Grant Williams: Why The Smart Money Is So Nervous Now

If you drop anybody into any momentous period in history, it’s really tough to perceive it at the time. It’s only when you look back on these things with the benefit of hindsight that you really see how historic they really are. But for many people right now who can forget the narrative and can forget what they're being told by various interested parties, if you can stand back far enough and take a practical look at what’s happening, I think it’s much easier to see certainly how far from normality things are today. 

So believes, Grant Williams, portfolio and strategy advisor for Vulpes Investment Management, and proprietor of the economic blog Things That Make You Go Hmmm

In this weeks' podcast, Grant and Chris discuss the growing anxiety they see among experienced investors. More and more, those who have made long, successful careers in money management are realizing that the system has morphed into a strange beast they no longer recognize, nor trust. Fear of epic, perhaps historic, dislocations in price when the current market reverses is causing more and more of the "smart money" to sell out now and seek safe harbor: 

We don’t know how it will end, but something has to give. It’s a question of what it will be. Because when you start playing with the forces of nature you can suppress them for a while, but they will eventually overwhelm you. We’ve seen this constantly throughout history. I’m a big reader of and a big follower of history because I think the answers to everything lie in there somewhere if you pay attention to the signals.

So, for example, the central banks interfering with the natural price of capital by suppressing interest rates and fixing somewhere where they really shouldn’t be you at that point, have interfered with every single transaction on the face of the planet. And so if you interfere with every transaction that happens on any given day anywhere in the world you are going to get transactions that are not natural. And if they’re not natural at some point they will revert to where they ought to be and I think we’re starting to see that. We saw that in Switzerland, we saw the natural forces reassert themselves once that peg was removed, and it was incredibly violent. And it moved the idea of hyper-volatility back into the public conscious.

Imagine what happens when the Fed does the same thing and says “Hey you know what we promised you for the last six years? Well we can’t fight this thing forever. We’re out”. Imagine the volatility that’s going to unleash. And at some point, this has to happen. Sure, plenty of people can make hay while we go along and they can close their eyes to what they may instinctively know is true and they can buy the markets and they can chase the trend and they can follow these things up. But at some point, it’s going to turn around and bite them. When that happens, if you’re not prepared for it or you’re still fully invested, there will be no way out. Not in the time frame you need and not at the prices you want.

What we risk is a switch in the market, a real switch -- which is something that obviously the central banks and governments of the world are desperately trying to avoid happening. When that occurs, we will see how this new world works in the opposite direction. And it’s going to work similar, except for the fact that you’re going to have a bunch of people looking to sell alongside the robots. And when markets are going up it’s very, very easy to product more stock. People can issue more shares, there’s always new stock if you want to buy it. But if instead you want to sell stock, you need a bid -- and this is something people often forget: sometimes there are no bids. And where there are no bids, you can’t sell. The first bid you might see may be down 20, 30, 40%. Guess what? The robots may well start hitting those; so you’re going to see incredible dislocations in markets once the wind changes direction and markets head the other way.

A tremendous number of people talk to me about how the financial system is broken  -- and they mean that in the worst possible way, in that this doesn’t work anymore. And when we do get this resumption of natural forces, people are genuinely concerned about what happens at that point because what do you do with an entire financial system that doesn’t work anymore? They’re very afraid about the steps that will be taken to counteract the amount that has built up by the interference over the last six years by outside agencies that have as I said corrupted -- and I use that term in the true sense of the word -- that have corrupted price signals all around the world. The financial system that we’ve all grown up with and that every economics text book talks about doesn't exist anymore. This reality is not going to be obvious to everybody until it just stops working. And very, very smart people are very, very nervous about that.  

Click the play button below to listen to Chris' interview with Grant Williams (54m:21s)

This is a companion discussion topic for the original entry at

Always good

We are definitely in uncharted waters right now.  Its great to have that reminder.
The world's unified central banking model is slowly breaking down.  Looking at the presentation by Koos Jansen about the evolution of Austria's gold holdings is particularly interesting.

The table in the article shows Austria moving from a situation where much of their gold was loaned to commercial banks, to where much more of it was "allocated gold" stored at the LBMA, with the changes taking place from 2009-2013.  And now they are concerned that they are unable to actually audit the allocated gold at LBMA.  If they have decided they aren't going to lease gold any longer, there's no upside (and a whole lot of potential downside) to continue storing the gold at LBMA.  Repatriation cannot be too far away.

One wonders what the Fed's table would look like, if we were able to see it.  If we could, say, audit the Fed.

Part of the motivation for Asian people to own gold is that they have dealt much more recently with dramatic government debasement and wealth confiscation, so they are more motivated to have actual physical gold.  Their faith in government is much lower than in the west.  The Chinese people that fled the rise of Communist China had to leave their real estate behind - but if they had gold, starting anew somewhere else was much easier.  Young men and women who lived through that period are now grandmothers and grandfathers.  They do not forget what they and their families went through.  And that's just one example.

At the end of the day, that's what gold is: a general hedge against government.  It is not merely a hedge against currency debasement, it is a hedge against all forms of government overreach, against the breakdown in the rule of law, against both inflation AND rampant financial repression and taxation put in place to keep those government benefits and pensions flowing to the bureaucrats.

Each central bank that repatriates its gold is another increment of trust breakdown in the system.  The comment from Grant that a single bar of leased gold appears as an asset in two different places is quite important.  Both parties clearly want the exposure to gold that the gold bar provides, and once we reach the point when this exposure becomes critical for both parties, only one of them will end up owning the bar.  The other party (or parties) will end up with a defaulted promise.  My guess: its the one with more power/influence over the vault owner that ends up owning the bar.  And Austria realizes, when push comes to shove in a crisis, they are probably the ones who will end up being defaulted upon.  "For the good of England."

At one level, this would be the oft-predicted COMEX default that I often make fun of, given the number of times this default has been imminently predicted and has yet to come to pass.  That's because I believe the default won't happen during "normal times" due to "running out of gold at COMEX" or other such silliness.  I believe it will happen as an unintended consequence of direct government action, when desperate governments panic and begin seriously flouting the rule of law and confiscating everything "for the good of the country" - but really in order to assure the survival of the bureaucracy and the powerful in a time of crisis.  A critical precondition for the default will drop into place: faith in government amongst the people will snap, and only then will people see the advantages of physical gold.  And that's when I believe the default will happen.

In the meantime - paper gold will continue to set the price, because a sufficiency of trust in the current system remains.  Even if that trust is eroding with each central bank repatriation request, as long as we remain out of crisis, COMEX sets the price.

We do live in strange times.  But the good news is, once we get through the other side, nobody will believe in promises by government that are fraudulent and unsustainable.  That's where the corruption comes from: the willingness of people to believe in promises from politicians (and government) that cannot be delivered upon.  Ultimately that leads to disaster, and once we experience the impact of that, the next generation (and hopefully the one after that) will not fall for such things again.

Sound money will come as a consequence of this awakening, but the popular awakening must come first.

The industrial sector started a natural recovery in early mid 2009.   Then the TARP and STIMULUS finally hit and it has been bumpy flat lining since then.

So besides some gold, where do you put your money? Under the mattress? I suppose US treasuries are almost in that category because they have little risk as far as being paid back but at what dollar value? The Fed can always print enough money to make good on the them. The stock market at these levels is worrying. Municipal bonds have been doing well for me perhaps because people believe the Federal government will back the cities in a too large to fail emergency? Junk bonds have been suffering because of oil prices crashing and uncertainty about the economy. Real estate has been driven up to vulnerable levels again.  Many assets have been inflated due to money printing and will probably have to come back to earth. So the article tells that there is a lot to worry about but not so much where to turn. Perhaps cash CD's spread around different banks in $250,000 FDIC lots for a while. In a big deflation cash could be king? If interest rates took off those treasuries would suffer. 

"where do you put your money"
My $0.02?

CD's are paying 2 to 3% depending on 5-10 yr term. Great low-worry investment.

If you're really worried, sink your cash into gold.

Start up a business. Invest in yourself.

If you have the stomach, bottom-feed in today's oil-stocks. Right now, they are screaming bargains, and possible getting even cheaper over the next months. By 2020, I think you will double your investment. If oil stocks fail, the world as we know it has come to an end, and money will be meaningless anyway…

Chris, I have the greatest respect for your sustainability work. But some months ago (Oct 2013?) you were so certain that the equity markets were poised for an imminent crash. Like so many others over the last 3-4 years calling for a major crash, the markets did not listen. 
While in the long run (2030-2050) I think it's clear we're headed for an unsustainable global train wreck, in the short term (2016-2020) the fundamentals are pointing towards accelerated growth. And the markets know this, which is why they've been so resilient.

Yes, our biggest issue is debt, and more haircuts are coming, but debt-holders are not going to kill the system. That would be suicide to them. Debt can always be restructured. Just look at recent negotiations in Greece.

Currently, we've come into the perfect economic storm:  cheap and abundant money, cheap energy, and cheap raw materials. I actually think oil prices will dip lower over the next few months, but that's another conversation (oil equities are a screaming bargain today). This perfect storm is a recipe for accelerated global growth. It's a law of biology: give a system more fuel and its growth accelerates. 

Global GDP has risen at roughly 3.3% y-o-y for the last 3-4 years. I expect that number to accelerate 2016-2020, perhaps reaching 5%. But as the economy tilts up, so will prices, inflation, energy costs, interest rates, etc… The real question comes after 2020.

After the economic growth spurt, can we sustain high interest, high energy costs, and high raw material costs? Likely not. And I think this was predicted by peak-oil theory. Fossil oil has entered into a new period of wild price oscillations, as predicted. Oil's long-trend inflation since 2003 has been 14% y-o-y. And since 2003, we've seen oil as low as $40 and as high as $140. Moving forward, I suggest the next economic peak (2020 range) will force $200+ oil, which will likely catalyze the next economic crash. Rinse. Repeat. 

It's this new and ever-accelerating cycle of debt-fueled, energy-constricted economic boom-bust that will likely be our undoing. When I project Kurzweil-Moore charts, there are around a dozen key indicators (energy, water, population, climate, etc.) that reach "effectively undefined" asymptotes around 2040. This tells me that the years 2035-2050 could be the hardest period in human history.

5yr CD's paying 2.3% maybe? 10 yrs is too long a horizon for me. I have been considering getting back into the oil and pipeline ETF's like MLPN and  XLE  to collect a dividend until it recovers. One might have to ride out a further dip but dividend oil stocks are perhaps a bit like gold in that oil goes up in price with currency destruction as people flee the Dollar. But unlike gold you get some income. I wonder if Janet Yellen has learned how disruptive QE is to investments. So much money flowed into unproductive investments that raised input costs to business. I think that you may be right about the economy growing with cheap oil and lower commodity costs spurring growth if our Fed can just stop messing with the currency and creating another panic out of the dollar and into $50 million dollar paintings, commodities etc. It seems when they do money printing foreign buying of treasuries dries up and the Fed could end up being the sole buyer of our debt like Japan. Who wants to own low interest debt in a depreciating currency? Most of the money flowed to the 1% and not to main street anyway. They have to find a better way to get the money to lower and middle class income brackets who spend most of their income into the economy. They could have mailed a check for $50,000 to every family in the USA for what was printed according to one article I read. Think what that would have done for the economy! Tax reform would help too if done correctly to take some load off the middle class. It seems that by lowering and raising taxes one could regulate the economy better than monetary policy. But that could fill a book so time to go.

As far as I’m concerned goldbugs just don’t get it.   “Money” is claim on future energy use.  Nothing more, nothing less.   The vast majority of our energy comes from fossil resources which, by its finite nature, is diminishing.  Gold on the other hand, while also finite, will never diminish.  Once mined it is always there, barring mishaps like forgetting where you have buried it. This is the fundamental  blindspot for goldbugs.
The main advantage that fiat currencies have over gold is that the money supply/velocity can change in response  to the available energy supply.  Indeed this was the very reason we came off the gold standard.  The increase in gold production could not keep up with the increase in energy production when we started to tap into our fossil energy reserves.  This will also be a problem with gold as a currency when we start our energy descent.
THE question for me is:  Does our money supply/velocity reflect the current energy situation ?
THE answer for me is:  Yes, because the system is self regulating.  We may be flooding the world with money at the moment but the energy (Net available to society ie. minus that used by the energy sector) is not enough to fully make use of it.  Hence the velocity of money is diminishing by a corresponding amount.
In layman’s terms;  this newly created money CAN’T be spent and circulated round society but instead is being parked in savings accounts, treasuries and equities.   This is driving treasury and equity prices up to record levels.
What will happen in the future?  I have my thoughts.  I’ll save them for future comments.

Mailing every family $50,000 would be highly inflationary but would reduce our current debt levels. This is something central banks in highly indebted nations may have to resort to doing, eventually. Whether it would boost the economy is debatable. This would depend on whether it is being constrained by lack of money or lack of energy and resources. I believe in the latter.

OK…   So how does Silver fit into your picture?

There's an element you missed about our self-regulating money system.  Once the defaults occur on the downslope of Peak Debt, our self-regulating system contracts the money supply due to a whole bunch of debt default.  While this shrinkage is an admirable virtue of the system, I for one would prefer that my own personal money supply NOT shrink.

What's more, the steps the government will likely take to ameliorate this process will probably pick winners and losers in this money supply shrinkage process, and at the same time inject a whole lot of new money supply into the system immediately after our personal money supply is shrunk, lowering the value of what remains of my personal money supply.  I would prefer not to participate in that either, if I could help it.

So when our self-regulating system does its thing, and then when the government then does its thing, my goal is to remain somewhat apart from the gyrations.  If possible.

To me, gold acts like a foreign currency that cannot be printed, defaulted upon, or capital-controlled.  Right now, since the USD is quite strong, and since the US is the core economy, and all is well in the credit world, that's just not useful.  Who needs flood insurance when the sun is shining?

But I suspect in the future - the not so distant future - things will not be so rosy.

I was talking about gold being an alternative to our fiat money system. On a personal level yourreasons for owning gold are quite valid. I personally prefer owning rentable properties and land although there has been many instants in history where the inequalities between the asset owning classes and everyone else has been so great that these assets have been confiscated by governments, including gold. This is unlikely to happen though in the US or here in the UK as the politicians and media are fully controlled. At the end of the day we live in a capitalistic world designed to use up the Earth’s resources and fossil energy resources at the fastest possible rate. I wish we lived in steady state Socialistic world but I can’t change this. Therefore as I can’t change this and being in top 10℅ or so of the wealth distribution, I would like to keep my wealth just like you. Owing some gold is sensible.

At the beginning of the book 'The Creature of Jekyll Island' there is a fairly simple description of types of money.  Commodity money, of which gold is an example, is based on energy expended since it is a commodity mined, refined, coined and in hand.  In contrast debt based money is based on energy yet to be expended. As the sources of that future energy diminish then the value of debt money will also diminish.
The preservation of wealth in commodities in general can be done while the debt based money is still exchangeable for commodities.  The use of gold as a concentrated form, or silver as a less concentrated one, or whiskey as less so, etc will help. Then there are the basic commodities like productive land and foods that if kept as a store for future use will help when the debt money falls in on itself.

A few years ago there was a book about investments and retiring that was based on the idea of ending up with zero money after your funeral was paid for.  A similar approach would be helpful in the upcoming death of debt money.  The risk is the loss of value on paper as certain commodity prices change in relation to debt money…otherwise, going through life with zero debt money in your account and lots of commodities would be a slam dunk. 


Commodity money, of which gold is an example, is based on energy expended since it is a commodity mined, refined, coined and in hand.  In contrast debt based money is based on energy yet to be expended.
That's a great way of looking at it.  Another way to say the same thing: debt money is based on an expected stream of payments derived from "value yet to be added" to the economy, while commodity money is based on "value that has already been added."

In an uptrending economy with increasing energy available to society, debt-based money is well-supported, as long as lending is relatively prudent.  It becomes progressively easier to add value to the economy in that environment.  However, if we anticipate a lower-energy future, where it will be progressively more difficult to add that value, then the debt-money will not be as well supported.


Rental properties make a great deal of sense, as long as disposible income continues to stay more or less the same.  My one concern is that during a difficult economic time, local governments will raise taxes (junk fees) on property to keep those civil service pensions funded while at the same time tenant incomes are dropping, which will end up squeezing net income from both ends - for instance, turning a 10% cap rate into a 5% cap rate.  Or maybe worse.

But if we posit a government reflation reaction, the time spent during that period hopefully won't be too long.

I don't see an easy answer; rentals may end up looking good if reflation happens fast enough.  I am facing this same choice at this moment: keep my family's small rental property, or sell and put the cash…somewhere, hopefully a place where the cash won't vanish.

Armstrong suggests property will enter a long bear market after 2015.75, retracing all the way back to the start of the bubble, which he tracks back to 1955.  I have to say, this fits in with demographics trends, and the tendency for bubbles to retrace back to their origins - as disagreeable as this would be for my family's situation.

Mortgage rates are going into a major low. When the economy turns, the availability of mortgages will decline as always with the cycle. If you have cash and want to buy real estate cheap, yes it is wise to wait. If you want to play the game, then you can buy now and hedge this with shorts/puts on bonds. It depends on your expertise.

Depending on the area, those that have seen the sharpest advances will drop the most. There should be some stabilization as foreign capital will still flow into the USA and real estate plotted in dollars may decline while it is still rising in Euros or Yuan.

Aggravated and davefairtex. Great contributions. Thanks. Aggravated - I think I also read that book. It avocated taking out a reverse mortgage later on in life and if you timed you death right, end up with zero debts and zero assets at the end of your life. Fine if you don’t want to leave anything to your children. Davefairtex - I have been forecasting a plunge in property prices for over a decade in the UK. I have been spectacularly wrong so far. It is the income that is important to me which should be index linked to average pay hopefully. I also have a civil service pension, so what the government takes with one hand they will give me with the other.

What an excellent insight.  I had not thought of it that way precisely…I've noted the temporal distinction before, that printed fiat money erodes your current purchasing power while debts destroy future purchasing power (as they are paid back), but I'd not thought of it terms of past vs. future energy.

Thank you, that is a really helpful distinction and I will be using that from now on!

Speaking of which, that's one of the major problems with the current narratives…all of them rely on future projections of growth that simply cannot be met.

For instance, whether you use the Treasury Department's own $60 trillion entitlement shortfall number, or you use Lawrence Kotlikoff's $220 trillion shortfall number, both are as flawed as the other because they both rest on an assumption of perpetual GDP growth.  Where they depart is in a subtle methodological difference in how they account for the 'terminal years' of the NPV calculation.

But if one of the main elements of the formula, namely the 'inflows' or revenues, is badly off then subtle distinctions will be utterly swamped by a larger reality and both sets of calculations will be badly off.

In this case the inflows (FICA taxes) are a function of GDP and here's what the CBO has in its files for future US GDP growth:

Sharp-eyed readers may notice that the the projection calls for the US to eventually have a GDP as large as the entire world's was in 2014.

We then might wonder things like, saaaaaay, if the US is currently consuming 25% of the world's daily oil allotment won't it require something like 100% of the world's current output in order to have an economy equal to 100% of the current economy?

Of course, world oil production will be very far in the rear view mirror by the 2070's with a probable technical peak in the 2018 - 2020 time frame (and a net energy peak which has already happened in my view).  

As will natural gas.  And Coal.  And fish in the ocean, and fresh water, and soil, and bees and butterflies.

But, no matter to the econo-dogmatists who will continue to just extrapolate infinitely into the future without a single concern for the impossibility of their world view.

So entrenched are their beliefs that Spain's first 50-year bond auction was in September 2014 (which brings us right into the same time frame as the story I've laid out above) and they got off a load of those at just a 4% yield.  Imagine the unbridled optimism that is required to purchase those!  They are due in 2064 and literally everything I track is past peak by then.


What a train wreck we've got coming.

Sounds like a decent trade - short the Spanish 40 year, long US 30 year.  The cost will be (over time) the interest rate differential, which isn't too dramatic.  Right up until Spain/Euro blows up, when the trade makes money hand over fist.  Euro tanks, Spain defaults, money flees to the US.  Both sides make money at that point.
I'm not sure how the trade can go wrong, really.  Which scares me.  It seems too easy.


I was thinking the same thing about Vermont's situation with funding the teacher's retirement system.  I know the discussion has been about issues much more global, but man, if you look at the numbers, Vermont's situation is bad and getting worse.

$110 million dollar deficit THIS YEAR.

Meanwhile the teacher retirement system, a commitment no different than social security, etc, is in serious trouble:

Article is from last year…but the situation is only worse.

Wishing my state would follow the lead of Texas and put some of the retirement system in gold, if I recall correctly.

Yes…it will be a train wreck alright.;_ylt=AwrBEiFLtfdUw0AAXlzQtDMD
Just curious if anyone has seen any more in depth reporting on Yellen's comments today.  I find them very interesting, although actions speak louder than words.

It is a start though.  I did not expect her to bring the issue up.