339: The Great Distortion: Dr. Nomi Prins

Buck: Welcome back to the show. Every Wednesday, my guest on Wealth Formula podcast is Nomi Prins. She’s an economist, geopolitical financial expert and investigative journalist. She is also a great financial author and she has written multiple books, including All the Presidents’ Bankers, Collusion: How Central Bankers Rigged the World, and most recent book PERMANENT DISTORTION: How Financial Markets Abandoned the Real Economy Forever. Thanks for joining the show, Nomi. How are you?

Nomi: I’m great. Thanks so much for having me on. It’s some very choppy times we’re living in right now.

Buck: Yeah. Yeah. And, you know, let’s just start off. I mean, your title, the title of your most recent book is very telling. I mean, it’s kind of tells its story right there. Right. Permanent distortion, how the financial markets abandoned the real economy forever. So, you know, I think many people who are not economists like myself and who are just following what’s going on and it’s really what’s been going on since maybe 2008, you have have noticed this idea that, hey, the economy and recession doesn’t mean, you know, doesn’t really reflect on markets. I mean, during COVID, everything was the businesses were were nonfunctional, but the markets were still going up. Is that essentially kind of the when you talk about the permanent distortion of the economy, is that what you’re you’re referring to?

Nomi: Yeah, that’s it in a nutshell. And I’ll start that title in the subtitle. We’re very specifically chosen to not just say there is a distortion now, but that the distortion that has developed since 2008 between the markets and the real economy has actually become permanent. It’s like we’re not going back. And there’s there’s two ways that the market outperforms effectively does better than the real economy.

One is when there is a crisis, whether it’s a financial crisis or it’s the COVID shutdowns, and there’s all this money that is created at the hands of the central banks, the Fed and other central banks around the world that have the ability to effectively inject or basically liquefy the markets with money that they create and they buy back from the markets.

So they basically inject money and extract it, but it doesn’t really help the real economy to do that. And so what happens is the markets and how that injected money, I’m probably mixing metaphors, see what they say and how it comes at them. And as a result, they balloon in different ways the stock market, the bond markets, the real estate markets and so forth balloon in different ways. When I have the injection as coming in, when it goes out, there is some pain for for the stock market as we’re seeing right now in the bond markets and the real estate market a little bit. But it’s nowhere near the pain that the real economy feels for various reasons for not having participated in the upside to all of the higher costs of everything from utility bills to food bills to medical bills.

And so there is there’s always this distortion between where the money goes and what it helps versus the real economy. And most people that live in the real economy that are impacted on the negative side, either way, if markets are going up or the markets are going down.

Buck: What do you think was the precipitating factor in this, of course, as you mentioned, was 2008. And, you know, the meltdown. At what point do you think this went from a short term panacea to a permanent distortion?

Nomi: So that’s a really good question because I had written a book after the financial crisis, a couple, but but the one that specifically looked at the central banks kind of role in in creating the first part of the distortion collusion was basically how a lot of central banks around the world in the wake of the financial crisis created. All this money went into markets and so forth in the real economy, GDP, for example, stayed effectively around zero, give or take. At most. It was sort of 2% per year on, but for the most part, it hovered between, you know, sort of minus and 2%. So really the economy was really going anywhere, but the market was was going up quite a lot. And so that was sort of when distortion was was accelerating. But where it became permanent was when the economy was shutdown effectively.

And what the Federal Reserve did and other central banks, they didn’t just inject some money. They doubled in a few months the amount of money that they had injected during all of the years that precipitated that from the financial crisis of 2008 through 2019. So it wasn’t like they just added a little bit or they distorted markets a little bit more.

They doubled what they had done in all of those preceding years. And that’s when I think it became permanent because two things happened. And one is the financial system. The market system recognized that no matter what, there was effectively an unlived amount of money that could be created in an emergency. Now, what defines an emergency is always up for grabs. In that situation, it was it was it was COVID related shutdowns. But whatever an emergency is, there is an ability to create vast sums of money to basically flood the markets with. And what we’re seeing now is what happens when the the foot of the central banks is a bit taken off the gas pedal and they sort of start to raise rates to to tighten in inflation.

And some of the things that they just did over the last two years in terms of creating money and creating all of this in flux and also seen the markets crater as a result because the markets want this cheap money. They got used to it. They got dependent on it. In the book, I call it an addiction. And so what we’re seeing now is what happens. We’re in withdrawal from an addiction, which is the markets are buckling, but more so the economy is stumbling and there’s more uncertainty throughout. And so all of that became permanent. The upside and the downside to markets and to the economy in the wake of the COVID crisis.

Buck: It strikes me that they’re part of this discourse and has resulted in in sort of this almost like a a game of financial chicken between the, you know, the central banks and the large institutional investors. Right. Like how much can we do and how much can we get away with? And then you’ll bail us out. And we know you’re going to bail out because you’ve shown it over and over that that is a how do you how do you escape that cycle? Because that to me seems like that’s something that is very firm. Now, I like I feel like investors, whether it’s retail investors or institutional investors, nobody really believes that the Fed is just going to just let things correct themselves.

Nomi: Yeah, I think that’s true. No one does believe that because of because of the facts. Now, what’s happening right now is that Fed Reserve Chairman Jerome Powell is is echoing what happened in the eighties with what’s left when then Federal Reserve Chairman Paul Volcker was at the helm, where there was multiple years of inflation and there was multiple rate hikes over time, we had rates go up to 20% for a minute. And he’s basically saying, look, inflation’s really high. I’m going to I’m going to pay more. Now, what the Federal Reserve policy is on this really high inflation and we’re going to do whatever it takes to get inflation down now. Now, the problem is and why the markets don’t believe that, besides the fact that they’ve shown that they can expand their book and reduce rates to zero when they feel like it, is that the inflation that that Powell is talking about doesn’t come from monetary policy inflation. If it did, they could have stopped it a long time ago. They’ve been inflating markets since 2008. It so happens it has come from a confluence of events. One is opening the economy is after they were shut down, which means reopening plants, which means reopening supply chains, reopening transportation change after they’ve been closed down. So the extra costs that that incurred is when things have been shut down to restart them up.

And then you couple that with the fact that we’ve got other problems going on in the world on the food side, you know, we’ve got droughts, we’ve got problems with fertilizers on the energy side. We have natural gas price spikes. We have geopolitical tension between Russia and Ukraine. We have an energy mess in Europe that’s going to push more of the cost of energy prices upward.

So all that’s happening together. So what that what that looks like is higher inflation because in fact, it is. But it’s not something that the Federal Reserve, any other central bank can do anything about. The Fed’s not going to go and help you with your electric bill. It’s not going to create oil. It’s not going to create food. It’s going to create for your fertilizer. It is not a farmer. It’s not a miner. It’s not it’s not a producer. So so the problem that’s happening right now is the markets are saying, wait, but wait a minute, you’re talking about fighting inflation. Okay. But the inflation you’re talking about fighting is not inflation. You can be. And so at some point, what you’re doing is causing a choking off of finance and capabilities, too, to real people, to, you know, for for mortgages, for for car loans or for tuition, for for things that that that people kind of need and used in their regular lives outside of the markets. And so by raising rates, you are increasing those costs. And that can create a situation where people don’t don’t buy that next home or or choked off on rent or don’t get that next car. That’s why we have such a, you know, extreme supply in the used car side of the of the equation. And and that can hurt the economy on the real side, but it doesn’t impact food prices or fuel prices.

And so all those reasons are where the markets are saying, look, at some point the Fed and I agree with this honestly at some point based on this reality and the fact that it will slow down the economy because people can’t both pay higher electricity bills and their rent and things, things will happen. Things will be shaken out as a result. It’s painful out there that’s going to create a scenario where the Fed is going to have to stop raising rates and stop letting assets float off of that stock, which is doing really slowly anyway. It just says it’s doing it. It’s not really doing it that much and either stop raising rates or go back to cutting rates. And so you’re right, long answer. But it’s important. I think there’s so much going on here that there is a kind of game of chicken going on because at some point the Fed, in order to maintain price stability, will have to recognize that the real economy or GDP figures anyway are very, very slow and energy prices are very high and they’re going to have to back off. And that’s what the market’s waiting for and betting on in the market. What it’s doing right now, especially institutional investors, is saying, all right, well, we’ll write this down for now, but at some point there is going to be a swoosh up because at some point the Fed’s going to first stop raising rates as much, then go to neutral. And then the third part of that pivot, go to cutting rates.

Buck: One of the things that you’d mentioned, you know, you’d you’d mentioned Paul Volcker in the 1980s. One of the major differences, I guess, in the economy at that time was that, you know, we didn’t have quite the debt that we have in the system right. And so is that a how much of a how much do you think the Fed can, you know, really raise rates? I mean, there’s a a presumably there’s a ceiling based on how much debt there is in the system.

Nomi: Yeah. So what’s interesting is that before the financial crisis, like 2007 or so, the national debt stood at about $9 trillion just to the public, that part of it, and now it’s a $31 trillion. All right. So so what’s happened is it’s basically tripled in the last 15 or so years because it’s been cheap to borrow and because as an economy, the US anyway has not been able to produce enough to cover its cost to survival. So more debt, more money is borrowed in order to basically keep the budget running and to basically keep the economy running at the sort of public federal level is also the state level on the local levels. So so that that’s been something that’s been fed by cheaper rates, the ability to borrow more more cheaply and not sort of worry about how the economy is really growing in order to be able to basically grow ourselves out as opposed to borrow ourselves out of this situation.

And so now the amount of bonds that are on the Fed’s books, a combination of Treasury government debt as well as mortgage debt from the banks equals $9 trillion. It equals the amount of total debt that we had before all of this stuff happened, before the financial crisis, before the Fed went to zero, before it created money to basically buy all this debt. So we’re in a situation now. It’s basically three times as bad as it was then. And as a result, again, this is this is another reason why this this game of chicken that we were talking about. It’s another factor because at the end of the day, not just the Fed, but the Central Bank of England, you’re paying central bank and so forth. They’re all facing debt, overwhelming crises at their sort of doorsteps. And the only way to ultimately keep that from explode is to continue to keep rates low for the next round of borrowing to happen. Now the US happens to be in a position where it’s its general cost of borrowing is still quite low relative, say other emerging market countries or so forth.

So we can still borrow relatively low at low rates, but they’re getting higher and higher. That’s going to have a cost to the budget and that cost is going to basically be have to borrowed against in order to pay it at a higher rate. And at some point the government is going to have this sort of in-door conversation. And with the Federal Reserve, if it’s not already happening and saying, look, you know, this is kind of getting very expensive to run here. I mean, you know, and the markets are crashing and we got an election and people are complaining the economy is slowing. And what are you guys thinking? Meanwhile, that hasn’t happened yet because inflation is so high that there’s this belief that’s perpetuated somehow that the Fed can stop inflation, which it can’t. And so this this this is a problem that we have right now. A lot of a lot of competing. Yes. Numbers and very high debt.

Buck: Yeah, I’m curious on your your take on, you know, obviously, you can’t predict the future, but when you’re looking at what’s coming up, energy costs are probably just going to keep going up. I mean, we’re in a winter in Europe right now in the middle of the war in Ukraine. What do you see? Like what do you see happening over the next, say, 6 to 12 months? I mean, do you see any hope of of getting inflation under control at all, given that where we are right now?

Nomi: Yeah, I think inflation’s going to remain high over that period of time for a couple of reasons. One, as you mentioned, the an energy problem crisis already happening in Europe and that’s before winter starts. There’s governments are trying to consider whether they can cap energy prices, whether it can help subsidize their people in order to not go sort of bust from having to pay their electricity bills.

But the reality is that’s either going to cost it or it’s just going to cost people more money or some combination. And it’s not going to bring energy prices necessarily down if what is keeping them up are geopolitical tensions. So unless Russia gets out of the Ukraine and says, Hey, sorry, I didn’t mean it, then we’ll open up our pipelines and our sanctions across Europe will be it will be removed as opposed to being increased, which they will be in December on the energy side. Then, yeah, that could turn around. But if that doesn’t happen, if none of that happens, even with all the warnings and even with all of the preparations that are going on in Europe, there’s still going to be a winter and there’s still going to be a lack of supply of storage, particularly natural gas, going into the winter after their very hot summer where those supplies were already depleted because the summer was that historic highs and people had to cool their places and their storage, their food and everything else.

So, you know, you have this like really this pending potentially harsh winter after an absolutely harsh summer. And that pushes energy prices up anyway. And same thing in the United States. We haven’t really felt the same sort of crisis mode. I mean, I was just over in the UK for a couple of weeks. You definitely feel that they’re everywhere. We didn’t. We don’t necessarily. But anyone who looks at their energy bill and I just did I just on my August bill, I was traveling, I just saw my August bill now and I was like, Oh my God, it’s like twice as much as was last time and I’m trying even harder. And so, you know, I think any business, any individual, any family is going to be really shocked by the end of their summer. Bill’s going into the winter. That’s not necessarily going to be easier and that’s going to absolutely come into play in all of this. So I don’t see inflation coming down because of that. Food prices, transportation prices, fertilizer prices, all of those rely on some form of natural gas, or at least for the most part, fertilizer relies on it in order to basically create better sort of crop supplies.

We’re behind on that. There’s famines kind of happenings, droughts happening, you know, and there’s also the tensions between Ukraine and Europe, which are closing off wheat and other types of supply. So so that’s not going to change. So those bills are going to remain fairly high. What could come down our housing prices, because people are just not wanting to spend 6% interest on on their mortgages or refinancing.

Obviously, that’s going to die for a minute or during that time period. What that has meant so far are that rents have been increased because people are kind of stuck between having to pay that higher rent or getting a house, which they can’t afford to buy. But at some point, if people can’t pay that, there might be a little bit of a down, you know, sort of a down movement in rents. But all those things together still equal relatively high inflation, literally, no matter what the Fed has done, the Fed’s raised rates now since March. And the only thing that’s really happened is housing prices have kind of come down a bit. Everything else is sort of still high.

Buck: So when you look at all of these really complicated problems that we are dealing with financially, geopolitically, do you foresee some kind of, you know, sort of a, you know, catastrophic event that culminates from all this? I’m just curious, like I mean, it just seems like we’ve got so much going on in terms of debt inflation. Interest rates are where does this are you worried about some kind of, you know, problem, big problem up in the pipeline here?

Nomi: Yeah. I mean, we’re seeing some of these problems, again, come happening already in an energy crisis, food crises, famine, increasing sort of food poverty, fuel poverty increasing around the world. And I consider those crises where generally crises look worse is when they impact the markets, because that’s what we consider the most financial sort of less than just an individual economic crisis. And we’ve seen this we’ve seen between the Dow, the S&P, the Nasdaq, other international markets are down, you know, 20, 24 to 5% this year. And since the Fed started increasing rates and kind of precipitously with little sort of mini rallies along the way, when there is that sort of collective thought, like can they continue to do this?

Are they not going to step in and help? Because this is kind of, you know, at the moment at the moment. Fuel. So I don’t I don’t necessarily see like a major other crash unless we have another epic war. Like, you know, if the Ukraine Russia thing gets get sort of bigger and it does become a kind of world war three of nuclear start of really big things start to happen. But I do see this the slow degradation over the near period.

Buck: Where does that culminate, though? How does that you know what, still, I’m just trying to figure trying to understand, like where all this leads ultimately.

Nomi: Yeah. I mean, where it leads to is, is a stagnant economy with with a real shift, as we’ve already seen since collusion and sort of the behavior of how people are employed. I don’t I don’t think the idea of raising rates in order to tame wages and to tame the the labor market really makes a lot of sense in this particular market. The labor markets change so much. How people work has changed so much. I don’t even think that our employment numbers actually represent the picture of employment. So there’s a lot of confusion there. And where does that end? Well, if if if there becomes a situation where before, say, the Fed dials back rate hikes and we’re in a situation where it is very expensive to borrow, not just for governments, but for individuals if they need to, or if they’re using their credit cards, which which themselves have rates rising on them to pay their electricity bills because they need to keep their food, their their homes, other sort of warm in the winter. In the summer. I think all of that creates more like are they across widespread economic angst, more so than we have right now. What that usually indicates is more unrest, more political infighting, more civil unrest around the world, because when people are uncertain and they have angst and they don’t feel like their governments are listening, and certainly central banks aren’t helping and they’re not even elected officials are just sort of like making things kind of worse.

I think that that results in a lot of, you know, little violence and excellent sides. So I do think we see a lot of sort of crumbling of of what we have and talk about this and permanent distortions is already with 2019 before even the pandemic was the sort of highest year in terms of episodes of social unrest across the economic and global spectrum, sort of on record and not necessarily meaning one big world war, but just in terms of the number and the breadth, you know, developing countries, developed countries, all that.

And that was in that process of the whole shutdown. But but now we’re entering the period where things are open and things are are anxious. So I see all of those tensions rising and I see, you know, again, the energy, the food, the fuel, fertilizer, all of that staying pretty, pretty expensive because there’s no real there’s no real infrastructure at the moment that that kind of is in process to to sort of shift that.

We do have obviously new energy coming forward and we have other forms of renewable, sustainable energy that that are coming on to the pipeline. But the problem is what happens is if if there’s a need right now for what we have right now and it doesn’t have in terms of energy, it doesn’t have the infrastructure there. And we’re trying to sort of expand beyond that to tomorrow. It creates, again, more attention and more sort of blocks and where that all winds up. I mean, I do think we’re going through a couple of years now of a lot of chop until the Fed backs off because that’s one of the market’s problems. There is probably a shift in government. You know, internally we’ll have another election, then we’ll have, you know, probably into the next election and around the world, you know, we’ve had like our fifth or whatever the Prime Minister in the UK in the last six years.

I mean you just have a lot of you just have a lot of change and what that means is that there’s no ability to really plan anything or to have anything take hold. It’s all kind of reactive. And so that kind of keeps both markets and economies on edge. But I think ultimately the markets will benefit from a pivot by central banks, not not in the next couple of months, but but the third part of that pivot back to reducing rates. And I think that will catalyze more major rallies in the market. We’ll see the cycle happen again.

Buck: So obviously, you know, you’ve you’ve been part of this economy at a very hands on level. You’re a managing director at Goldman Sachs. I was at Lehman two, I believe, putting your investor hat on, so to speak. What do you think? Just in broad strokes, what potential opportunities there are, you know, for investors looking to say, well, gosh, you know, the world is changing. I don’t know where to put money. I’m not saying to give us financial advice. But what are some of the things that you think about as potential opportunities in the environment that we live in?

Nomi: And so, I mean, I started to mention, I think that in a different context, some in what I said just before the shift to the energy markets, because I think what we’ve seen here and also the fertilizer more basic basically energy and energy for for power, energy for food, etc.. I think I think those are the investment opportunities right now. And of course, some companies are very highly in debt and some companies won’t be able to raise capital in these markets because of there’s just a lot less to to be gotten a cheaper rates now. But I think in general, the power companies that are well situated that have a mixed portfolio of sort of I’ll call old traditional sort of fossil fuel as well as renewable, sustainable sort of transition. I think those companies are going to be the ones that whether this the utilities that do both can weather this, let’s say weather related the chop, but also be good investment opportunities as well as the infrastructure for new energy as well will be a good investment opportunity. And the companies that have the ability to actually either finance themselves, pay for their financing or part of the need today as well as the need tomorrow.

So I think those hybrid energy companies are really the and the materials that they use. So that goes from lithium to nickel to all of the battery related or storage capacity related metals and materials will also be a part of where there is upside from an investment perspective. Anything that basically looks to well, anything is profiting. Now as well as has a future path on an energy transition.

Buck: You think of nuclear energy. I’m just curious, just as an add on to that, you talked a lot about some of the other things, but it seems nuclear, obviously, it’s got you know, a lot of countries are worried about the implications of that. But it also seems like potentially one of the best, you know, ways to pay forward in this energy situation.

Nomi: Everything that goes with wind, solar and nuclear and geothermal and all of that’s important for a nuclear perspective. Obviously, that’s still tainted from from from years of disasters that nuclear plants. But but that said, I think we’re we’ve evolved a lot passed some of that and I’ve learned from some of those mistakes. And I say they won’t ever be another disaster nuclear plant again. But certainly there’s been progress in the technology. There’s a progress in safety measures, and there’s been progress in the sort of capital that can be used for for for nuclear power. And one of the reasons we’re seeing nuclear power come back online are plants being resurrected and built across Europe is because there’s just a realization kind of late, but a realization because of the what’s going on in Ukraine that we just need to continue to advance other forms of energy, of of power.

I would say in California. In California, the biggest you know, let’s just go wind and solar state in the United States. Gavin Newsom is talking about and is basically focused on reinvigorating nuclear plants. And so there’s that standpoint of nuclear power, the companies that own those assets and the companies that actually can use those assets to produce power as well as the materials, again, that go into that, as well as uranium, which is one of the sort of feeding factors for having nuclear power and so, again, that that that sort of specter of the material and the energy sources, I think are definitely big investment opportunities.

I think they’re not it’s not like tomorrow because we have a lot of chop in the market, but that sometimes if you look at way ahead, I’ve always thought this Wall Street’s insistence being on Wall Street is if you’re looking to decide whether you’re an investor or a trader, then if you are an investor and you have a reasonably longer term horizon, I more than the next six or 12 months and these are all areas that for multiple reasons need to grow, right?

Buck: So the book Nomi, is Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever. And that book, by the time we publish this, will be available presumably everywhere, Amazon, bookstores, etc. How else can we get a hold of you in terms of, you know, finding some of the other things that you write, other other things that you’re producing?

Nomi: Well, I do have a website where we do reasonably good job of sort of compiling, whether it’s my interviews, my writing, my books and just my tweets, basically everything sort of that’s that’s home central and that’s WW dot nomi Prins dot com and then from there you can get the books, you can get all the social media handles and all of that. That’s probably the best place my Twitter handles @NomiPrins So there’s that just real quick. But yeah, so I have I have been busy and there’s a lot going on and so there is a lot out there. And I think I’m a my my whole mission here is to is just to make the information available to people to to be able to just be informed and and go from there.

Buck: We appreciate that. Thank you so much for joining us on Wealth from your podcast today.

Nomi: Thank you so much.

Buck: We’ll be right back.