Jim Puplava on How MMT Will Change the Way You Invest

In the first half of 2020, we saw the U.S. unemployment rate jump from 3.5% up to 14.7%. During the depths of the downturn, just under seven million unemployment claims were filed in a single week. The market’s 38% downturn was followed by a 43% rise. There were 103 bankruptcies filed as of June 1, 2020 and the price of oil went from $40 down to -$37.

The Fed's balance sheet has grown exponentially, now at $7 trillion and growing $1 trillion a month at the current rate. We’ve never seen a year, let alone the first six months of year, quite like this one. In a recent Big Picture segment on the Financial Sense Newshour, Cris Sheridan talked to Jim Puplava about what all this means for the markets and economy. See below for excerpts from this interview.

For audio, see Big Picture: The Long Road Ahead of Us.

So, Jim, just how significant has the first half of 2020 been?

You know, it’s pretty amazing. In the depths of the Great Depression, the unemployment rate got to 24.9%. We went from 3.5% to almost 15% in three months— not three years. In a matter of weeks, the stock market lost close to 40%. And a couple months later, it was up 40%.

We spoke with Chip Rogers recently, he’s the president and CEO of the American Hotel and Lodging Association, and some of the facts he shared are just astonishing. To give an example, typically hotel occupancy rates run between 75% and 80% during the summer—now they're now at 46%. They need 55% occupancy to break even, and according to Chip, nearly half of these hotels are not going to make it. In other words, they're not coming back.

The implications of this are so far reaching and so much of what we thought was normal life is going to change. I mean, this isn't going away in the fall. It's not going away at the end of the summer. It's not going to go away. Chip’s anticipating that it may take the hospitality industry until 2022 to get back to pre-COVID levels of business. That's assuming that business travel comes back in October.

If it doesn't, this is going to get much, much worse, which is why some of the experts are saying that there could be another wave of white-collar unemployment ahead of us if we don't turn this around. And I don't think our politicians have any clue as to the damage that some of their policies are doing to this economy.

How does this tie into the government response, especially when it comes to small business?

Well, one thing that we've been talking about on this show and that I’ve written about in my End of Money series, is that Modern Monetary Theory (MMT) is the blueprint for inflation. It's embraced and loved by Wall Street because it inflates assets. Politicians of both parties love it because they can spend money and just give the voters whatever they demand. Academia loves it because it supports progressive socialism.

The blueprint for MMT is a new book called The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton. She's a professor at Stony Brook University and was the Chief Economist on the U.S. Senate Budget Committee for the Democrats. She was also a consultant to the Bernie Sanders campaign.

The book basically says the government is different than you and me. In other words, they don't have to operate with balanced books like you and me, they simply can print money when it's denominated in their own currency. The only drawback to government printing money is inflation. But it goes along with the redistribution scheme that John Maynard Keynes talked about in his book on unemployment in the 1930s.

Keynes talked about the rentier class. He had a disdain for the upper class in England and talked about the rentier class, those that lived off interest, dividends and assets. One way to redistribute wealth is through inflation schemes. So, you're talking about a loss of value through inflation. I'll give an example, you've heard we've been in a disinflationary trend, and if you have the chance, read my latest article. In it I give an example of what you could earn on money by decade.

In the 1980s, you could earn $140,000 a year on safe investments. I remember when I first got in the business, I was doing Ginnie Maes, they were paying 15% and by the time we got to the 1990s, it dropped down to $80,000. Then it dropped down to $70,000. In the last decade, it dropped down to $40,000. Now, when you get to this decade, if you were to go into 10-year treasuries on a million dollar, you would make less than $7,000 a year.

So, your money is buying you less and less goods and services. If you want to read Stephanie Kelton’s book, I highly recommend it, it’s something that the markets aren't anticipating right now, investors aren't anticipating. And it goes to a theme that I learned in the business, that you only really need to make a few key investment decisions in your lifetime. That is, find a trend that is emerging, get aboard that trend, and ride it until that trend completes itself.

Think of commodities in the last decade, think of tech stocks in the 1990s, Japanese stocks in the 1980s, commodities in the 1970s. This is one of those pivot points in history where the investment markets are changing, and they're going to change. And we've got, basically the government scheme, and the theory behind what we're going to see unfold in this decade.

It sounds like you’re saying investors will need to be more flexible?

Yes and I'm going to recommend two books and we’ve interviewed both authors. The first is George Friedman's new book, The Storm Before the Calm. Read that if you want to get a bigger macro sense of what's coming ahead of you.

The second I’ll recommend is Peter Zeihan’s new book, Disunited Nations. He's talking about the global order that was in place after World War II coming to an end. That was when the U.S. with its military basically supplied safety for world trade. Now, we're starting to withdraw from that, and we are asking other countries to take that responsibility.

Zeihan also covers this attempt to go to clean energy, like the University of Finland’s comprehensive study, and it doesn't work everywhere. It works best, believe it or not, in the United States, because of our geography and resources. But it's not going to be a clean and easy transition. It's going to take longer than expected. Zeihan also talks about the coming turmoil in international affairs.

I highly recommend both Friedman and Zeihan’s books. In fact, I’d recommend all three of Zeihan's books, and Freidman's latest book. I think you'll find it very enlightening. It'll give you a bit of a perspective as you look forward into the future.

Given that, what are some ways Financial Sense Wealth Management has been helping clients?

One of the things we’ve done—and this just our philosophy—we've operated in the global bond markets for decades now. We operate with sovereign bonds, corporate bonds, and we like that because it gives us flexibility. We can control the outcome and we control the income.

For example, when we saw massive dollar depreciation, we were in foreign sovereign bonds. We not only had a good interest rate, but we also got the appreciation of the currency as the dollar was debased. So, that's something that we do.

Also, when we saw that the U.S. was heading for zero percent interest rates, we developed an income fund. It’s roughly 60% in high dividend-paying blue-chip monopolies or oligopolies. These are high dividend stocks that have yields that are two or three times what you could get in government bonds. Then we have preferred stocks. We also have it hedged with gold and gold dividend paying stocks. We're investing in areas like energy. We're investing in technology. We're investing in healthcare. We're investing in precious metals.

The fund is designed to produce increasing income and also tax efficiency, because dividends are taxed at lower tax rates from zero to 20%, versus tax rates that can run as high as 40%. Corporations have the same problem. What do you do if you have to keep large cash balances in your business to run them, if you're a money market fund, you're getting zero.

A lot of these money market funds have dangerous debt that they're holding on to that may be illiquid or that may not be able to back up the buck. So, we have a corporate management account. If you're a large corporation, you need to manage cash. So we can provide a business safety but also, at least somewhat of a return on their cash.

Finally, we’re more tactical and active asset managers, which allows us to either raise or lower our risk levels depending on what we see in the economy or the markets. It's one of the reasons we were able to sidestep a lot of the damage that took place in February and March. So, you have to adapt and what worked for 10 years is not going to work in the next 10 years.

A recent example, if you were in a S&P 500 index fund in the year 2000, the markets lost over 45% in the next two years. It took another five years to get back up to where the markets were by 2007. But then the markets lost nearly 60%. So, for almost 10 years, it took 13 years to get back to even. If you were in an index fund in the year 2000, it wasn't until 2013 that you broke even.

You can go through large periods of time like 2000 to 2013. 1966 to 1982 was another period where we went through a similar return as well as what happened in the 1930s. So, these cycles come and go, but you have to adapt. And unfortunately, most people play static investing. It's kind of like a pie chart, you put 60% in stocks and 40% in a bunch of bond funds and you just set and forget. Well, this is not going to be a set and forget decade.

Investors are going to have to be more flexible. We're going to have to think a little differently than the way we're used to thinking. The best example I can give you is what happened in the last decade.

If you were in stocks and bonds, you didn't do that well. You did well in it from 2009 to 2020. But you did not do that well from 2000 to 2013. So it's going to be a different decade, and you're going to have to dodge, weave and be more alert because the investment environment is going to change and Modern Monetary Theory is telling you how it's going to change.

The government's basically telling you, they’ve got a blueprint for inflation, and they're going to implement it. And the surprising thing about it, everybody's behind it. The Republicans are behind it. The Democrats are behind it. The bureaucracy is behind it. Wall Street is behind it, and the academics are behind it and it’s being implemented as we speak.

To listen to the full Big Picture with Jim and Cris click here or for an archive of past shows, visit our Financial Sense Newshour page.

To find out more about Financial Sense® Wealth Management or for a complimentary risk assessment of your portfolio, click here to contact us.

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