Speaker 1: We're in a depression right now. It will last for a long period of time. But a lot of people get confused, and one can understand why, about the difference between a recession and a depression. Most mainstream economists, they don't like what I call the D word. They don't talk about depressions. They talk about recessions. So a recession is conventionally defined as two or more consecutive quarters of declining GDP. And this would be the first back-to-back recessions since 1980, 1981. So you have a recession, you come out of it, and then you go right back down into recession. So that's technical recessions. Depressions are different. And a lot of people think, well, if a recession is two quarters of declining GDP and a depression is worse, well, a depression must mean 10 quarters of declining GDP, as if it's a really long recession. And that's not the definition. Depression means depressed growth. Growth is depressed relative to trend, relative to potential. So you can actually have growth in a depression, but the point is the growth is too weak. And so this is what we're in. The third quarter, when you went down that sharply, you were going to come back pretty steeply. That's natural. But we didn't come all the way back. People say, well, OK, you went down 31% and you went back up 33%. So aren't you back where you started? And of course, the answer is no, because you're applying the 33% to a smaller base. So if you normalize, let's say 2019 is 100%, 100% of 2019 output. You go down 5%, and then you go down 31%. Well, now you're around 65% of the prior output. Well, if 65 is the new base and you go up 33, that adds 21 or 22. But you're only back to 87 because you're working off a smaller base. Even if you have, in my example, 10% growth in the fourth quarter of 2020, it's 10% of 87, so add on eight more. You're only back to 95. So a simple way to understand it, you fall into a 50-foot hole, you climb out 20 feet. Well, that's good climbing, but you're still in the hole. You're not back to where you started. But a better comparison is maybe Japan. I would say Japan has been in depression since 1990. Now, it doesn't mean now they had growth and recessions and growth and recessions. You can have two or more recessions in a depression with periodic growth, but the point is you never get back to the old potential. I mean, good example, the Japanese stock index, the Nikkei index, in New Year's Eve 1989, it was 40,000. Today, 30 years later, it's about 28,000. But okay, it came off the bottom, but it never made it back to the prior high. It'll never be. Oh, I think that's right. It may never be. Another example, in October 1929, the United States stock market crashed, a very famous crash, but it lasted for three years. And when it bottomed in 1932, it was down 89.2%, almost 90%. That's what a stock market crash looks like. But then you ask people the next question and say, well, when did it get back to the 1929 high? How long did that take? The answer is 1954. It took 25 years to get back to where it is. Now, it doesn't mean you couldn't make money in the meantime. You could have bought the low in 1932 and made money in 1933. But that's what depressions look like. That's the kind of thing we're in. This will be intergenerational. The effects of this will last for not 30 months, but 30 years. And there's very good, very good evidence to back that up. There was a group, an economist at the Federal Reserve Bank of San Francisco and two academic economists, and they looked at all of the pandemics in the last 650 years, going back to the Black Death. I often criticize economists because their time series are too short. They say they're doing correlations and regressions. They say, well, no, we need a much bigger time series. Well, 650 years is good enough. But they went back to the 1350s, to the Black Death, and they looked at every pandemic in which 100,000 or more people died. The fatalities were 100,000 or more. Of course, the two worst were the Black Death, the plague in the 1350s, and the Spanish Flu around 1918, 1919. The Black Death was about 75 million dead, they estimate, and the Spanish Flu was 100 million dead. And then after that, there were several where there were 2 million fatalities and some fewer. They were using 100,000. Well, there were only 15 pandemics in the 650 years where 100,000 or more died. COVID-19, by the way, is going to end up being third on the list. Right now, it's fifth. But we have over 1.8 million fatalities, but it's not under control. So you can see that that number is going to go past 2 million. It'll pass the flu, and there was one other influenza in the late 19th century. So it's going to be third on the list. But what they asked themselves, because they're economists, not doctors, and they said, well, how long did it take these economies to normalize following these extreme pandemics? And the answer is, on average, 35 years, not 35 months. And just to kind of give a concrete example of that, so I grew up in the 1950s, 1960s. It was a very prosperous time in the United States. I did not live through the Great Depression, but my parents did and my grandparents did. So I was raised with a sort of depression mentality, even though I didn't live through it. And when we were little kids, nine years old, my parents would send us out. We'd take our wagons and go door to door and collect tin cans and newspapers. And we weren't doing it for environmental reasons. It might have been good for the environment, but we were doing it for recycling because all that stuff could be turned into buildings and so forth. And so, as I say, and that didn't change until the late 1960s when the baby boom came of age and then we just started partying and using credit cards and everything else. So it did change, but it took 30 years to change. In other words, the behavioral and adaptive effects of the depression of the 1930s lingered through the 1960s. And that's my experience, but it's consistent with what these researchers found out. But at the end, when we get to asset allocations, the first thing I do is I explain my methodology and explain what diversification is. Diversification is a very powerful tool. It does what it's supposed to do, which is increases your total return with less risk. But people don't understand how to diversify. I run into people, they say, well, I'm diversified. I own 30 different stocks in 10 different sectors, technology, consumer, non-durables, minerals and mining, et cetera. And I say, you're not diversified. You may have 30 stocks, but you're in one asset class called stocks. So in stocks, they'll go up together. I'm not saying they won't, but they'll go up together and go down together. So you may have 30 stocks, but you're not diversified. Diversification is if you have a slice for stocks, that's fine. Gold, cash, real estate, treasury notes, and alternatives. That is closer to real diversification. So in particular, I recommend about a 10% allocation to gold. And people always want to put words in your mouth and say, well, Jim Rickards says sell everything and buy gold. I've never said that. I don't believe that. But a 10% allocation, I think is right. That will, if there is extreme inflation, that will produce gains that are so large, they'll kind of insure, insulate the rest of your portfolio. So you're protected that way. And if there's a loss of confidence in the dollar or some kind of currency collapse, again, gold will do very well. I also recommend 10-year treasury notes or for the German investor, bonds, 10-year bonds. And the reason for that is, I mean, first of all, they're high credit, they're liquid, but interest rates are going to go lower, which produces capital gains. It's a little bit counterintuitive. People don't understand bond math, but it's pretty simple. If interest rates go down, the value goes up. So as interest rates go down, you're getting more capital gains. So we have a lot of very smart, very prominent people in the United States, Jeff Gundlach, Bill Gross, Dan Isaacson of PIMCO and others who say, the interest rates are too low. This is the greatest bond market bubble in history, short the bond market, et cetera. One by one, they've been carried off feet first. They've been wrong about that. And the reason is they confuse real rates and nominal rates. So nominal rates, that's the rate you see on television or when you look at a screen. That's the nominal rate. But the real rate is the nominal rate minus inflation. And the problem is nominal rates are low. That's true. But real rates are not low. I borrowed money in 1980 at 13%. That was my first mortgage. My mother cried because her first mortgage was 2%. But I said, mom, I'm borrowing at 13%, but inflation was 15%. So my real rate was negative 2. Plus, taxes were 50%, 5-0, and my interest was tax deductible. So I got a tax benefit on the money I was paying of 50% on the 13%. So that's another 7%, 7.5%. So my after-tax rate, after inflation, after taxes, my real rate was negative 8%. So I was borrowing at 13% nominally, but my real rate after taxes and inflation was negative 8%. That's a low real rate. But the point is that that's where we have to get to. If you want to stimulate the economy and borrowing and lending and spending and investment, et cetera, you have to get real rates much lower than they are right now. Well, we're not getting inflation. Eventually, we may. Down the road, we may. But not now. Deflation is a greater danger. So if inflation is declining, we're getting disinflation and deflation, and the nominal rate is here, how low does the nominal rate have to go to get to a negative real rate? Well, it's got to go negative. It's got to go maybe negative 2 or negative 3. That will produce enormous capital gains for the bondholders.