russia but the pain seems to be spreading from newton to paris to plano texas that is we'll look into it coming right up then axel merckx is live on the show today and i are talking about the u.s. economy and what the remainder of twenty four team looks like and in today's big deal edward harris and i are discussing the latest g.d.p. numbers you won't want to miss a moment so let's get to it. our lead story today the global economic fallout from the latest sanctions against russia now tuesday if the u.s. and e.u. expanded sanctions against russia to punish moscow's adamant stance on ukraine for

the west the big question now is whether these latest sanctions will make president putin more cooperative or just prompt him to dig his heels in even harder so what do these latest sanctions include and who suffers the most well that year's new measures target russia's banks oil industry and military and they're designed to slowly suffocate the russian economy however the measures could increase financial pressure on europe's already sluggish economy and deny certain technology that much of the continent just relies on now british petroleum said that the new sanctions would have an adverse impact on business b.p. is the biggest foreign investor in russia and with an almost twenty percent stake in russia's biggest oil company rosneft these sanctions will undoubtably hurt them meanwhile the european commission said that these measures are likely to cut zero point three percent of g.d.p. off of the economic growth this year and zero point four percent next year even if the crisis is. contained and without

a serious disruption of energy supplies now russia's finance minister sergei lavrov has said that russia plans have no tit for tat reprisals however according to the telegraph russia's parliament has already drawn up legislation to blacklist aggressor countries specifically specifically targeting authors and consultants which includes companies like deloitte ernst and young boston consulting and mckinsey now this would trigger bonding covenant clauses that rely on external audit which could provoke brutal brutal market reactions now as for the u.s. companies like. exxon mobil and how the burden went up taking a hit as well tuesday's sanctions basically reduced access to some of the world's largest energy companies from one of the biggest untapped energy locales on the planet an estimated seven and a half trillion dollars in oil natural gas and sprawled across nine of russia's time zones there's a leavened so nine out of eleven they're in

a bind oil and oil servicing companies like halliburton and whether for generate roughly forty five percent of their global sales from russia so from an audience standpoint this clearly hurts these companies and as their revenue from russia dries up they'll have to absorb a lot of fixed costs and of course for russia deep recession now looks pretty much inevitable worst case the european commission believes sanctions could cut russia's growth by one point five percent this year and four point eight percent in two thousand and fifteen according to leaked reports so basically we're turning russia to the soviet like stagnation it experienced in the early one nine hundred eighty s. all in all economic outlook is bleak. quick

correction i love roth is the foreign minister not the finance minister those f. they get every time now anyway moving right along second quarter g.d.p. numbers are out and they say that u.s. economy grew at a pace of four percent in the past three months and it turns out the first quarter g.d.p. wasn't as terrible as everyone thought either the bureau of economic analysis revised its q one g.d.p. number to negative two point one percent were exploring what this means for the u.s. economy now for the remainder of the year and i'm joined by axel merckx president and chief of merck investments chief investment officer of merck investments welcome back to the show it's a pleasure to have you here as always to be with you now what's your takeaway from those numbers that i just read regarding the u.s. economy and the overall investment climate right now a dozen everything look great i mean you just mentioned everything looks horrible in europe and everything must be so fabulous in the u.s. it's just nobody feels that how fabulous it is maybe part of it is because

a lot of that was inventory build up of but clearly some indicators are looking better the other number that came out by the way today was inflation core p.c. inflation was up and if you put that into context inflation is moving up the fed today holding rates steady doesn't that mean that real interest rates interest rates often are dropping so we have this hawkish federal reserve because everything is looking so great yet interest rates actually formally and so to me that suggest maybe not everything is so great and when we finally going to raise rates i think we're still going to be in negative territory meaning after inflation that means financial repression in the u.s. is going to continue for long time the key difference is that here we have made to believe that we have a strong recovery but i think that's not exactly the case now absolutely both core and headline inflation of ticked up a bit lately and they were both up two point one percent in june which is above the . inflation target so what's going on here. what's going on is that

inflation creeping into the system we have this very bifurcated recovery i think is everybody knows that one thing that the fed and janet yellen to take a look at is wage inflation and as a wages have been fairly stable only two percent inflation which is the fed is comfortable with but when you look dig a little deeper full time employees have been able to give man higher wages it's over three percent inflation there it's just that if you don't have a job you don't have pricing power what a surprise if you have a pot time job you don't have pricing power so it's the same thing as we see in housing as we see in consumer spending at the high end of the job spectrum there is inflation to call college tuition is up five at the low end certain craftsman cannot demand higher wages and then stead bifurcate economy that we have but yes you can have inflation and that sort of environment the question is can you really drive a g.d.p. growth high and a long run when it's an ever smaller fraction of a portion of the population of participates in this. now real interest rates are increasingly negative in the us because of inflation so what impact do you think

financial repression is having on investment strategies and different asset prices . while the no one asset class that does well in comparison to cash that savin negative growth on it on a real basis of course gold or gold pays nothing and i watch either take something that has nothing that done and then something that has a negative yield and the reason why gold i think is also going to do well in the long term is because we cannot afford higher rates somebody we had just somebody on one of the major channels come out today and say oh the new normal is two percent well if we're going to go up to two percent in a couple of us guess what inflation is going to be higher than two percent and so that's why i'm like gold is going to do just fine now do normally in inflation environment other asset classes should also do well except of course that we've already gone through the roof on the s. and p. and on bonds and the one thing that's going to happen is the fed is trying to untangle itself from what we're in right now is that that volatility is going to come up risk premium the premium that you pay for risky assets is going to go back

up right now the junk bond yields are record lows because of the fed policies if we step away from that well suddenly the glass is half empty and we have very concerned about the implications that's going to have for asset prices in general so absolutely do you think that the fed is behind the curve. yes but intentionally so because one of the things bernanke he always said is you don't want to tighten too early when you have five face for the credit bust and it's because when you have deflation your forces play out if you take the foot of the accelerator that deflationary forces take back over so he wants to firmly err on the side of inflation because if they think inflation is a probably not to fight except of course the economy can't stomach it we confines our deficits with if we were to have focal length rules to fight inflation and so this is a textbook approach to a script that has never been played out except that i just simply cannot see how that's going to have a good ending but by all means the fed wants to be behind the curve and it's very successful at that now some people think the u.s.

economy is recovery is very much an asset based recovery but how much do you think growth has been underpinned by the melt up in risk assets. almost all of it and they did real and the real problem with that is that that's not very robust if for whatever reason the market perceives the glass to be half empty let russia turn of the gas to europe or let the knowledge and team in the fold if one were to happen it seems like they might be able to avoid it but let any of these things or even nothing cause the glass to be half empty while suddenly you have asset prices come down stock prices come down twenty percent and suddenly consumers don't spend anymore and that is really the danger when you're not basing recovery on the sound fundamentals but simply on inflated asset prices you are working walking a tightrope and it's it's tying the hands of the fed to fight inflation if they really have to fess up to it and so for the time being we defend is just acknowledging well low inflation is no longer a problem but i mean time don't worry everything is going to be fine because we

still have enough slack in the economy so good luck with that working out. actually i understand that dr one of the many doctor doing this but dr demarco thinks that the u.s. market is the sub sceptical to a crash because prices have risen too steeply so do you agree with dr farber and if so how would you suggest investors hedge against that possibility and i think he is an optimist the different he's not he and i don't think it's the problem isn't the rising too steep of the rut the problem is that complacency the devic sendak's a measure of complacency what he has to be i've hunted is near record lows when people buy a rising asset and another way of the risk of the volatility that comes with that these are very weak hands they'll be gone in a heartbeat we only have these our respect trade as in the market these days and if something doesn't work as normal they take a step back and so from that point of view a crash can easily happen i don't know whether it's twenty or thirty percent it can be more than that it can be less than that but that's a very very dangerous situation to be in and even if you don't believe any of this

odds are that the potion of your portfolio has has risen disproportionately so taking chips off the table to rebalance one's portfolio is a prudent thing i have to go much further because i'm very scared of our surprises these days now i want to actually ask all our risk premiums in the market right now rising or falling. they have been extremely compressed and they have been compressed because of what the fed is doing if you think about it the fed to guess they've lowered interest rates a little bit what they have truly made is that suddenly don't pay a premium for portuguese debt you don't pay a premium for junk bonds and so if you're trying to have the so-called exit those premiums have to go up and by the way the biggest risk acid out there is the equity markets so suddenly you need to justify stock prices based on different metrics meaning things have to go through the roof to continue justifying to stock prices you have should volatility go back up i just don't see that happening and that's why i think that these markets are very vulnerable both on the equity side and on the bond side. now internationally where are the biggest safe havens going to be

both in terms of asset classes and country risk i'm sorry but we have twenty seconds left can you let me know. well the bad news is there is no quote unquote safe haven left the euro zone has become a good competitor to euro money that went from emerging markets went right back into the euro and the recent flare up in your crying so to market back the money back to emerging markets so the u.s. dollar isn't it a safe haven anymore but there isn't a single safe haven there is no safe place in the world anyone nothing is safe anymore thanks axel you really made my afternoon. and i did our good now and a pleasure talking with you as always that was axel merckx president of merk investments. time now for a very quick break but stick around because when we return peter schiff is on the show we love mr schiff peter sat down with me earlier today to discuss the latest g.d.p. numbers and you definitely don't want to miss what he has to say about them then in today's big deal edward harris and i are continuing the g.d.p. number discussion and remember you can see all segments featured in today's show on you tube at you tube dot com slash boom bust our teeth and on who out who dot com

slash boom dash. now before we go to break here are a look at some your closing numbers with the bell come on back. i think that's the master plan is to or remove public governorship or stock market participation from the unwashed masses who have the temerity to go out there and buy a share in some publicly listed company hoping that they too can emulate warren buffett all that's going to be wiped out by the koch brothers and the buffets of the world the private equity scam artists are going to take it all private and this is what these it's going to be could be told with oligarchies hill america's

a clip talk oligarchies. iran like syria has been george very harshly on the leads on to the constant change so isn't it justified the even if not pursued him from the weapon down you know raising to spectrum of personal revenue would lead to one you know in the same time you see where he's developing nuclear weapons in the homes. recently did they want to see these are people being removed for makeup and school. we would be stupid not to take. if you drive people away from the dollar many people now it must be sitting there saying gosh if we have u.s. dollars and the us decides they don't like us they're going to put sanctions on us

so people more and more people would say maybe i should use the u.s. dollar. welcome back to the show now the four percent growth that we saw in the second quarter could be a sign that the u.s. economy is finally finally turning a corner yet hold the door at the same time we're still climb back from hard contraction first quarter so i guess that equals out so how healthy is the recovery that's the real question and earlier i sat down with peter schiff c.e.o. of euro pacific capital peter is bearish on the u.s. economy and the effects of fed policy and i first asked him if he could give me his take on the recent g.d.p. numbers here's what he had said. well first of all the the plus four percent that

was just released today is a political number and is very likely to be revised. downward maybe even significantly so in the months ahead so i wouldn't jump to any conclusions based on the first look because historically or at least the past several years these numbers are almost always revised downward. but even if you accept the four percent number for now it still shows that the u.s. economy barely grew in the first half of two thousand and it's just shy of one percent annualized which is must last been to three percent or so that people were looking for at the end of two thousand and thirteen the very beginning of two thousand and fourteen and i think those people who are drawing a false sense of comfort right from this four percent number they say well this shows that the first quarter was just a weather related anomaly no it doesn't because even if the first quarter was

depressed because of weather the second quarter got an artificial boost because activity that should have taken place in q one but didn't because of the weather took place in the second quarter so if you assume that maybe weather took two points away from the first quarter g.d.p. and added two points to the second quarter g.d.p. which historically is what happened over the last fifty or sixty years when you get a very bad winter if you strip that out we really got minus zero point one in q one and plus two in q two and a plus two number is nothing to get excited about so i think the markets are overreacting to economic growth that really is not there and in fact i think that this q two number is going to be the high for the year and it's all downhill from here peter a lot of people look at fed ex u.p.s. and wal-mart is almost proxies for economic activity in the u.s. so which companies in the u.s. stock market do you look at as proxies for overall economic activity especially in

terms of forward guidance. well i don't look at any one company but the ones that you mentioned in particular had disappointing earnings and a number of other companies that have reported in the last couple of weeks that cater to the middle class consumers they're reporting weaker than expected numbers we also have had weaker numbers in the homebuilders and in fact if you look at a lot of the housing data that's been coming out over the past several weeks and several months it has generally been disappointing numbers and so i think the housing recovery is already over and the market is already reversing and remember the fed is basing is optimistic forecasts od on the housing market continuing to grow because the the the phony recovery is built on a foundation of asset bubbles and stocks at all state and the resulting wealth effect from those bubbles but if they're already deflating then the whole the fed's

whole thesis on unravels now some people think that the u.s. economy is recovering has very much been an asset based one so i want to talk to you about asset markets this time and first let me ask you about you know the debt underlying those assets now listen to this according to an urban institute study an estimated one in three adults with a credit history know that seventy seven million people in the u.s. are in collections in that's a shocking i mean just shocking number to me so does that surprise you and what do you make of this statistic. well not at all because i think most americans that are having trouble paying their bills are not benefiting from the rise in the stock market because they don't own any stocks or they're not benefiting from the increase in real estate prices because they're renting now or even if they own real state they're still underwater maybe they're under less water than they used to be but it's still a negative number so it doesn't help you pay the bills in fact if you look at the

interest rates on credit card debt it's been rising in fact the spread between credit card rates and treasuries is the highest it's ever ban and you know you look at other segments of the economy even junk bonds interest rates are at historic lows yet consumers are paying higher interest rates on their credit cards now than they did in the year two thousand when interest rates were higher in general then they made then they are now yet they're paying higher rates i even with the fed funds at zero and the reason for that is because of delinquencies because so many people can't pay their bills their credit card companies have to charge those people who are paying their bills and even a higher rate of interest in order to make up for the losses on the people who are paying and this is indicative of a economy in distress of a consumer in distress and this wouldn't be the case if we had a legitimate economic recovery but the fact is we don't we have

a real recession that underlie these phony numbers the labor force is collapsing people are losing their full time jobs they're replacing them with part time jobs they're drowning under a pile of debt money that they've borrowed in the past to pay for past consumption or whether it's a mortgage or credit card debt or student loan or an auto loan meanwhile the cost of food has gone off the cost of health care has gone up their electric bills are going up and they don't have the income to service it they're relying more and more on credit cards to bridge the gap and now they can't pay their credit card bills you know peter was there prior to the recession people were using you know credit cards with lower interest rates to pay off other credit cards maybe the higher interest rate perhaps i'm just trying this out there maybe the higher interest rate is a good thing at a correction no. well it's not a good thing if you have credit card debt and you're being charged a rate of interest but what it shows though is that. there are these losses in the

credit card industry because interest rates are going down for everybody except consumers who want to use credit cards they're going up and you know i'm not a fan of consumer credit i don't think consumers should be using credit cards at all to buy things i think they should only buy things if they have the cash the problem is today americans don't have the cash and you know they're not using their credit cards for luxuries they're using them for necessities people are using their credit cards to buy their groceries because they can't afford to pay for. that was peter schiff c.e.o. of euro pacific capital time now for today's big deal. big deal time with edward harrison. today we're discussing u.s. g.d.p. because we'd like to stick with the theme here and the direction of the u.s.

economy in two thousand and fourteen now we heard from both peter schiff and absalom work on these numbers but i want ads tapes are going to get it now had thoughts comments concerns so you know what i've been saying i guess since the beginning of two thousand and fourteen is that we're sort of a muddle through. two percent type of growth scenario and basically that's because you when you strip out all the other extreme things you're definitely left with with income growth wage growth and that that's not going to support more than about two percent so we saw a huge dip. we're getting something back in q two i think we're going to get more back and i think we have a graphic that i want to see this first quarter changes in real g.d.p. just so people get an understanding of what this looks like you know q one fourteen look at that down and down. and when you average that although it's really spectacular if you look at. the second two parts of q three in q four and two thousand and thirteen they were actually what i would look

at as a high water mark so far for this recovery we might be able to get past that with q three because of inventory builds but i think you know the underlying fundamentals based on the growth really sort of a two percent now one of the things that we've talked about where you've talked about a lot is whether or not this acceleration is is strong or if it's just cyclical you know this economic salvation so can you explain your position here so you know the difference between the secular the sick. trends you know a lot of economists their focus on the cyclical trends they really want to get things accelerated on a cyclical basis even though it might add to financial for jill the because of those that you talked to peter about debt and i think that's a big problem because if we get to a financial pick up you know we get to a recession and we still have the same sorts of problems not only for the debtors but also balance sheet problems for the lenders then you have

a situation where there's a certain degree of financial for julie that will add to the leverage in during that phase and that will make the downturn that much more problematic and especially when you have rates of zero percent you know there's a lot less room for policy to actually help in the way that it did in two thousand and eight two thousand and now ed let's talk about the fed here because they're they're going to continue to taper their asset purchases to twenty five billion so what's your take on this you know it's a done deal a lot of people they've been deciding whether or not you know i think that is de facto tied it has been tightened for some time and that really you know they're tightening into weakness and the reason is because they don't know you know monetary policy is the only game in town and they don't know how to deal with that fact the fact that you know we have this balance of growth that supported by a monetary ease that's leading to excess in the credit markets where the real economy is only supporting two percent growth which is not enough to make up for

the slack in the labor market so the question is how do they get out of this they can't because you know they're just the fed you can't print your way into into nirvana it's just not going to work japan has. no other areas that you mentioned spain and the u.k. basically seen robust growth so talk to me about these two countries and basically is the cyclical or do you think that this is real in the u.k. i think it's very similar to what we're seeing here you know you they had a housing bust their house prices. it considerable about the same thing was actually true in spain but i think that there are going to there are some. structural issues in spain that have been addressed that have made spain much more robust economy in a secular basis and all of the other periphery countries like italy for instance which has no growth whatsoever yeah when you're up against you know it's. pretty strong not i love it or leave it to somebody to die or that i think are

a completely different club from greece italy portugal. portugal and italy things there and thank you as always i'm sure we'll talk about this more so thank you thank you that's all for now but you're going to want to make sure to join us tomorrow for tech thursday our favorite day noted cryptologist bruce bruce schneier is on the show and you'll want to hear what he has to say about your privacy and what he did with the n.s.a. and please don't forget that we love just love hearing from except they check out our facebook page at facebook dot com slash boom bust our t. and please tweet at us at erin aid at edward and it's from all of us here at green bus thank you for watching the scene.

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