“Extreme Money: Masters of the Universe and The Cult of Risk,”
offers expertise and insight from best-selling author Satyajit Das.
John Nyaradi: Hi everyone, I’m John Nyaradi,
publisher of Wall Street Sector Selector, a financial media site
specializing in exchange traded funds and global markets and economic
analysis. Today, I’m really pleased to welcome our special guest,
Satyajit Das. Das, welcome to Wall Street Sector Selector.
Satyajit Das: Happy to be with you.
John Nyaradi: Das is an internationally respected
financial expert. He has more than 30 years of experience with firms
like Citigroup and Merrill Lynch, is the bestselling author of “Traders,
Guns and Money” and was featured in the 2010 Oscar-winning documentary
Das has a new book out called “Extreme Money: Masters of the Universe and the Cult of Risk.”
Today we’re going to talk about that book, what he sees ahead for
investors and the global economy, and how we as retail investors can
navigate today’s dangerous waters.
Das, let’s just start with the title, “Extreme Money.” It’s really a catchy title. Give us an overview of extreme money.
Satyajit Das: Well, I think you have to look at
money as it used to be, which was a means of exchange and a claim on
real goods and services. But somehow, somewhere along the line, we lost
track of that, and we converted money into something quite extraordinary
where money gradually became more and more removed from the real
economy and became things like collateral obligations, or CDOs, and CDO
squared and CDO cubes, with people issuing debts, which were basically
buying other debts, which were basically buying other debts, and the
whole thing became something so abstract, the whole thing was about
leverage and creating different types of risks, so extreme money is a
catchall for this process which has brought us to this rather disastrous
point in financial and economic history.
John Nyaradi: You have some wonderful phrases and
subtitles and one I particularly enjoyed was the Doomsday Death Machine.
Can you explore that a little bit?
Satyajit Das: The
Doomsday Death Machine was my way to show how debt became an
overarching process, and I think the level of debt in the world is now
quite extraordinary. You’ve got to remember two very simple rules. Rule
number one is that if you’re borrowing, you have to find the asset on
the other side of the balance sheet, as it were. Where did that debt go?
And as long as what you bought with it or invested, it has value and
that value exceeds the value of the debt, well, you tick one box.
The second box that you need to tick is basically that the income
that the asset provides is sufficient to pay the interest of the debt
and ultimately pay back the capital. Now, if you consume with that, it
depends on what you consume. Like if I go and get an education, which
enables me to earn more income to pay back the student loan that’s
great, but if I use it to basically go on a holiday where there is
really at the end no productive income to me, the debt becomes
And what we did was, we forgot those two rules absolutely, totally,
entirely. And I think that fundamental Doomsday Death Machine was
forgetting that rule, and the world now has more debt than it can
So now you have to deal with the fundamental problem that this debt
is unserviceable, cannot be repaid, and we’ve got to write it down. The
problem is when we write it down, somebody, somewhere, who’s lent the
money, who saved that money, is going to take a loss, and in this case,
the savers of the world are going to take massive losses, and that’s why
I call it the Doomsday Debt Machine. It’s like a gigantic Ponzi
And the second element of the debt machine is it artificially creates
value because that flood of money pushes up all the assets in terms of
values, and we’re going to go through a massive, massive reset of asset
values around the world because most of that was inflated, in my view.
Prices are also going to have to adjust because they were based on the
assumption that this infinite, almost constant tide of liquidity would
be there, but we’re now going into a world where that liquidity is
shrinking, and that’s what I meant by the Doomsday Debt Machine.
John Nyaradi: You talk about cracks in the structure and a great reset.
Satyajit Das: There’s an interesting diagram in the
book. There’s a small box, which is the real economy. Then I add
leverage and put a big box around the little box, and suddenly, the
economy appears bigger, and I’m saying well, that leverage box is now
deflating slowly, and when it deflates, you still have the real economy,
but obviously, the economy overall will look smaller.
And that process that I’m talking about is the reset, and the reset
is a very, very complicated process because I don’t think certainly in
the economic history I’ve read and studied, there is any precedent for
this type of process. We had the Lehman moment, the AIG moment, the
banks having to be bailed out moment. We’re now having the global
sovereign moment. We’re going to have a series of these dislocations,
and it’s part of the process of the entire financial system resetting,
what I always referred to as we went from real engineering to financial
engineering, and we’re now going a full 360 degrees back to exactly
where we started, to real engineering.
We’re going to go back to that real economy. Unfortunately, what that
means is, having accelerated all this consumption and accelerated all
this economic growth, we’re now going to go back to mean which basically
means we’re going to be in a very prolonged period of low growth.
It’s about the fact that everybody’s realized we’re not going to grow
4% to 5% for a very prolonged period of time, and growth is going to be
much slower, and secondly, and this is the most important issue, that
the policy makers really are not at all powerful superheroes. In fact,
they have very limited powers, and most of the limited ammunition they
have has been spent.
And I think this is symptomatic of the fact that there’s a kind of a
desperation on the part of policy makers because you don’t win elections
promising people, you know, a recession, and that’s what all the
politicians and policy makers around the world are now confronting.
That’s a very, very difficult choice. So I think we are in a place where
it’s uncharted territory. We are Lewis and Clark in the Wild West going
“Oops, did I make a wrong turn here some way?”
And we’re going to have to work our way out and the only guide we
have is what happened in Japan where they had, not exactly the same
problem, but there were some symptoms, which are similar, and as we know
in Japan, it’s taken a very, very long time to basically try to work
your way out of that, but basically, they haven’t really to a large
extent ever recovered the economic drive and impetus of say, the 1970s
John Nyaradi: Obviously we’re in dangerous times and we have a rough road ahead; what should individuals do?
Satyajit Das: Well it’s pretty tough, and I think
most people are now coming to the realization that once sovereign debt
becomes very risky, which is now what’s happening, then you know, in the
Martha and the Vandellas song, you remember the old song “Nowhere to
Run, Nowhere to Hide?” And that’s basically where we are and so you need
to think about your investment portfolios in a different way.
Will Rogers, the very famous American comedian, once said that he was
interested in the return of his capital more than he was interested in
the return on his capital. So first thing investors have to do is look
at things which are going to hold their value longer term, which
obviously, traditionally has meant things like bonds and fixed income.
The income is going to be far more important than the capital gains.
The other interesting thing is you can throw traditional methods of asset allocation
out the window because the moment the market’s correlation is so close
to one to one, it just becomes meaningless to try to do asset
allocations. You’re going to have to be much, much more active. You’re
going to have to basically look at the world as it evolves and try to
get ahead of it as much as you can, but the key asset here is
During periods like this when you get a huge, huge dysfunctional
change – and that’s what we have, a massive plate move in terms of
tectonic plates – what you have is enormous volatility, and you need to
capture into that volatility, and one strategy that certain people use
is to have the bulk of their portfolio in capital secure things like
government bonds, and basically play the volatility by buying out of
money options in puts and calls which give you exposure to large moves.
So you have no view on direction. You just have a view that the world is
going to be a scary and uncertain volatile place, and that type of
strategy is one way to think about it.
I used to joke with people that if it was a Botox economy, the first
thing you need to work out is how much Botox do they have, and secondly,
where are they going to inject it? So if they’re going to inject it
near the eyebrows, I want to be long eyebrows. If they’re going to
inject it near lips, I want to be long lips.
And so it’s about almost anticipating the actual way governments are
going to react. I think the days of stocks for the long run and if I
just, you know, buy and hold, is going to be extremely difficult and
I’ll give you a very good parallel. The Nikkei is down right about 75%
from end of 1989 in nominal terms, about 85% in real terms, but there
are moments in time when you could have made a 100% in the Nikkei
because it doubled from year to year, and it is that opportunism that’s
going to become very important. That’s very difficult for individual
investors because just mentally they don’t really think in that way, and
those are some of the challenges that individual investors are going to face, and it is going to be a very challenging, a very difficult period for everybody.
John Nyaradi: I always like to end these
conversations by asking if there’s anything else you’d like to add, just
one thing that’s really on your mind right now that maybe keeps you up
at night that people should watch out for as we go into the 4th Quarter
Satyajit Das: I think the major thing is how people
will react to the social side and the political side of this, and let me
illustrate what I mean by that. You’re now seeing in Europe, in places
like Greece and in Spain, essentially the starts of what I would call
social disorder. These are people who are very middle class, who have
had reasonable jobs, reasonable prospects with the future who are now
being disenfranchised. Now you can argue whether they’re protesting for
the right reason or the wrong reason. That doesn’t matter anymore.
They’re protesting. And I really worry about what that means for social
order because we all live, as we know, on a very thin crust of the
earth, and every once in a while, it opens up and plunges us into fiery
And that social order that we actually have is fairly fragile, and I
don’t know how these pressures from the economic and financial sphere
are going to affect that. If we have vast scale social disorder driven
by poverty and driven by social disenfranchisement, I worry deeply about
what this means.
And the second dimension of this is what it does to the political
spectrum. We are seeing the rise of extreme parties. We see very, very
divergent views in Europe, and in the United States, we’ve seen almost a
Balkanization of both the main parties, the Republicans and Democrats,
the most obvious example being the Tea Party, and these people have
quite extreme agendas.
Now, if you actually look through their agendas, there are things in
it which actually are a response to some of the economic pressures and
financial pressures that have emerged, and what does that mean to the
governability of countries?
So we have these geopolitical things which in the financial sphere,
we don’t often engage with, but they’re out there, and sometimes,
they’re related to what we do in the economic and financial sphere,
sometimes, they’re not. And those are some of the issues that I muse
over and try to work out how those things could essentially change the
course of economic and financial history.
John Nyaradi: Well folks, unfortunately time and
space allow us to just scratch the surface of this fascinating book,
“Extreme Money,” written by bestselling author Styajit Das who’s an
internationally respected expert in finance, bestselling author, and
featured in the 2010 Oscar-winning documentary “Inside Job.” You really
owe it to yourself to read this unique work in great detail because it
is a fascinating look at all this we’re going through right now. The
book has gotten rave reviews from Nouriel Roubini, The Financial Times,
Bloomberg and Barry Ritholtz and it’s already a business
bestseller and deservedly so. I would like to add my humble endorsement
to say this book is a terrific way to learn about our new world and
what’s happened, how we got here, and where we’re going.
To learn more about Das’s book and his work, just follow the link at
the end of this interview and that will take you to his page at
amazon.com where you can learn more about his work. Das, it has been
wonderful chatting with you today. Thanks for joining us. I know we’re
all looking forward to talking with you again soon.
Satyajit Das: Thank you for having me and it would be a delight to continue our conversation at a future date.
Learn more about “Extreme Money and Satyajit Das
(Recorded interview, edited for length and clarity)
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10-19-2011 3:30 PM