The End Game Ep. 7 – Edward Chancellor

The End Game Ep. 7 – Edward Chancellor

September 15, 2020

Bill and Grant welcome historian, journalist and author Ed Chancellor to The End Game. 

Ed’s remarkable book, Devil Take The Hindmost, chronicles three centuries of bubbles and manias and, in this wonderful conversation, he shares his thoughts on how and why they end, the historical parallels previous bubbles share with today and the likely problems the world faces at it moves through The End Game. 

Entertaining, insightful and packed with historical relevance, this is a conversation you won’t want to miss.

The Grant Williams Podcast
The Grant Williams Podcast
The End Game Ep. 7 - Edward Chancellor
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Bill and Grant welcome historian, journalist and author Ed Chancellor to The End Game.

Ed’s remarkable book, Devil Take The Hindmost, chronicles three centuries of bubbles and manias and, in this wonderful conversation, he shares his thoughts on how and why they end, the historical parallels previous bubbles share with today and the likely problems the world faces at it moves through The End Game.

Entertaining, insightful and packed with historical relevance, this is a conversation you won’t want to miss.

 

Grant Williams:

Before we get going, here’s the bit where I remind you that nothing we discuss during The End Game should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now, on with the show. Well, welcome everybody to another edition of The End Game. Joining me as always, because it would be no good without him, frankly, is my Pal Bill Fleckenstein. Bill, hi mate.

Bill Fleckenstein:

How are you doing, mate? It’s nice to be back in the podcast business, especially given the timeliness perhaps of our guest that we’re going to have on today.

Grant Williams:

Yeah, as we record this on… What day is it? It’s the day after Labor Day, Tuesday, September the 8th, I think. Markets have been wobbly for the last few days. We’ve seen all the tech stocks starting to succumb to that psychological meltdown that you get at tops. And our guest today is Edward Chancellor, who’s written one of the best chronicles of manias, panics and all kinds of things crash-related of any era, and that is, Devil Take The Hindmost, which chronicles just about every major crash between the 1600s to 2008. If you haven’t read it yet, I can’t recommend the book highly enough. It’s something Bill and I both compared notes with our tattered copies of the book lying around our offices today. Bill, you and I, I think we were both at the same conference where we saw Ed speak. It’s fascinating to listen to him, and his perspective on this stuff is extraordinary.

Bill Fleckenstein:

I totally agree, so let’s get going.

Grant Williams:

Well, Edward thank you so much for joining us today. This is something Bill and I have been looking forward to for quite some time now.

Edward Chancellor:

Nice to be here.

Grant Williams:

As we’ve kind of approached this day, it’s funny how the world seems to be cooperating with us for once and putting things in front of us that jives so well with the conversation that we’d love to have with you about manias and panics and how kind of euphoric episodes come to an end. But I think before we get into that, if I can, because there will be people out there who haven’t perhaps read Devil Take The Hindmost, and hopefully we’ll all be rushing out to buy a copy after this. But perhaps, if you could just tell people how your kind of fascination with that came about and what was it that led you to produce this phenomenal piece of work?

Edward Chancellor:

So I actually went into the City of London in the early 1990s having done a postgraduate degree in history working for, actually, in corporate finance rather than on the investment side. One had to talk of railway manias and tulip bubbles and this and that just as one does when one works on Wall Street or in the City. I didn’t really know anything about them. Couldn’t find anything, any sort of up-to-date account that I thought was particularly accessible. There was, of course, Charles P. Kindleberger’s Manias, Panics and Crashes, but I didn’t have any issues with Kindleberger. It was more of a sort of taxonomy rather than a narrative account. And I thought it would be interesting to work on more a narrative account of the speculative mania. So, that’s how I sort of got into it.

Edward Chancellor:

And then as it so happened, as I was writing the book, from the sort of mid-1990s onwards, it just so happened this epic speculative bubble got going in the internet stocks. And that was quite useful to me, because I found myself sort of writing about the railway mania of the 1840s, and finding that sort of language and expectations of the internet were quite similar to the railway mania of the 1840. I found very strong historical parallels, as one still does. And in that sense, I was influenced greatly by Bill and my mutual friend, Jim Grant, who sort of looks at what’s going on in the current world with one eye on the past. That’s in short what took me into this particular field.

Bill Fleckenstein:

One question that I’m sort of curious about is, when you got done writing it, and then you saw… I mean, I think you published it, was it 1999 when it came out?

Edward Chancellor:

I think June ‘99, yeah. Summer of ‘99.

Bill Fleckenstein:

I remember reading it, because at the time I was running a short only fund, and I felt like we were in a bubble. And I had read all the other books, even some of the ones you’ve quoted, trying to get a handle on how this has happened historically. I’d always had a fascination with, why did manias end? After doing that, I kind of came up with my own theory about why it ended. But I thought that rather than lead the witness, I would ask you, given the fact you’ve studied them, if you have a strong opinion about what causes them to end. What’s your feeling on that phenomenon? Why did they end?

Edward Chancellor:

There are sort of big manias and small manias. A small mania, let’s say, is a bit like a pyramid scheme, or a virus. They could just run out of steam, when it’s infected as many people as it’s going to infect. So, I mean, look. Sort of go back two or three years ago to the Bitcoin bubble. It was cresting in December 2017. Is that correct? Within six months it was down by two thirds. I am not sure if anything particularly busted that Bitcoin bubble. It’s just that the world had run out of idiots to buy Bitcoin. But the bigger bubbles, the great stock market bubbles or the great real estate bubbles, I think they tend to be bust by something that interrupts the flow of liquidity. And the most common cause, to my mind, is tighter money, is a restriction on the supply of credit.

Edward Chancellor:

I remember being interviewed in ‘99 on CNBC, the summer of ‘99. And they said, “What could end this bubble?” And I said, “Well, look, the Fed is hiking rates. That is what normally… And if you then think, that what actually stopped the internet bubble really in the spring of the next year was actually the holding the flow of junk bonds that were financing the sort of old net telecom carriers in the States and in the UK. It was just, money was quite tight. US treasury yield, 10-year yields, was over 6% at the time. And I still think it’s mainly tight money rings the final bell. Tell me if you have some other view.

Bill Fleckenstein:

I have kind of a combo view. Part of it is, conditions change. Reducing liquidity or raising rates was… That happened in ‘89 in Tokyo, that happened in both ‘00 here and ‘08. But, I have a slightly different view of it. Having sat with a portfolio betting on the fall or the unwinding, while these things were happening, my observation was sort of corroborated in reading history was that negative events come along. They don’t upend it. And the fact that they don’t kind of emboldens people, even as maybe the leadership narrows. And then what finally ends it is simply nothing. My favorite A-grade quote from your book on that subject was when Winston Churchill visited a stock exchange on Black Thursday, I believe. And you write, “The panic that unfolded before his eyes had no palpable cause.” And so, that’s sort of my belief is that, yes, conditions change. But it isn’t the changing of conditions that starts to maybe winnow the field a little bit, but then something happens and psychology changes. The continuity of bullish thought gets disrupted somehow.

Edward Chancellor:

Bill. I mean, to go back to 1929, and I don’t want to contradict myself.

Edward Chancellor:

After 20 years, perhaps I do want to contradict myself, so this is the way I see it. And I think probably in Devil Take the Hindmost I underplayed it or hardly even mentioned it is that, the second half of 1920 saw enormous capital flows, as you’re probably aware, from the US into particularly Central Europe and Germany. Interestingly, it was the hiking of US interest rates in 1928 after the retirement and death of the president of the New York Fed, Benjamin Strong. After he died, the sort of shift of the Fed was towards restraining speculation, so they jacked up domestic rates. What that did is it pushed call money rates up to very high levels, I think 15% or something.

Edward Chancellor:

What happened then, is actually money was then sucked out of Central Europe. Instead of American money flowing to Central Europe, the money started flowing back. So, I think that I would… I mean, in fact, actually I have been sort of rewriting this whole period, because I’m now working on a history of interest rates. I’m sort of looking at that whole period again through the prism of interest rates. I’d say that it was tighter money that was the death knell of the ‘29 bubble.

Bill Fleckenstein:

So would it be fair to arrive at this sort of a conclusion, that a tightening of money in some way shape or form… Because, remember March of 2000 was, they’d withdrawn the Y2K liquidity injection, which at the time was a big number. Now it’s a small number when in comparison. But the tightening of liquidity is a necessary precondition, but not a sufficient cause all by itself? Something has to happen, because you can find these periods of tightening and they go on for quite a while and then somehow it just goes. So, maybe that sets the precondition. And then you still have to get psychology to snap.

Edward Chancellor:

Sure. I mean, I think there is an element, feedback loops in markets. And therefore, what one might identify at the time as the cause is not really a cause, it’s just eventually… It’s your Wile E. Coyote has got over the cliff without realizing he’s over the cliff. And I think to get back to the current tale, I think is something… What we’re seeing now is slightly different. I mean, as you have been aware, look at the last seven or eight years. Each time the Fed has sort of reduced its accommodation. They’re starting with the taper tantrum in the summer of 2013. And I’m thinking I might be missing somethings. But then the next year, you’ve got your bond market flash crash. And then in the summer of 2015, you’ve got sort of ETF crashes and so forth, which are related to the China devaluation, which I think was related to the fact that the Fed was coming off its zero interest rate policy and flagged it. It was coming off the next year.

Edward Chancellor:

Then I’m fast-forwarding to 2018, which was a rough year. I think 2018 again was this, the Fed at that time, said it was continuing to tighten up. I mean, admittedly, it didn’t get very high by its standards. And it just shows you that 2%, the world falls to pieces now. It is no longer 6% or 15%. So, I think that’s one side of the coin. I think the other thing now is that the central banks are just far more accommodative of markets than has ever been years ago. And there’s someone who pointed out, with the Coronavirus panic of March, I don’t know what date it was, around the 20th of March if I remember. [crosstalk 00:14:00]. Anyhow, it was interesting. As the market cracked, and I think I’m right in saying it’s the Fed went in with very heavy support to the markets.

Edward Chancellor:

Where the markets were only 10%, let’s say the S&P was only 10% off its peak… Now, as you will know, the peak was one of the highest market levels in history. I mean, it was higher than in 1929. So, it’s sort of as if the Fed were suddenly opening the gushers in September 1929, and in which case you weren’t really going to get your October of ‘29. What keeps the market going, is actually continuous accommodation. In the past it was tightening that was required. And now it may simply be the absence of accommodation that would actually end itself. But, I mean, one can’t be certain because this really is quite unprecedented what we’ve been going through. I mean, it’s so interesting for those of us who sort of have an interest in finance, but I mean it’s also quite scary because one’s never seen. It’s just far more extreme than anything one’s ever seen.

Grant Williams:

Ed, let me ask you. You touched on something there that I was going to ask you anyway. And that is the degree of sensitivity that the world now has. Because as you said, when you go back to ‘29 and you look at where rates reached before the wheels kind of fell off the whole thing, much higher than now. As you said, core rates were 15%. I think interest rates were 6%, 7% before that happened. Obviously, we were on a gold standard and that changes the dynamics somewhat. But I think to your point that you made a couple of seconds ago, the sensitivity to rising rates at this point is so much heightened now that we’ve seen we got to 1% in the last time there. 1.25% but otherwise 1.5%, somewhere around there. And things started to get very, very shaky. In this era of, as you put it, flat out accommodation, is there any room for them to ever raise rates again. Because right now it feels as though if they even raise them a tiny little bit, this is so fragile now, that it can’t withstand that.

Edward Chancellor:

So I’ve been working on this whole question of rates for the best part of the last decade. And in presentations, five years ago, I just used to show the Fed funds rate peaking at different peaks and just drew a sort of line.

Grant Williams:

Like a simple 45-degree line?

Edward Chancellor:

And this is sort of stockbroker stuff, which one doesn’t normally hold by. But I just said, “If this continues, we will be peaking at 2.25,” which is exactly where it got to. So in that sense, it is following this trend. And I don’t think that interest rates can rise. And there’s a term used by Jim Grant uses and Claudio Borio of the Bank of International Settlements use which is, “Low rates beget low rates.” And the low rates beget low rates in a number of different ways. And that’s sort of part of the thrust of this book I’m working on, which is to try and understand the world we live in today through the prism of the interest rates. Anyhow, I’m going to say one obvious way is just a huge amount of debt out there. And that’s true, whether it’s household, corporate or government debt is that the more debt there is Out there, then…

Edward Chancellor:

One of the things that Borio and the Bank of International Settlements fight is that the economy’s debt service ratio tends to be rather stable. So everything else being equal, the more debt you have. The lower interest rates required in order to validate the debt. And so we call that, you already know of that phrase, The Debt Super Cycle. From one cycle to another, debt keeps on rising and interest rates keep on falling. And the cause in a capitalist society, you need to sort of create credit in order to generate purchasing power. You can bet that the authorities will push the debt super cycle as far as it will go, and which is why in some countries it takes you down into negative rates. The other thing is that the growlery of the debt super cycle is an asset price super-bubble. And what’s interesting is that each bubble is bigger than the bubble that precedes.

Grant Williams:

Yeah. Necessarily, I guess.

Edward Chancellor:

Well, it’s not necessarily. I mean, this is a relatively new phenomenon. I mean, the data that I like to cite, i commonly cited, is you just take the sort of what used to be called the Fed flow of funds, household wealth, net household wealth or gross. It doesn’t really matter. What you see is, I’m talking slightly off the top of my head, but that relative to its historic mean, household wealth will probably… I don’t know. So, I’m just so excited, like $15 to $20 trillion above its historical mean, or roughly two-thirds of the GDP. So, that is a lot of wealth.

Edward Chancellor:

And where things are at the moment, I take it that despite COVID-19 and the collapse of the global economy, the bubble is probably higher today. We are richer at a time when, frankly, we almost never been poorer. I mean, it’s a horribly paradoxical thing. Just in terms of financial wealth and plus throw in your real estate assets too. And that, I think, requires lower and lower interest rates in order to push this wealth bubble up.

Edward Chancellor:

Now, this wealth bubble is not just in order to make Steve Schwarzman of Blackstone richer, it is actually essential for these economies, like the British and American economy, which have been under-saving for years. Our savings are entirely financial asset savings with nothing really backing it up. And I was thinking, this summer I’ve had a swimming pool built and doing up a barn, it’s entirely from selling some assets, some shares that I bought just three years ago. And I just took the profits on some shares and turned that into something you know, to do up my house. There was no actual act of saving, Truth be known. Now the thing is that, and I think I’m one of the prudent ones. So the rest of the world, rest of the Anglo Saxon world, where…” Very, very little by way of pensions, savings and so forth.

Edward Chancellor:

And the validation of the pensions is very much dependent on interest rates going lower. Particularly in Britain, as you know, that basically a lot of middle-class people relying on their houses as their pensions. And that requires the house prices going up. Again, British house prices are at an all-time record high despite COVID. So, that’s another reason why you can’t raise interest rates. And then you’ve got this sort of financial fragility, sort of chasing yield and so on and so forth, the corporate and high yield stuff. And you saw that beginning to blow in March. Though needless to say the Fed came in, put an end to that. But you have the financial fragility, which is sort of slightly independent of the stock of debt. And then you have the misallocation of capital. So, basically once you have tied in a lot of investment with a very low sort of threshold rate of return, then all those investments become dubious or doubtful when you raise interest rates. And then, all these zombies and so on and so forth go belly up.

Edward Chancellor:

So I think of it really as sort of almost as if there are many sort of streams leading to this great torrent of ever-lower interest rates. And that’s what we’ve been sort of stuck on now. I mean, our friend Jim Grant didn’t quite understand it. We all got it right. We get these things wrong and we learn while we analyze, and which is sort of why finance or investment is quite interesting, because one learns from one’s mistakes. But yeah, we have been on this great, if you want to call it, bond bull market. And at some stage, we will get off it. I mean, it cannot continue indefinitely, because the lower negative rates are, to my mind, the end of capitalism. It’s sort of, they’re inimical to capitalism. And in that sense, the longer you stay down that route, the more the wheels come off the machine. And I think the wheels have been coming off the machine big time.

Edward Chancellor:

If you will, my end game to this is that you’re going to get some inflation into the system, and the inflation will then start to freak the markets out. And at that stage, the central bankers are going to have to switch from that priority of just accommodating financial markets to try and get money under control. To my mind, that is the only way this ends. I mean, otherwise, I just can’t see it ending. It has gone on for much longer… I mean, Bill, you are probably like me. I read a report on the credit boom published in 2004 or ‘05 which said, “When this ends, they’ll run out of bullets.” Well, they hadn’t run out of bullets. They had a whole arsenal that was never considered.

Bill Fleckenstein:

Well, that’s an interesting observation, Ed, because I have an unanswerable question but you just kind of walked into that right there. It’s not really a question, but Id like to see if you can frame it or make some sense of it. So if we just start with, we got the South Sea Bubble and the Tulip mania, they were fairly far apart, and then we managed not to have any world-shaking manias that did a lot of damage really until ‘29. And then we managed to not have a big one until Tokyo. I know there are some little ones thrown in between, but the big ones…

Bill Fleckenstein:

And now all of a sudden, we have three in a row. Well, this is maybe our third. We had the equity bubble, the real estate bubble, and now we have whatever this is. And it’s like the equity bubble got big enough here that there was no way to not go back to the same thing. And now we’re on this path where they can’t raise rates, because they’ve got this epic edifice of debt and the bubble, and they’ve managed to trap themselves. I mean, I just can’t understand how societies have managed to avoid this for so long. And now, that’s all it is. It’s one giant financial bubble.

Edward Chancellor:

I wouldn’t quite agree with you to say that they were so interspersed, the bubbles. You had the tulip mania. Then you had in the 1690s is sort of what I call the diving engine mania. Anyhow, but it was the first sort of proper mania in England in the 18th… The 18th century was sort of different in England, because they banned the formation of joint-stock companies. But, you still had a sort of periodic financial cycle. And again, a linked interest, I was curious. You could see that the sort of house prices in England and even construction cycles were linked to the interest rate cycle, but then in the 19th century you got a hell of a lot.

Edward Chancellor:

1825 was definitely the biggest bubble in England they have ever seen, and then 1836 and 1845 and 1856 and 1862 blah, blah, blah. And then a really big boom in the 1880s and early ‘90s, which ends with the Argentine crisis and the failure of Barings Bank. That’s the sort of stuff that Walter Bagehot was writing about in his journalism for The Economist in the 19th century. So I think the 19th century was pretty speculative, but there were limits on speculation. And the limits, I think, were created by the fact that money was redeemable in gold. And you could only build so much credit onto a system before someone starts to want to take their profits in gold, in which case these bubbles or whatever you want to call them, financial booms, came to an end. And again, to go back to my point, even the Bank of England would often find that its reserves, the gold bullion relative to the amount of paper notes it had out there, that it’s reserve was diminishing and it would hike to bring gold back to England.

Edward Chancellor:

In the five years after the financial crisis, the Fed expanded its balance sheet by more than the nominal growth in GDP. Can you believe that? The large banks expanded in a decade after Lehman about 15 trillion. I think I read something like that. It said the only limit, to go back to what I said, the only limit on the central bank actions is the stability of the currency. And for a variety of reasons the initial response to Lehman’s bust was not inflationary. It was asset price inflationary, but it was not consumer price inflationary. And we all love asset price inflation. No one said it’s a bad thing. Well, a few people did but they were just considered party-poopers.

Edward Chancellor:

And I think now, and it was partly to do… I’m not saying that deflation pressures are completely diminished, because in this highly financialized economy that I was describing, which sort of everyone is really dependent for their solvency of their spending power on taking financial assets and converting them into cash. That means that any crash can quickly become very deflationary. I’m pretty certain of that. But on the other hand, I think that that great force of disinflation, the sort of China is flooding the world with its goods and globalization, it definitely seems to be reversing. You want another sort of end game for your great speculative manias, think of that lunatic, Peter Thiel. He said, “Every bubble is a bubble of globalization.” And he is sort of right. The South Sea bubble and the Mississippi bubble were globalization bubbles. And I told you about the sort of 1880s or even earlier, 1825s.

Edward Chancellor:

So we’ve had a period of sort of massive capital flows of globalization. And one of the consequences of that is that, if you bring in a whole load of people into the global workforce or the workforce to traded groups, you depress obviously the bargaining power of workers in the West. And actually as you depress that bargaining power, that in itself has a rather disinflationary effect and tends to lower interest rates as well. So if we have a reversal or collapse of globalization, which I think we will do, then I think that is perhaps in itself is the death knell. But, I don’t know. I could sort of now conceive of a world in which there is a Federal Reserve just buying the last asset on earth, and which we are all living Armageddon.

Grant Williams:

It feels that way.

Edward Chancellor:

There is actually quite a good Tom Lehrer song about the nuclear apocalypse. And it goes, I guess, “We will all go together when we go.” And it goes, “Lloyd’s of London will be loaded when they go.” So, no one will be around to pick up on their premiums. And I sort of feel that what we have now is a sort of world in which the Anglo-Saxon economies are down 20%. And actually if you just look at your stocks, if you hadn’t bloody opened any letters from the stock broker or accounts from the stock broker since the beginning of the year, we’ve all been having a good year. Thank you very much. It doesn’t make any sense whatsoever.

Grant Williams:

There’s a bunch of things in there I’d love to kind of explore with all three of us. And a lot of that comes back to this idea that rates have to stay at zero. And if we assume that you’re right, and I believe you are right, I don’t think there’s any way they can raise them, what are the consequences of essentially having zero interest rates for as long as they can get away with it, let’s say. Because at some point, as you say, inflation is going to come back. And then they’re in with a very difficult choice, because given the debt load, the servicing costs if they raise rates, blow them out of the water very, very quickly. But what does this do to money? What does this do to the value, the sanctity of money? And does it potentially bring gold back into the equation, do you think?

Edward Chancellor:

Well, I think the situation is slightly more dire than rates having to stay at zero. Have you ever come across this economist called Bernard Connolly? Does that mean anything to you?.

Grant Williams:

Yes. Euro-skeptic, yes.

Edward Chancellor:

Yeah. But Bernard, actually, is a very sophisticated monetary economist. And his thesis, which I sort of buy into, and it goes by… His argument is that, once they created the bubble back in the 1990s, then from that moment onwards when they started propping it up, people have been saving too little and taking on too much debt. At which point Bernard’s argument is that interest rates started going on this downward escalator. And once they’re on the downward escalator, they have to continue going down. There is no zero lower bound.

Grant Williams:

Sure.

Edward Chancellor:

The thing is that once, and I touched on it earlier, but we used to think of interest as related to profitability, or even as a hurdle rate. What is the discounted cash flow, or again, what is our hurdle rate? At a negative rate, you are actually destroying capital, and there’s no incentive to save. You get no incentive to save. You have massive incentive to misallocate capital. The way I see it is this, I think my book is going to be called The Price of Time, because really what interest is putting a price on time. People sometimes call it the price of money. It’s not the price of money. It’s the price of money over a period of time. Everything we do, well, all our economic actions are inter-temporal. They take place over time. We invest and save for some period in the future. So, there is this huge coordination that is taking place over time. And I think the interest rate is actually acting, if you will, an ideal or free interest rate is acting as the coordination for all these inter-temporal activities.

Edward Chancellor:

And it’s what Jim Grant, again, who always has sort of the best phrase, he calls it the universal price. And I think if you take away the universal price, the price of time, you then get constantly mal coordinated economies. So your savings and your investment and your consumption are going to be out of whack with each other. Everything is going to be in a state of continuous and worsening disequilibrium. And one of the things you’ll see, which we have seen over the last decade, is this extraordinary deterioration and collapse of productivity. So, the capitalist economies cease to grow. They cease to generate productivity quick. Then the next phase would be that their productivity growth will then start to collapse. I’m sorry that I am sounding a bit depressed, but this the nature of the world.

Edward Chancellor:

Then I think the next phase frankly is that the government steps in. And that, again, you’re seeing that this year is that, as capitalism flails and fails, then you’ve got the Larry Summers of this world saying the Fed should be printing the money and the government should be spending money on investments blah, blah, blah. And in a way, the COVID-19 responses will be accelerating that. In the sort of draft of this current book, my last chapter was called “The Road to Serfdom”. My thesis was that sort of Hayek was right but he was 60 years early. What?

Bill Fleckenstein:

Sorry, I didn’t mean to interrupt you, but I wanted to actually ask you that. And since you’ve talked about it, at the very end of Devil Take the Hindmost you brought up this very subject of Hayek. And you said that he believed that from a mixed economy there would be inevitable progress to socialism. History has proven Hayek wrong, and you concluded by the pendulum swings back and forth between liberty and economic constraint. And so I was going to ask you at some point the question is, would you be revising that conclusion if you were to write it today?

Edward Chancellor:

I am much more Hayekian now than I… I mean, probably just as well I wasn’t Hayekian I couldn’t have known. That book, it would have been a sort of, A, it’s a bit too academic and recherche. And B, Hayek is a bit of a red rag to the Keynesians and the behavioral finance people and so forth. Hayek, odds, he was wrong. If you look at his arguments, I re-read it a couple of years ago, definitely worth re-reading the Road to Serfdom, because it’s not really about economics. Although he’s this great economist, it’s not really about economics. When he describes sort of how… Typically, his bugbear is really central bankers aiming at price stability. And that was what Hayek sort of cut his teeth on in the 1920s. And really what’s happened in the last 20 years is we’ve had a repeat of the 1920s experiment, which we now call sort of inflation targeting, but it’s the same kind of thing.

Edward Chancellor:

And Hayek said that if you went down that route, and he does touch upon this in The Road to Serfdom, you would create tremendous inequalities. We haven’t really mentioned that so far. But a lot of the inequalities both the sort of, if you will, between the classes but also between the generations are actually a product of the monetary policy. And I know that, because I even to some extent I am a sort of beneficiary. Any of us who’ve worked in finance have found it much easier to make money than we would have done in earlier times or should have done, frankly. And I think that that sort of, if you will, that sort of stokes a grievance.

Edward Chancellor:

But I think Hayek’s also point is that, he describes a sort of, if you will, a sort of… And Schumpeter does the same thing, the sort of intellectual elite that wishes to control everything. And we’re really back in that position where you’ve got, if you will, the sort of Ivy League, Oxford and Cambridge educated elite, who’s sort of occupying both the higher echelons of the universities, the civil service and the large corporations and finance. They have forces of centralization. And their desire to control, it seems to be sort of pretty unquenchable already.

Edward Chancellor:

And so, I think, with low-interest rates and the capitalist system fall into pieces, they don’t acknowledge that they’re responsible for this process. I mean, again, going back to Jim Grant, he says, the Fed is both arsonist and a firefighter. So we’ve got basically the arsonist who are already standing there. And so the whole world will be a massive fire station, because everything will be burned down. And then gain, it sounds a bit gloomy, but it does seem as if we’re heading in that direction.

Grant Williams:

Ed, let me ask you and change the subject a little bit. Your book is a masterful chronicle of all these various extraordinary bubbles going from the, I think, the late 1600s to the most recent one. At the time, the .com bubble. But as you look through those, two questions. One, can you just point out some of the common threads to the people listening. The things that you can trace through all of them that you might see today as well. And also, perhaps highlight which bubble you think is maybe the biggest object lesson for us today that people should really read up on and know more about if they want to try to understand what’s happening today.

Edward Chancellor:

Well, I think, I don’t know which bubble I like. One thing I didn’t write about in Devil Take the Hindmost was the Mississippi bubble. And I have actually been writing quite a lot about… because that’s very monetary thing as you know it. John Law not just having this huge company, but also conveniently running the central bank and lowering interest rates and printing. And this year is the sort of the 300th anniversary. And so, in fact, actually if you… I mean, your listeners, if I were sort of to tout one book and one event, I’d say the, ideally you’ve read it, James Buchan’s life of John Law.

Grant Williams:

It’s a pretty recent book.

Edward Chancellor:

Yeah. It came out two years ago. I find Law’s Mississippi bubble really the most instructive for the current take, because you’ve got all the ingredients. You’ve got your bubble of globalization, your company. Well, frankly, the Mississippi bubble incorporated all the French overseas trading companies. The company of China, the East India Company, the Africa company, and then the Louisiana company that late came to roughly sort of half the current landmass of the United States. It was a huge domestic company. It had a lot of domestic type of tobacco monopoly and the monopoly on the collection of taxes. And then took over, for good measure, the French national debt, which was roughly the size of French GDP. And in fact, actually, so James Buchan wrote a letter to the FT about three years ago which he said that compared to the Mississippi company, the company [inaudible 00:43:06], as it was officially called, that Apple was a rag-and-bone shop. Now that Apple has got a $2 trillion value.

Grant Williams:

Yes. Things have changed.

Edward Chancellor:

Probably the Mississippi company in itself was I don’t know. I think its market capitalization must have been, I’ve never seen it written up, but it must have been something between one and a half and two times french GDP.

Bill Fleckenstein:

Apple got 20X to go to catch up.

Edward Chancellor:

So, it’s a buy. Apple is a buy.

Bill Fleckenstein:

Based on the Mississippi company.

Grant Williams:

What a great benchmark.

Edward Chancellor:

I think that what’s interesting then is, as I said, John Law has this company but he also starts a bank which then becomes the French Central Bank. And he de-monetizes gold, so you have your first fiat currency. He pushes down the French interest rates from about 6% to 2%. And therefore, the Mississippi company trading on a P/E of 50 times is sort of fair relative to the interest rate. That’s a law of Ford, and that was his sort of reasoning. And then things fall out of control pretty quickly, partly because French people try and get their money out of the country. And so the French currency starts collapsing relative to Sterling, because Sterling is still convertible into gold. And that forces Law to become rather tyrannical. So, there you are. You have your little Road to Serfdom in a very short period of time. So, Law turns from being the sort of loose gambling into a petty starlet really in a sort of short period of time.

Edward Chancellor:

And then you get this inflation. And it’s really the surge of inflation that brings the Mississippi bubble to an end, because Law has to decide between embracing the inflation or a deflationary course. And he actually chooses the deflationary course, which blows up the bubble. Admittedly, I’ve been writing about it more recently, but I can’t find anything more instructive than the Mississippi bubble for the current world we’re living in.

Grant Williams:

That’s both great and terrifying.

Bill Fleckenstein:

So if John Law had known about QE, he could have kept the thing going?

Edward Chancellor:

The funny thing is that-

Grant Williams:

He tried it.

Bill Fleckenstein:

I know he tried it, but the rest of the world still was on the gold standard unlike now when they’re all on the printing press standard.

Edward Chancellor:

Yeah. But Bill, there is a rather charming old boy, Irishman, who has written a biography of Law. I mean, it’s sort of academic. He’s called Antoine Murphy. And he wrote a paper, and it this is quite common that the academics say that the marvelous thing about Law is that he anticipated modern central banking, notwithstanding the bloody failure of his scheme. The academics do not get it.

Edward Chancellor:

Antoine Murphy, he’s perfectly nice. He says what, I mean, he wrote this five years ago, what Draghi and Bernanke and blah blah blah Carney were all just doing was just what John Law advised. More fool them you might think. But on the other hand, you could give them credit, they’ve got [inaudible 00:46:46]. Law kept his show on the road for 18 months. And these guys have pushed things a lot further. But then you might be saying, Bill, here might be your, again, one of your end game indicators is around gold. And people like you and I, I take it we’ve been sitting on a little pile of gold. And it’s fine, because we were buying it in ‘99. And it wasn’t very expensive. But then there were times when…

Edward Chancellor:

It is interesting, in the last cycle, you probably noticed it, even I used to sort of josh Jim Grant about this I would say is that basically, gold was following capital flows. It was sort of raised really up until the gold bubble burst in 2013. If capital flows were getting into emerging markets, and the emerging markets were central banks or banks… So in fact, actually, it was almost indistinguishable whether you were buying gold or emerging market actors. So, if you will, the bull and the bear both look smart. Whereas now, I’m thinking that people might be more coming round the fact that you want to be sitting on something a bit more solid when this comes to an end.

Bill Fleckenstein:

The functional equivalent of the French citizens trying to get a little money into gold as opposed to just fiat.

Edward Chancellor:

Exactly exactly, yeah. I mean, and the only caveat I’d say is, as you’re probably aware, John Law banned the ownership of gold. So, I mean, it’s not inconceivable. I mean, and quite a few times, just when you wanted to own gold, you find that the authorities would make it. And it may be just simply too good to be true, but they… I mean, you could easily see the freezing of ETF accounts or that sort of thing that some say. But yeah, I wonder whether that gold search if… I mean, I’ve given up trying to call the end of this current cycle.

Bill Fleckenstein:

Welcome to the club.

Edward Chancellor:

I’m just very glad that I am not shorting anymore, because it would be too stressful. As I said, we’ve been living through unprecedented times and we didn’t know how far things could get. Frankly, one could be forgiven for making mistakes. But, there we are.

Grant Williams:

When you look it, obviously, there’s a huge psychological component to all of these bubbles. And when you look back at the ones you chronicled and you look at today, perhaps you could just kind of tease out some of the threads that you find that run generally through all of these. When you read the chapter on 1929, which I went back and re-read a couple of days ago, it’s really stuck some of your passages that just ring so many bells with investor psychology and investor behavior today. So I’d be fascinated to hear, through the course of time, if there are any obvious signs that ring true with all these bubbles.

Edward Chancellor:

I won’t bang on about the monetary side of it any longer. But what I’d say is, well, in fact I’ll go back to a comment I made earlier, which was that the bubble is… There are two aspects to it. There is, if you will, the monetary side, then there is just simply the sort of pyramid scheme. Now, what gets a pyramid scheme going is communication. So I think what you see is a lot of the bubbles seem to coincide with advances in communication. And that means really, if you go back to your pyramid scheme is that… Bubbles are contagious events. So if you can infect, if they have an R number greater than one, it helps to have people communicate. If you communicate, back in the 1690s or 1720s, they were doing it through periodicals. Actually, people like Defoe were writing their owns. It was a plethora of little publications. It was sort of almost a bit like blogs, if you can imagine.

Edward Chancellor:

And then, going into the 19th century, and then you get railways and telegrams and so on. And then you go into the 1920s, you get the telephone, radio. And even now, of course, the internet is actually the sort of godsend for communicating speculative euphoria. So you have, again, during the lockdown, you have sort of… All these people have been given a huge amount of money by the government, sit at home doing nothing. But they weren’t doing nothing. They were all on their Robinhood accounts buying Tesla stock. I mean, I’m now getting too old to know where they were communicating their enthusiasm for Tesla. I didn’t know if they are doing it on Twitter, or whether they got some sort of more recherche bulletin board. But I take it they are-

Grant Williams:

Reddit.

Edward Chancellor:

Where are they doing it? Can you tell me that?

Grant Williams:

I think Reddit is the main culprit from what I can-

Edward Chancellor:

Okay. And then, of course, you have the crypto stuff a few years back. Even crypto has been coming back a bit. And I don’t know where Bitcoin is at this moment but it’s sort of-

Grant Williams:

About 12 grand.

Bill Fleckenstein:

It’s about 12k off the top of my head.

Edward Chancellor:

I wrote a piece nailing Bitcoin in December 2017, which I said was going the way of the tulip bubble. I cited some data on the Gouda tulip bulbs which went, I don’t know, let’s say from 30 guilders to 0.1 guilder. And I said that I couldn’t see why Bitcoin shouldn’t follow the same trajectory. Paul Singer wrote to me and said, “Why should it retain 0.1 of a full guilder?” That’s another thing about bubbles where the medium also speculates in itself. So in a way, cryptocurrency is sort of… The euphoria is communicated digitally, and then the object of itself is digital. And in effect, in my mind, a complete novelty. But having value as long as people, I mean, you could say… I mean, obviously Keynes would say that of gold. But, we won’t get into that.

Edward Chancellor:

To some extent, it is true that all value is in the eye of the perceiver. But in the case of Bitcoin, or even the tulip bulbs of the 1630s, they are sort of purely speculative bubbles, if you will. I think Bitcoin is the purest bubble in history. I can’t think of a more pure bubble than Bitcoin.

Bill Fleckenstein:

The only thing that would be purer would be a chain letter, and they never got big enough. They would fizzle out. That’s kind of what gave me my focus on the psychological component, because I’ve seen a couple of chain letter periods in my life. They never get big enough, but it’s pure psychology that ends them, right? I mean, they go longer than they should and they just stop. So, to me, that’s the purest form of bubble mentality because there’s no… Not even Ponzi, it’s just a chain letter.

Edward Chancellor:

Well, it is I think Ponzi. And again, I think it is-

Bill Fleckenstein:

Yeah, but there’s not just one promoter behind it, or maybe there is a promoter behind it. So, maybe it is just a Ponzi scheme.

Edward Chancellor:

Yeah. I mean, it doesn’t matter. I mean, Ponzi scheme is just a name given to some… I mean, we call it a financial scam. I mean, it’s just an asset that is rising in value, or in the case of Ponzi, paying out interest rates because more money is coming in and then blows apart when the money ceases to come in.

Grant Williams:

Well, I have a slightly different view of Bitcoin, but we can go into that another time where you and I can talk about that as a podcast. But I’m still fascinated, Edward, this psychological component of this. Where we are now, as I said, when reading about 1929, again, just the idea of cognitive dissonance, the idea that the stronger things were the more disinclined people were to believe them. The fact that the market had a couple of really nasty falls, but we got the idea that, “Well, this is my last chance to get in.”

Grant Williams:

When you look at where we are today with psychology, and obviously this last few days in the markets have been very shaky, where do you think we are on that glide path? Are we in the, there’s still a chance to get in and the markets feel that they might take off again, or do you think we’re reaching that point where there’s a real danger that we might psychologically let this thing decompose?

Edward Chancellor:

I mean, it’s difficult for me to gauge the psychology from where I’m sitting at the moment. It’s not something I have been thinking deeply about. The way I see it is that there was huge support, sort of double-barreled support for the markets as the sort of coronavirus outbreak sort of gathered steam. And why is all of the… And we talked about the central banks intervening and opening up their balance sheets and so forth. And the other is the governments spending huge government deficits. And those government deficits, in the near term… I’m sorry, I am being a bit economic rather than psychological. But those government deficits in the near term, the corollary is to boost profits.

Edward Chancellor:

For what it’s worth, I had my hair cut today by a woman next to our village. And she’d been given some money by the government, because she rented out her cottage. And they’d sent her 10,000 pounds. So she said, “Well, actually, I rented out my cottage. So, this is my best year ever.” Her little business is more profitable, but it’s sort of an illusory profit. It’s a profit coming from the government deficit. So what I suspect is that the support for this market could, and I haven’t been following things that closely, but I think it should be quite sensitive to the monetary or fiscal support. And then to go back to my point that I think it would sensitive to anything that may be central banks feared a return of inflation. So, I would have thought, I mean, look how flighty… it is sort of extraordinary, isn’t it?

Edward Chancellor:

I wrote a piece in March saying that the response to coronavirus struck me as a risk bubble, a sort of inverted bubble and that people were overestimating the virulence of this disease and the risk posed by it. And yet, there was this tremendous fear sort of surged around, well, really the whole… I mean, the half the world was locked down, extraordinary. And, at an enormous cost. No one deny it. And yet at the same time, we are talking about… On the one hand, you have the world locked down in fear. And at the same time, we have the financial markets in a state of weird euphoria. And so it seems almost schizophrenic or bipolar, doesn’t it? That you could hold those two positions in your head. I mean, I can’t. Perhaps, I am the last sane person on earth, or perhaps the three of us are the last sane people, because I’m not prepared to be both sort of…

Edward Chancellor:

Funny enough, I’m actually slightly bipolar. I’m less worried about the coronavirus than I am about the state of the financial markets and the economy. So, it really does keep me awake at night. If we run with our bipolar for now, then you can see that you can flip very quickly. Having said that, I thought the world would flip out of its panic with the coronavirus when they saw that it was tailing off and it was just going to look like a very bad flu season. And that hasn’t happened. So, again, the longer we are in this business of analyzing markets and analyzing risk, the refreshing thing about it is that one is wrong every year. You age with your errors, which is fine. If you had told me at the beginning of the year that this was going to happen, I’d say, “I can’t believe it.”

Bill Fleckenstein:

Well, I don’t think anyone would have believed someone who said that, but what it seems to demonstrate is the power of QE here and what the other central banks have done when married with the illiquid market structure that may have been created through the passive investment communities market share. The combination of those two now has created a dynamic such that we can have this economic disaster with so many people’s lives ruined financially, and businesses the same. And then the stock market acts like we’re in the midst of the greatest prosperity the world has ever seen. And that’s just the warpage caused by these policies. It’s insane.

Edward Chancellor:

I do think that it’s very irresponsible, because, again, people like us have been complaining about the sort of short-termism of policymaking establishment, particularly monetary policymaking. But, it’s sort of true everywhere. They’ll sacrifice anything for an easy week or month or six months or year. Actually one of the things, and we haven’t touched really upon it, but I mentioned the inequality and the sort of social tensions that are building up. And it seems to me that we’re pushing things too far on that front. One doesn’t want to belabor these comparisons between the 1920s and or1930s. But, I mean, you can see American Portland, these thugs, armed paramilitaries and so forth.

Edward Chancellor:

Bill, you were there I think at Jim’s conference two or three years ago when… There was some Swiss guy speaking. I think he’s called Tony Deden or whatever. I think he alluded to a short story by Thomas Mann where he said that, written in the 1920s about the German hyperinflation, that Mann was suggesting that money was the sort of, if you will, the yardstick of values, not merely just economic values. And that if that yardstick was sort of broken, that the sort of cohesive values of society would start to fall apart. Now, we associate that sort of social collapse with the hyperinflation. You see a picture of someone sort of with a wheelbarrow full of Deutsche Mark, or Reichsmark they would have been. I’m wondering whether, actually, the endless monetary manipulation isn’t as sort of corroding to the values that held society together as the more avert German hyperinflation.

Edward Chancellor:

I mean, it is weird as you know. There are so many things you cannot discuss nowadays, and things that seem quite sort of palpably straightforward a few years ago say for instance, the gender of a woman would become an impossible thing to talk about. So, it seems to me that we’re back. There’s something of this era of the destabilization of society’s values. And in a way, frankly, that is a much more important story than whether Tesla is worth a billion dollars. Because in the end, when society breaks down, all wealth is destroyed. You sort of have to start all over again.

Edward Chancellor:

That’s what worries me about this sort of debt super cycle and asset price super cycle. Claudio Borio refers to it as a global seismic rupture. One does feel one’s heading in that direction. And so, who cares what they do to the stocks? Frankly, I think it only matters if you’re cashing in like me. If you’re cashing out the money to build yourself a swimming pool. Otherwise, it is just a monetary value. At least it doesn’t signify that much to me.

Bill Fleckenstein:

Well, you know what? That’s a brilliant insight. I had never considered the sort of the societal breakdown with what you see in… I mean, I know what happens in hyper-inflationary environments, but I hadn’t considered the sort of similarities between what we’re seeing in certain places in America and that outcome. It’s a pretty interesting thing to think about.

Edward Chancellor:

Yeah. A nice fellow called Michael Panzner, did you ever read him?

Bill Fleckenstein:

Yeah. I’ve read something that’s he’s written.

Edward Chancellor:

He wrote one book called “When Giants Fall”. He wrote a very sort of uncanny book about the sort of uncanny prophetic insights in about 2005. He sort of plays on the line of financial collapse and societal collapse. But I thought though that Tony Deden or whatever his name is, I thought his comments sort of lit a little light bulb in my head.

Grant Williams:

He has a habit of doing that. It’s interesting when I think about this, and I thought like you, and I have thought about this stuff a lot. And the problem with it, I see, is that at this moment it feels as though a lot of the things that are being done are being done very deliberately to try and stave off that precise outcome that you have just described there. Unfortunately, the part of the cycle we’re now in is that those actions actually now accelerate that outcome. And that feels to me like, perhaps, the end game is that we’re in this position where we’re doing everything to stop it, and at the same time every one of those actions brings that denouement that you described closer to hand, which I must admit does worry me a great deal.

Edward Chancellor:

Yeah. I mean, I’m now observing stock more closely in England. But with the lockdown, clearly it’s…. The middle classes and people employed by the state on the whole sort of seem to have done reasonably well. And particularly if you had a little business, you’ve got a lot of £200,000 checks sent by the government. But frankly, if you were working-class, your children weren’t educated, you had probably a miserable time. And then if you’re younger generation, you’ve lost your jobs. They’ve managed to prevent the house prices collapsing, so houses remain more unaffordable.

Edward Chancellor:

I have a certain sympathy. All my nephews and nieces, all sort of perfectly nice middle-class children. They’re in their 20s or early 30s, but they’re all incredibly left-wing. And much more left-wing than I would have thought that I was when I was their age. And they think I’m sort of absurdly right-wing. When we were young, you had a chance of sort of getting a foot on the housing ladder, of saving some money. They really didn’t have any of that possibility. And at the same time, you’ve got this plethora of too many university educated people and with practically no proper jobs for them. It’s a very toxic situation. I mean, that sort of revolutionary Tinder.

Grant Williams:

Yeah, absolutely right. I read this week that 52% of millennials live with their parents now. Which when you think, the kind of leading edge of the millennials are early 30s now, is a terrifying statistic.

Edward Chancellor:

That doesn’t surprise me. And again, I’m afraid I just put that… I got two chapters on my book on interest rates about inequality. One being the 1% and the other being the 99%, and showing how it affects each group differently. So it’s very divisive and people have not, by and large, picked on to it, have they? I’m only going off slightly at a tangent, but when you see all these corporations or even Wall Street going woke, you think, “Well, actually why are they going woke? Is there some game woke in order to sort of conceal their own heinousness?” It’s just a very cheap virtue flagging now to sort put yourself on the sides of the revolutionaries. But in fact, it is not…

Grant Williams:

The enemy of my enemy is my friend.

Edward Chancellor:

Something like that.

Grant Williams:

Well, Ed, listen. I can’t thank you enough for taking all this time to talk with us. I feel as though that the events of the next kind of like couple of years is going to give you all the material you could ever want for a third book, obviously once you finish your interest rate book.

Edward Chancellor:

Funny enough, I mean, I finished the interest rate book. It’s taken me five years. And I’m quite looking forward to putting it to bed. And then, I think I’ll take a walk.

Bill Fleckenstein:

When do you think it’s going to be published, Ed?

Edward Chancellor:

I don’t know. I mean, I just got to get it finished this year, or perhaps by the summer of next year or something like that. I don’t know. Or, later next year. We’ll see.

Grant Williams:

Fantastic.

Bill Fleckenstein:

Well, maybe your timing will be perfect to catch the end of the bond bull market that’s gone on for the last 40 years.

Edward Chancellor:

You probably know. It’s not the longest bond bull market in history. It’s just the most extreme bond bull market in history. There is a line in Homer and Sylla that says, “Interest rates in the 20th century went higher than ever before and lower.” So I have to say, I think interest are going to come either… I don’t know if I am going to get run over by a bus, but I do think I’m going to live to see double-digit 10-year… So, Bill, we’ll see that.

Grant Williams:

Well, that’s a bold call.

Edward Chancellor:

I’m predicting a double-digit US Treasury rate in, I say within this decade. Before this decade is out, I am going to see a double-digit Treasury rate.

Bill Fleckenstein:

We’ll have to huddle back up once we get down on that path and see how it starts to play out.

Edward Chancellor:

Well, we’ll see. When I was at GMO, we used to short JGBs.

Bill Fleckenstein:

Yeah. No one’s made money on that trade yet, but one of these days they will.

Edward Chancellor:

The Widowmaker.

Bill Fleckenstein:

Yeah, exactly.

Grant Williams:

Before we wrap up, let the people at home know how they can keep in touch with your book update, or are you on social media, websites, that kind of thing where people can follow you?

Edward Chancellor:

No. I mean, I write for Reuters Breakingviews. I’m not writing there at the moment. But when I’m not working on the book, I’ll be writing there.

Grant Williams:

The old letters of the times, perhaps.

Edward Chancellor:

I actually decided I’m not going to speak to anyone on social media. I was wondering, is the world divided into those who are on social media and those who weren’t? And that our brains were starting to form in slightly different ways.

Grant Williams:

I think now you’ve successfully alienated the Bitcoin crowd. It’s probably best you do stay off social media. Thank you so much, Ed, for your time. It’s been a real pleasure talking with you.

Edward Chancellor:

Nice to speak to you both. Bye Grant, bye Bill.

Grant Williams:

Thank you.

Bill Fleckenstein:

Thanks again, Eddie. Good to see you. That was fun.

Grant Williams:

So much fun. I was conscious of Ed’s time, but I figured you and I could kick this around for a bit. Because when I hear a call like that, 10-year treasury rate within a decade, my ears pick up because there is literally no way that can happen without an entire reset of the financial system, right? That cannot happen.

Bill Fleckenstein:

Oh, yeah. I mean, let’s put it this way. That kind of an outcome will only happen after the printing press is taken away from the central banks, because of FX, fixed income or some other reason and then rates would… But then, you’ve got to figure out what kind of debt defaults…

Grant Williams:

Well, I mean, very fiat currency in the world is gone at 10% over at the US Treasury, right? With the debts everywhere, they are gone. Gold is $10,000 an ounce.

Bill Fleckenstein:

Speaking of fiat currencies and gold, it’s funny. I spent a ton of time reading all these different books on manias and things like that, and I never really thought about the saving grace of the rigidity, if you will, of the self-balancing nature of the gold standard and its various forms helped preclude bubbles. I mean, as he said, there were a handful of manias but not the big size bubbles we’ve talked about. And then obviously, the gold standards would finally upend in John Law, which I’d never thought of as the perfect analogy. But of course, it is. So, that was the really interesting thought. Not that it’s actionable, but I always feel better if I can at least understand how things sort out. It was sort of like when we learned about the size of passive investing because of Mike Green. It was depressing and liberating at the same time. So understanding what you’re up against, at least allows you to figure out some sort of a sane game plan perhaps.

Grant Williams:

Well, and I think it helps you understand what to look for. Because one thing about The End Game, we’re certainly no nearer to figuring out an absolute end game, but we’re running through some fascinating scenarios here. But I think the one thing that is common to any and all of them is enormous turbulence. There cannot be a smooth end game to this, right? There cannot be a known position from this period to whatever comes next without an enormous amount of upheaval. And so understanding that gold, for example, is something you need to watch for signs of that stress appearing is important. So understanding the role of passive, and understanding if the flow starts to shift in passive, that is something that could lead to great turbulence.

Grant Williams:

One of the things that we want to talk about, obviously, is volatility. And that’s something that we’re going to talk about, hopefully, in the next episode of The End Game, because I think it kind of wraps everything up. Because of that transition, as I said, volatility is the one thing you can count on.

Bill Fleckenstein:

Well, and another takeaway, which I was sort of aware of but hadn’t quite thought about it, is that if Ed’s observation is that you need some bit of tightening to get the preconditions for a mania to end, then given the fact that this one has the market sort of kind of skinnied down from a supply standpoint thanks to passive and then their impact coming in, and we’ve got QE guns are blazing and we’ve got all these Robinhooders and new people coming in, how high might things have to go to end this mania? Although, it could be happening today for all we know. But it’s kind of a scary thought.

Bill Fleckenstein:

Now, maybe as you suggested, if it gets crazy enough, we don’t have to get to tightening, we just need to get to a little less cowbell. But, to use James Aitken’s favorite expression, but then again the problem with that is if we get a little less cowbell and the market starts to tank, they just come back with more. So in the end, they have to be discredited for this to ever end, because that’s exactly what they do, right? If the market broke 10% in a short period of time, they’d be coming back with more. They’d find some new stuff to do.

Grant Williams:

Yeah, it’s true. But the one thing I found when reading Devil Take the Hindmost again… And I’ve read for the fourth time this summer Lords of Finance. I think it’s just such a hugely instructive, it’s almost an instruction manual for what’s happening now. And the one thing that struck me, firstly in Lords of Finance, the second when reading “Devil Take the Hindmost” again this week, is that none of those bubbles was just left to deflate. They threw everything at it. And yes, they had different measures, they had different tools available at the time, but they threw everything at all of them to try and stop them happening. And ultimately, none of it worked.

Grant Williams:

When the time comes, and that I think is why the psychological component is so important to understand, because there comes a point in time, and Ed writes it in the book, and it just talks about people get to a point where the fear of losses overwhelms the hope of making profits. At that point, it doesn’t matter. It doesn’t matter what you promise to do if you are more afraid of losing what you have than of making more. The fair can say, “Free money for everybody,” and you’re just not going to take the risk.

Bill Fleckenstein:

Yeah, that’s my pet exhaustion concept. But, I always thought it was purely exhaustion. It’s clear that there’s some level of tightening that’s been involved in these prior ones. And then, the exhaustion was what tipped it over. The question is that now with almost no tightening on the table, how wacky does it have to be to get to exhaustion?

Grant Williams:

Well, that’s why I think volatility is so important. Because the more volatile we get up here, the more scary it is for people, the more afraid they get. And if you’re not a professional, stomaching the kind of churn you see at these volatile points is a very difficult thing to do.

Bill Fleckenstein:

But on the other hand, part of what made the late ‘20s the late ‘20s was every scary dip came to be bought. And by the time we finally got to the big one, people weren’t afraid anymore. It’s like now, right? They’ve learned every dip is to be bought. So, getting away with that a number of times is almost a prerequisite for getting something set up that’s going to be extremely devastating. I mean, we talk about these things rather glibly, but the consequences of that outcome would be horrendous.

Grant Williams:

Yes. As Ed pointed out, on a societal basis. That’s the thing that troubles me the most.

Bill Fleckenstein:

And as he pointed out, I mean, we all know the fabric is eroding. But I had never looked at it through that prism of monetary debasement. I would have always thought it would have to go further to get those societal impacts, but quite frankly, I mean, once I started thinking about it that way, it’s pretty clear why some of this stuff is happening.

Grant Williams:

Yeah, I think so too. Well, listen, I guess all that remains is to plug Ed’s books, which he didn’t do. But if you haven’t read Devil Take the Hindmost, then I can’t recommend it strongly enough. It’s a fantastic chronicle of bubbles and manias. And every one you’ll read, if you keep the highlighter pen with you as I do, you’ll find more yellow words on the page than black by the time you’ve finished it.

Bill Fleckenstein:

And what I would say is, I often get asked by people about investing. And the first book I make everyone read, or I suggest they read first, is that book. And then another book on psychology, David Dreman’s first book on psychology and the stock market. Because everybody talks about the math and all this stuff, but they never talk about the psychological factor. And the longer you are around in this business,, the more you see that, yes, the facts all matter, but psychology matters a lot. And it’s very difficult to quantify.

Grant Williams:

Yeah, absolutely. If you’re still listening and you’re a Bitcoin bull, I can only apologize for some of the things you’ve heard today. I’m sure that you’ve been gnashing your teeth. But rest assured, Bill and I are both in agreement at some point Bitcoin is going to play into the end game. And we will explore that once we found the right way to do it.

Bill Fleckenstein:

We’ll get someone properly bullish, and somebody perhaps somewhat properly bearish.

Grant Williams:

Yeah. So, we’ll take care of that. In the meantime, do email us or find us on Twitter if you want to ask us questions, suggest guests et cetera. You’ll find Bill at @fleckcap, right?

Bill Fleckenstein:

@fleckcap, yeah.

Grant Williams:

You’ll find me @ttmygh. Thank you so much for listening, and we will see you next time. Nothing we discussed during The End Game should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.

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