James Rickards - The Road To Ruin

Full transcript: James Rickards on London Real

4:20 This is London Real. I am Brian Rose. My guest today is James Rickards, the American financial expert and author of The New York Times bestselling books The Death of Money, Currency Wars, and The New Case for Gold. You are an adviser for Johns Hopkins University and the U.S. Department of Defense, where you served as a facilitator for the first ever financial war games conducted by the Pentagon. Your new book, The Road to Ruin, outlines the global elite’s secret plan for the next financial crisis. James, welcome to London Real.

5:59 Thank you, Brian. Great to be with you. Awesome to have you here. I’ve got tons of questions about the book, about you. But one of the things that really piqued my interest that you went through in your life was that day in 1998 when you sorted out long-term capital management. And the reason I know even who that is is because in 1993, I was a derivatives trader at Bankers Trust.

6:21 Okay. And later, I moved to the first national bank of Chicago, and I remember the emergence of long-term. And it was almost kind of mythical at the time because we heard of these guys that were in Connecticut. I think you had, did you have Myron Scholz? Myron Scholz, Nobel Prize winner, was one of the partners.

6:37 Yeah. And so like when people get to Wall Street, like the options pricing model is called Black Scholz, which are after two professors that finally figured out how to price options after the market was doing it kind of incorrectly for 20 years. And then you guys had hired one of those people. Two. Yeah.

6:56 Two Nobel Prize winners. Correct. And it became this kind of mythical institution, and it went, I think, as you said, from a billion dollars up to four. Well, eventually it got to seven. To seven, yeah.

7:07 And then we gave some back. And when it crashed at the end, it lost four billion in about one month. But it was an incredible rise, exactly what you’re describing, Brian. It was just for five years, we were the hottest thing out there. There was no talent we couldn’t attract, no money that wasn’t interested in coming in, very secretive, very tight-knit culture, enormous success. Real results. We actually did give a $3 billion all-cash dividend to our investors at the end of 1997. So what we did, we tripled their money, gave them two dollars back, kept one, and then lost 92% of the one dollar. But you still got two bucks and change for your initial one. So most investors actually made money over the life of the fund. Most of the money that was lost was our money. Little by little we had, through our deferred compensation plans and compounding and not charging ourselves fees, we had actually grown to the point where $2.6 billion of the money was our own money. So it was a horrendous loss, but it fell where it should have fallen on the people who were running the fund.

8:09 Right. And like you said at the time, it was this kind of mythological thing. Everybody wanted to do business with you. All the banks opened up their credit lines. Everybody wanted to work for you. And yeah, I just remember knowing about it. And it was this huge success. And like you said, you had amazing returns. I think you did a lot of things in the swap market, a lot of liquid fixed income instruments that I think you guys really had some great trading strategies and harms. So I know it really well. So then I remember when it all went wrong in 1998, and it just didn’t make sense because these were the guys that knew about this stuff. And I believe it was the Russian crisis that made the swap spreads go really wide that caused a bit of a liquidity crisis and made things happen, right?

8:53 That’s exactly right. It was interesting because in my new book, The Road to Rule, and I talk about this, by the way, there’s a whole chapter on this. This is the first insider account that’s ever been written. There have been other books written about Long-Term Capital One, and particularly came out in 2000 by Roger Lowenstein. It’s called When Genius Failed, an excellent book, by the way. And I talked to Roger, helped him with that at the time the book came out. But he interviewed, he did hundreds of interviews with all the Wall Street participants. But there’s never been an insider account written by somebody who was actually there. So mine is the first one, and it’s one of the chapters in The Road to Rule.

9:27 Yeah, chapter four, I think. And you were general counsel? Right. And I was the lawyer. I did compliance and all that. But you talk about these derivatives contracts. I was not the trader. I was not the quant. I wasn’t sitting there with formulas, pricing things. We had plenty of people to do that, including Myron Sholes, the co-inventor of the Black-Sholes formula. By the way, there were three professors responsible for that. It was Fisher Black, Myron Sholes, and Robert Merton of Harvard. So it might have been called Black-Sholes Merton. But Bob was actually a very generous guy. Fisher and Myron had kind of worked out their formula. But there was a really difficult, challenging piece of math involving something called Edo’s calculus, a branch of calculus. They couldn’t quite solve it. They went to Bob Merton.

10:10 Merton solved it. He said, can you guys publish the paper, take credit for it, and then I’ll do another paper later on, which is pretty generous of Bob to let Fisher and Myron do that. So when they awarded the Nobel Prize, now, sadly, Fisher Black died, and the Nobel Prize is never awarded posthumously. You have to be alive. So they awarded it to Merton and Sholes. Sholes and Merton were the joint recipients of the Nobel Prize. They were both partners of long-term capital.

10:37 And what they did, again, very generous, they took the money, they pooled it, carved out a third, and gave that to Fisher Black’s widow. They didn’t have to do that, but they felt that was the right thing to do. So I always thought that was a very admirable way to handle the prize money. We had two recipients of the Nobel Prize and two of the three founders. That formula is at the root of all derivatives pricing, because futures are really just a form of options. Everything, futures, forwards, options, they all involve optionality, like betting, whether the market’s going to go up or down. So that formula is at the base of all of it.

11:10 Yeah. It’s such a huge formula. And for many, many years, people were estimating it incorrectly, calculating it incorrectly. And so I went to MIT. That’s one of the reasons I was recruited there by Bankers Trust to get a bunch of these rocket sciences in to try to price these derivatives. And I don’t know if you remember Bankers Trust back in 93.

11:27 Absolutely. I started banking in 1978. Okay. Gotcha. So Bankers Trust, we didn’t have the pedigree. We weren’t Goldman, we weren’t JP, but it was this scrappy bank full of a bunch of smart people that didn’t mind taking risk and putting on all sorts of fascinating derivatives trades. And I got on the fixed income book in 1993, and it was the crazy thing. I was 22 years old. I just passed my Series 7, and I got on the desk, and the guy gave me a phone, and he said, this is the phone to Chicago, where you will trade futures. This is the box to the treasury desk. And you were now trading swaps. And I was just like, I mean, now? And they’re like, now.

12:02 And next to me sat all of the exotic option desks, and they were doing time trades, which were daily options. And they were at the cutting edge of some of these really crazy derivatives. Well, a swap is just a leveraged bond trade without the bond. Correct. When you buy a bond, you finance it in the repo market. So I buy the bond, and then I pledge it to get cash. That’s the repo, and I use the cash to buy another bond and so on. So you build up this pyramid of bonds and repos, and then so you’re receiving a fixed return on the bond, and you’re paying a floating return on the repo. So somebody said, well, why don’t I do a contract with you where I receive fixed and pay floating, but we’ll skip the bond. That’s what a swap was. And so it was kind of invisible, but you had cash flows, and you could profit or loss according to that, but there was no actual bond, and it was off balance sheet. And today, Brian, as you know, there are one quadrillion dollars notional derivative of swaps of the kind we’re talking about.

12:56 For the viewers, one quadrillion is a thousand trillion. That’s how much is out there. So this is a monster that’s completely out of control. Right. And what James is really talking about, this off balance sheet property means that it doesn’t show up anywhere. And now, look, I traded derivatives for about five years, and I broke credit derivatives here in London for 10 years afterwards. So I’m a derivatives guy. And I still believe, well, there are some great things about derivative contracts, but the problem is that you can’t tell where they are and who belongs to what. And so you can do a massive amount of leverage where the usual risk controls wouldn’t see that, say, long-term was holding the equivalent of a trillion dollars worth of bonds. Correct. And so, look, when used correctly, they are valuable instruments, but they can also get a little out of control. Well, I would disagree a lot. I would say they’re a lot out of control. I would say derivatives where, in my book, I actually go through three crises. So 1998, which is the one we started talking about with long-term capital management. 2008, I think the viewers are very familiar with that. Everyone lost money in 2008, so they’ll need to be reminded of that. And then those are 10 years apart, 98 and 2008. So I hypothesized a third crisis in 2018. So I talked about 98, 2008, 2018. Although I make the point that it could be tomorrow, that the setup is there. 2018 is kind of a device to talk about

14:14 The next crisis, but it could be sooner or later. It could be tomorrow, for that matter. Now, in 1998, Wall Street got together and bailed out a hedge fund. In 2008, the central banks got together and bailed out Wall Street and all the banks in the world. In the next crisis, who’s going to bail out the central banks? In other words, each crisis gets bigger than the one before. Each bailout gets bigger than the one before. We are now at the point where the central banks can no longer bail out the system because they are stretched to the limit. I’ll use our US Federal Reserve, our central bank, but this is true of central banks around the world.

14:47 They took their balance sheet from $800 billion to $4.2 trillion to bail out the crisis the last time. And more than that, because they also did $10 trillion of swaps, invisible swaps with the currency swaps with the European Central Bank, guaranteed every bank deposit in America, guaranteed every money market fund in America, took interest rates to zero. I mean, the measures were extraordinary. Now, it did truncate the crisis. It would have been a lot worse if they hadn’t done that. But they haven’t normalized. In other words, if somehow in the meantime, in the last eight years, they got their balance sheet back down to $800 billion and got interest rates up to 2.5%.

15:23 I’d be the first one to say, nice job, guys. You saved the system. You got your balance sheet back to normal. Nice going. But that didn’t happen. They’re still at $4 trillion. Interest rates are still close to zero. When the next crisis comes, and it could come tomorrow, it could come any day, they’re not going to have the capacity to deal with it because they’re stretched as far as they can. Now, some people, Stephanie Kelton, Paul McCauley, some of the modern monetary theorists say, what’s the problem? Just go to $8 trillion or $12 trillion. Print as much money as you need. I don’t believe that’s possible. Legally, it is possible, but politically, they’ll encounter resistance. They’ll lose their independence.

15:56 And there’s also an invisible psychological boundary. You will destroy confidence. You will cross that boundary. You won’t know until it’s too late. So the central banks can no longer bail out the system. The only clean balance sheet left in the world is the International Monetary Fund. They’re not the height of the leverage. They can print money. They have this world money, the special drawing right, the SDRs. They give it a funny name so people won’t know what it is. But I just call it world money because that’s what it is. So they have the assets that can allow them to bail out such points? They can print this money. That’s the point. So it’s the last institution left with any kind of credit? Or printing power, I’ll put it that way. So clean balance sheet and others. So the Federal Reserve can print dollars.

16:36 The ECB can print euros. And the IMF can print these special drawing rights. Now, I dare say, no one knows what these are. And why should they? It’s highly specialized. I mean, I’ve met PhDs in international economics who can’t give you a straight answer as to what an SDR is. But I obviously have studied it and I’ve trained in this. So I’m pretty familiar with it.

16:54 But that’s what they’ll do because there won’t be any other source of liquidity. And then that will be the end of the dollar as the benchmark global reserve currency. We’ll still have dollars. They’ll still be around. But they’ll be like Mexican pesos. There’s no confidence. Correct.

17:07 Because it ultimately is about confidence. Absolutely. And that’s what people need to understand. And like you said, the powder’s not dry anymore for the Federal Reserve. And so as they get levered and levered and levered, at some point, it won’t work anymore when they go out of bail. That’s exactly right. And it is this confidence issue until everyone says, wait a second, this can’t work. And that’s when everything falls out.

17:29 You’ve got it exactly right. And once you lose it, you can’t go back. Look, you get, you’re right. Once confidence is fragile, it’s easily lost. And once you lose it, you can’t get it back again. It really goes back to the fundamental question, Brian, what is money? So at various times and places, feathers have been money, clamshells have been money, dollars and euros are money today, gold and silver have been money. I would say they still are. I would say that the best form of money, debit cards, credit cards, and Bitcoin is money. I don’t own Bitcoin. I don’t recommend Bitcoin.

18:01 But I would say that it’s a form of money. And people go, well, it’s not backed by anything. The dollar is not backed by anything. The euro is not backed by anything. Bitcoin is not backed by anything. I say, no, they’re all backed by one thing, which is confidence. If you and I think it’s money, if you’re willing to accept it from me, because you’re confident you can give it to someone else for goods and services, then it’s money. But what happens when the confidence goes away? That’s the point. Yeah. There’s a great book out now, I think it’s one of the best sellers called Sapiens. And it just talks about all these institutions that we have faith in as people. They’re just figments of our imagination, whether it’s the Queen or the USA or Money or Ford Motor Company. And it’s a belief until it’s plainly obvious it’s not anymore. And when that happens, it all the bottom falls out.

18:46 Samper has no clothes. I mean, the classic fairy tale or children’s story. But it’s exactly how things work. Right. And now, for people to understand, if we go back to these 10-year cycles, and I think they were really interesting to look at it that way, in 1998, why was long-term bailed out? Just so people know, you’ve got a lot of derivatives on the books. You’re about to fail. You’re going to lose all of your money. Correct. Now, why did the banks have to come in to bail this hedge fund in Connecticut out with all these smart, rich guys that will probably still be rich again? Right. And that’s the point, I mean, without mentioning names. Let’s just say that some individual was worth $300 million on paper, because that was their share of long-term capital. We lost 90%. So now you’re down to $30 million. Not a hardship case. You’re still worth $30 million. You’re right. These people were not going on welfare. I like to say that if we actually had failed, and we were prepared to file for bankruptcy, we were days away, I would have just slept in the next day. It would have been Wall Street’s problem. And that’s the point. Wall Street did not bail us out. They bailed themselves out, because we owe them the $1.3 trillion notion of value of derivative contracts. Now, if you’re a bearstone, or you’re an old firm banker’s trust, or Credit Suisse, or any of the other firms that are involved, so you write the contract with long-term capital management, and then you write the

20:06 Offsetting contract with some other commercial hedger or some other bank. And you’re just sitting there taking a little spread. Like, I’m receiving fixed and paying floating over here, and I’m receiving floating and paying fixed over here, and I’m making a little spread, and I’ve got a lot of leverage, and I’m making 20% returns on equity, and it’s all good. Well, the minute one side goes away, the minute this contract goes away, which is what happens in bankruptcy, you’ve got a one-sided position. Instead of having a spread trade, you’re net-long or short, whatever it is, you have to go out on the market and cover that position. This is what was going to happen, that Wall Street collectively, I call the 14 families, you know, after the mafia, these 14 families, we’re going to have to go out and cover a trillion dollars of stuff, you know, Treasury bonds, and I’ll never forget the Sunday before the bailout. So this was all happening in real time. So I was the lawyer, so I had a guy that stayed up for five days in a row getting all this stuff done.

21:01 I mean, there were teams of lawyers around, but I was in charge of our side of the deal. So before the consortium, that’s what they called themselves, came together, a delegation from the Fed and the Treasury came up. So it was Peter Fischer from the Federal Reserve Bank of New York, his deputy, Dino Koss, and a guy named Gary Gensler, who was Assistant Secretary of the Treasury at the time. So the Treasury and the Fed come to Greenwich, Connecticut. They sit down, John Merriweather, Colin J. Em, as our founder and CEO. He was the former Soloman brother?

21:29 He was the Vice Chairman of Soloman Brothers. Isn’t that a huge name that went out there? In the 80s, he was the master of the universe. There were books about him. Correct. Well, Lyers-Poker, which is Michael Lewis’s, Michael Lewis is a string of bestsellers, but his first bestseller, Lyers-Poker, was about J. Em and this hand of Lyers-Poker, you know, he played with the serial number on a bill that supposedly a million dollar bet between John Goodfriend, the CEO, and John Merriweather, the Vice Chairman of Soloman Brothers on the trading floor. That’s how the book starts.

22:00 But he was John Merriweather, who was also kind of the model for Sherman McCoy and Bonfire the Vanity’s Tom Wolfe’s novels. He was the master of the universe. Really nice guy, by the way. But the bond trader on the floor, not afraid to take risks. Absolutely. But see, the difference was that at Soloman Brothers, they were a unit within a much larger firm. Now, the firm had to disclose their overall results, but they didn’t have to break down the results of that unit. So these guys, they could lose $200 million one quarter and make $400 million the next quarter. And so you’re up $200 million, which is pretty good. But that one quarter where they lost the $200 million, nobody knew about it because it got buried in these much larger results.

22:40 And huge balance sheets. Correct. The problem when they got the long term, if you lost money, everybody knew about it because we didn’t have any other businesses that we were in. And so that was that when we got to the acute stage later on, that’s what happened. But the point being, so it’s JM and me and two guys from the Fed and the Treasury, and we sit down. We didn’t ask for a bailout. We called them to let them know what was going on.

23:03 It was almost like good corporate citizens. Like, okay, this plane is going to crash. We just want to warn the people on the ground that the plane is crashing. But we didn’t really expect them to bail us out. So let’s just tell you what’s going on.

23:14 We just sat there. We had printouts. I mean, the computers obviously, but this was all printout. We just spent a whole day going page by page. When we were done, Peter Fisher’s face was white. And Peter’s a very solid guy. He’s seen it all.

23:26 And what shocked him, he looked at us and said, I knew you guys were going to destroy the bond market. I didn’t know you were going to destroy the equity markets. Because we had $5 billion of equity trades. We were the biggest name in risk arbitrage. That’s when you bet on takeovers.

23:44 We were the biggest. It was all under derivative form with Bear Stearns. So Bear Stearns gave us what’s called a basket swap. And we could just call up and say, you put in some Citigroup, sell some Lockheed, all the big deals at the time. MCI WorldCom, Citicorp Travelers, Boeing Lockheed, all those big merger arb deals in the summer of 98. We were in all of them in size. But it was just a contract with Bear Stearns. So Bear Stearns would go out and they would sell us Citigroup or whatever the target was in derivative form. But then they would go out and buy it themselves. So they would have a covered position. Well, if we went bankrupt and that swap went away, they were going to have to dump that stock because they were just net long. They didn’t have the capital for that. So there was going to be a $5 billion wave of panic selling in the stock market on top of the bond market. So that’s a mess. Then it’s mom and pop, it’s pension funds, and then everybody fills the volatility. They would have closed the markets, at least temporarily, just to get some word of it. So this is what we were up against.

24:41 So my point, Brian, is that Wall Street didn’t bail us out. They took over our balance sheet so they wouldn’t have to have the fire sale, which would have bankrupted them. Now, the exact same thing happened in 2008. We were hours away, probably days away, a couple days away at most, from the sequential collapse of every bank in the world. So Bear Stearns had failed in March of 2008. Fannie Mae and Freddie Mac, the big mortgage agencies, failed in June and July of 2008. Lehman Brothers failed in September of 2008. They were falling like dominoes. They were going like this. Morgan Stanley would have been next, then Merrill, then Goldman, then B of A, then Citi, then JP Morgan might have been the last guy standing. But they all would have fallen. Same thing around the world, Deutsche Bank, Barclays, and all the rest. So you can see this.

25:27 I got a call Sunday night in my house in 2008 saying, are you coming in the office from my clients at JP Morgan Credit Suisse or whatever. And I knew things were bad, and I’d watch an Lehman equity go down to zero. But I didn’t know Lehman had failed. And so I was like, why would I come in the office on a Sunday night? And they’re like, because we are about to start liquidating contracts. Because like you’re saying, when you miss a counterparty, all of a sudden, all these contracts that look like fairly low risk hedge instruments, everyone has to start going in and liquidating.

25:57 Right. And this is exactly the point, which is that all of the risk models that Wall Street uses, and you’re familiar with them because you traded this stuff, this value at risk. So you go to James Dimon and say he’s doubled his derivatives book, which they have since 2008. Right. This is the president of JP Morgan.

26:13 Yeah, he’s the CEO of JP Morgan. So you go to James and say, OK, you’ve doubled your derivatives book. How much did the risk go up? And he would say, well, very little because it’s long, short, long, short, long, short, long, short. All in that cell comes down this tiny little thing.

26:26 We get a little capital, but this is value at risk, right? But that is not how you measure risk in derivatives because that only works when everything’s good. But when you’re in stress and people are going bankrupt, all of a sudden, the net becomes the gross, exactly what we just explained, which is you take a counterparty out of the equation, your net exposure is a gross exposure. And then it’s liquidating the gross or covering the gross that causes the illiquidating the markets causes the panic. So why they are allowed to get away with providing capital using value at risk when that is not the proper measure of the risk astounds me.

26:57 But that’s the system we have. Right. And in 08, they were saying here in London, RBS was like hours away from shutting down ATM machines, which I think people don’t really understand when people can’t go to the ATM machine is where you get real panic, right? And you get humans behaving in ways we haven’t seen them behave in probably hundreds of years. And that’s when there is no confidence anymore and scary things happen. Are you amazed that we made it through 08 without more social unrest? Well, given the magnitude of the response, no, although we would have had the social unrest if it had been allowed to continue. But the way I analyze it, Brian, and we just talked about the flaws in value at risk. The models that are used, equilibrium models, normally distributed risk, that means that the degree distribution of events is a bell curve. Standard models on Wall Street. Efficient markets, all the information. Prices move continuously. So I want to get out. I might be a worse price, but I can always get out.

27:54 Every one of those assumptions is wrong, empirically wrong. That’s not an opinion. If you actually look at the degree distribution of risk, it’s not a bell curve. It’s what’s called a power curve, a different shape curve, which represents a completely different system. Prices don’t move continuously. They gap up and down. There’s no chance to get out anywhere in between. Markets are not efficient. They do crazy, irrational things all the time.

28:16 And it was all the assumptions of modern finance are incorrect. And yet we’ve built this one quadrillion inverted pyramid of derivatives on flawed models. We shouldn’t be surprised that these things keep happening. But the point I’m making is, and you’re exactly right about the dynamics in 1998 and 2008. In the next crisis, we’re going to have the same dynamics on a larger scale. The central banks will not be able to truncate it as they did in 2008. And it’s going to take six or eight months for the IMF to issue these SDRs. They’re slow. They’re not a nimble organization. And they’re going to have to lock down the system. They’re going to have to shut down the system. Money market funds are going to suspend redemptions. Banks are going to be closed. ATMs will be reprogrammed. So it’s like Colombia, basically. Or India today. Or India, where you can’t get your money out unless we let you. Or Cyprus or Greece. I mean, this is happening more and more. It’s happening in Cyprus. But it’s coming to Europe. It’s coming to the UK. And it’s coming to the US. It almost turns into this weird pseudo-socialist communist system, where you don’t own your assets anymore. Or you can redeem your assets when we decide to let you. Well, it could be socialist. That’s one description of it.

29:24 And I have a chapter on socialism in my book. But it will end up being neo-fascist. And the reason I say that, and by the way, fascism, properly understood, is not a creature of the right or the left. They’re right-wing fascists, but they’re also left-wing fascists. Fascism is the elevation of the state. Mussolini’s definition of fascism was everything within the state, nothing outside the state. There’s no civic society. There’s no individual. Everything is in the state. That can come from the left or the right. But the point is, when you lock down the system and when you reprogram the ATMs and say, hey, you can have 300 pounds a day for gas and groceries. Why do you need more than that? That’s enough for gas and groceries.

30:05 We’ll get back to you about the rest of your money. But that’s your allowance. People will riot. They’ll start to burn things down. They’ll break into banks, et cetera.

30:12 They’ll break into supermarkets. And then there’ll be a militarized response, a neo-fascist response, because states don’t go down without a fight. So that’s how this will play out. Right. And then that just gets worse and worse.

30:24 Correct. Right. OK. And so just to recap, the 08 crisis, when I think a lot of people don’t understand the bailout, people are bailing out themselves. We’re bailing out our own system so we don’t have more pain down the road.

30:37 Exactly. And so, OK, as long as people understand that. So this next crisis coming, maybe 18, maybe tomorrow. Maybe tomorrow. But it’s coming.

30:44 Right. And you went, after long-term capital, after you wrapped that thing up and put it to bed, you went back and re-studied markets and you realized that they weren’t these beautiful stochastic systems that we wanted to model. And again, these derivative instruments, they’re very young. They’re 20 years old, 25 years old. Well, that’s a very important point. So I was the lawyer, so I did my job.

31:06 We negotiated the bailout. We got it done. By the way, everyone went on with their lives. I mean, there were no enforcement actions, no lawsuits. Nobody got a slap on the wrist.

31:15 Everybody had a clean record. Everybody went back to business. The back office at Long-Term Capital Management moved two towns away from Greenwich to Harrison, New York, started a firm called Globop, a hedge fund administrator, sold it for a billion dollars 10 years later. Story of Wall Street. Yeah, F. Scott Fitzgerald said there are no second acts in American life, but there are plenty of second acts. And Myron Scholz started a billion-dollar hedge fund, J.M. started another hedge fund. I went on to start a couple of funds and do other things.

31:44 But my point being that life went on. So as a lawyer, I say, okay, I did my job. We did the bailout. Everyone moves on. Nobody’s disqualified from anything.

31:56 But as just a person, and I lost money personally, and I was part of this, I was very dissatisfied because there was no dishonesty. I mean, it was just really bad mathematics and bad risk management. And these guys were trustworthy, but they didn’t understand risk. So I said, well, wait a second. They actually are the smartest people around. They all had 160, 170 IQs.

32:17 They were way smarter than I am. They had the Nobel Prizes. They had the PhDs. We had 16 PhDs. I said, okay, if the smartest people in finance got it wrong, the whole thing must be wrong.

32:27 It can’t be that they were unlucky or they’re stupid because they weren’t stupid. So there must be flaws in these models. So I spent five years studying physics, applied mathematics, network theory, graph theory, behavioral psychology, complexity theory, a variety of fields to understand what was wrong. And I found it. I discovered what was wrong. That didn’t take too long. What did take longer was, okay, this doesn’t work. What does work? How can we understand capital markets?

32:56 And this is where I kind of part ways with Nassim Taleb, the author of The Black Swan. So Taleb writes this book, The Black Swan. And he demolishes the bell curve. He just takes a baseball bat and he bludges the bell curve to death. And he should. That’s good for some things, but it’s not good for finance. As in the bell curve, is there an accurate representation of events? Of events, the redistribution of events.

33:18 It’s a normal distribution. It’s not even close, but it mimics it sometimes, which is what confuses people. So he destroys that. But then he throws up his hands and says, you can’t use math. I’m a philosopher. I’m going back to 11 and see you later.

33:30 And he’s like, no Nassim. I got to the same point he did. And I never read this book, of course. And he’s like, yeah, you’re right about the bell curve. But we don’t have to throw up our hands. We have to keep trying. And so then I spent another five years developing these models. And interestingly, around the same time, I was recruited by the CIA to help out with counterterrorism, because there was insider trading in advance of the 9-11 attack. That’s obvious. The last two trading days before 9-11, there was 286 times the average daily volume of put buying on American Airlines. When you buy a put, it’s a bet that the airline’s going to go down. So that’s like statistically, that’s like a guy who orders a sandwich for lunch every day.

34:09 And then one day he orders 286 sandwiches. Well, you know, it’s not him. You know, there’s something going on. And that’s been well studied. And what the CIA said is, OK, it wasn’t their job to run that down. That was the FBI and the SEC had to go find the bad guys there. But what the CIA said was, OK, if there were another spectacular attack being planned, a 9-11 style attack being planned, would there be insider trading again? Could you detect it? Could you trace it to the source, get a FISA warrant, break down the door, break up the attack, and save lives? That was our mission. We called that project prophecy.

34:44 Now, CIA, you know, they didn’t help spying, but they didn’t have the capital markets expertise. So they reached out. They’re very good. When they know what they don’t know, when they don’t know something, they’ll reach out. So I was one of the people invited in to bring in the capital markets expertise to help them figure this out. And over time, I actually got more and more involved, became a co-project manager, and ended up along with a couple others leading this project prophecy. And we answered all the questions. We said, yeah, there will be insider trading. You can spot it. We built a system to detect that.

35:14 But in the course of doing that, pardon me, I learned statistical techniques that I wasn’t familiar with as a lawyer. Because, yeah, I was going to say I wasn’t a trader, including Bayes’ Theorem, sometimes called causal inference and complexity theory. Well, the more I got immersed in that, the more I realized that that could be applied to other things. We were using it for counter-terrorism, but it could be used for predictive analytics and geopolitics and predictive analytics and capital markets.

35:41 Normal politics. I was out in Australia and New York a week before the US election, saying Trump’s going to win and getting laughed at in my face. Yeah, you did predict the Trump win. I have all the video tapes. Great thing about doing television. You got the timestamp video tapes so you can prove it. But I was using this Bayes’ Theorem. I was using statistical method to make that forecast. It wasn’t just because I was a partisan. I was like, no, there’s very good evidence that he was going to win. Same thing with Brexit. I was in the London Eye on June 20 saying, short sterling, buy gold, because I could see that the markets were priced for remain. And if leave wins, you’ve got to reprice those two things. And so we’re getting very good results with this. So I went on this 10-year intellectual odyssey to figure out what works. I did it. And pardon me. So that’s the methodology I’ve been using. I talk about it all in the book. I explain it all. And there are a few equations, but it’s not heavy on the quant stuff. It’s pretty plain English.

36:35 Were you ever able to predict any terrorist attacks based on the financial markets? I guess you probably couldn’t tell me if you did. Well, we did spot one because it was broken up. It was August 2006. And it was being executed here in London. This was the liquid bomb plot.

36:53 And the plot was they were going to smuggle. They could make the explosives using two different liquids. So you take two different bottles on the plane, combine them, set off. I remember that. I flew to Italy that day. And they were trying to blow up 10 planes, mostly bound for New York. So they would have killed everyone, but mostly targeting Americans.

37:11 So they might have killed 3,000 Americans because they were looking at Delta American Airlines and British Airways and others. Well, that MI5 in New Scotland Yard took that plot down. I believe it was a Wednesday morning, early Wednesday or Thursday. You have to check the exact date. It was like August 10, 2006. The Sunday before I’m sitting at home, and I’m a little bit of a night owl. So it was about 2 o’clock in the morning.

37:34 And my, sorry, that’s when they took down the plot. But a couple days before that, my colleague, Christina Ray, called me. She said, Jim, I’m getting a bright red on American Airlines right now. We had a red, yellow, greens, green, all good, yellow, keep an eye on it, red, looks like insider trading. We had built this system. She said, I’m getting a bright red on American Airlines. Based on options trades or even just stock volatility?

37:57 A lot of things. Volatility, volume, momentum, options, skew. It was a multi-factor formula using the kind of Bay statistical methodology that I’ve been describing. She goes, I got a bright red on American. So we escalated that, and this is the part I can’t talk about, kind of how that goes up the chain. But a day went by, two days went by, and nothing happened. And we’re like, okay, well, maybe it was a false positive. We can’t really go any further with that.

38:25 And then the next day, MI5 took down that plot. Now, I’m not saying we called MI5, and they were onto that plot anyway. They got information from ISI, Pakistani Intelligence, CIA, MI6. They all collaborated on this. My point was our system was detecting a plot in motion.

38:44 And there was one key arrest that was made in Pakistan. And then when that happened, the Pakistani arm of the terror cell called London said, start the attack, because they’re taking us down to get the attack going. And then that’s when the insider trading took place that we saw on our system. And then, as they say, the plot was taken. But this was a plot in motion, but we got the bright red on the insider trading. Right. And the theory is that there’s enough people involved in this attack, and some of them are greedy. Correct. Or maybe someone that overheard them are greedy. And so the information gets out, and somebody wants to play some bets.

39:16 That’s exactly right. And I actually, within the CIA, I encountered a lot of skepticism when I outlined this methodology. They said, oh, no, the terrorists would never compromise operational security by doing insider trading. This is a complete waste of time. And I said, look, nobody’s saying Mohammed Atta on his way to Logan Airport to hijack the plane stopped off at Charles Schwab to put in a few trades. That’s not what happened.

39:39 It’s your point, Brian, that these terrorists operate within a social network. Everybody has a mother, father, sister, brother, cousin, neighbor, safe house operator, driver, et cetera. And some of those people are greedy, cannot resist the impulsive bet on a sure thing. So I had a two-word answer whenever I encountered this skepticism. I said, Martha Stewart. Because Martha Stewart was a legitimate billionaire. Martha Stewart made a billion dollars legitimately.

40:07 She was a very successful businessperson. But she ends up behind bars on $100,000 trade. If you’re a billionaire, why do you care about $100,000? But people cannot resist the temptation to bet on a sure thing. So the trading does happen. And then once it happens, you can spot it.

40:22 Right. And if people don’t know the whole story of Martha Stewart, like you said, legitimate billionaire, she was caught doing a tiny insider trade.

40:32 Just to be clear, she didn’t actually go to jail for insider trading. It was related to an alleged insider trade. And I think there was some other kind of cover-up, just to be fair to her. But it involved insider stock trading, even though that was not the precise conviction. But she ended up behind bars for $100,000, basically.

40:49 Yeah. And humans do funny things. Correct. And that’s why I believe the US has managed to block, I think, most of the terrorism efforts on its soil. Because when you get more than three or four people, just loose lips usually happen.

41:02 Sure. And there’s these lone wolf attacks. But usually, when it’s more than a few people, they end up talking to a mole that’s in the CIA. Yeah, FBI or whatever it is. Which is interesting. So now you can look at these financial liquid markets, and you can be like, OK, something funny is happening here.

41:17 But what I’m doing now is using the same techniques that I studied or learned as CIA, and that we actually built, we built this system, and then using it on my own to basically do forecasting and geopolitical forecasting and forecasting in markets. OK. Now, you knew that this subtitle was going to get some people’s attention. The global elite’s secret plan for the next financial crisis. Now, what are you saying about the global elites? Are they doing certain things before this crisis, as far as stockpiling cash, doing certain things with their trades?

41:50 And are they doing this because they know better, or are they conspiring with each other? And what can we learn from what you know? Great. Well, I don’t think it’s a conspiracy in the sense that there’s a small group of Illuminati-wearing hooded robes sitting around a mahogany table, like a scene of Spectre from a James Bond movie. It doesn’t work that way.

42:10 Well, of course. You used to hang out with those Illuminati-infinished Connecticut. We’ll get to that later. That’s another story. But the way it does work, and I talked about this in the book, first of all, it’s not a secret that we know who they are. It’s Christine Lagarde, head of the IMF, her first deputy managing director, David Lipton, professors like Larry Summers and Ken Rogoff at Harvard, public intellectuals here in the UK, Adair Turner, Anatol Kolecki, Mario Draghi, head of the European Central Bank.

42:40 So it’s a collection of central bankers, finance ministers, academics, think tankers, and public intellectuals, and several hundred of them around the world who collectively run the international monetary system because they either run the central banks or the multilateral institutions, or they’re in and out of finance ministries where they have a lot of influence. So that’s who they are. They influence 90% of what happens or more. Exactly. So there’s no secret that it’s a mother guy.

43:03 We know who they are. Okay, so then what about the hooded robes part? And the answer is, they don’t need that. You just say conspiracies fall apart, and they do. Conspiracies are kind of easy to spot most of the time. It’s more the case that they’re like-minded individuals.

43:15 They don’t need top-down organization because they all agree with each other. They all went to the same schools. They went to Oxford, Cambridge, MIT, Harvard, Chicago, Stanford, like six or seven schools in the whole world. They all went to them. In many cases, they were each other’s PhD thesis advisors. You know, Stanley Fisher is the vice chairman of the Federal Reserve, former MIT professor, a little older than the rest.

43:36 He was there. He’s one of my alumnus here. Look, I know a lot of these guys. I kind of know where I speak. As I said, I hung out with the 16 PhDs and the two Nobel Prize winners at the long-term capital. I shared an office with Myron Scholes for six years. So I know this milieu. But Stanley was the thesis advisor to a lot of the other central bankers. So they’re not only like-minded. They taught each other.

43:58 And they all learn the same thing. And it’s all wrong. They’re not uneducated. They’re miseducated. In other words, the models that they have taught themselves that they perpetuate and that they’re teaching to the younger scholars are, at best, obsolete and, at worst, dangerously flawed in ways that are setting up a system for this new crisis that’ll be worse than the last two. So they’re in control. They’re like-minded. So they don’t need a lot of coordination because they all think alike. They’ve got badly flawed models. And they never see this coming. So are they trying to wreck the system? No. But they are wrecking the system through their own kind of ignorance and misapprehension of the statistical properties of risk. Meanwhile, they are smart enough to know what we’re describing, which is that this is going to happen again. They can see it coming. They don’t actually understand why. But they know that nothing got fixed in 2008. And one way to think about this, Brian, is that the dynamics and the mathematics of a financial panic are exactly the same as the collapse of any complex system anywhere in the natural world. So earthquakes, volcanoes, forest fires, various phenomena, avalanches of this kind, they’re not just metaphors. I mean, I use them as metaphors in writing, but they’re not just metaphors. The dynamics are identical.

45:19 But with one difference, which is in a man-made system, you can truncate it with policy. In the natural system, you cannot. So when an earthquake starts, what’s an earthquake? An earthquake is a release of energy. That’s how you define and measure an earthquake. When an earthquake starts, you can’t stop it. You can’t stop an earthquake in the middle and say, time out. But if you could, imagine if you could, what would happen? That energy would be unreleased, but it would still be there. The pressure would be there building up. It just didn’t get released at that time. Now, bring that over to the man-made systems. There, when the earthquake starts, when the release of energy starts, you can truncate it. So you have dominoes falling, boom, boom, boom, boom. You know that the last one’s going to fall, unless they drop a steel wall between two dominoes. Now, the domino hits one, and the next one doesn’t fall. That’s what they did in September of 2008. They dropped a steel wall between Lehman Brothers and Morgan Stanley, and Morgan Stanley didn’t fail, but because they guaranteed every bank deposit, money market fund, and currency swap in the world. When they should have let it fail, or nature would have let it fail? Well, they should have let it fail. Now, I don’t think we should have allowed ourselves to go and do something worse than the Great Depression.

46:29 There was a solution on the table that they never pursued because of cronyism. See, now we’re getting into the gangster side of it, the cronyism side. So what they should have done, by executive order, and the legal authority was there, they could have nationalized all the big banks. Not permanently, because I’m not in favor of socialism, but temporarily nationalize them. What you do is you wipe out the equity. First of all, you rip out the bad assets, and you put them over here and trust for the American people. So it might take 20 years to sell them, but whenever we sell them, that money goes to you, the taxpayers. Over here, we now have a clean bank. Equity, you’re wiped out. Bondholders, how big is the hole in the balance sheet? 20% haircut, 40% haircut, whatever it takes. Preferred stock, you’re probably wiped out. Put the losses where they should be. Put the losses on the people who deserve it, which are the stakeholders in the institution. So now you get rid of the bad assets, you wipe out the equity, you now IPO a clean bank to raise new equity, and you start over with Citibank and Goldman, all these guys private, with new owners and clean balance sheets, and we can get the economy moving again. That is not what happened. What did they do? They took the TARP money. By the way, TARP was the greatest bait and switch in history, because Hank Paulson, our Secretary of the Treasury, went to the Congress and said, I want this money so I can buy the

47:43 Bad assets from the banks. I want to strip out the bad assets. That’s not what he did. He took the money and gave it to the banks as capital, and they kept the bad assets, which meant that when they recovered, the bankers got the profits, not the people. So this was cronyism at its first. Nobody went to jail. None of the big banks failed, other than Bear Stearns. So the big banks didn’t fail. He was ex-banker. Sorry? Paulson was ex-banker, right?

48:06 Goldman. Yeah, Goldman. So they bailed out their buddies. All these guys kept their jobs. They kept their phony-baloney jobs. They got their million-dollar bonuses. Their stock price came back. When things recovered, the profit didn’t go to the taxpayers where it should have. It went to the banks. Everything about this was corrupt. But they could have done this nationalized cleanup, re-IPO, privatized, and kind of move on with the clean bank.

48:29 OK, so that was the other option. That was the other option. It was not done. So there’s still this energy in the system that is going to have to play out some way. And it’s playing out today in Deutsche Bank. Deutsche Bank is insolvent. I mean, nobody wants to get in and mark that thing to market, or put those derivatives on the balance sheet, or ask how much capital adequacy. Deutsche Bank is a mess. The Italian banking system is bankrupt. The US banks are a little better. But nobody counts the derivatives exposure.

48:54 And again, when the panic starts, all that net exposure becomes gross. OK, now you’ve got people thoroughly scared. What can we do? What can we do? The common person. No longer a banker, by the way.

49:07 Well, one thing I don’t do, pardon me, I don’t write these books and go through these scenarios and not provide some solutions. I think that’s unfair, and it may be a little irresponsible. So there are some things that can be done at the policy level to prevent this from happening. And again, just to illustrate this, I’ll use a metaphor. So you’re in a mountain. It’s snowing and snowing and snowing. The snow is building up. A big snowpack is building up on the side of a mountain. And any seasoned mountaineer can look at that and say, that’s going to turn into an avalanche. That’s unstable. It’s going to collapse.

49:39 It’s there for now, but it’s inherently unstable. It’s going to collapse, right? And then once snowflake comes along, perturbs a few other snowflakes. It lands the wrong way. They gather momentum. It becomes a shoot. It becomes a slide. Momentum builds. The whole thing rips loose, kills some skiers, and bury the village below. That’s the dynamics of an avalanche collapse. Same exact same thing in financial markets. It only takes a very small initial event. Maybe one Italian bank or Deutsche Bank, which would be a pretty big snowflake, or failure to deliver physical gold, because there’s a physical gold shortage in the world that becomes public and starts a gold-buying panic, natural disaster, a political assassination, something. It could be a lot of things that are the snowflake. But go back to the avalanche.

50:22 You go up in the high ridgelines in Switzerland or Colorado early in the morning, what is the ski patrol doing? The ski patrol is out there with dynamite, shooting cannons, and setting up dynamite charges to break up the snowpack. So what they’re doing, as a physicist, I would say they’re descaling the system. They’re breaking up little avalanches so the big avalanche doesn’t happen, making it safe for the skiers in the town below. Now, bring that over to the capital markets. We should be descaling the system. That means, number one, separating commercial banking and investment banking. So in the US, bring back Glass-Steagall. That worked brilliantly for 66 years from 1933 to 1999. Why on earth did the Congress in 1999 think that they were smarter than the Congress in 1933? Why did they enact Glass-Steagall in the first place?

51:12 Because in the 1920s, the banks went out, they originated garbage loans, securitized them, sold them to their customers, and then it crashed in 1929. We went into the Great Depression. Congress had hearings. They said, uh-uh, that’s an empowering conflict of interest. From now on, you can take deposits and make loans, or you can underwrite in self-securities, but you may not do both because there’s an inherent conflict of interest there. That was Glass-Steagall. In 1999, the smarty pants Congress led by Phil Graham, a Republican, and signed by Bill Clinton, a Democrat. So that’s the other thing. The Democrats and Republicans are in this together. This is not left versus right or Republican versus Democrat. This is elites versus everyday people. That’s what’s going on. So Phil Graham, the Republican leader, and Bill Clinton, the Democratic president, get together, and they repeal Glass-Steagall. What happened next? Banks originated garbage loans, securitized them, sold them to their customers, and the system collapsed. It was an exact replay of the 1920s. Why are we surprised?

52:05 The bankers will do this every time. So break it up. So first of all, go back to separation of commercial banking and investment banking. In the UK, pre-Big Bang. 1985 was the Big Bang. That was the Glass-Steagall here. Go back to those pre-85 rules. Number two, break up the banks themselves. When I started in banking, today’s JP Morgan was five giant banks. They were all big.

52:27 It was the old JP Morgan. It was Chase Manhattan Bank, manufacturer’s Hanover, chemical bank, and a couple others thrown in there. So break them up again into five banks. And the metaphor here is to take a vessel, a ship, and sea. They have watertight compartments. So you punch a hole in a vessel. One compartment will fill up, but the vessel won’t sink because those bulkheads keep the water from spreading to the rest of the vessel, right? Same thing in banking. Break up JP Morgan into five banks or more. If one of those banks fails, too bad for them. But the whole system doesn’t go down. Third thing you do is ban derivatives, all of them. All of them? Yes, you’re old. Look, here’s the thing. I created the credit, the sovereign credit default swap market. I mean, I did the first one. When I was a long-term capital with a trader, we were the largest. What was it on Korea? It’s Italy, actually. Oh, Italy. We were the largest trader in Italian government bonds. Actually, the Italian treasury, this was not known at the time, the Italian treasury was an investor in long-term capital management. So we were joined at the hip with the Italian government. Or elites. So they’re an investor. We had all the elites. So the Italian treasury is an investor. We’re the biggest trader in their bond market, right? And we had an Italian trade that just was a money machine. I mean, it just always made lots and lots of money. But we were so big,

53:43 We said, well, because we could hedge the currency risk, we could hedge the interest rate risk, we could hedge the market risk, but we couldn’t hedge the sovereign risk. We said, well, if Italy defaults on its debt, we’re out of business. Now, that was a very low probability event, but the consequences were catastrophic. So our guys who like to hedge everything said, well, can we buy insurance on an Italian government default? So we found, it was the Milan branch of Sumitomo Bank. They had lots and lots of Italian liabilities.

54:12 They were willing to take on some Italian assets. So we did a billion dollar Italian sovereign credit default swap, first one ever with Milan branch of Sumitomo. I had to write the contract. And at this time, there were no forms. And today, you have ISDA forms, and you pull a form off a shelf and sign it, and you’re done. We had to do it from scratch. So my job, I didn’t price it.

54:34 That was, this guy, Arjun Krishnamachar, did that. But I had to- I priced it like this. I had to think of- More basis points, you’re done. Well, we paid a lot of money for the protection, but that was, you paid for insurance. So I had to think of every possible way a government can screw you over.

54:50 Like putiation. Well, okay, repudiation. That was easy. They don’t pay you. Okay. What about 100% withholding tax? So here’s your money, but there’s 100% withholding tax. And that to you is zero.

55:00 What about capital controls? Here’s your money, but you can’t leave the country. Come and get it. What about hyperinflation? And on and on and on. So there was just every way that they could screw us. I had to write them all down and invent to this. And then not long after, Gillian Tett has a great book. Gillian Tett of the Financial Times wrote a book about blithemasters and the team at JP Morgan. And what they did, we did the first contract.

55:23 They created the market. We were just doing a one-off trade, but they then had this idea, same idea. A lot of times, this was kind of in the air, and they turned it into a huge market. And credit to them for doing that. But so I’m a little bit like Dr. Frankenstein. I created The Monster. I’m telling you that we should ban derivatives when I went out and created some of the biggest new products in the market. But I actually understand them better than most people.

55:49 I think I have more credibility as a critic, having been very deeply involved in the creation of these products. So I think I broke one of the first credit derivatives in London. It was 1997. I remember blithemasters, she was like the it girl of credit derivatives at JP Morgan. And I think I did the, it was like six month Korean development bank protection for like 20 bips. And at the time, we were faxing documents through because there was no standards. And it went on in mall mayhem on the back of that. And if you were an emerging market, you had to put in all sorts of crazy currency transferable risks, things like that. So yeah, I saw those babies emerge. And as did you. But you think it should all be, all the darlin’ should be killed.

56:27 Correct. The only exception, I would say, like the old school Chicago style futures contract on an exchange, heavily margined with a well capitalized clearing house with a reasonably understandable underlying use for commercial hedging purposes. That has a role. Basically a commodity. I think like a farmer who’s got corn coming up next year and doesn’t want to risk the price being too high. Instruments that have been tested for a hundred years. A hundred and fifty years. Exactly. A hundred and fifty years, right. So I’m all for that. That’s fine. The old school Chicago contracts are fine. But all this off balance sheet stuff, exotic, they only exist for one purpose, Brian, which is to steal from your company. That’s not the only reason.

57:01 Well, it’s a powerful motivation. They’ve maybe been used for that now in a crazy way. And now it’s so hard to keep track of these instruments. Right. All right. But that’s not realistically going to happen. Well, that’s a very good point. So there’s my program. Break out the big banks, bring back Glass-Steagall, band derivatives. It’s a descal the system, set up dynamite to get rid of the evidence. It is not going to happen. There’s the program. As a responsible writer and citizen, I just told you what it is. I give it a zero probability. So then the next question is, OK, we can’t save the world. What can we do to save our families, save ourselves and our families? And there we don’t have to be victims. I recommend putting 10 percent of your investible assets in physical gold and silver. Not paper gold, not ETFs, not gold forwards from the London Bullion Market Association, not gold futures. Physical gold and silver, held in a safe place outside the banking system. Do not put your gold and silver in the bank because there’s a very high conditional correlation. The day you want your gold the most is the day the bank’s going to be closed. That won’t be a coincidence. It’ll be closed because there’s a panic like, yeah, I want my gold banging on the door of the bank and they won’t let you in.

58:09 So get it outside the banking system. And 10 percent. People always want to put words in your mouth, as you know. Jim Rickards says sell everything and I fall in on gold. I’ve never said that. 10 percent. So you can have something that you know is there and save. Correct. And don’t put it in the bank’s hands. Correct. I remember in 08, I had some money in RBS or something and I was like, this doesn’t look good. And I called them and I was like, I want to get my money out. They said, OK, come to the bank and wait in line and we’ll try to get your money back out. Meanwhile, I’m trading derivatives swaps as mass as I can. But I was like, that’s a great point you make is that inherently there’s a bad correlation there of getting it out from someone who’s going to probably want your gold or not want to give it back to you. Correct. It’s a crisis. Yeah, I was in Switzerland recently and when I go there, I don’t primarily visit the bankers. I visit people who handle physical goals. I meet with refiners, secure logistics operators. They’re people with vaults and armored cars and kind of move the gold around and gold dealers.

59:10 And they say what’s very interesting, first of all, they can’t build the vault space fast enough. There’s so much physical gold coming in. And there’s this whole thing now where the Swiss Army going back to the 1950s and 60s hollowed out mountains and had these nuclear bomb proof command centers and depots and all kinds of railroads and chambers and things inside these mountains. You look under a rock and you look at what looks like a rock in the Swiss house. It’s probably a piece of plastic where they get machine gun behind. It’s a heavily fortified place. But now they’re abandoning some of these and they’re turning them over to gold vault operators with multiple security parameters and they’re being used as very secure actually nuclear bomb proof vaults.

59:48 But they told me that we can’t build them fast enough. And what’s going on is that the gold is coming out of Deutsche Bank, Credit Suisse and UBS and going into, I don’t do endorsements, but Loomis and Brinks and some of these other names. So it’s not new gold. I mean, it’s the same gold, but customers don’t like bank custody. They’re moving it over to private custody. And the difference there is that when the banks have it, depending on the contract, they can sell it 10 times over.

1:00:17 They can take one bar of gold and sell 100 bars of gold. So the 100 people out there think they own a bar of gold. If they read the fine print in the contract, they’ll find out it’s what’s called unallocated, meaning no gold. So if you come to the bank and say, give me my bar of gold, pardon me, the first person might get it, but the other 99 will not. So that’s starting to sink in. So people are like, I think I’ll move my gold over here to a private vault. And so it is being drained out of the banking system.

1:00:47 That does not change the total supply. It’s still the same gold, but it changes the floating supply. The floating supply is the gold available to support the paper gold pyramid. That’s shrinking. Every time a bar goes from London to a Swiss refiner turned into one kilo, four nines, and then goes to China to deep storage, that gold comes out of the floating supply. And so that’s what’s kind of going on in the gold world. OK, talk about Trump. You predicted his win because you could see things happen in the financial markets. What did you see? And now what does a Trump world look like, in your opinion? Do these things happen faster or slower?

1:01:29 Well, what I saw, actually, I was using the polling data. I was looking at polling data, financial markets, betting odds, which most people don’t understand. Let me give a very concrete example. So the mainstream media, they all had 90% chance of Hillary. I mean, it was an embarrassment. The smart guy, Nate’s New York Times upshot, I think it was 89% Hillary, 90%, Nate Silver, Mr. FiveThirtyEight. They were all way, way off. But part of the reason, one of the data points they were looking at were betting on us in places like Betfair, Ladbrokes, Patti Power. It’s not legal in the US, but it’s legal over here in the UK.

1:02:09 And you could get that information. And they were showing 80% probability that Hillary was going to win. But what a lot of people missed is that there were five Trump bets for every one Hillary bet. But the Trump bets were like a fiver or a tenor. And the Hillary bet was probably some big shop in the city who was betting 1,000 quid, right? So the bookies have to give Hillary short odds because of the weight of money. So that’s why she was getting those odds.

1:02:35 But I’m like, will you win the voting booth? There is no money. This is five votes to one. In other words, in betting land, the odds have to be skewed based on the weight of the money. But in the voting booth, every vote is equal. So when I see five Trump bets to one Hillary bet, she’s got 90% odds. But that’s because of all the monies here. But I’m looking at five votes to one.

1:02:56 Now it wasn’t five to one. But things like that, there was a lot of evidence like that. Oversampling Democrats in the polls, oversampling African-Americans within the Democratic sample, because that skews it more because African-Americans are 95% likely to vote Democrat. There you would miss white Democrats who might vote for Trump. There was just lots of evidence kind of lying all over the place. But you need to kind of have ice water in your veins. You can’t be a partisan. And so many people hated Trump, his demeanor, his vulgarity, his unfitness for office, as they claimed. They couldn’t look at the data objectively. They were too spun up emotionally.

1:03:30 Yeah, it was really emotional. And actually, I was reading The New York Times. Now, I’m removed over here. And I like The New York Times as a paper, but I read it. And it was so biased against Trump. It was just almost slander some of the headlines. And then Hillary was just getting this free pass. And I was like, man, they’re not even coming across as objective journalists. And I guess it’s because it became emotional for people, right?

1:03:50 Right. Well, it’s a good point. I’ve spent a lot of the time immediately before and in the weeks since the election abroad. So I’ve been in Australia, Ireland, here in the UK. I was in Paris a couple of days ago. And you run into foreigners, non-Americans, and they go, well, how does it feel to have a monster for a president? They’re just horrified and shocked.

1:04:08 And I thought about that. And I realized that in the United States. So you’re absolutely right. Washington Post, New York Times, CNN, NBC, ABC, CBS, they all had them as a monster and unfit and all that. But we have other voices. In the US, you could listen to Rush Limbaugh, Laura Ingraham, Fox News, Sean Hannity, et cetera. So you could get both sides in the US.

1:04:29 Now, if you favored one or the other, you probably filtered that out. But you could hear the other voices. But abroad, you don’t get Rush Limbaugh, Sean Hannity, Laura Ingraham. You don’t hear those voices in the UK and Australia. You do get CNN, CNBC, NBC, et cetera.

1:04:45 So I was just trying to imagine what it would be like to be someone abroad getting 100% of my information from the anti-Trump bias media and having no other voices. No wonder non-Americans think he’s a monster. He’s not. I mean, a little vulgar, flashy. You can criticize him.

1:05:03 Sounds like a Wall Street traitor. He’s not, yeah. He’s not Mussolini. He’s not Hitler. And I think the CEO experience will serve him well. And as far as his policies are concerned, and this is interesting because so many people couldn’t get past the personality that they never looked at the policies.

1:05:20 Now that he’s our president-elect, they are looking at the policies. Well, guess what? Low taxes, less regulation, big spender. What’s not to like, right? So he wants to do a trillion dollars of infrastructure spending. So John Deere and Caterpillar grow up because you need heavy equipment. He wants to do defense spending. So Lockheed and Boeing and Raytheon and all these companies go up because of the defense spending. He wants to get rid of regulation.

1:05:45 So banks are up because he’s going to repeal Dodd-Frank. Pharmaceuticals are up because he’s going to repeal Obamacare. Consumer non-dorables are up because he’s going to cut taxes and consumers will have more discretionary income. So everything’s up. It’s like happy days are here again. I mean, there’s euphoria in the stock market because this is great. There’s a problem here, which is the numbers actually don’t add up. And this is the Reagan playbook. This is Ronald Reagan 1981. What did Reagan stand for? Lower taxes, less regulation, and Reagan was a big spender. He was not a fiscal conservative. So you have the Reagan playbook, and actually you have a lot of the same advisors who’s in Trump’s inner circle. Well, you got voices like Steve Moore, Larry Kudlow, Art Laffer, Judy Sheldon. These were all veterans of the Reagan revolution. And so David Malpass is the other one. He’s one of the big ones. So they were all in the Reagan administration at various stages. So you got the Reagan team, the Reagan playbook, happy days are here again, but there’s several big differences. When Reagan came in in 1981, January 1981, he was sworn in, interest rates were 20%. They had nowhere to go but down. Trump comes in, interest rates are close to zero. They have nowhere to go but up.

1:07:00 The other thing is that the debt to GDP ratio when Reagan was sworn in was 35%. He took it to 55%, which you go from 35 to 55. That’s a 60% increase in the debt to GDP ratio. But Reagan had the fiscal headroom. Reagan could do it because that was available.

1:07:19 Trump’s coming in, okay, interest rates are zero, so they probably have nowhere to go but up. And the debt to GDP ratio is 104%. Trump doesn’t have the fiscal space. He can’t cut taxes and put a trillion dollars of spending on top of $20 trillion of debt. That’ll push the debt to GDP over 110%. We’ll look at Greece at some point. We’ll have a sovereign debt crisis in the United States. So my point is, Trump’s got the Reagan advisors. He’s running the Reagan playbook, but he has very different initial conditions. Reagan had tailwinds. Trump has headwinds.

1:07:53 And I think when the market sees that the spending is not going to materialize, that they’re not going to be able to do it, that the Fed is raising interest rates, that we’re going to get a very different result. Let me ask you a question. What does James Rickards put his money? I put my money where I tell people to put their money, same thing. So my portfolio is an allocation to physical gold and silver. Actually, fine art has been my best performing asset class over the last six or seven years.

1:08:22 You have a fund, or do you actually own pieces? I invest in a fund. So look, if you’re Stevie Cohen, you can go out and pay $100 million for a Picasso. Most people are not in that category. But this is museum quality. I’m not talking about the posters you put on your college dorm room. I mean, it is high quality art, this particular fund I invest in. But there are a number of funds out there. So gold, silver, fine art, land. I have a lot of cash, and people are surprised to hear me say that, wait a second, Jim. You’re the guy talking about the death of money and locking down the banking system. Why do you have cash? And my answer is, I have it for now. I might not have it for long, but I like it for now. Because first of all, it reduces volatility. It’s a very good deflation hedge, and deflation is in play. But the third reason is, when you have cash, it has huge embedded optionalities. We were talking about options earlier. So if I said, Brian, what would you pay me for, not the money call option on every asset in the world? You say, must be valuable. Well, that’s what cash is. You’re the guy who can wake up and go buy anything in the world. You don’t have to get out of anything. You don’t have to cross a bid offer. You don’t have to take a mark to market loss. You don’t have to pay a commission. You don’t have to deal with illiquid assets. You are illiquid. By the way, the guy with the most cash he’s ever had is Warren Buffett. He’s got over $30 billion of cash. Buffett is a master

1:09:45 Waiting for things to fall down and then going in and going shopping at discount prices. So I like cash for that reason. But you have to be nimble. This is not a set it and forget it portfolio, because the time may come when I want to take the cash and move in one direction or another. The other part of my portfolio, I invest in startup companies, tech companies.

1:10:05 These are, in many cases, very small businesses, four or five employees, but an entrepreneur, someone I have confidence in, putting a good team together. So I like those kinds of companies, because that gives me the equity upside without this risk. And you can lose all your money. That’s the way these deals go. But it gives me a lot of equity upside without being in the public markets, which I view as manipulated and very prone to crashing. Right. And yeah, like you said, manipulated by high-frequency trades. So gold, silver, land, cash, fine art, private equity, venture tech. Most Wall Street traders that I used to hang out, including myself, kept most of their money in cash. What does that tell you? And every time I went to the bank and they were like, oh, we’ve got this equity link. No, you can buy it. I’m like, no, I know what you take out of those things. Exactly. And so, yeah, I always liked it just because of the liquidity reasons, just like you said, even though there’s a lot of arguments against having things in cash. But like you said, if you need to have to move.

1:11:02 Well, the worst trade on Wall Street is to invest in the firm you work for, because when it fails, you lose your job and your portfolio at the same time. So that’s doubling down. So I knew a lot of guys, they would never buy. Now, what’s interesting, Wall Street management is forcing them to take stock in lieu of cash. So they don’t have any choice. But back in the day, when you had a choice, you wouldn’t invest in your own firm by and large, because that was doubling down. Yeah. I mean, look, when I was there in the early 90s, mid 90s, you know, all the guys I worked with, you know, late 20s, hotshot traders, cash bonus, there’s no equity vesting period. There’s no nothing.

1:11:34 Take the money and run. Take the money and run. And like, that’s the way things traded. And that’s the way things got out of control. James, just wanted to know what we can learn from you. You know, you’ve got multiple books here, New York Times bestsellers. You’ve been there, done there, and seen that. Just wondering, like, you know, things that you learned over the years, was there something about your own game that you changed, say, 10, 20 years ago, where you’re like, you know what, when I started believing this way, acting this way, things started going my way. I mean, obviously, going for long term and going back and studying the markets and then coming out with your own ideas and publishing books. I mean, was that something that really changed the course of your life?

1:12:11 Yeah, there’s no question, pardon me, there’s no question that the long term capital management experience was a very searing, look, I lost money. And it was physically demanded. I mean, I would never mention names, but there were, you know, people involved who had breakdowns, and we had to call ambulances. And it was interesting, when I did the bailout, that was August, September, 1998. But the most acute phase was, it was five days between September 23 and September 28, 1998. So I was reminded of John Reed’s book, 10 Days That Shook the World. It’s the story of the Russian Revolution.

1:12:46 Lenin didn’t sleep for 10 days, you know, so, but we had five days that shook the world, and nobody slept. It was funny, you show up at the law firm, and everybody’s in my suit, and tie, and all that. Well, the first thing that goes to tie, you know, that’s gone, then the jackets are gone, and they start unbuttoning the shirt, and then people are like sleeping in cots, not bathing, and then everything gets a little gross. And then, but there’s 24 hour catering, so you’re buying, you’re not buying anything, but you’re taking meals at three in the morning, or two in the afternoon, whenever you happen to be doing your thing. But I had just returned from an expedition to climb Denali, the highest mountain in North America. And I was never more fit in my life, because I trained, that’s hard, you set out 150 pound load, you have a 75 pound backpack, and you’re pulling a sled with another 75 pounds, and you’re going up 13,000 vertical feet to a 20,000 foot summit. The scary mountain, we’ve had people that have climbed it here.

1:13:41 My season was actually a high fatality season, a friend of mine was killed. There was a British Special Forces team that was doing matinee ring training that was rescued at 19,000 feet. They got in distress, which is one of the highest helicopter rescues in history, not the highest, but close to the highest. So we had a very, very tough season. But my point being, it’s almost as if subconsciously I knew trouble was gone, because I was never more fit. And then somebody actually grabbed me in the line. And like after a couple of days, the scat and arms at the law firm that was hosting the bailout negotiation, they said, are you Jim records? I said, yeah, he goes, how are you still standing? Like, how are you like getting through this? I said, well, so far, it’s not harder than climbing Denali.

1:14:24 I mean, I’ll let you know when it is, but I was sort of a little bit prepared for it. But look, that was traumatic. In some ways, I kind of powered through it. And then I probably had some post traumatic stress syndrome, because you power through it, you do your job as a professional, I knew what I had to do. But you get through it, it’s like, man, my network just went, you know, away. And this company is going away. And I’ve got, you know, a wife and family and three kids who were just setting off on, you know, private schools, private boarding schools, private colleges, I mean, there’s, that’s a lot of checks are right.

1:14:56 And I had to sort of, you know, kind of reinvent myself, which I didn’t, you know, in various ways. And so you learn from that. And interestingly, many years later, I was launching a hedge fund with a partner. And you go through that initial stage, this is around 2006. And you go through that stage of, you know, we got an idea, we got a team, we’ve got an investment process, we have all the controls, we know what we’re doing, we’re experienced, but we need money. You know, so you’re banging on doors, trying to get $50 million, $100 million seed capital, we had a little bit of money, but not that much. So we went, we found a group in Switzerland, I can’t mention the name, but they, we had a nice dinner in Zurich, a few bottles of wine, and they agreed to give us $50 million of seed capital.

1:15:40 And later in the evening, the guy took me aside, and like I said, we all have a couple glasses of wine. He said, here’s why I’m investing with you, because you’ve had a setback. He said, I would never give money to anybody who has not had a setback, because you won’t let it happen again. It’s the guys and women who have never had a bad day, like everything, you know, best schools, pardon me, best schools, best jobs, great career. They don’t know the bad things that can happen. And so when you’ve had a setback with long-term, as I did with long-term capital, you know, emotionally, physically, financially, it’s, you learn a lot. And then you do go forward, you say, okay, now I know how bad it can get, and I won’t let that happen again. You’re actually probably a better trader, a better investor, a better manager going forward. So that was a turning point in many ways. And then in addition to that, that would have been true if I had just gone on with my career. But beyond that, that was my inspiration, just intellectual curiosity. It’s like, hey, you’re the smartest people in the world. You got it wrong. There must be something wrong with the method. It can’t be you. You’re not dumb. There must be something wrong with the method. And as I said, I spent 10 years figuring that out.

1:16:51 Right. A lot of people that watch this want to write. How do you write and how do you consistently write these great books? Well, thank you. It’s very kind. I like to write. I guess that’s a help. For me, you know, you need, you like a quiet environment. You know, I mean, I can write on a plane, but not usually. I have two writing studios in our two homes, and one’s on the water, one’s in a mountain. So they’re pretty quiet places.

1:17:21 And you get what’s called flow. The Japanese call it Satori. Long distance runner calls it the runner’s high. Writers and artists call it flow. But you start writing and you lose yourself and you just keep writing. And I’ve had periods where I’m writing. I use a keyboard and I don’t do it by hand. I’m writing and writing.

1:17:41 And then I’ll stop. And then I’ve lost track of time. And I look at what I’ve written. I don’t even know where it came from. It’s like, whether you’re channeling something or you’re tapping into something, it’s not like I slaved over every word. It just flows. Now you’ve got to proofread it and do all that stuff. There’s a lot of editing involved. But you almost don’t know where it came from. And so, you know, having the time is a big deal. I mean, if you’re doing like a nine to five job or something, that’s difficult.

1:18:09 My children are all adults now. They’re all doing extremely well. So, you know, I think it would be harder with small children around. I mean, you want to be a good parent. So, not having the distractions, having the time, which is a luxury. You do start with an outline.

1:18:24 It’s not all stream of consciousness. You kind of know. And then I would say a little sense of urgency or mission. Like, well, why are you doing it? Like, how you do it is one thing, but why are you doing it? And my answer is that having lived and worked and known and conversed with elites for decades, because it’s what I did for a living, I know a lot about their world. I actually, before I went to law school, I got a graduate degree in international economics from the School of Advanced International Studies, which is basically boot camp for the IMF.

1:18:58 I get that school, Tim Geithner went there, Wolf Blitzer, a lot of distinguished alumni. When you leave there, you either go into banking or you go to the IMF, or maybe you go work for some part of the government that’s with three-letter initials. So, I actually went to law school. I didn’t start my career right out of that. I got a degree in international economics, then went to law school, then got another law degree, and then started in banking.

1:19:24 But I had that technical training. When the IMF speaks, I can translate their jargon into R-plane English. And I see what’s going on. And I know that everyday citizens around the world don’t. And why should they? I mean, they shouldn’t be experts in all this.

1:19:38 So, sometimes I feel like an anthropologist who goes out in the jungle to this exotic tribe of monetary elites, studies them, comes back to civilization, and explains them in plain English. I mean, part of what I do is read these, you know, 24 layers deep on the IMF website. There’s some technical paper full of jargon. I’m enough of a geek that I read it and I understand it. And I can tell people what they’re doing. Tell them the SDR is coming, the end of the dollar is coming. This lockdown plan is already in place. The U.S. is operating under state of emergency. How many people know that? President Bush declared a state of emergency two weeks after 9-11. Understandable. But by law, it has to be renewed annually. For 16 years, President Bush and President Obama have renewed the state of emergency. America is one phone call for martial law. So, these are all the things I see. So, this is what I’m telling people in the book. So, they don’t have to be victims.

1:20:30 Yeah. James, I always ask everyone a question at the end. I’m going to ask you, if you can make a phone call to the 20-year-old James Rickards. I’m not saying that was a long time ago or not. What advice would you give that young man? What would you tell him now based on everything that you’ve learned?

1:20:47 Be skeptical. Don’t take what, you know, filter everything. Read a lot. I mean, kind of going back to the other question about how do you write. I won’t classify myself as a writer, but every really good writer is a voracious reader. Reading is your main toolkit to writing. So, I would say read a lot. Read books. Get off the computer screen. Travel. I mean, you asked earlier, how did I see that Trump was going to be president?

1:21:14 Well, one of the ways I did it, I was out in Western Washington, Spokane, Washington, fairly small city. And I took a Greyhound bus to a small town in the middle of the desert. Well, you’re hanging out at the bus station. You’re talking to the bus driver. These are everyday citizens. When you’re in the elite bubble in Washington or New York or Nantucket for the summer, I hate going to Nantucket because it’s like all the people you see in your town, they’re all up in Nantucket. So, I go somewhere else, so I don’t have to see the same people.

1:21:40 My point being, most people don’t get out of the bubble. I think it’s very true of reporters, by the way. They sit in front of the screens. They look at the social media. They’re just recycling their own ideas. I went to another Trump data point. I went to an evangelical camp in the Ozark Mountains on the border of Missouri and Arkansas, on the Missouri side, near the Arkansas Ozarks. And I was invited out to speak, and I was happy to do so. And I remember thinking to myself, boy, this is back in the prime, I said, this is Ted Cruz country. This is evangelical country. I said, I better tread lightly on the whole Trump thing, because these people love Cruz.

1:22:20 Turned out they love Trump. This was like a huge evangelical Trump crowd. I said, wow, the evangelicals are going with Trump. So, my point being, get out of your bubble, travel, read, be skeptical, and sort of be your own teacher in a way. I mean, it’s good to have mentors and all that, but just try to observe as much as you can, but just get out of the bubble. Yeah. On that same note, best advice you’ve ever received could be about investing, could be about writing, but just something that comes to mind.

1:22:50 I had a very good mentor when I started at Citibank, and I was a lawyer, so I wasn’t like a bank teller or whatever. I had a pretty responsible job, but I was the new kid on the team, and there were more senior people. And I once had to do this unbelievably difficult reconciliation. It was foreign tax receipts and translated it in accordance with IRS rules and how much foreign tax. It was a really hard thing to do, but we had to prove it to the IRS to get our tax credit. So, I did this reconciliation, and I was off by like 100 bucks, but it was like hundreds of millions of dollars, and I was off by like 100 bucks.

1:23:22 So, I take it into my boss, and I go, look, I think I got this problem box. I’m off by 100 bucks, but I think I solved this. He goes, you’re off by 100 bucks now. That could be 50 million one way and 50 million and 100 dollars the other way. Like, I don’t know what’s behind that 100 dollar out trade. It could be 100 dollars, or it could be 50 million, two 50 million dollar mistakes in two different directions. I have no confidence in your work. Take it back and reconcile it. And I was like, okay, so no shortcuts here. Be rigorous. Don’t fool yourself about what you’re actually doing. So, he kind of busted my chops a little bit, but it was a good lesson. I love it. Great details. James, thank you so much for coming. The book is The Road to Ruin. Our next door neighbor, Max Keiser, can’t say enough about it. You got to come back next time so we can talk more and longer about war stories and your life and the rest. Thanks, Barry. But thanks so much for writing this, especially chapter four, long-term capital management story, first time told. But thanks so much for coming on. As we say on London Real, it’s about the journey. I wish you well on yours, and come see us again sometime. Thank you. Thank you.