is exporting inflation, or IMNSHO words from exactly a year ago,  "Bernanke's crimes against humanity, exporting higher food prices to poor nations."  I don't think we should be taking pot pie out of context.  I think, once again, ET has nailed it.

I’d add that the most important words on this entire site right now for any of us wondering how this is going to (continue) to play our are (link):  

According to Ludwig Von Mises: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. [Greenspan’s housing bubble] The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, [when Paulson cut the "700" billion check voluntary abandonment was tossed out the window] or later as a final and total catastrophe of the currency system involved.”



If Erik’s observation is that a $57.00 pot pie is outrageous, then I take it as his own personal and honest assessment.  I and probably many others would not only think it outrageous but out of our league.  I wouldn’t have even concidered buying it after looking at the menu.  The point is that there is definately a debasement of our currency and thus inflation.  Thus we have a need to buy more gold and silver, as someone said recently, a silver quarter can still buy a gallon of gas.  I helped my daughter buy some silver for her three boys yesterday.  A good start for those youngsters.