THE GOLD CHRONICLES
with James Rickards and Alex Stanczyk
Update on 3rd Great Gold Bull Market
Proper portfolio allocation when it comes to gold
The difference in mindset between investors that are trying to accumulate wealth, versus investors who have wealth and are trying to protect it
Gold as insurance versus investment
Moving jobs from outside the US, into the US
North Korea Update
Physical Gold Fund presents The Gold Chronicles with Jim Rickards and Alex Stanczyk offering insights and analysis about economics, geopolitics, global finance, and gold.
Alex: Hello. This is Alex Stanczyk, and welcome to another edition of The Gold Chronicles. This
one is for March 2018, and I have with me the brilliant Mr. Jim Rickards. Welcome, Jim.
Jim: Welcome, Alex. It’s great to be with you. Thank you.
Alex: Just briefly, in our last episode of The Gold Chronicles, we covered several different things
including why exploding sovereign debt and the debt-to- GDP ratio are critical to market
stability in the next few years, how student loans at about $1.5 trillion is a big problem and how
its significant default rate is going to affect other things, what the two critical conference
boundaries are and how we might cross them, and then finally, we did an interesting potential
scenario. Jim wasn’t calling this a forecast, but it was a three-year playbook.
If you’re interested in that episode, you may access the archive of all of our podcasts at
Why don’t we dive right in, Jim. The first topic is gold. I’m not going to prompt you at all
regarding this topic; I’m just going to let you run with your thoughts. Let’s keep this one short,
because we have a couple more that are really important, but what are your current thoughts
on gold right now?
Jim: Just very big picture, as I mentioned before, we’re in the third great bull market of my
lifetime - actually, the third bull market in history.
The reason I say that is, prior to 1971 - or in different ways, 1933 - the world was on a gold
standard. We didn’t really have bull markets and bear markets in gold, because the whole idea
was that the money was gold or that the money was backed by gold. Either way, it was a
constant store of value and a constant exchange rate, so people were happy with that. They
weren’t looking to make money on gold, because gold was money.
It’s only in the 20 th century when countries went off the gold standard that we had to say,
“What’s the ratio of dollars to gold by weight?” Now we get these bull and bear markets. I can
say it’s of my lifetime, but maybe it’s of all history. It’s just the new world we’re living in.
That said, the first bull market was 1971 to 1980 when gold was up well over 2000%. The
second bull market was 1999 to 2011 when gold was up almost 700%. The third bull market
began in December of 2015 and is running today. It will run for many years to come, and in my
view is the one that’s going to take gold up to $10,000 an ounce.
I don’t want to go through all the analysis behind that, because you know I don’t like to make
claims without the analysis. I just made a claim about the bull market, but we did provide all
that analysis in prior podcasts.
To update that story a little bit, gold has been strong very recently, back to that $1350 to $1355
level for the third time in just the past three months. It fluctuates and could be down tomorrow
and up again the day after. We all understand that.
What strikes me the most and is the real story on gold right now is that gold is showing a lot of
strength in the face of very adverse conditions. Two charts in particular caught my eye. One
was the comparison of gold to real interest rates.
The real interest rates were shown on an inverted scale, meaning if the line went down, that
meant interest rates were going up. These were real interest rates, so using five-year TIPS to
strip out inflation (because the principle is adjusted for inflation), this was just the real rate, the
so-called term premium. The other line on the chart was the dollar price of gold, and that was
on a normal scale, meaning up is up.
It shows from 2013 to 2017 that those are highly correlated. If you take it back even longer, the
pattern is very similar. They go down, up, down, up, but they move together with a high degree
of correlation. That makes sense. Money, bonds, and notes compete with gold for the investor
dollar. As we’ve talked about before, gold has no yield. It’s not supposed to, because it’s
These other instruments, whether bank deposits, five-year notes or ten-year notes, do have
yields. The higher the real yield is, the more an investor is inclined to buy the note and not buy
the gold, because they can get a higher return. With lower real yields, gold looks relatively more
attractive, because the opportunity cost of holding it is a lot lower. To me, that’s not the reason
to hold gold, but for a lot of people, that is the reason to hold gold or not hold gold.
That’s a very meaningful figure. The fact that they were correlated makes sense, except
beginning in 2017, continuing today, and getting more extreme by the day, those lines
diverged. All of a sudden, real interest rates were continuing to go up (which meant that the
line was going down on the inverted scale), but the dollar price of gold was also going up.
There was this correlation, but then suddenly, gold goes like this, real interest rates go like this
(meaning they’re going up; a downward-sloping line is up), and there was this spread opening
up between higher real rates and higher dollar gold prices. That’s extremely unusual. When you
see that, it tells you something is going on. You have to ask yourself more questions, because
that is a highly unusual pattern.
There are a couple of narratives you could apply to that. The first one is, one of them is wrong.
The market is never wrong; the market is what it is, so you take the data. You can’t make up the
data, but from a narrative and forecasting perspective, you would say one of those is wrong.
Either gold prices must correct sharply - gold must come way down and get back in line with
real rates - or the real rates must crash down a lot and get back in line with gold. One way or
another, that gap is going to be reconciled. Either the gold price is going to come down or real
rates have to come way down, meaning that line goes up and they get back in sync.
My view is that the real rates have got it wrong. In other words, this inflation narrative - the
strong growth narrative, the fiscal stimulus narrative coming out of the Trump tax cuts - none of
that is going to materialize the way markets expect.
These real rates are real rates, meaning they’re going to slow the economy. They’re not
happening because growth is strong or borrowing demand is high or thriving enterprises are
competing for funds. Those are normal business cycle events that you might see. They’re not
happening, and that’s not what we see.
What we see is expectations, Fed policy, and other factors taking real rates higher for no good
reason. In my view, that’s going to correct by real rates coming down and those lines getting
back in sync. In other words, gold is looking through the cycle a little bit. Gold is more forward-
leaning than five-year note rates, and it’s saying the Fed has to back off.
The Fed has to switch from this double tightening mode we described - tightening by raising
rates, tightening by reducing the balance sheet, tightening into the teeth of a weak economy.
They’re going to have to back off. They’re not going to cut rates, but they can easily use forward
guidance to indicate they’re going to skip a rate hike.
Right now, the stars are aligned for two or maybe three more rate hikes over the course of the
year. I expect as of now that they’ll hike one more time in June, but after that, they’re going to
hit a wall. If I’m right in the economic forecast and growth slows, they’re going to hit a wall and
won’t be able to raise for the rest of the year. Real rates are going to go down, and those lines
are going to converge.
That’s one explanation, but there’s another explanation equally powerful that has very good
evidence, which is that it’s just good old-fashioned supply and demand. Gold is saying, “To heck
with real rates and all these other correlations. We’re going to go our own way, because people
When I say people, unfortunately I don’t mean Americans. I spoke to a gold dealer recently, and
he said, “Jim, business is awful.” I said, “Well, I’m always here for you.” But business is pretty
bad. He showed me some numbers he gets from the Mint because he’s on a special mailing list,
and they were just dismal. Americans don’t get it.
Again, I don’t have to spend a lot of time on this story. Russia, China, Turkey, and now Iran
(secretly, because they’re nontransparent) are major economies. They’re emerging markets,
but they are big economies with 80 million people in Iran, a billion people in China, upwards of
200 million in Russia, and Turkey around 80 million people. These are very big economies
among the 20 largest in the world with China in second, of course. They’re buying all the gold
they can. There’s also India’s consumer demand as opposed to government demand.
The mining capacity is not growing and, in fact, is barely keeping even. I don’t want to get into
peak gold; that may or may not be true. There’s some evidence it is true, but you don’t have to
go there. You just need to understand that when they took mines offline in 2013, 2014, and
2015 when the price of gold was in a bear market and those mines were not economic, it’s not
like throwing a switch; it takes years to get those mines back online.
I think both things are true:
Gold is correctly anticipating a flip to ease by the Fed, because the Fed is over-tightening
and will have to reverse course thereby giving gold a huge boost later in the year and,
There is a supply-demand fundamentals story there
Again, gold is very strong. As of this podcast, it’s outperforming the Dow Jones and S&P 500 this
year. This bull market goes back to 2015. Gold is up 35% with a lot of strength in the face of a
lot of adverse factors. As those adverse factors flip, the headwind will turn into a tailwind, and
gold will go even higher. It’s a very bullish scenario for gold right now, and it looks like a great
Alex: Let’s talk a little bit about forecasting gold, because I think you and I have a lot of the
same viewpoints and values when it comes to the way we look at gold. I know you and I look at
gold as insurance. In my experience in the industry going on 11 years, I run into two different
kinds of gold investors.
The first type of gold investor is basically just capital gains oriented. They’re looking at gold as a
trade. They want to get in, get gains, and get out. Another type of investor is more interested in
gold as sort of an insurance for the rest of their portfolio.
I notice there are a number of people who follow our podcast and follow you, Jim. Sometimes
they say, “Jim, you’ve been talking about gold for X number of years, and I could have done this
other trade. It hasn’t done what I thought it was going to do in this time frame, etc.” What do
you think about that?
Jim: Two things. Number one, I recommend a 10% allocation; 10% of your investable assets. If
you go back and look at my books, at podcasts, and at interviews, I’ve consistently said this for
I have a working definition of investable assets, and it’s not the same as your net worth. Take
your home equity or whatever it may be and put that to one side. Also take your business
equity. If you’re a doctor, lawyer, dentist, auto dealer, dry cleaner, restauranteur or whatever it
may be, you have some equity in your business. Put that to one side, because you don’t want to
mess around and speculate with your home and your business. That’s your livelihood and the
roof over your head, so exclude those.
Whatever’s left are your investable assets. It’ll be a 401(k) or savings account or stock portfolio,
etc. Take 10% of that - which is less than 10% of your net worth assuming you have some equity
in the other things - and put that into gold. If you want a slice for silver, that’s fine, but primarily
People approach this topic as if it’s a binary world. “Jim, I either have to be 100% stocks or
100% gold. You like gold, but if I’m 100% in gold, I miss out on the stock market.” Well, I never
said that. That’s a bad portfolio choice. It shouldn’t be 100% in one.
That’s a false setup, a false frame. Honestly, I think a lot of the people who complain about
that, if you met them in person and drilled down a little bit, you’d find that they do have a
balanced portfolio. They’re just grumpy about the gold part, or they have one gold coin and no
stocks and wish they owned ten shares in Google or whatever it might be.
The more thoughtful listener, the more sophisticated viewer, understands what I’m saying. If
you put 10% in anything and it goes down 20%, you take a 2% ding on your portfolio, but you
could have been making a lot more on everything else.
This is not my recommended portfolio, but if you happen to be 10% gold and 90% stocks, you
didn’t miss anything in terms of stock market rally. In fact, as I’ve described, gold has out-
performed stocks this year. In the 21 st century, and in the last couple of years, it has at least
held its own. As I said, gold is up 35% since the bottom in December 2015, so it’s not true that
gold has done poorly.
Gold has actually done very well since 2015. Okay, we had a bear market from 2011 to 2015. If
you backed up the truck and bought gold in August 2011, you’re down significantly, 40% or so. I
understand that, but that would not have been a prudent decision.
You should be buying gold all along, accumulating it. As you get more income, take the 10%
slice, buy the gold, and do what you want with the rest. You should diversify that as well, but I’ll
leave that to individuals. If you’re getting an average price as opposed to a peak price and you
went for a 10% slice, you haven’t done that poorly at all.
It’s a myth that gold hasn’t done well; gold has done well. It has not had the kind of bubbly
activity in recent years that stocks have, but we’ve seen lately that that’s a two-edged sword.
There have been days when the stock market is down 4% or 5% in a single day, as it was very
recently and has been more than once. We’ve had a number of 3% or 4% down days in the past
several months, and as I say, gold has held itself.
Number one, diversify. If you have 90% in stocks and 10% in gold, you’ve done just fine and
have no cause for complaint.
As far as the 10% gold is concerned, people have insurance. They have fire insurance, casualty
insurance, liability insurance, all kinds of insurance. When you write a check to the insurance
company for the premium, you don’t think you’re throwing your money away. You think you’re
doing something smart, because how could you sleep at night if you didn’t have insurance? We
all know we’ve seen a lot of natural disasters, we live in a litigious society, etc., so you think
that’s a good use of money.
Well, when you have gold, if stocks outperform gold in some stretch - and sometimes they do,
of course - take the opportunity cost. Here’s a simple example: 90% of your portfolio went up
30% and 10% of your portfolio (which is gold) went up 10%. What’s your opportunity cost? Your
opportunity cost is 10% of 20%, in other words 2%. That’s what it cost you in terms of overall
portfolio performance to be in gold instead of stocks for the 10% slice. It costs you 2%.
That’s the check you’re writing to the insurance company in order to have the insurance in case
the stock market falls 20% or more in one day (which it did on October 19 th , 1987) or just does a
very quick 10% down in a couple of weeks, which we’ve seen twice in recent months. You write
that insurance check, and now you preserve wealth in that portion of the portfolio. That’s a
mild thing, and you’re glad you have the gold.
What I just described is not Hurricane Andrew or Hurricane Katrina. Hurricane Katrina in stocks
versus gold is when you have a global liquidity crisis, when they shut the stock exchange - which
has happened many times, by the way, and people tend to ignore that - and the price of gold is
going up $100 an ounce a day, $200 an ounce the next day, it’s screaming, and you say, “Give
me some gold. This is the only thing that’s going to protect my portfolio.” You call the dealer
and the phone is off the hook, you call the Mint and they’re backordered, and you’re watching
it go up on TV and you say, “I want some gold,” but you can’t get it.
That’s Hurricane Katrina, the real insurance scenario. That’s the reason to have gold, and you’ll
be very happy you did. You will not end up unhappy when that happens. My answer is to do a
10% slice. When it underperforms, think of it as insurance, which it is, and when it outperforms,
you’ll be very glad you did.
Alex: That whole scenario you’ve just described, when gold’s running and people are trying to
get it and they can’t, is the entire reason we decided to not trade on the secondary market. I
totally agree with you there.
As a final comment before we move on to the next topic, in my experience, I’ve noticed there’s
a different mindset. You mentioned a sophisticated investor versus someone who’s maybe not
as much. There’s a difference between somebody who’s trying to build their wealth and
somebody who’s already got wealth and are trying to protect it. They look at the world another
way, so that makes a big difference.
Jim: Let me drop a quick footnote there, Alex. I won’t mention names, but I was having dinner
with an individual who would be a household name, a multibillionaire who runs one of the
biggest hedge funds in the world. This fund is multi-strategy and trades stocks, bonds,
commodities, currencies, and private equity all day long. You would associate this individual
with being a big foot in the stock market.
It was a private dinner with himself, his wife, and my wife, so just the four of us. We weren’t
talking about stocks or gold; we were talking about other things that interest us, but my wife
has this insatiable curiosity, so she turned to this hedge fund manager and said, “By the way, do
you own gold?” He looked at her and said, “Lots,” and that was the end of the discussion.
I’ve had more than one encounter like that where I meet these billionaires who are known for
hedge fund stock trading, but you ask them privately, “Do you own gold?” and they say, “Yes, I
do, and a lot of it.” These are the most sophisticated people in the world, and they think it’s a
Alex: I totally agree. I have numerous stories similar to that. We won’t get into the weeds on it,
but yes, absolutely.
Let’s move on to the next topic. In February, there was a pretty serious correction in the U.S.
stock market. There’s been a lot of talk about that and a trade war. What are your thoughts on
Jim: We are in a trade war, and that has been one of the drivers of the stock market in recent
months. Let me unpack that a little bit. A lot of viewers know my first book called Currency
Wars that came out in December 2011. I said at the time that the world is not always in a
currency war, but when we are in a currency war, it can go for 10 or 15 or 20 years. I
documented several cases where that was true, and I outlined the dynamics behind that in
terms of why it’s true.
I said this new currency war began in January 2010. The reason I could pinpoint it is that was
President Obama’s 2010 State of the Union address at the end of January when he announced
the National Export Initiative to double U.S. exports in five years.
I said to myself “That’s interesting. How do you double U.S. exports in five years?” We’re not
going to be twice as productive, we’re not going to be twice as smart, there aren’t going to be
twice as many of us. There’s only one way to do that, which is to trash the currency. That’s
what we did between January 2010 and August 2011. In August 2011, the dollar hit an all-time
low using the Fed’s broad real index.
I prefer the Fed index to DXY. A lot of traders use DXY, and that showed dollar weakness at the
time, but DXY is heavily weighted to the euro. It’s almost a euro-U.S. dollar cross rate. I can get
that anywhere, so I don’t need DXY to tell me what that’s doing.
The Fed index is trade weighted by our actual trading partners, so it tells you more about how
the dollar is viewed globally. That index hit an all-time low in August 2011. We did trash the
dollar, here we are in 2018, and guess what? The currency wars are going strong, and I expect
we’ll be back here a year from now with the currency wars still going on.
I also said that the reason currency wars go on so long is because they don’t have a point of
resolution. It’s like a tennis match between two good players. It goes back and forth and back
and forth. I devalue and then you devalue, and then I devalue again, and you devalue again, or
I’m down and you’re up and then suddenly, I’m up and you’re down. It goes like this.
Alex: It’s the so-called race to the bottom.
Jim: Yes, it looks like a race to the bottom but with one difference. A stock or bond - or a
country as a whole if you want to take Venezuela or Zimbabwe as examples - can go all the way
to the bottom. Currencies have the dynamic of a race to the bottom, but one difference
between stocks and major currencies is that they don’t go to zero. The Zimbabwean dollar and
Venezuelan bolivar did, and maybe all currencies get there eventually, but at least in the short
to intermediate term, major currencies don’t go to zero. They can just go up and down like this.
If you look at the euro-U.S. dollar cross rate, in the last 20 years, that has made seven 20%
moves both ways. In 2000, the euro was about 80 cents. Within a few years, it was $1.60, $1.60
came back down to $1.20, it went up to $1.40, came all the way down to $1.05, and now it’s
back to $1.25. These are big moves in currency land.
In fact, when everyone was bemoaning the lack of volatility in 2017 prior to the recent
volatility, they said, “We’re looking at stocks and bonds, and there’s no volatility. Looking at the
DXY, there’s no volatility.” I said, “Look at the currency markets. There’s your volatility.” It’s
true, because that’s how countries were managing their growth. They were stealing it from
each other in the currency wars. That’s what currency wars are.
The point being, they go on for so long because they don’t have a resolution. After some period
- five or ten years - policymakers and leaders wake up to this fact. You would think they would
know it already because we have enough history, but they go, “You know, we’ve been fighting
these currency wars that are not really working. We still have the original problem, which is too
much debt and not enough growth.”
Those are the conditions in which currency wars emerge: too much debt and not enough
growth. We saw it in 1919 after World War I when the Germans owed reparations to the
French and British that they couldn’t pay, and the French and British owned war debts to the
United States that they couldn’t pay. Nobody could pay anybody, and so you have this debt
overhang standing in the way of growth, and you can’t pay your debt. It’s too much debt and
not enough growth.
The temptation is, “I’m going to steal growth from my trading partners by cheapening my
currency,” but it doesn’t work. After about ten years, they say “Oh, I’ve got it. Let’s have a trade
war.” In other words, currency wars become trade wars.
This trade war was completely predictable. It’s exactly what happened. The currency war - one
of the two I documented - began in 1921 - 1922 with the Weimar hyperinflation. Then we had a
French/Belgian devaluation in 1925, the Sterling devaluation in 1931, the U.S. dollar
devaluation in 1933, and the French and British devalued a second time in 1936. There was a
whole series of devaluations, but the trade wars started in 1930 with Smoot-Hawley, and then
you had a lot of reciprocal tariffs being imposed.
By the way, they can overlap. It’s not like one day the currency war is over and the trade war
begins. That’s not how it works. The currency war keeps going, but somewhere along the line,
the trade war begins, and then you have both.
Unfortunately, they end up in a shooting war. The sequence is currency war first, then trade
war, then shooting war. History shows that shooting wars work. When there’s a lot of
destruction and debt, that gives economic growth. It’s not a good outcome we should wish for,
but it does solve the debt problem by wiping out the debtors, and it solves the growth problem
by creating so much destruction that you have to rebuild. I’ll save that story for another day,
but based on that, the trade wars are 100% predictable, because it’s exactly what you would
expect in year seven or eight of a currency war.
Now that trade wars have begun, the fact that Trump did this, I couldn’t believe the markets
were shocked. From February 2 nd to February 8 th , U.S. stock markets had a full correction down
11%. They ran into correction territory, and everyone was like, “Oh my goodness, what a
surprise. Trump is starting a trade war.” Are you kidding? He’s been talking about this since the
Decades before he was even a public figure or certainly a politician, this was his biggest
grievance. “U.S. is getting ripped off with trade deficits,” etc. He talked about it. It was in his
speech in June 2015 when he announced he was running for president, and he talked about it
all throughout the campaign.
The only thing that threw people off is that when he got into office in January 2017, he did not
launch the trade war immediately after talking about it forever. There was a reason for that,
and that was North Korea. Who’s one of our biggest trading partners? China. Where do we
have the largest trade deficits? China and South Korea. Whose help do we need in dealing with
North Korea? China and South Korea.
The national security team, which at the time was McMaster, Tillerson, Mattis, General Kelly,
Dina Powell, Gary Cohn, and a few others, were saying, “Mr. President, don’t start this trade
war with China and South Korea, because we need their help to deal with North Korea.” And we
had what I call the trade troika (Wilbur Ross as Secretary of Commerce, Peter Navarro as White
House Trade Advisor, and most importantly but least well-known Robert Lighthizer, who today
is the U.S. Trade Representative) making the case for tariffs.
Throughout 2017, the national security team won. The trade troika did not have their voices
heard, but Trump wanted to do the tariffs. He realized China and South Korea were not really
helping. South Korea was kind of rolling over acting like a doormat for Kim Jong-un, China was
going through the motions doing a little of this and a little of that, but nothing really
substantial. Trump said, “I’m not getting the help I want, so why am I holding off on the trade
war if my reason for doing so is not being satisfied, which is I’m not getting the help I want with
the North Koreans?” So, he said, “Okay, time’s up. I gave you a year, you didn’t do anything, so
We’ve seen references to the Trade Act of 1974, Sections 232 and 301. Section 232 allows
reciprocal tariffs for dumping, so if you can make a case that China is dumping steel, then you
can put a tariff on imported steel.
Section 301 is very different. It has to do with national security considerations. If you can show
that the trade or even non-trade practices or economic practices and policies of a trading
partner or an adversary are damaging national security, you can slap penalties and tariffs on
Trump is doing both. The first round, and the thing that knocked the stock market down in
February, were Section 232 tariffs. He started with solar panels and washing machines. Solar
panels are big and so are appliances coming out of mainly South Korea and some out of China.
Then he dropped the hammer on steel and aluminum, which are much more important, a much
bigger part of the economy. Those were all Section 232 tariffs that sent the stock market into
correction territory. Very recently in the past week or so, he’s come back with Section 301
They needed a report, because you can’t just do it arbitrarily, but it is important to note that
the president can do this on his own. He does not need Congressional approval to impose these
tariffs. It’s the law. Congress has already given the president the authority to do this, so he
doesn’t have to worry about Mitch McConnell, Paul Ryan, Chuck Schumer, Nancy, and all those
The Section 301 tariff is $50 billion on China for openers. They say there’s potential to go up to
$1 trillion, but he’s starting with $50 billion. That’s what sent the stock market into a swoon.
Why did the stock market bounce back? It hasn’t come all the way back as it’s still well below
the highs on January 26 th . It’s down significantly from there, but there are days like last Monday
when the stock market performed well. The reason is because of news that maybe the trade
war is not so bad after all. The news that sent the stock market up on Monday the 26 th was that
China was willing to negotiate.
That’s exactly what Trump wanted. Trump didn’t want a trade war. He said, “I’ll start one, but
what I really want is for you to come to the table.” China said they would, so the stock market
That’s fine, but the problem is that China has done this forever. They always go through the
motions, say nice things, put up a good appearance, and then they don’t deliver. Stocks, enjoy
your respite here and good news from China, but I don’t put much weight on it. As I said, just as
currency wars go on for a decade or more, so do trade wars. They don’t have a logical
conclusion; it’s just back and forth.
Some of the exemptions Trump has given by saying, “You’re exempt and you’re exempt,” or “I’ll
give you a temporary...” is a little ‘inside baseball.’ It was done for an unusual reason, which is
U.S. companies that buy imported steel put those orders in and agreed on a price. It takes
sometimes a month or two for the steel to get fabricated, loaded, shipped, and unloaded. If
tariffs were put on immediately, the steel would get to the Port of Los Angeles let’s say, and all
of a sudden there would be a 25% tariff. Well, that U.S. manufacturer did not price their goods
or do their deal assuming there were tariffs. They put the order in maybe last December before
the tariffs were imposed. Suddenly, the steel gets to Los Angeles, boom, here’s the tariff.
Trump extended the deadline not to be Mr. Nice Guy or help the stock market, but so as not to
unduly penalize those U.S. importers who ordered the steel in good faith before the tariffs were
Once that’s up, he is going to put the tariff on. He’s going to say, “You’ve been warned. Now
you know if you put your order in in mid-February and it’s not arriving at the port until May,
you know you have to pay a tariff, so don’t blame me if it’s there. It also gives you time to
redirect those orders to Nucor, U.S. Steel, and other U.S. steel manufacturers.”
That’s not being Mr. Nice Guy; that’s just a little bit of trying to achieve some fairness in terms
of the speed at which this is implemented on people who didn’t expect it. So those are going to
Yes, Mexico and Canada are trying to be nice on NAFTA and China is trying to be nice on
bilateral trade negotiation. Let’s see where they go. Hopefully it has a big kumbaya ending, but I
don’t expect it. I expect the trade war to continue, I expect the stock market to continue to
suffer from those headwinds, and I think we have a very long way to go.
Alex: Not to get too far into it, because we have one last important topic we need to discuss,
but at this point, would you say it’s more about the job situation than anything else? Is this
reminiscent of what happened with Japan?
Jim: Japan is a very good example. Now we’re talking about the early 1980s when U.S. auto
manufacturers were getting hammered by Japanese imports. Nissan, Toyota, and others were
making better cars. They just were. And they were cheaper, and Americans were buying them.
Detroit was suffering and unemployment was going up. We had a very bad recession in 1981 –
1982. At the time, it was the worst recession since The Great Depression, and Detroit was being
President Reagan was in office. It’s important to note that Reagan’s trade advisor (not the
ambassador level U.S. Trade Representative) was one of his White House advisors at this time.
It was Robert Lighthizer who today is the U.S. Trade Representative and has cabinet rank,
ambassadorial rank, so he has seen this movie before. Lighthizer threw steep tariffs on
Japanese imported automobiles. He didn’t do it to collect money; he did it to force the
Japanese to move their manufacturing to the United States.
A tariff is a wall, so the goods are flowing like this: Put up a tariff as a 25% or 30% wall on
imported goods. They can pay it, in which case they’re not competitive, or they can jump the
wall by moving their manufacturing to the United States.
That’s what they did, and it wasn’t just the Japanese; it was also the Germans. Today, people
drive around in BMWs and say, “I have this nice German car.” No, you don’t; you have a nice
South Carolina car. They’re driving around in their Hondas like, “I have this really cool Japanese
car, great quality.” No, it was made in Tennessee or Kentucky or Ohio. Quite a few of these cars
are made in the United States, and that created high-paying jobs.
This idea that tariffs don’t work is not true. You hear the whining from the globalists, the special
interests, and the global corporations that, taken individually, may incur some cost associated
with this, but America has always thrived on tariffs. Alexander Hamilton, Henry Clay, and
Abraham Lincoln were all in favor of tariffs or what they called the American plan: create
American factories, support American manufacturing, create American jobs. Reagan did the
same thing, and Trump is doing the same thing.
Tariffs are as American as apple pie. This whole globalist, Bloomberg, Gary Cohn, Goldman
Sachs, and academic economist rap you hear about tariffs imposing cost on consumers, etc. It’s
here and there a little bit, but they do a lot more good than they do harm.
You need to look at the secondary and tertiary effects. We must create high-paying jobs.
There’s nothing wrong with being a barista or an Uber driver, don’t get me wrong. I think
there’s dignity in all work, so if you’re an Uber driver or a barista, be the best, make the best
coffee you can. But candidly, those are not the jobs that support household formation or home
ownership, bringing up a family, income security, and pensions.
Jobs of the kind I just described come from several sources such as transportation and
technology, but they also come from manufacturing. That’s what Trump is trying to do, so it’s
not going away. Every sign is that with help from Lighthizer, Trump is doing this intelligently. As
I say, it’s as American as apple pie and a very good thing.
Alex: Moving on, Jim, you and I have been talking about North Korea since the beginning of
2017. Things progressed over the course of 2017 to the point towards the end of the year when
you were saying strongly that we were going to be at war with North Korea by March. We’re in
March, and there are people asking questions.
Jim: Fair enough. I did say that categorically in September, October, and November of 2017.
The great thing about doing podcasts and interviews is that you can always timestamp the
commentary. You don’t have to guess.
By the end of 2017 and certainly now in 2018, that timeline has been pushed out. Let me
explain that. In November of 2017 - because that’s a fairly late date - I said we’ll be at war with
North Korea by the end of March. I did not make that up; I got that from Mike Pompeo, who is
the Director of the CIA, and H.R. McMaster, who is the Director of National Security. I met with
both of them personally in Washington D.C.
I agreed with that forecast and wasn’t just parroting what they said. That was my analysis and
their analysis based on conditions or circumstances, but those circumstances change. And when
they change, you have to change your forecast.
Pompeo was asked the same question. You can ask me, and that’s fine; I’m happy to answer it,
but they asked Pompeo. They said, “Mr. Director, you said five months.” That’s what he said in
October; five months happen to be March. “You said five months. Four months into it, what
The answer is, he said it was five months then and it’s five months now. In other words, it’s a
five-month window. Here’s the way to put it: North Korea is five months or less away from
building a nuclear arsenal of ICBMs tipped with nuclear weapons that can end U.S. civilization.
Enough of them - let’s say ten would be enough - so that even with our anti-missile defenses,
four or five of them could get through and destroy Seattle, Denver, L.A., and Chicago.
Well, America’s over at that point. We’d fight back, destroy North Korea, and pick up the
pieces, but that’s a scenario under which the veneer of civilization gets pulled away. Apart from
death and destruction, you get some bad results. That’s an existential crisis no president, no
flag officer, no admiral or four-star general will ever allow.
They’re five months away from that. That’s what Pompeo meant when he said that in October,
and that’s how I understood it. What happened was we have a timeout. In other words, we hit
the pause button.
It’s like a two-hour movie on Netflix or in the Blu-ray player. It’s downloaded, and I say, “Alex,
this movie is going to be over in two hours.” One hour into it, we hit the pause button, get up
and get some popcorn and snacks or whatever, and we come back. Now it’s not going to be
over in two hours. It’s going to be over in two and a half hours, because we hit the pause
button for a half hour. It doesn’t mean I’m wrong about the two hours; it means that somebody
hit the pause button, and we must take that into account.
North Korea and the United States together hit the pause button in early December because of
the Olympics. We knew the Olympics were coming, so that wasn’t new news.
The U.S. has been conducting joint military exercises with the Koreans and Japanese for a long
time. We do this with military forces all over the world, but there’s no doubt that this was one
of the hot zones and an area where troops need to be prepared.
If you’re the 101 st Airborne and fighting in the desert from Mosul or Kirkuk and suddenly you’re
told that your mission is to land behind enemy lines in the mountains in the middle of winter,
you have to do some mountain training up in Alaska or the Rockies or wherever. It’s the same
for bomber pilots and the navy. Everyone must change. This training is very important, and
we’ve been doing it on a regular basis.
North Korea has been shooting missiles, setting off atomic weapons, and firing missiles on a
much faster tempo under Kim Jong-un than either his father or grandfather. (His grandfather
didn’t have missiles, but he wanted some.)
The idea was called Freeze for Freeze. “We, North Korea, will freeze our missile and weapon
development if you, the United States, freeze your operational tempo in terms of military
exercises.” Russia and China supported this, and North Korea wanted it.
The U.S. refused, saying, “No, we’re not going to let North Korea dictate the operational tempo
of our training. We have to do what we have to do. If you want to get rid of your weapons,
we’re all for that. We’ll talk to you about that, but you’re not going to tell us how to run our
In December, President Moon of South Korea turned to the United States and in kind of a soft
voice said, “Hey, do you think we could just postpone these exercises? Not end them, but just
postpone until the Olympics are over so that nobody makes a mistake or does a provocative act
in the middle of the Olympics.” The U.S. kind of said in a very quiet voice, “Um, okay,” at which
point Kim Jong-un stopped firing missiles. His last missile test was November 2017, and his last
nuclear weapons test was September 2017.
We fell into a Freeze for Freeze, hitting the pause button as I described it, without anybody
losing face and with no formal announcement, but nobody said they wouldn’t start it up again.
That’s what happened. From December, January, February, now into March, we’ve hit the
The question is, do we now have our popcorn and snacks? Are we ready to hit play and let the
movie keep playing out? The answer is, possibly, because the U.S. has scheduled military
exercises for April. Let’s see what happens.
During that, we had some Olympic diplomacy with Kim Jong-un’s sister, Ivanka Trump, Mike
Pence, and all these people showing up in Pyeongchang for the Olympics. Who knows who said
what to whom behind the scenes, but suddenly the South Koreans came out on the West Wing
driveway or lawn outside the West Wing and said, “By the way, we just met with President
Trump and told him that North Korea wants a summit, that they’ll meet with Trump.”
Two hours later, Trump gets in front of the press and said, “Yes, I’m willing to meet with Kim
Jong-un, and we’ll try to do it before the end of May.” That was hitting the pause button a
Where does that stand? No one knows, because the North Koreans have not responded to that.
The South Koreans said that the North Koreans told them they would have a summit, and
Trump agreed, but the North Koreans themselves have never said this publicly. That doesn’t
mean it’s not happening, but there’s something kind of strange about it.
It looks like Kim Jong-un might be in Beijing right now. He doesn’t travel by plane; he goes by
train, and he has a specially constructed armored train that he travels in. He doesn’t go far,
because how far can you go by train? Japanese satellite surveillance and media have reported
that his train is in Beijing. Is Kim Jong-un on the train? It’s hard to say, but there’s good reason
to believe he is, which means he’s meeting with Chinese leadership, so there’s some behind-
I doubt this meeting will happen in May. The reason I say that is it takes a very long time to
prepare. You can’t wing it. There’s a lot of intelligence collection, analysis, and game playing.
“What if they say this? What do we do? What if they say that? What’s our response?” You must
do this all in game theoretic space. You must debrief the president. That takes six months if
Then there’s the logistics. Where are you going to have this summit? Are you going to have it in
the demilitarized zone? It’s not exactly a Ritz Carlton up there. I haven’t been there, but I
studied it and there’s a lot of reporting about it. It’s a pretty spartan environment, and there’s
no way you could secure the safety of the president of the United States on the border with
North Korea. Maybe it will be there, but that’s a heavy lift.
It’s not going to be in South Korea, because the North Korean president doesn’t want to lose
face. It’s probably not going to be in China, because the North Koreans don’t want to appear to
be kowtowing to the Chinese. It’s not going to be in Japan for the same reason, and the
Japanese and the Koreans hate each other. It’s not going to be in the United States, and the guy
Through a process of elimination, the most logical place is Russia, because they do stand back
from this a little bit, and you can go by train from North Korea to Vladivostok, Russia.
Imagine the impact of this on the whole Russia collusion story. I don’t want to get too far down
the trail, but this would vindicate every Russia conspiracy theory we’ve ever had. But hey, it’s
Russia, you have to expect that.
When someone says, “Jim, last fall you said March. It’s March, and there’s no war,” my answer
is, “Yes, but it’s a two-hour movie. Somebody hit the pause button. It’s still a two-hour movie,
but we’re on pause. Let’s see if somebody hits play and we get back to this scenario.”
It’s still on the table, but I’m a good Bayesian. A suitable quote that’s attributed to a lot of
people goes, “When the facts change, I change my mind. What do you do?” A good analyst will
update the forecast. It’s still on the table but on hold for the moment.
Alex: As you said, the two major takeaways from that are, number one, sometimes people
tend to look at a forecast as if it’s written in stone tablets by the finger of God when in reality
it’s a fluid situation. And, facts can change, so you have to update.
Jim: I just explained that in this podcast, but I’ve been saying it since January. It’s not like I
waited until March to update. We maybe even covered some of the same ground in earlier
podcasts and certainly on Twitter and other platforms.
A lot of what I do is for free in the sense that we make it publicly available, so I’m not trying to
sell subscriptions, but for regular listeners and viewers, you need to stay with the story. You
can’t come in in the middle and raise your hand about timing, because we updated this a while
Alex: The other part is that this story is continuing. It’s not done yet. This play button can be
pressed again at any time - as soon as they start weapon testing, basically.
Jim: That’s right. In one sense, somebody has a finger on the play button, because we are going
to have these military exercises in April. Kim Jong-un has said, “I kind of understand you have to
do that, so it’s not a trigger for me to go ahead and fire a missile.”
There is a lot of weapons development you can do without launching missiles or detonating
nuclear weapons. You can test what’s called ruggedization in wind tunnels or you can fly a
missile into a turbocharged jet engine exhaust. There is stuff you can do, and I’m sure they are
doing it and moving the ball forward in the way that Mike Pompeo described.
The last thing is that McMaster is gone. He’s been replaced by John Bolton who is more of a
hawk. And Tillerson, who was on the dovish side, is gone, replaced by Pompeo who is more of a
hawk at the State Department. And, his replacement at CIA is a very hard case. Gina Haspel is
very well-respected inside the agency. We now have more hardliners than when the pause
button was hit. If we hit the play button, it’s going to be a very tough case.
Alex: Very good. Jim, that does it for our time today. Thank you for being on with me. As usual,
I think this was a great discussion, and I look forward to doing it again next time.
Jim: Thank you, Alex.
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