This series is unrelated to the conversations with Middelkoop that have appeared
previously on DeepJournal, and is devoted to covering the latest news. Today's conversation concerns the manipulation of the stock market by the Plunge Protection Team, escalating monetary depreciation, the role of hedge funds in the buying up of European assets with dollars that soon won't be worth very much, the price of oil as it relates to a coming war with Iran, the housing market, the unstable dollar situation, the risk that pension funds take by investing in dollars, and the lack of investments in gold.
The transcript of this interview has been translated from Dutch into English by Ben Kearney. Download the interview.
Daan de Wit: It's April 18, 2007. My name is Daan de Wit and on the line with me now is Willem Middelkoop. Willem, last time we talked about the housing market; what are right now the most important issues?
Willem Middelkoop: The housing market remains extremely important of course. It's going to put pressure on the American economy. Another important development that has become increasingly evident these past months: in order to offset the effects of the recession of 2002/2003, bankers drastically lowered global interest rates in order to stimulate people into borrowing more money. People thus responded en masse, and as a result the amount of new money grew by 10 to 15%. In Russia it's growing as much as 40% annually - every year they see a 40% increase in new money - but we're also seeing this growth in money crop up in India, China and Japan, and in Europe the amount of new money is increasing at a rate of 10% a year.
How is that new money is getting into circulation? Banks are money-creating institutions and can magically bring real money into existence. So when you qualify for a new mortgage or a new loan, that money is actually created on the spot by the bank in the computer. No money needs to be printed - you can see the money in your account balance. Most of my colleagues don't even believe that this is the way it works, but it really is the case. Banks are money-creating agencies which are permitted to create money out of nothing. Money hasn't been backed by gold for quite some time, so we've seen a huge mountain of extra money created each year throughout the entire world, with which a worldwide recovery has been fashioned in the past couple years. In this way things seem to be going just fine - and they are doing just fine - but the result is that there's a lot more money now and the sum total of raw materials is remaining constant, or is even shrinking somewhat every year due to consumption. So now raw materials are seeing a tremendous increase in their value relative to money. That's regardless of whether we're talking about zinc, oil or gold - all those prices are rising. This can also be seen in the rising prices for homes and land - we can't just all of a sudden create millions of extra houses. This would seem to be a very healthy development, but if you correct for the loss of buying power, then you realize that prices have risen nominally, though not in relative terms. A house that sells for 200,000 euros now has a totally different value then a house that sold for 200,000 euros back in 2000 (then 440,000 Dutch guilders). In 2000 you could buy a beer for 2 guilders, and now you pay 2 euros for the same thing (2.2 times as much). The loss in buying power is enormous, monetary depreciation is enormous, and I think that this depreciation in the value of money - due to the creation of more and more money - is one of the most important developments to come to grips with.
So actually we're finding ourselves in an inflationary situation in which more money is continually being created and monetary depreciation is going to increase. During inflationary times you're better off borrowing money than owning it, because if you have money sitting in the bank in savings it keeps decreasing in value, whereas on the other hand your mortgage is also decreasing in value, which is just fine.
Those who lived through the hyperinflationary days of the Weimar Republic of 1920's Germany - the likes of which by the way we're now seeing in Zimbabwe, with an annual inflation rate of 1000% - and who had money in savings, didn't have a single cent left over. And anybody who had borrowed money was in good shape because the value of the loan evaporated. So what at one time was a very expensive loan ends up being rather easy to pay back. What I always advise people to do if they have a good job: Just get an equity-plus mortgage, lock in a low, long-term interest rate, and you'll see that in such a scenario your mortgage will evaporate over the course of 30 years.
Daan de Wit:
It's my understanding that in America it's not possible to lock in the interest rate long-term in the sub-prime lenders market, what with terms such as liar loans and predatory lending coming up. You wrote on your site about the collapsing housing market: "And so the Plunge Protection Team, the PPT, opened up the floodgates at exactly a quarter past eight. The rates shot up." If that's true, then we're totally getting swindled, and the big question then is - why isn't that front-page news? Willem Middelkoop:
It's very difficult to prove intervention in the financial markets, to prove that financial markets are being propped up. It's a given that the Plunge Protection Team exists, that's a popular name for the Presidential Working Group on Financial Markets, which was founded in 1987. After the crash in 1987 the financial world realized that a team was needed that could ensure stability in the markets in the event of a crash or during times of crisis. The Plunge Protection Team seems to be getting more active of late. Not only during crises but also on any given day of the week, though there is only circumstantial evidence of this. So there's no hard evidence for it, and journalists can't write stories based on some suggestions and clues. They're all waiting on solid evidence and sources, and there is nothing of the kind. There have been some reports written by a notable Canadian asset management firm that has taken all of the indications into consideration. Meanwhile for me it's no longer a question as to whether the rates are being propped up, it's quite obvious that in America real losses are no longer being tolerated on Wall Street. Only once in the last thousand trading days has the Dow Jones dipped more than 2% on the day, and that was attributed to computer malfunction, so that tells you which way the wind is blowing. Daan de Wit
: Exactly. But on April 12th the NRC Handelsblad wrote: "Economy again in balance following lopsided growth." The first sentence reads: "According to the IMF things are once again going well with the economy." What should we make of that? Willem Middelkoop:
Through the creation of enormous amounts of money, through loaning so much to people and by taking on huge investment projects, things seem to be going well again. The economy is definitely growing again, but that has been happening in a very artificial way. The economy hasn't received just one shot in the arm - it's received a hundred shots in the arm. The big question is: When will the drugs wear off, and what will the side effects of all this heavy medication be? Even now with the imploding housing market we see that the drugs used to fight the recession of 2002/2003 are having some serious side effects. You just have to let recessions work themselves out, that's a natural cleansing process in the economy. But recessions have now become too dangerous for our financial system, and so the big guns are being brought to bear against them. Then what you get is a partially-successful recession that gets cuts short halfway into it, and is absorbed with the help of a created bubble. But the bigger that bubble gets, the bigger the bang is going to be later on, because that recession is going to come back one way or another.
Daan de Wit:
A significant part of the problem has to do with the dollar reserves of China, Japan and Russia, but I read a report by Bloomberg that said we are only paying attention to the official reserves of China, Japan and Russia, which amount to only 60% of the total. The other 40% concerns money that isn't lying in reserve but which has been invested out of sight, and which can influence the financial markets. Willem Middelkoop:
There are huge deficits in America now, but it's in the future that there will be unsecured obligations to the tune of 60 trillion dollars. There's practically nobody who believes that America can remain prosperous into the future (10 to 30 years from now) and can hang on to the advantages it now has. The dollar can be used to purchase raw materials. The whole world has to buy dollars in order to be able to purchase raw materials, while America is alone in being able to print the dollars for free and then buy raw materials with those dollars. That also explains why 1 out of every 4 barrels of oil - 25% of all the oil - goes to 5% of the world's population - the Americans.
Americans have enjoyed a huge advantage with the dollar being the world reserve currency during these last fifty years. The dollar was at the root of the financial system. What has now become clear to economists is that in the coming ten to twenty years, the role of the dollar is going to get smaller and smaller. What's key here is that the entire world is stocked to the gills with dollars. The money is mainly in China, Japan, and especially in India. Forty percent is held by everyone and their brother, and anyone can decide to exchange those dollars for some other currency, or to purchase raw materials with it. That development is underway; there are more people selling dollars than buying them. That's how the dollar is falling in value. Right now there is something very important to keep an eye on. We always look at the value of the euro as expressed in dollars. That stands now at 1.36 - the dollar is weak and the euro is strong. For 1 euro I get 1 dollar and 36 cents. That was also the case 3 years ago, up until now that was the record during the time that the euro has existed. But if you look at the value of the dollar as expressed in other currencies, then what you end up with is the dollar index. In twenty years the dollar index has never fell below a mark of 80. It stands now at 82. If the dollar weakens any further, then we would fall below the 80 mark. And then we could get a dollar panic in the financial markets. Before that happens you should take another look at the VPRO documentary The day that the dollar falls
. But for the time being we're still above the 80 mark. That's a key index that I keep an eye on no matter what. What you can also figure on happening is, if the euro goes above 1.40, then things are going to start getting tense. I think that will also bring instability to the financial markets.
Right. The pound has now become quite strong - we haven't seen that for some time. The euro stands at its highest point in two years. But it's really all about the value of the dollar as it relates to all those currencies. The pound, the euro, the Japanese yen. So that's the dollar index - it hasn't found itself under the 80 mark in twenty years. And it's now just under 82 (81.7). And should that fall below 80, then I would advise friends and acquaintances alike to withdraw yet more money from the bank, and in any case to sell off all of your dollar holdings if you haven't done so already. Daan de Wit: And regarding the price of oil - it remains more likely than not that Iran will be invaded... Willem Middelkoop:
I recommend that everyone go out and buy the latest book
by Scott Ritter, who was a U.N. weapons expert charged with the duty of finding Saddam Hussein's forbidden weapons a number of years ago. At one point back then he revealed that the hunt for weapons of mass destruction in Iraq was hopeless - because the weapons weren't there. At that time no one believed him. He has now received a lot of credibility because everything that he wrote about Iraq appears to have come true. Now he's written a book in which he once again lays out the facts concerning a potential attack on Iran. The Israelis want to draw America into that conflict. Iran itself would also like a conflict, for if you read the book you can see how Iran can only emerge as the victor. America can do a lot with air strikes, but America is in no condition to occupy Iran. Iran is a very strong and proud nation that could stir up a lot of trouble. And that's really going to interfere with the oil market. If just one missile is fired at Iran, then there will be an orgy of violence in the Persian Gulf - or so Scott Ritter predicts. I share that opinion.
Daan de Wit: But the price of oil?
Willem Middelkoop: In my opinion it can only go higher, and that's not including what ends up happening with Iran. I follow the data on worldwide supply and demand, and for the first time we've arrived at a situation in which the demand for oil has exceeded supply for three years running. We've talked often about peak oil and possible problems in the future if the demand is greater than the supply. But the future is now, because in 2006 the demand for oil was 100,000 barrels greater than the supply. We're talking about 100,000 barrels per day. This year the shortage is up to 700,000 barrels per day, and for next year yet another shortfall is predicted. So that's three years in a row with an oil shortage. And then the last thing we'll need is another conflict in the Persian Gulf.
Daan de Wit: Getting to the hedge funds, you can't open a newspaper anymore without reading about the so-called thieves, the locusts who just buy everything up and then resell it. The PCM deal went south, Hema is being sold off, ABN is up for sale. Is all of The Netherlands for sale?
Willem Middelkoop: Dutch and other European companies are relatively cheap in comparison to American companies. Also playing a role are these hedge funds - private equity corporations that buy up these kinds of companies - which are working with an awful lot of borrowed money. And if you as an American make an acquisition in Europe and borrow a whole lot of dollars to do that, and you know that the dollar is going to fall further - which is what everyone is expecting in the future - then you're going to make a huge profit on the increase in value of your European investment. Add to that the fact that you've borrowed a lot of dollars to finance that due to the fact that European companies are relatively cheap: you can purchase them relatively cheaply and then pull all kinds of different stunts like we saw with PCM. PCM was to a large extent sucked dry in 3 years time.
Because of low interest rates, these kinds of private equity corporations and hedge funds can borrow money quite easily. Lets take the example of a hedge fund - a hedge fund with a net worth of 10 billion and interest charges totaling 5 billion in the past year. These kinds of funds are speculating with enormous leverage. They borrow a massive amount of money with which to negotiate their positions. It's Monopoly, but for the really big boys.
We're now in a situation in which things are actually going pretty well worldwide. There seem to be hardly any risks for an investor. Even Alan Greenspan gave a speech two years ago in which he said that history shows that there is no mercy bestowed upon the perception that risks are low in the financial markets. You can expect a period in which bubbles are bursting left and right. And if all the bubbles burst and then massive debt along with huge losses transpire, then don't be surprised if huge losses are suffered by the pension funds, such as we saw between 2000 and 2003. And I don't believe that pension funds learned anything from what happened back then. Pension funds continue to speculate as if everything is going to continue to go well, that you actually don't need to practice safe investing, and that you can take on all kinds of risks. There isn't a single pension fund in The Netherlands that invests in anything that would have previously been considered normal, such as asset management companies that have invested 50% of their portfolio in physical wood. It's all been invested in paper and stocks, obligations and other certificates. It's all on paper, all promises on future returns, future yields. You have to hope that all those promises are kept.
One last thing I'd like to mention Daan. I'm no longer writing for Inveztor; I'm no longer contributing to inveztor.nl, where my weblog and columns appeared. I'm writing a monthly column for Penthouse and I'm going to be writing a bi-weekly column for the members' newsletter of the VEB - the Dutch Investors' Association. But for the moment my columns can no longer be found freely on the internet. I'm working on a new English-language newsletter for investors, and I'm going to be launching my own website, but more about that as the time comes.
Daan de Wit: Okay Willem, thanks a lot and I'll talk to you next month.
Willem Middelkoop: Okay.
The original Dutch transcript was prepared by Pieter Navis and Laurens Foudraine.