good afternoon and welcome to capital account i'm lauren lyster and i want to get straight to our show today because we have another day another record low for the u.s. treasury the ten year the two year book could this be the biggest bubble we have ever seen well here to talk about this is someone who was said he thinks as much famed investor dr marc father a publisher of the gloom and doom report and author of many books including the one you see here tomorrow is gold asia's age of discovery and he joins us from a gore a financial symposium in vancouver and dr father let me first say that it is a real pleasure to have you on the show today welcome back to capital account. the

world a pleasure isn't karlie murray oh it really is all mine because i am dying to hear what you have to say about treasuries because you've said before and explaining why people are willing to buy u.s. treasuries that offer a negative real yield or even invest in interim instruments with a negative nominal yield that people think if i give my money to the u.s. government for example at least i know how much i'm losing if i give it to a fund manager i'm a loser thirty percent i'd rather lose two to three how long do you think this trend can or will continue we're investors are willing to lose money just in order to know that they'll at least get some of it back. well i think that's a very good question because as you know. treasury yields speak out in nineteen eighty one with the ten years at fifteen point eight four percent and now we're

below one point five percent and some of our friends who are at the super fairs or asset prices and on. inflation they think that they were will have deflation they think that yields could drop to say less than one percent on the ten years and less than two percent on the thirty years so it may happen but say it's like if you said at the end of ninety nine the nasdaq is a bubble well it's still wind up between december of ninety nine and march two thousand by thirty percent and after it's people lost hell of a lot of money on in nasdaq stocks so all i'm saying is i don't think that from a longer term perspective to all of us treasuries is a desirable investment but if you ask me can they rally some work to more yes possible i just wouldn't buy them at this level i think the risk outweighs the

return potential and let's talk about that rest because you've been very outspoken that you think u.s. treasuries are and above all perhaps the biggest bubble avar i know you said and you just said it now that you can't say when it will pop but if you're right what happens after that point when we do see a lot of fireworks in the treasury market as people come to realize that they own the wrong investments and they start to come out of them that what's the damage then well for the last few years we had very big inflows into bond funs and outflows from the equity markets from the equity firms. and that's in both soon japan and in the u.s. if interest rates started to rise there would be a reallocation of funds probably out of treasuries out of j.g. b.'s in japan into the equity markets and so i am not so concerned in terms of

equity markets going down when the us will go up again i am more concerned about the us government that if you would drive significantly the interest payments on the government that would go up significantly and what would then happen is that the deficits instead of coming down would continue to escalate and the credit quality of the u.s. would stay in the client that's interesting so worse for the u.s. government than for investors let's speak about who is also a large customer for the u.s. government's debt and also has been driving global growth i want to talk about china because i know we i've heard you talk about china i want to differentiate here between your short and long term view because you've said before long term it's easy to say china will continue to grow but like america and the eighteen hundreds there will be bumps along the road america had recessions america had financial crises wars

a depression so what's your short term outlook for china because there are a number of prominent china bears out there maybe they're some of your bear friends you mentioned like jim cheney i was in hugh hundred who point to the fact maybe the greatest credit investment boom the world has seen. were led to me. a difference between china and the us the us had the credit bubble built on consumption in other words the level on the household sector level government level went up dramatically to finance consumption in the case of china at least it financed investments in infrastructure in research and development and so forth and that is a key difference now if you have a capital spending bubble like in china the downturn can be very severe because you're running to overcome by cities that then if you're trained to money you

produce even more over capacities and the fact is simply that if you look at reliable statistics say. which countries the largest export market for taiwan and south korea it's china in there and if you look at exports from korea and taiwan all for out this year only a year so that is quite reliable you look at electricity production in china that's up one percent a year on the year and so force and so on so those statistics would actually suggest that the chinese economy is much weaker than what the official statistics suggest it doesn't mean that the whole charities grows the model will collapse and kylee but i'd like to mention one area where we still have a one party system and we have an incredible level of corruption and that

could lead to social on race at some point by the way we can have social unrest anywhere in the world given the high unemployment got we are seeing in most countries but that could derail growth in china for a while i can tell you we have your political problems coming up the south china sea and so forth and so many things that could grow wrong i want to get in or before we go because you're talking about a few statistics indicating a slowdown i want to see how it fits into your view of a global recession because i know for china for example there was a positive manufacturing report out today suggesting government policy to support the economy is working but i actually want to look at another indicator at something tied very closely to the health of the chinese economy which in steel and recently chinese steel prices have fallen the world's most traded steel futures in shanghai the rebar future hit two thousand and twelve low and our viewers are looking at a chart of spot market prices for rebar in three of china's largest cities that are

at their lowest levels in at least a year so i'm curious if this is something you have your eyes on not just in terms of a slowdown in china but also in terms of the global recession i know you're predicting for two thousand and thirteen and if it's gaining momentum. yes i think you can be sure that we have recessionary conditions already now in europe you know grows the u.s. economy has been slowing down and if the chinese economy slows down meaningfully it has a huge impact on other emerging economies and the emerging economy bloc today is like sixty percent of the world's g.d.p. and that's where the growth is coming from so if the chinese economy slows down it has actually a much larger impact on the global economy than the u.s. economy slowing down because the u.s. economy is largely service oriented economy we have seventy percent of

g.d.p. is consumption and of the seventy percent consumption seventy percent are services they don't require commodities and significant imports so a slowdown in china will have very very dire impact on the global economy i guess what i'm asking is are we already there already at about taking point. there i say if i look with my own eyes at the world and i travel extensively in asia we're not in recession but there's no grows because we had boom times from the recovery in two thousand and nine to two thousand and eleven and now we have gone x. grows i can see everywhere now it doesn't mean that everything will crash but i think there is a possibility that we'll get some kind of

a crash all right also in one thousand nine hundred thirty s. r. and go down or out of time and then i have to leave you right there with a prediction for a crash but a good one to end on dr father editor of the gloom and doom report founder of mark barber limited. and still ahead the libre saga continues as more reports come out about the criminal investigation underway into a possible trader manipulation rank what alternatives do we actually have to the way live or is that hold on to their own heads contributing editor bob english after the break but first your closing market numbers. we just put a picture of me when i was like nine years old i want to tell the truth.

i'm a confession i am a total get a princess i love driving hip hop is a one trick. but it was kind of the jester day. i'm very proud of the world without you she has played. the. guitar sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear see some other part of it and realize that everything you thought you knew you don't know i'm charged welcome is a big issue. what drives the world the fear mongering used by politicians who makes decisions to

break through that sort of a being made who can you trust no one who is human be you who with a global missionary see where we had a state. controled capitalism is called sessions when nobody dares to ask what we do r t question more. welcome back let's switch gears a bit because more reports have come out about the civil and criminal probe into libel for the wall street journal reports several groups of traders are under investigation by regulators around the world for allegedly working together to rig interest rates it with an interest rate rigging reign is what it sounds like

allegedly more than a dozen traders from at least nine banks are under scrutiny and we keep hearing more and more about this investigation but what about libel or itself what is being discussed in the way of alternatives to a benchmark interest rate that is the underpinning of an estimated five hundred fifty trillion dollars in financial products but which we've seen seems like it can be pretty easily rigged while alternatives are actually something that federal reserve chairman ben bernanke he wouldn't you know spoke about before congress and a hearing last week let's listen to reserve has not come out in favor of specific one but a number of possibilities include repo rates. the so-called. index . and even potentially treasury bill rates exist. and so those are his ideas now central bankers from around the world will reportedly join bank of england governor mervyn king in september to meet about the future of life

or so what would happen if a hundred trillion dollar indicator was simply switched by the central banking cobol overnight what happens to old live war and library based contracts what room is created for major power plays which are probably trying to figure all that out and here to help us do that is bob english contributing editor for a zero hedge and economic policy journal dot com and he has really been looking into all of this and has some really really interesting insights so first of all bob english thank you so much for being on the show thanks it's great to be back here again and yes we are going to be discussing. all right that's not going away anytime soon first bob i want to ask you about bernanke you broadly he talked about switching to a market based indicator possibly but please decode for us because this is been ben bernanke he is burning his definition of a market based indicator the same as your definition of a market based educator probably mine or

a lot of our viewers. i would think not and we need to take a step back here for a second to just think about what who is the great manipulator when it comes to library and that's none other than the central bankers themselves because it is them after all who are setting the short term interest rates and it's their mandate to manipulate them and all these other derivatives from whether it's libel or cerebral rates are really just that their derivatives off of this great manipulation scheme that we already have going so once we get beyond that we have coming up and saying that yes we have a couple actually three market based alternatives and we can discuss those for you right now yeah let's get into those but but before i do what i'm hearing you say is that these alternative the bernanke is proposing are actually more manipulated then having private bankers manipulating libel or potentially i think so because if you look at the for instance he mentions treasury securities well the market itself is

unsecured meaning that these banks that lend to each other overnight at various rates or on various other terms they're lending without collateral and treasury securities are backed by the full faith and credit of the united states so anything like library is going to command a premium and if you're going to have a library substitute that's based on treasury interest rates or t. bill rates you're going to have to have a formula that calculates premiums so if we think this through who gets to calculate the premium and what you know what counsel are they going to form to do this behind what closed doors are they going to have this meeting so it's always who gets to make these big decisions that i don't think people have focused on that that's interesting so who do you think would determine that premium in the case of say using t. bills instead of instead of live or. well we go to this september ninth meeting that's going to occur it's going to precede another meeting by

a bunch of v.i.p.'s bankers in the financial stability council so most people haven't heard of a lot of these organizations but they're pretty much accountable to no one at least in terms of the democratic sense that we think about it so i think the financial stability oversight council which is related to its u.s. counterpart would play a big role in so essentially central bankers or some kind of central banker like authority yes yes so there is that there is option number one let's go to option number two repo rates what what our report rates for anybody that doesn't know and what are the issues with it being used as a substitute for life or. repo rate so every purchase contract is basically like a loan and it can be it can also be on an overnight basis and it is secured like a loan with some kind of collateral and the collateral itself might might be one of these two bills we were just talking about it might be corporate paper most likely with bernanke he is talking about setting interest rates that are

a substitute for libel or off of this it's going to be probably general collateral treasury repo rate and so this could spec to the problem that we have with treasuries you have to figure out a premium that's going to be charged because this is a secured loan and who gets to calculate the premium so we're back at that argument back and who gets to calculate the premium and would it be the same answer in this case some kind of central banking at the ready. exactly and again it's only a guess but it's it's a likely one that ok so likely guess number two for central banking determined premium let's go to the third option which is overnight index swaps again bob what are these and what are the issues if it was used instead of life or. ok the overnight index was up or is basically tied to an average of the federal funds rate and the federal funds rate is better known to a lot of people the federal the mechanizations of the federal reserve as the

interest rate that the federal reserve manipulates the target's. short term interest rates and so when you see comes out with his policy decision and on c n b c or a capital account they say the fed cut the fed funds target rate by zero point two five or twenty five basis points that's what they're talking about so the problem with the federal funds market and at least it's on security so we have more of an apples to apples comparison is that since october of two thousand and eight it's a vastly different market and that's the time period in which banks got the ability to receive payments called interest on excess reserves by the federal reserves so they park all their excess money at the fed and get an interest rate which heretofore had never been done before so the federal funds market doesn't behave like the other markets anymore and i can tell you a few reasons why but here i am. ok the first is the biggest sellers

in the market are the g s c s that's fannie and freddie no why are these guys biggest lenders or sellers that's because they don't have the ability as depository and institutions to to get that zero point twenty five interest rate so they have to lend their phones to banks so that the banks can collect that interest rate so you have these two dominant players fannie and freddie as the biggest sellers by a federal reserve economist the senior one's own admission in an e-mail to a reader of the economic policy journal he admits that these fannie and freddie preferred to do business only with a handful of banks so we have the two geo cities operating with a handful of banks and setting an interest rate policy. that has billions if not trillions tied to it and where we heard this before i mean isn't this the very problem that we're trying to overcome right and i want to bring up that e-mail because we do have a quote from it just so our audience can see from the senior fed official or

economist that you said sent this to economic policy journal. employee anecdotal evidence suggests that all of the housing related entities are willing to lend to the same few banks which limits the possibility for competition to raise market rates so so that's what you're talking about right there i also want to look at the spread between federal funds and live or and what that's done over the years bob let's bring that up for our viewers to see sure does it pretty much is it's closely matched for most many of these years it gets really out a line during late to seven thousand two thousand and seven and to two thousand and nine but before we talk about what was going on there why is there any reason why it's so closely matched for the majority of those years. well it was we were in a period of relative stability and you could have all these algorithms or even human traders would tightly are out any differences between it and the federal

funds rate what happens is when you get to a period of market instability then you have these large pockets of money that are no longer willing to commit their resources to are being these things out because timing can make you have a multi-billion dollar mistake in a in a matter of seconds so the spreads widen which is exactly what we would have expected when the financial panic came into view in early two thousand and seven and accelerated in late two thousand and seven so what we see there is really what we would expect ok so nothing to nothing to see here in terms of of the connection between the federal funds rate and why we're well there is there are certainly plenty of room for the banks to have manipulated for their own benefit on a daily basis. by submitting erroneous are right false interest rates to affect the mean but i think overall you in the big picture like i said at the

beginning the greatest manipulator of interest rates sort of the central banks and in this case particularly the federal reserve so getting back to live before yes there's room for manipulations by the banks and they were probably doing that but we need to look at the bigger picture and you're saying that the bigger picture is the manipulation of library in your view by these private bank is not the huge scandal it's cracked out to be. i don't think it's the scandal of the century and you kind of have to look at the timing of this a good friend of mine dave harrison who writes that trade with dave dot com points out pointed out to me in this blog that there is a lawsuit that's been going on for years against hank greenberg and g. regarding the financial panic and there and there are there are implicated as having conducted insurance. and financial statements shenanigans and there are some e-mails by eliot spitzer the new york attorney general at the time who had prosecuted the case supposedly done by private email address that are

coming to light and a judge is about to rule and these e-mails could exculpate hank greenberg gee and this whole libel or thing could at least in part be kind of a push back because there's kind of a there's a shift occurring if i'm reading this correctly on wall street where we have a separation of the big banks from the administration they're not as tight as they used to be and you have warren buffett coming out kind of bearish on treasuries and talking down about the muni bond so things are a little bit different right now that's interesting that you think that this library scandal could be a bargaining chip for washington to use in and balancing out something like this a i.g. lawsuit that that makes wall street look bad never let a good crisis go to waste and never let a crisis go to waste then i want to ask your opinion on this that timothy geitner said when he talked about the regulatory response to live or let's take

a listen and then i have a question for you. to see if you see justice f.s.a. actions very powerful force in action very important to do very consequential deterrents this behavior and it's the first step there's more to come now ok so he's talking to talk and you just give a reason reason why you think washington might want to try to get back at wall street but sorry i have to be skeptical about how do we know that this isn't timothy geitner doing his p.r. thing because we already know he's under scrutiny for not doing enough back in two thousand and eight when he reportedly learned that live or was being manipulated by barclays i don't doubt that this has to do at least in part with his own p.r. spin but when you look at the big picture you have to see where this is all going and live or is one hundred trillion dollar market and the central planners have their ability to get their fingers in all of this and kind of determine the direction and get to tell

a bunch of institutions whether or not there's going to going to survive or not and those are the powerplay manipulations that they really thrive on so they have a big stake in this too so briefly before we go do you really think that lie board could be this turning point where washington goes after the banks and will it constitute that turning point if we only see mid and low level traders get arrested or have charges brought towards them and not senior level executives. i don't doubt that history will view this as a turning point is that the actual catalyst there are probably other factors involved but in terms of the public face. of the evil bankers and and everything this is kind of a defining moment because it it's simple enough that the broader public can understand and there's still kind of agitated about what happened in two thousand and eight so you think it but if senior level executives are charged do you think that this is not going to be the turning point. well i think that they will be and

perhaps a few and it's you think about it's kind of ridiculous that corps and still john corps and stole one point six billion dollars from customers of a global of the metaphorical safety deposit box and you have these guys who are who are still walking the streets i don't think they're going to at the end of the day just go go through the mid to lower level traders i think a few big heads are going to roll and that's the political punch that all this packs all right you think maybe there's a political will for it with a scandal as big steaming as library that can go nicely on the cover of time magazine thank you so much bob english contributing editor for a zero had thank you economic policy journal dot com and that is all we have time for thank you so much for watching and make sure to come back tomorrow and in the meantime you know you can follow me on twitter at more in leicester and give us feedback at youtube dot com slash capital account or you should also subscribe watch us an h.d.

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