I had the honor of sitting next to Jim Rickards throughout the second day of the conference and I thoroughly enjoyed his company.

He is a very nice and extremely smart gentleman (and as I mentioned last week he gets extra bonus points for treating me like a respected fellow investor and not simply “someone’s wife”!).

Jim discussed a topic he is quite passionate about, Currency Wars: The Making of the Next Global Crisis, which is his latest book (and a great read). He spoke about the importance of history and behavioral science to investing, two things that I am passionate about as well, and presented a compelling case for competitive world-wide currency devaluations and resulting inflation.

He had a lot to say, so I’m going to jump right in! Please let me know what you think about all of this in the comments…thanks!

Jim Rickards — Currency Wars

Jim first discussed the role of currencies in the overall economy, likening them to the ocean (and all creatures of the ocean need to worry about the environment of the ocean, from the tiniest fish to the Great White shark!).

Currencies are the ocean in which every type of financial transaction takes place — every financial transaction is denominated in some currency.

Usually the ocean is calm (periods of stability and low volatility), but sometimes the environment becomes much more hostile and difficult to navigate, and unfortunately we are in one of those periods right now.

What is a currency war?

An effort by one country to improve its economy by devaluing its currency in effect to steal growth from its trading partners.

Jim likened global trading to a small town with four stores who all sell more or less the same products…if one store has a half-off sale, everyone will visit the store with the sale, and with global trading it’s the same process.

For example, several countries manufacture and produce aircraft (the U.S. has Boeing, France has Airbus, etc.).

If we cheapen our dollar and lower the exchange value of the dollar, our U.S. Boeing planes appear to be “on sale” versus other countries’ planes, so countries who are out “shopping” for aircraft (perhaps Thailand, or Indonesia, where they do not produce aircraft) will look favorably on our U.S. Boeing planes.

(And of course you can apply this to everything, whether it’s Microsoft software or Hollywood films or iPads or books or vacations.)

So, it seems quite simple…we can just cheapen our currency, which will help us to sell more aircraft, add to our net exports, reduce our deficits, improve our GDP, and create jobs! (Sounds terrific!)

When politicians look at this they say, “Wow, this is great! We can expand the economy, create jobs, and reduce unemployment, all by devaluing the dollar…what’s not to like? Let’s go cheapen the currency!”

This does sound good, and is a big temptation for politicians, but there is also a lot “not to like” with cheapening the currency.

In fact, Jim brought up four specific things “not to like”:

1. The U.S. does not operate in a vacuum—other countries also fight back and cheapen their currencies, too.
2. It’s not limited to just currency—a country can also impose an excise tax on imported goods like Nixon did in 1971, which has the same effect as cheapening your currency, and this can quickly morph into trade wars.
3. Can impose capital controls. Jim said to look at Brazil…Brazil was the loser in the currency wars recently because they had the strongest currency (it’s like golf—the lower your score the better) so Brazil has imposed a surtax on short-term deposits to discourage the hot money from coming into Brazil.
4. Inflation as a consequence — We must remember that we import more than we export. So, if we are cheapening our currency, we are increasing the cost of those imports and are paying more for everything we buy which leads to inflation (which is exactly what the Federal Reserve wants).

Currency devaluation may therefore sound good superficially, but it is not.

Jim said that there is “no greater currency manipulator in the world than the U.S.” (although China wants to manipulate its currency too), and that there is no difference between Obama and Romney on this issue.

Jim loves mathematical models and uses them in his analysis, but cautioned us to be very humble about models because while there are certain things they can tell us, they cannot tell us everything and it is impossible to get every parameter and control “perfect” in your assumptions.

Therefore, he believes strongly in supplementing models with history and behavioral science, something yours truly greatly believes in, too!

He presented us with a brief history of previous currency wars, specifically two in the past 100 years (and he believes the third has already started now).

Currency War I (1921 – 1936)

You’ll note there is some overlap with the U.S. Great Depression, but Jim said that the 1929 date is very U.S.-centric. England was in a depression in 1925, and Germany completely destroyed its economy in 1921.

So, from a global perspective it’s important to go back to the Weimar hyperinflation of 1921 – 1922.

This was the ultimate currency war—Germany took their currency to zero, and their money literally was just litter by the end of it, confetti that they swept down the sewers.

It wasn’t even money anymore.

How did Germany get to that awful state?

Well, after WWI, Germany had reparations imposed on them by England, France, Belgium, and other countries. Germany was told, “look, you started WWI, you lost WWI, and now you’re going to pay for it.” Literally.

So Germany had to pay various reparations to the winning countries, including veteran’s benefits, survivor’s benefits, reconstruction of physical infrastructure that they destroyed, etc.

Apparently they made an effort, but it was just too impossible for them to pay and they couldn’t get out from under all of their debts to the winning countries.

And Jim said it wasn’t just Germany…France and England also owed money, to the U.S, because they had borrowed money to fight the war.

So, everyone was in debt to everyone else, and there was a terrible sovereign debt crisis (sound familiar?).

Jim pointed out that too much debt clogs balance sheets, restricts world trade, and is a major suppressant to economic growth because neither the banks nor the sovereigns have enough capital to stimulate world trade and provide finance for expansion.

The world back then looked a lot like the world today.

So what did Germany do? They fired the first shot in the currency war by hyper-inflating their currency.

Jim said that we all know who the losers were… the middle class was completely wiped out. If you were a teacher, fireman, retiree, or mid-level bureaucrat, then your savings were wiped out and your insurance policies, annuities, and retirement were all worthless.

That is fairly common (yet sad) knowledge, but Jim pointed out that there were a lot of winners, too.

For example, if you owned a factory, you still had a factory and it didn’t matter what the currency was; it was still a valuable producing asset.

Or, if you were a German multi-national and had earnings coming in from strong currencies overseas, you did well, and many people got their money out of Germany and into Switzerland, and others bought gold.

Many people with debts saw their debts devalued, making them easier to pay with cheaper currency.

So there were a set of “losers”, but the winners did very well, and in many cases bought up their competitors for pennies on the dollar (Jim even mentioned one story where people sold things like pianos and furniture to buy just a few day’s worth of groceries!).

Post Hyper-Inflation

What happened next was even more interesting…

To get out of their hyperinflation, Germany went back to a gold-backed currency in 1923.

They had no choice…they had some gold and their goods were so cheap they had a trade surplus (because everyone was enjoying buying German goods “on sale”) and from 1924 – 1929, Germany had the fastest growing major economy in the world.

Then, in 1925 it was France and Belgium’s turn…they wanted to go back to the gold standard, too.

The world had been on the classical gold standard from 1870 – 1914, but it was suspended at the beginning of WWI because countries knew they needed to print money to fight the war.

By the mid-1920’s, there was a strong desire to go back to gold standard. The only question was…at what price?

France and Belgium had printed so much money to fight WWI that gold priced in francs would need to be a lot higher—it would take a lot more French and Belgium francs to purchase one ounce of gold.

So France severely devalued the price of the French franc as compared to gold (or increased the price of gold, depending on how you want to look at it), and went back on the gold standard with a significantly devalued exchange rate for the French franc.

Belgium did the same, but England took a different path. Winston Churchill felt honor-bound to go back to the pre-WWI price, believing that if you were holding the currency (pound sterling) you were a creditor of the Bank of England and therefore by extension of the UK, so he felt duty-bound to go back to the pre-war price of $ 20.67 / oz.

Jim said to think of it this way: You begin with a parity between gold and sterling, then you double the money supply (to go to war), then you want to go back to parity with gold but you have doubled your money supply, so you have two choices:

1. You can increase the price of gold (like France and Belgium, devalue your currency against gold), or
2. You can cut your money supply in half

Churchill decided to cut the money supply in half to get back to the old parity, but this threw England into a severe depression and was highly deflationary.

Churchill later said in his memoirs that it was the greatest blunder of his life. (Ouch)

Jim said that to this day he debates mainstream economists about the gold-exchange standard, because they ask him “well, don’t you know that gold caused the Great Depression?”

And Jim says, “Well of course I know that! But it wasn’t gold that caused it; it was the price—they got the price of gold wrong. If they had gone back to gold at $ 40 or $ 50 per ounce, which would have been an honest reflection of the paper money that had been printed during WWI, that would have been not only stable but perhaps mildly inflationary and we might have avoided the depression.”

By 1931 it was too much to bear for England. England had to break with gold and suffered a banking panic where people demanded their gold (a run on the banks). England then went off of the gold standard in 1931 and drastically devalued their currency, which did help their economy and gave them some breathing room.

But now, who was the last man standing? Germany, France, Belgium, the UK, all had their chance…but the U.S. was still operating with gold at the old rate.

And this was the most severe period of the Great Depression for the U.S.

The economy and times were exceedingly bad, deflation was overwhelming, and unemployment reached over 20%.

So FDR, on his first day in office in 1933, did two things:

1. First, he closed every bank in the country. (Can you imagine? “My fellow Americans, we have decided to close every bank in the U.S. and we will let you know when they re-open…” Banks finally reopened about 10 days later according to Jim.)
2. Second, he confiscated all of the gold from all American citizens. And American citizens went along with it!

In fact, Jim said that Fort Knox was built in 1937 to house the gold that had been confiscated from the American citizens.

Jim qualified the word “confiscated”…apparently you did get $ 20 / ounce in paper money for turning in your gold, but Roosevelt knew he was going to increase the dollar price of gold. FDR wanted the dollar price of gold to go up because it was inflationary and he was fighting deflation. He wanted inflation, like France and Belgium.

Jim relayed a funny story about FDR being in his pajamas in the White House and calling down to his Secretary of the Treasury, “Henry, what do we want the price of gold to be today? I know, let’s bid it up by $ .21 because that’s 3 * 7 and 7 is my lucky number!”

So apparently he sent the Secretary of the Treasury to New York and had him bid up the price of gold by $ 0.21, and over a 6 – 8 month period they got it up to $ 35 / ounce, where FDR finally locked it down (a 75% increase!).

Jim pointed out that during the greatest period of deflation in American history…gold went up 75% (which is why it does well in times of deflation as well as inflation).

Jim said to think about what this was doing to England, though, because we were now devaluing the dollar which devalued against the pound sterling, too.

Sure enough, by 1936, England and France devalued their currencies yet again, until finally this currency war ended.

Here is a quick run-down of the competitive devaluations:

• 1921 Germany
• 1925 France and Belgium
• 1931 England
• 1933 US
• 1936 England and France

What did we get from these successive devaluations?

One of the worst periods of growth in global history, with massive unemployment, contraction in trade, contraction in industrial production, and deflation of a very destructive kind…in other words, disaster.

Currency War II (1967 – 1987)

Jim pointed out that he intentionally skipped over the Bretton-Woods period from 1944 – 1971 because that was actually a time of currency peace (we were on a form of the gold standard at that time…really a “dollar standard” but we were indirectly linked to gold).

This worked very well through the ‘50s and ‘60’s, but by the late 60’s it came apart.

In 1965, Lyndon Johnson was our newly elected president, and in his January State of the Union address he made two significant announcements:

1. He announced the great expansion of U.S. military presence in Vietnam…he began sending tens of thousands and then hundreds of thousands of troops to Vietnam.

2. He announced “The Great Society”…his welfare and entitlement programs.

This was the famous “Guns and Butter”…guns were the Vietnam War, and butter was the Great Society. Johnson thought we were a rich country and could afford both (but we couldn’t).

So, this was also the beginning of the twin deficits: the trade deficit and budget deficit that have been haunting us ever since.

And this created all kinds of problems…in those days, under Bretton-Woods, if you ran a trade surplus with the U.S. and accumulated a bunch of dollars, you could take your dollars to the Treasury and exchange them for gold.

And many did!

According to Jim, in 1950 the U.S. had 20,000 tons of gold, but by 1970 the U.S. had only 9,000 tons of gold.

Where did the gold go?

• 3,000 tons to Germany
• 2,000 to France
• 2,000 to Italy
• 600 to Netherlands
• Little bit to Japan

And they still have it! They are global powers by today’s standards.

By 1971 (still before yours truly was born) there was a run on the bank, and inflation was the only way out of our debts.

We all know what happened next… Nixon closed the gold window internationally in 1971 (Roosevelt had closed it domestically in 1933).

And ever since that fateful date, the world has been on the dollar standard, not any form of gold standard.

Jim brought up another interesting anecdote of a U.S. government mid-level aid named Pete Peterson who in 1971 wrote a report saying Nixon’s policy would devalue the dollar, increase U.S. exports, and create 500,000 jobs over the next 2 years. (Wow, nirvana!)

And does that sound familiar…? It’s much like what we’re hearing today…

But on the contrary, the U.S. entered its worst period of economic growth other than the Great Depression.

We had three back-to-back-to-back recessions, in 1974, 1979, and 1980, the price of oil quadrupled, unemployment skyrocketed, the stock market crashed, inflation took off between 1977 and 1981, the value of the dollar was cut in half, and there was 50% cumulative inflation in those 5 years.

Wow.

This would have led to a greater catastrophe, but in 1980 and 1981 we were saved by Paul Volcker (that era’s Ben Bernanke, except an anti-printing-press version) and Ronald Reagan, who created the policy of “King Dollar”.

Using this “King Dollar” policy of a combination of high interest rates and low taxes (the exact opposite of what we have today), they were able to get by without a gold standard because the world accepted that (our fiscal responsibility…hard to even put those two words together in the same sentence today though!).

So, world trade grew, reserve balances grew, countries accumulated dollars (particularly after the 1998 Asian financial crisis as precautionary balances), and countries accepted and trusted dollars.

According to Jim, they had good reason to at the time, because for 20 years, from ~1980 – 2000, we actually maintained a fairly stable and strong dollar under Reagan, Bush, and Clinton.

But now we are entering…

Currency War III (2010 – ?)

And the combatants are the U.S., China, and the euro as a whole.

The world once again, for the third time in 100 years, has decided to expand growth by cheapening its currencies, one against the other.

We now have two cases (previous currency wars) that we can examine in the past 100 years: the 1930’s deflation and the 1980’s inflation. Either case is a possibility, although Jim definitely leans towards inflation, but you need investments that can do well in either state.

Jim says that one of these investments is gold (and I agree). He said that most people “get” that gold does well in inflation, but that gold does very well in deflation, too.

Deflation is a Central Banker’s worst nightmare and something they will avoid at any cost.

So, if you have already cut interest rates to zero and have cheapened the dollar and have done everything you can do but are still facing deflation…you can devalue your currency against gold — it is the inflationary numerator of last resort.

Wrap Up – Economics Lesson

Jim wrapped up his talk by giving us a quick economics lesson and update on where we stand.

(Don’t let the formulas scare you…he explained everything in English, too!)  

GDP = C + I + G + (X – M)

GDP = Consumption + Investment + Government Spending + (Net Exports)

Basically, that’s how economists “compute” our GDP. And here’s what that means and where we are in English…

Consumption:

This is “OK” (I’m sure that’s a technical economic term).    Seriously, this was reported recently as OK, but in fact it is flat and very sluggish. Consumer debt is awful…think mortgage debt, upside down mortgages, student loans, credit card debt, auto loans, etc.

The consumer is so heavily indebted and burdened that if people do in fact get more income, we are more likely to save it and pay down our debts than we are to spend it as we have been doing for the past 40 years.

Investment:

This is very weak, and went down in the most recent report. This makes sense… are you going to invest in new equipment if you think the consumer is not going to buy your goods? Possibly if you think the consumer is going to come back next year, but that’s not a likely prospect.

And Jim said that companies are investing in India, and other countries, but that doesn’t count for our GDP.

Government spending:

This is what got us through 2009 and 2010, but between the debt ceiling fiasco and the general sense that there is actually a limit to how much debt-to-GDP we can take on, this has hit a wall.

Net Exports:

This is all that’s left…so how do we increase these?

Well, the only way is to cheapen our currency.

The President announced in his State of the Union address in January  2010, a new “National Export Initiative”, saying, “It is the policy of the U.S. to double exports in 5 years”.

(Kung Fu Girl Note: cough…double???)

But how are we going to do this?

Jim was really funny here, saying “we’re not going to be twice as productive, we’re not going to get twice as smart, there’s not going to be twice as many of us…”

So really, the only way we can do this is to cheapen our currency, and this is exactly the policy of the Fed and the Treasury and the White House.

He illustrated this with some “basic quantitative theory”:

1 + 4 = 5

and

4 + 1 = 5

(My kind of math!)  

The first term is inflation and the second term is real growth.

So the first little equation is terrific, with 1% inflation and 4% real growth…5% growth is really exceptional growth for the U.S., and according to Jim is Central Bank nirvana. (He really is hilarious, and I encourage you to listen to him speak live sometime!)

The second equation however, means 1% real growth and 4% inflation.

Now both of these get to the same end goal of “5″, and Jim says that of course the Fed prefers the first one, but they will take the second one…they just need the “5″. If the Fed can’t get real growth, they’ll take inflationary growth.

Just one more reason to be concerned about inflation.

Money Supply Chart

He also showed us a chart of the money supply and said to expect QE3…but everyone is wondering “where is all this inflation” if we have increased the money supply so dramatically?

The Fed can print all of the money they want (and they are…) but it is up to us to spend it (and banks to lend it). Right now the velocity of money is declining, which the Fed cannot control (they can’t control that except by manipulating our behavior, which is why they are so secretive!).

Bernanke has said in press conferences that inflation of 2% is wishful thinking and it will go beyond that.

But they need a shock factor, because if they target 2% and deliver 2% the behavior impact is zero.

But, if they promise 2% and then deliver 4%, some people might be shocked into action—“I’d better go lock in that mortgage before rates go up! I’d better go buy that car!”, etc.

————————————

He took a few more great questions on SDR’s and more, but I think that’s enough for today! I highly encourage you to pick up Jim’s book if you haven’t read it yet, and to get yourself to a live conference soon! I believe the next Casey one is in September of this year.

Have a fantastic week, and let me know what you’re doing to prepare for the next currency war!

Who do you think will win?

To your financial success,

—Kung Fu Girl

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I hope you had a wonderful weekend!

This weekend the Kung Fu Family got our international groove on by participating in an annual tradition in downtown Palo Alto, the May Fête Parade. This is a children’s parade where the kids can bicycle or scooter down the illustrious University Avenue in support of their school or organization, and it is a ton of fun for all involved.

We followed up the French festivities with a Cinco de Mayo celebration at our friend’s home (who is actually from Hong Kong, but hey, who’s counting?).

(We in the Kung Fu Family celebrate any and all holidays, of any and all ethnicity and religion…if there’s a party, we’re in!).  

I bring this up because my report today is from John Mauldin, an international man (who I think also appreciates a good party) with high-level “friends” from all countries (he rubs elbows with Senators, the President, European prime ministers, economists, central bankers, and many other high-level officials from all over the globe). At the Casey Conference, John was rather bullish on the future and discussed the upcoming “party” and good times that lay ahead for us (once we have solved our current debt problem).

Without further ado, here is John Mauldin on the four biggest trends in our future!

John Mauldin — Four Big Trends For Our Future

John shared four big trends with us that he believes will dramatically affect our future in the next few years.

1. This is the end of the developed world’s “debt super-cycle”

…and the end of the ability of governments to be able to borrow money at reasonable prices.

John is enormously bullish because of this!  He considers it one of the greatest events of his life, because we (as a society) have been misallocating capital to unproductive uses for 30 years.

Now, however, we will be forced to allocate capital back to productive uses, to new technologies and to new businesses, and he sees this as an exciting time to be alive.

He showed us a chart he borrowed from Dr. Lacy Hunt, and said that Lacy is one of the smartest economists he knows.  His words were that Lacy “lives and breathes” history, and if you get the chance to listen to him for even a moment, take it!

The chart visually showed the ending of the great debt super-cycle and how we are witnessing it in the private sector now (huge deleveraging), and that it is going to happen in the public sector (it has already started).

John, ever the optimist (at least at Casey conferences!) believes that the U.S. will actually get our act together and that the government in 2013 will proactively say we need to bring the deficit down and put ourselves on a path to a balanced budget.

(Kung Fu Girl Note: I’m not quite sure what he was imbibing to give him this glorious optimism, but I sure would like some…)  

He said that this will mean a long period of slow growth (at least 4 – 5 years), with higher unemployment than we are comfortable with, but that at the end of that period, we would be done…he hopes that we can use the opportunity to completely restructure our tax code and move to a lower overall tax rate at the higher end of the income spectrum, which would launch a new rush in jobs and create a “capitalist frenzy”.

He reiterated that if we don’t solve the problem, it’s not the “end of the world”…it’s just the end of the ability of the U.S. government to borrow money at rational prices (which is a good thing), but that it is not the “End of America”.

In fact he almost sees it as the “beginning” of America, because the government will be forced to cut spending and raise taxes, and we will have finality (rather than this endless kicking of the can) and we will know where we are…we will be done!

And once we have certainty and clarity on what’s going to happen with our government we can truly begin to plan for a bright future.

But in the meantime, it’s going to be a rough, bumpy road, and as investors we will need to hedge everything and try to get to “the other side” with as many assets as possible.

2. Europe is in much worse shape than we are

John pointed to a black swan that he believes not many people are paying enough attention to, which will come out of left field and may be the final nail in Europe’s coffin…France.

According to John, France is in deep trouble (not the word he used).  

In fact, he joked that the only good thing that is going to happen out of this entire debt crisis is that “France is finally going to get theirs” (he was referring to the French government, not the people).  He teased their socialist system mercilessly (imagine saying in your best French accent, “Our seestem eez sooo supeereeor! You capitalist pigs you do not understand zee social franchise…”).

John said, “Of course I understand it! You have 50% government taxes, you’ve got too much debt, you’ve got your banks at 4.5 times your GDP and you can’t afford to bail them out…”  He went on to say that French banks have lent multiples of their bank capital to countries that will not pay them back in anything that looks like a viable currency, and then quoted Porter’s technical term (which I will kindly replace again…) “They’re fracked”.

He said that Holland is an accelerating factor and Greece is “hopeless”.

And Ireland is going to tell the ECB to “piss on it” (again no mincing of words at the Casey conference…you really must attend in person with me next time!).

By “it” he was referring to the €60 billion that they borrowed for their banks—Ireland is not going to pay it back.

John says they will renege / default on that debt prior to their next election, and in fact the government that is in power today was elected to do that very thing. If they do not do it before the next election, we will see the immediate absurdity of Sinn Féin becoming the majority ruling party of Ireland because that is the one party the people can actually count on to tell the ECB to “go piss off”.

John knows this for a fact, and has talked to members of the Irish parliament, prime ministers, business leaders, pub owners, and economists…and all of them agree they will not pay it back (they just disagree on the method of how they are not going to pay it back!).

Moving onto Asia and Japan…

Again not mincing words, John said that “Japan is a bug in search of a windshield”. Their ¥7 trillion injection is hitting zero.

(Kung Fu Girl Note: the Bank of Japan injected 7 trillion yen ($ 86 billion) of funds to the short-term money market in March—the largest ever for a single operation by the central bank).

When that reaches zero John says that Japan will issue a few emergency orders where corporations will be required to put their money into Japanese Government Bonds (JGB’s). But he said that at the end of the day, Japanese citizens are going to want to turn their savings that they have been saving for 50 or 60 or 70 years into yen so that they can buy sushi and sake and all of the things in life they want to buy, and they will not see it as part of the “solidarity” and “cultural imperative” to hold onto their Japanese bonds.

In fact, his friend Kyle Bass (John has many famous and high-level friends!) recently did a survey and found that only 13% of Japanese citizens would be willing to hold their bonds if the government asked them to.

He then showed us what he referred to as “the most important chart that you will see today”, and the reason why things are going to change and why he is so bullish for our eventual future.

That magic chart was a GDP chart….it showed the U.S. GDP of 2.2%, and then it showed the GDP without government borrowing (which was very negative), and then the GDP without government spending…which was the private sector and it has been flat for the last 15 years.

He used this to illustrate that the private sector has been sucked more and more into paying for the public sector, and that we are therefore putting money into unproductive uses. So, when we shrink the size of government relative to GDP (there was no “if”…John believes beyond a shadow of a doubt that this will happen), we will finally be at the “Endgame”. John says that we will either do it willingly (which is a problem) or we will be forced to (which is a crisis).

He talks to a lot of government leaders from both parties and says that they “get” the problem. They just cannot get up in public in advance of the November elections to say so. He doesn’t think anything will happen in the lame duck session, but he did say that if we get what we got last year, and Obama wins again, John then becomes “not so bullish” and even “pessimistic”.

He did say that no matter what we are going to have higher taxes, and the only place the government can get those taxes is from the middle class, because they can’t get it from the rich…he said they can take every single cent from the rich and it doesn’t get us far enough!

He hopes that they (Congress) really go for it and restructure the entire tax code and put us into something that encourages capitalism and capital formation.

(Kung Fu Girl Note: me, too, but I will be astonished if this actually happens!)

He mentioned Simpson-Bowles and said it was one of the worst things he’s ever seen…but also that he would vote for it tomorrow, because if it was enacted, we survive.

He likened it to chemotherapy and said that we have a cancer in this country and it’s our debt, and that sometimes when you have cancer, you put things in your body you normally would not be in the same county with! And you do it because you want to survive, not because you think it will make you better in the short-run, and not because it’s something that’s going to be pleasant…but because you want to survive.

And he said what we have to do to survive is not going to be economically “fun”, and that our goal as investors is to get to the other side of this problem with as many assets as we can, so that when the opportunity comes to productively deploy our capital, we can do so.

3. Massive demographic changes all over the world.

My apologies, because I missed a little bit of this (see, next time you’ll have to come with me!) but he said that Russia and Europe are 22% of the world’s (population?) today…not sure if that was a specific segment of the population or not, but in 40 years they will only be 7%.

And in 30 years Iran will have a bigger population than Russia.

He went on to say that the demographics in Russia are worse than you think….Russia’s young people are leaving as fast as they can get a visa to anywhere., because there is no opportunity there unless you are in the big cities. He also said this was happening in Greece now and in Spain and that you don’t export your young people if you want to be a growing country.

In the U.S., we need to recognize that the most important import that we have is young people, and he said that our immigration policies are stupid (“ignorant in the extreme”). He believes we should be giving green cards to everyone who gets a degree, and we could solve our housing problem by giving a green card to anyone who will buy a house for cash.

He used Ireland as an example and said that they could solve their housing problem in just that way, if they gave anyone in Ireland who bought a house for cash an Irish passport (he said he would buy one in a heartbeat!).

He went on to talk about “mature” countries like Japan, Europe, and China, and said that China has terrible demographics in the next 10 – 15 years. They have hit the end of their boomer generation (when the number of retirees outpaces the number of workers) faster than any other nation in the history of the world due to their “one child” policy.

They still have 200 million people who still want everything we have, but John is more interested in India, and in countries like India that have a more positive demographic cycle going for them.

Technology

John predicts that in the next 10 years we will see more change than in the whole last century. He predicted a bubble in biotech by the end of this decade, and said that cancer will be a manageable disease by the end of the decade, if not curable. If we get a virus, we will simply go to Walgreen’s and get a viral patch and slap it on our arms and be cured within 2 – 4 hours.

He also said that robotics and AI (artificial intelligence) are finally coming into their own, and discussed a 1 GB wi-fi router that will be coming onto the market late this year or early next year. Advances like this will cause us to revolutionize the way we interact with each other…we will be getting 100MB wireless downloads cheaply, and will be able to video-conference on an HD 80-inch screen that will seem like you are almost face-to-face with someone in person.

He says that manufacturing is coming back to the U.S. and stressed that we (the U.S.) are great at allocating capital into productive assets—this is one of our strengths—and the sooner we can get the debt/deficits out of the way, the better!

4. Coming to end of secular bear market

He mentioned that he goes into greater detail in his book, The Little Book of Bull’s Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets (Little Books. Big Profits), but in the meantime…

Spain is a problem.

They are quickly running out of their ability to access the credit markets at a reasonable rate. They are in a recession. They are imposing capital controls, and just passed a law that says that all citizens must report all foreign bank accounts and must report all cash transactions greater than €2500.

Spain is trying to convince Europe that it is doing all it can and is a fellow member of the euro zone, “We are not Greece! We are a European country working on our austerity program!”

But John says this won’t work, and they will be worse off. It is all posturing for the 21 other members of the ECB that are not Germany.

He said that the Bundesbank is a “toothless tiger”, because they only have 2 out of 23 votes!

So we can read all we want to about the Bundesbank saying that we shouldn’t print, we should have more austerity, etc., but the Bundesbank can only stomp their foot—they can’t actually do anything.

John believes that the only way Spain can make it is for the ECB to continue to print money. He said he had to applaud Draghi (Mario Draghi, President of the ECB), because as a central banker (e.g. money-printer) he gives Bernanke a run for his money!

John says they’re going to need another trillion euro for Spain, and then they’ve got to figure out Italy.

He’s not 100% convinced that the euro will break up, because they all want to stay together and they haven’t yet experienced enough pain to split apart. He said that the impetus to keep Europe together is far more powerful than we can imagine, and that we don’t understand it here in the U.S. (He also said that it doesn’t mean it won’t happen, though!)

John does think the euro will break up, but it’s not clear that it will happen. They are caught between a rock and a hard place, because the pain of staying together is disastrous, and the pain of breaking up is disastrous. Either way, it’s a disaster.

He also said Japan is a disaster, and that we (the U.S.) are a disaster-in-waiting if we don’t get our act together.

He closed by quoting R.E.M….”It’s the end of the world as we know it, and I feel fine”…

And he said that he actually felt better than fine, because the world as we know it right now sucks, but it will end soon and we will be better when we get to the other side!

(Kung Fu Girl Note: I’m not quite sure you can call this “bullish”, but he swears he is!)  

And as investors, all we need to do is to figure out how we can get as much of our assets and buying power over to the other side with us as possible.

He left off with imagining the year 2022 or 2032 and looking back on today saying, “My God what barbarians we were! How terrible our medicine was! How backward our technology! How big was our government!”

He said, “We may even have a gold standard if Lacy’s right!”

——————————————-

So, to sum up, John believes some sort of crisis is inevitable (and imminent!), but he is hopeful for our future when the dust finally settles.

What do you think about Europe? Do you think they will be able to hold it together? Or will they break apart and kick the weaker countries out? Will the euro survive? Or is it a lost cause, doomed to the history books?

Please let me know in the comments!

Thank you so much for reading, and have a great day…

To your financial success,

—Your faithful reporter, Kung Fu Girl

Kung Fu Finance

I’m taking a quick break today from Casey Conference reporting to go “back to my roots” (although I will return to that soon, including sharing with you my take on how best to “get to the other side“!).

A few weeks ago I was interviewed by Andrew Dumais of Your Money Mogul fame, and he graciously captured our interview in an audio session on his website via a YouTube video that you can access here:

Your Money Mogul Interviews Kung Fu Girl

We talked for almost an hour, and he got me to open up more about:

• my story,
• how I discovered Austrian economics,
• why I like “alternative” investments,
• the daily/weekly disciplines I follow to become a better money manager,
• my mentors and their best advice for me,
• what I would do differently if I had to do it all over again,
• the many questions I ask myself before making an investment to take the emotion out,
• how I developed my Kung Fu Finance website,
• and more!

I’m working on getting the interview transcribed and will let you know when that’s done, but for now, I hope you enjoy listening to my (dorky-yet-hopefully-helpful-and-encouraging) story!

Back on Friday with some Casey insights and Q&A…

To your financial success,

—Kung Fu Girl

Kung Fu Finance

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