Special Guest: Paul Brodsky spent several decades trading bonds and other securities for such Wall Street firms as Drexel Burnham Lambert, Kidder Peabody, and Spyglass Capital, where he actively managed mortgage-backed derivative funds for over a decade (over 85% of investor capital in that fund was returned by June 2006, before the wide-scale credit contraction occured). He was co-founder and co-managing member of QB Asset ManagementQ which serves accredited investors. He is currently sarting a a consultative resource for professional investors, advisors and fiduciaries called Macro Allocation Inc.
46 Minute VIDEO Interview
Paul Brodsky introduced himself as a presenter at the Park Plaza Hotel (NYC, NY) to 200 of the world's largest Institutional Investors from large Sovereign Wealth Funds, Pensions Funds, Endowments and Foundations .... "I'm Paul Brodsky, I'm a Gold Bug!" This not only took guts but serious credibility in front of an audience that doesn't consider gold in their portfolio allocation decisions. So why would he do this?
Paul had been asked to present the "Case for Gold". It was 2010 and Gold had just had a run. Though Gold had been the elephant in the room for previous 9 years, Paul surmised the organizers simply felt gold needed some sort of obligatory representation. His presentation focused on the Global Monetary System and sheepishly admits he actually never mentioned the world Gold again! This summarizes the thinking within the community of Global Managers of serious money.
Paul says he felt he got the invitation because of the thrust and struggle of QB Asset Management, the hedge fund he co-founded. It showed in Paul's writings to QB's clients while seeking the truth. He sought an understanding of Price and Value (which are often quite different) in addition to Alpha generation for clients.
"Its easy to think there is a grand conspiracy out there is terms of the banking system, the policy makers and politicians in the political dimension. It is very easy to draw lines between all these groups connecting them. I think what we have is a natural set of incentives that are drawn together by how the system works. For example, Politicians usually like to spend money they don't have and the banking system can let them do that! So it is a very symbiotic relationship - one feeds the other - there is little need that a word be said! There is no back room, smoke filled discussions going on."
"After the 1971 Nixon Shock, for the first time ever we had a global monetary system where there wasn't one currency that was 'hard' - that is, backed by anything scarce. What that did was make everything relative. It made currencies relative and it made financial assets relative. Ultimately it made performance relative!"
"When everything becomes relative it makes thing very easy for authorities to manage the system because there is no governor on them to bring things back into balance!"
"What was once "the role of the Fed to take away the punch bowl when the party got going", it was now the Fed that was 'spiking' the punch bowl."
Fractional Reserve Banking
"The system as it is constructed using fractional reserve lending and fractional reserve banking is the real 'bugaboo'!" Paul is quick to point out there are two sides to this argument. "Yes, the hard money crowd is correct - it has allowed us to spend money beyond what may be considered sound, but also this "funny money" for example helped defeat communism and helped fund the dotcom frenzy which left a technology footprint that may not have occurred as quickly without it."
"It has been a terrible flowering of baseless credit, debt that has never been extinguished. It may all come down in a Minsky like debt deflation that is ugly - or it may force the Fed and other central banks around the world to create much more base money through QE and other lines of credit that diminishes the value of not only our currency but all others - that gets us back again to relative value and performance!"
"The central banks are devaluing their currencies and devaluing against themselves in a 'tag team' manner. They are also devaluing against Production. There used to be only four ways you could get a dollar. You could produce something, you could borrow it, you could reinvest what you had already earned or you could steal it. Now banks can make money out of thin air without any discipline. There is nothing on the other side. Debt is created through the loan process and it never has to be extinquished if the monetary authority doesn't demand that."
"We have gone through this great leveraging over the last 35 years. It has been encouraged by Monetary Authorities in the US and elsewhere. Now we are at zero interest rates we can't refinance ourselves to another round of leveraging. We have to find a new outlet for credit or there is going to be some sort of reconciliation. When you ask about Financial Repression, I think it has been forced on Monetary Authorities (though its their own doing). It had to happen. It is a consequence of the past 35 years."
"I think they are boxed, as is everyone else (like the IMF) that is involved"
Who is Going to Stand Up to This?
"It is also in China and Russia's interest to have a baseless currency and even fractional reserve banks. What it does is centralize power to decide what wealth looks like in their nations and economies."
"My sense is we have to accept that this is the reality. That for the first time ever .... I think there is going to be increasing coordination amongst all sorts of Monetary Authorities and the net loser is going to be the saver or pensioner in real terms. It is not necessarily a negative on equities, real estate or anything that relies on credit. It may be bullish on nominal pricing but bearish on real pricing and value. That is what Financial Repression is bring us."
.... there is much, much more in this broad ranging 46 minute interview with a very thoughtful and experienced Wall Street insider telling it the way it really is:
- Why the death of the infamous Bond Vigilantes occurred and how they got trampled by the Fed,
- Why we have had a slow migration from Capital producing economies to Credit producing economies or Financialism,
- Why a policy of unsound money has allowed China and Russia to transition to modern societies without becoming militaristic,
- Why the global over supply is driving pricing pressures and deflation,
- The eermergence of China's new private mercantilism system,
- The political dimension of the $555T global SWAPS market exposure.