Speaker 1: If you want to know where asset prices are going,
Speaker 1: if you want to know where bitcoin and crypto goes, gold,
Speaker 1: real estate, and any other stocks or commodities, then you
Speaker 1: have to understand one single thing, and this is global liquidity.
Speaker 1: And so I am having the master of global liquidity on.
Speaker 1: I'm talking about doctor Michael J. Howell. He's worked in
Speaker 1: finance for over thirty years. He was the former research
Speaker 1: director at Solomon Brothers, and during that time he developed
Speaker 1: the concept of global liquidity. This is a lot more
Speaker 1: than just m two. He's focused on analyzing liquidity trends
Speaker 1: and capital flow data, which I believe is the most
Speaker 1: important thing to watch in financial markets. He's also the
Speaker 1: author of multiple books about this, including Investing in Emerging
Speaker 1: Markets and more recently Capital Wars. Again, like I said,
Speaker 1: if you want to know where asset prices are going, bitcoin, crypto,
Speaker 1: real estate, it doesn't matter. You have to understand this
Speaker 1: one thing, global liquity. So let's go ahead and jump
Speaker 1: right in, all right. Michael Howe the author of the
Speaker 1: book The Capital Wars and someone who has been studying
Speaker 1: liquidity global equity for a long time. Something that I've
Speaker 1: been talking about for the last year. I'm super excited
Speaker 1: join have you joined me today? So thank you for
Speaker 1: taking the time. You know, I've been subscribed here to
Speaker 1: your substack, been reading your articles obviously your book as well,
Speaker 1: but just for the audience, just quite and give us
Speaker 1: a little bit of a background. And why have you
Speaker 1: been studying liquidity cycles for so long? And and how
Speaker 1: long has that been? Well?
Speaker 2: Hi, Mark, Yeah, it's a great privilege to be here.
Speaker 2: Thank you for the invertation. It kind of goes back.
Speaker 2: I mean, my studies of liquidity and why it's an
Speaker 2: interesting subject go back to probably well at least twenty
Speaker 2: five years, probably a tad more. Actually, when I worked
Speaker 2: for the US investment bank Salomon Brothers. Salomon Brothers was
Speaker 2: the world's biggest trader in terms of world fixed income
Speaker 2: markets for X markets, et cetera. And to understand trading,
Speaker 2: you had to understand where the money was flowing, and
Speaker 2: that was really the critical thing. If you can understand
Speaker 2: these capital flows and where they were shifting, you had
Speaker 2: a pretty good insight. It was actually insight their information.
Speaker 2: In many ways, you had great insight into understanding the
Speaker 2: direction of macro markets. And so what I did was
Speaker 2: while I was there to basically put in a framework
Speaker 2: that allowed us to monitor flows of money around the world,
Speaker 2: understand what central banks were doing, etc. And the whole
Speaker 2: concept of global liquidity really grew out of that. And
Speaker 2: global liquidity is very simply flows of money through international
Speaker 2: financial markets. It's as straightforward as that. That's what moves
Speaker 2: the world.
Speaker 1: Yeah, I read I read about Stanley Druckenmiller and how
Speaker 1: he when he first started his career, you know, his
Speaker 1: the person that he was working under, said or he
Speaker 1: brought all his research to him and you know, here's
Speaker 1: here's what's going on in the economy, and here's whats
Speaker 1: going on with the company, and here's their price to
Speaker 1: earnings and all these different things. And they said, no, no, no, no, no,
Speaker 1: take take all that and come back when you know
Speaker 1: what moves markets. And he said, or moves asset prices.
Speaker 1: And he says, what do you mean? This is this
Speaker 1: is what I learned. And he said no, no, no, that's it.
Speaker 1: And so Stanley Drucker Miller came back and said, no,
Speaker 1: what moves markets isquidity, which is exactly what you're saying.
Speaker 1: So you said, simply, it's the flows of money through
Speaker 1: the financial system, But it's a little bit more complex
Speaker 1: than that. I think most people, well at least in
Speaker 1: my sort of sphere, are very US centric, and so
Speaker 1: they think of just like US M two and I
Speaker 1: think that's a little bit oversimplified for liquidity. So is
Speaker 1: it just like excess bank reserves? Is it money on
Speaker 1: the sideline that's ready to trade these assets or how
Speaker 1: would you define global liquidity?
Speaker 2: Well, I think you as you rightly say, one has
Speaker 2: to be more granular, and look at some of the components,
Speaker 2: and some of the things you cite are important someone less.
Speaker 2: So you talk about M two, which is sort of
Speaker 2: a traditional measure of the supply of money. Now we're
Speaker 2: looking at money in a general sensor, generic sense, obviously,
Speaker 2: but we're not looking at an M two aggregate. And
Speaker 2: the reason being is that M two measures effectively retail
Speaker 2: deposits in high street banks. Now, if you believe that
Speaker 2: that's the only important thing in the world, then I'll
Speaker 2: come uly and you drop the global liquidity idea. But
Speaker 2: actually banks, high street banks have been eclipsed a long
Speaker 2: time ago. What you've got now, you've got international markets,
Speaker 2: you've got wholesale markets, you've got repo markets. You've got
Speaker 2: what the Federal Reserve is doing through QE. You've got
Speaker 2: extraneous things like I mean, just think the Swiss National
Speaker 2: Bank is a major investor directly in the US equity market.
Speaker 2: It's a big holder of techtocs. I mean, all these
Speaker 2: things are sort of, you know, unusual factors, but they're
Speaker 2: liquidity driven factors that come in and move asset prices.
Speaker 2: And one's got to have a pretty broader, eclectic view
Speaker 2: of what matters. And what we're looking at is to
Speaker 2: give you a sort of stricter definition, we look at
Speaker 2: the interventions and central banks around the world. We would say,
Speaker 2: as a caveat this is not just about looking at
Speaker 2: the size of balance sheet.
Speaker 3: You've got to look at the active components within the
Speaker 3: balance sheet.
Speaker 2: Not all the elements on the balance sheet create liquidity markets,
Speaker 2: for example, and the Federal Reserve is a great example
Speaker 2: of that. We also look at what the banks are
Speaker 2: doing in terms of bank credit. We look at shadow
Speaker 2: bank credit. Shadow banks have been an important element in
Speaker 2: the whole equation about global liquidity, particularly in the last
Speaker 2: twenty years. That's a key factor. And then we look
Speaker 2: at repo markets, wholesale market activity, we also look across
Speaker 2: border flows. They're also a critical element I mentioned in
Speaker 2: the Swiss National Bank in the US. But looking at
Speaker 2: the other side, look at US investors and emerging markets.
Speaker 2: They often control the pace of many of these markets
Speaker 2: with their capital outflows.
Speaker 1: Yeah, so it's pretty complex. There's a lot of things
Speaker 1: that go on. And being in a debt based monetary
Speaker 1: system and money is created through debt issuance, then a
Speaker 1: lot of what you have to look at, I would imagine,
Speaker 1: is sort of the bank's willingness to lend, like how
Speaker 1: tight are there lending markets? Maybe the SLUZE reports things
Speaker 1: like that, Yeah, exactly, I.
Speaker 2: Mean I think the thing is is that I mean,
Speaker 2: the SLUS report, as you mentioned, is a pretty good
Speaker 2: heads up. I mean, unfortunately, it tends to be a
Speaker 2: bit of a lagging indicator. So we're looking earlier in
Speaker 2: the pipeline as to what is actually going on to
Speaker 2: actually see the sources of that liquidity coming into the banks.
Speaker 2: So the banks are operating that banks will sort of
Speaker 2: change their view when they've got more opportunity to actually
Speaker 2: raise capital in markets themselves. So it may be that
Speaker 2: very short term money markets become liquid and the banks
Speaker 2: will respond to through the SLEWS or the Senior Loan Office.
Speaker 2: That's survey for example. In terms of you know, what
Speaker 2: is sort of critical to understand in terms of what
Speaker 2: the things that the main things that we look at.
Speaker 2: We look at what the Federal Reserve is doing. I
Speaker 2: mean that clearly goes without saying it's the most important
Speaker 2: central bank worldwide. We've got to understand the Federal Reserve.
Speaker 2: We also look at the People's Bank of China. The
Speaker 2: People's Bank of China is bigger in some ways than
Speaker 2: the Fair It has more more reach, if you like,
Speaker 2: through the Chinese financial system. It tries to keep the
Speaker 2: Chinese Chinese financial system and relatively tight rain for example,
Speaker 2: It's very important for understanding the temper of the world
Speaker 2: economy because China has such a big economic footprint, particularly
Speaker 2: in the Asian region.
Speaker 3: And then we also look at the pool of collateral.
Speaker 2: And the reason for emphasizing collateral is that ever since
Speaker 2: the global financial crisis in two thousand and eight, most
Speaker 2: lending in the world, particularly wholesale lending, is backed by collateral.
Speaker 2: It's like, you know, taking the analogy of the whole
Speaker 2: mortgage and saying, well, okay, let's just extend that idea.
Speaker 2: Everyone who borrows now has some collateral, not necessarily a
Speaker 2: real estate residential real estate, but it could be a
Speaker 2: treasury bond, or it could be an equity, something which
Speaker 2: is actually put up against the loan for security and
Speaker 2: collapse with the collateral base of the system is increasingly important.
Speaker 2: So these are the factors that we mainly watch. Federal Reserve,
Speaker 2: People's Bank of China, and the pool of collateral. Those
Speaker 2: are key things. But I would go on to say
Speaker 2: is that one of the things we've got to recognize
Speaker 2: now is the whole nature of the financial system has changed.
Speaker 2: We characterize it really by saying that, you know, if
Speaker 2: you go back and pick up an economics or a
Speaker 2: finance textbook, it will tell you that interest rates are
Speaker 2: all important.
Speaker 3: I mean, of course, you know.
Speaker 2: Every you know, almost every day in the journal or
Speaker 2: in the financial time, you find people dancing on the
Speaker 2: head of a pin about what the Fed is going
Speaker 2: to do in terms of setting FED funds next next
Speaker 2: month or next FOBC meeting.
Speaker 3: Generally, in argue, that doesn't really matter very much.
Speaker 2: We're not in a world now where interest rates are
Speaker 2: really ruining the tempo of the business cycle. We're much
Speaker 2: more rather than being in a new financing world, we're
Speaker 2: in a refinancing world. When your point about debt is
Speaker 2: extremely important because in a world of debt, you've got
Speaker 2: to refinance that debt. With something like three hundred and
Speaker 2: fifty trillion dollars of debt worldwide, with an average maturity
Speaker 2: of that debt of about five years, the system is
Speaker 2: basically refinancing or needs to refinance about seventy trillion dollars
Speaker 2: every year. That's an eyewatering amount and actually quite demanding
Speaker 2: on the financial system.
Speaker 3: This not interest rates.
Speaker 2: The matter in that case is actually the capacity of
Speaker 2: the financial system to roll the debt, and that really
Speaker 2: is a liquidity feature.
Speaker 3: So that's why global aqudity is all important. And I
Speaker 3: go on to.
Speaker 2: Say, as a sort of as an end NOE, all
Speaker 2: this is that if you look back, every financial crisis
Speaker 2: that I can think of in the last twenty or
Speaker 2: thirty years has fundamentally been a refinancing crisis. It's been
Speaker 2: a time when debt gets out of step with liquidity.
Speaker 1: Now you talked about the interventions of the central banks
Speaker 1: around the world has changed, and it looks like it
Speaker 1: really changed around two thousand and eight with the introduction
Speaker 1: of Q at least in the United States, and then
Speaker 1: the sort of ever increasing willingness to intervene in markets,
Speaker 1: as we saw obviously through twenty nineteen, twenty twenty and
Speaker 1: so forth. Even you know the bank collapse bear Stearns
Speaker 1: went bankrupt in two thousand and seven, it took seven
Speaker 1: months to get a fed bell out. In twenty twenty
Speaker 1: three when the bank's collass we got one in six days.
Speaker 1: So we see like the willingness to intervene has changed.
Speaker 1: But if we go back to these refinancing cycles that
Speaker 1: you talk about, it's almost like I've seen like a
Speaker 1: YouTube video where you put all these metronomes for keeping
Speaker 1: time and they're all on different beats, but after a
Speaker 1: period of time, they all get on the same beat.
Speaker 1: I don't know if you've ever seen that before, And
Speaker 1: it's almost like this refinancing cycle has been syncd up
Speaker 1: maybe since two thousand and eight when the whole world
Speaker 1: went to zero, interest rates got refinanced, and now we're
Speaker 1: sort of in this like four year refinancing cycle, which
Speaker 1: also seems to align with the presidential cycle. And also
Speaker 1: you talk about bitcoin as well, and it also coincides
Speaker 1: with the bitcoin having cycle. And so I guess my
Speaker 1: question to you is, does it seem like we're now
Speaker 1: in this rhythm of refinancing that seems to be about
Speaker 1: every four years? First? And then do you think it's
Speaker 1: because of those interventions that happened in two thousand and eight.
Speaker 2: Yeah, I think you've absolutely nailed it. I mean, I
Speaker 2: think the key point here is that if you go
Speaker 2: back historically, the business cycle was typically eight to nine
Speaker 2: years in length, and that was really driven.
Speaker 3: By the Kapex cycle, and all was how.
Speaker 2: Businesses will actually invest in new capital, plant, on equipment,
Speaker 2: et cetera. And that tends to be an eighteen nine
Speaker 2: years sign what's happened in the intervening in the intervening
Speaker 2: years in the last maybe the last twenty years, is
Speaker 2: that business cycle length the sort of concerting and smaller.
Speaker 2: So it's sort of shrunk into a period of nearer
Speaker 2: sort of four to five years, and that basically reflects
Speaker 2: this debt refinancing cycle. And as you correctly spot, what
Speaker 2: you're getting is everything is moving in that harmony. Now
Speaker 2: you've got bitcoin, you've got central bank interventions, you've got
Speaker 2: the presidential cycle, all these things seem to be in
Speaker 2: a sort of four year window. Interestingly enough, now it's
Speaker 2: kind of difficult to cause and effect over that. But
Speaker 2: I think debt is a critical factor, and I think
Speaker 2: that if you look at the interventions of the central banks,
Speaker 2: they're increasingly coming in with alacrity, of course, to try
Speaker 2: and smooth the system if there are any hiccups in
Speaker 2: depth refinancing, and they move much faster as we've identified.
Speaker 2: So in two thousand and seven, it took a long
Speaker 2: time before the FED really showed its hand. But if
Speaker 2: you look at what happened in the COVID crisis, or
Speaker 2: look at what happened in the REPO crisis in twenty nineteen,
Speaker 2: the FED was moving very quickly. And I think that
Speaker 2: you can even see in the shorter term instances where
Speaker 2: you get wobbles in markets such as SVB that crisis,
Speaker 2: the FED is there almost immediately. And I think what
Speaker 2: this is really telling us is that the primary goal
Speaker 2: of the monetary authority in the US and maybe in
Speaker 2: every country now is to preserve the integrity of the
Speaker 2: sovereign debt markets. This is absolutely critical with so much
Speaker 2: debt and so much public DEBTA run they need functioning
Speaker 2: markets and a very good heads up.
Speaker 3: To that, if people can remember.
Speaker 2: The instance is to go back to Britain and the
Speaker 2: so called lizt Trust moment, when an incoming British Prime
Speaker 2: minister sort of screwed the markets badly by outrage of statements.
Speaker 2: It ruffled the market's feathers significantly, and what you got
Speaker 2: was a huge seller in the British sovereign debt market.
Speaker 2: And that was a wake up call to central banks
Speaker 2: and finance ministers everywhere to say, look, we simply cannot
Speaker 2: allow us to happen. Had this happened in the US
Speaker 2: treasury market, the core, you know, it will be in
Speaker 2: penury now, the system would have collapsed, threatened to collapse.
Speaker 1: So I want to talk about their capacity to intervene.
Speaker 1: But just sticking with this four year cycle, so you
Speaker 1: do see it sort of on this four year cycle.
Speaker 1: As you said, the business cycle has sort of gone
Speaker 1: from about an eight year cycle down to about a
Speaker 1: four year cycle. And it seems like the metronomes on
Speaker 1: time and it does seem to coincide with these things.
Speaker 1: And so then if we're in as you said, we're
Speaker 1: sort of in this basically what would you say, a refinancing cycle.
Speaker 1: So now all this debt gets kicked down the road,
Speaker 1: and in order to refinance the debt, we need more
Speaker 1: debt to refinance it. And it's almost like every four
Speaker 1: years we sort of see maybe this I think maybe
Speaker 1: you framed it up as liquidity air pocket where maybe
Speaker 1: there's not quite enough debt to like roll it over
Speaker 1: until then the central banks sort of intervene and inject
Speaker 1: this new liquidity to kick that can back over, which
Speaker 1: sort of resets it like another four years.
Speaker 2: I think that's absolutely right. I mean, what you're getting
Speaker 2: is exactly that kicking the can down the road. I mean,
Speaker 2: it's it's almost impossible for any administration, whatever the stripe,
Speaker 2: to actually change the outlays that the Treasury is undertaking
Speaker 2: because most of those outlays are sort of their non
Speaker 2: discretionary spending. They're things which are mandatory like Social Security, medicare,
Speaker 2: ultimately defense, these bills have to be paid, come whatever,
Speaker 2: and it's very difficult to actually offer any cutbacks in spending.
Speaker 2: And they can tweak around with discretionary spending, but it's
Speaker 2: such a small item of the budget now it's pretty
Speaker 2: much irrelevant. And then you've got on the other side, taxes.
Speaker 2: Taxes are clearly an unpopular area. But will any administration,
Speaker 2: particularly marginal administration where you've got, you know, you're scrambling
Speaker 2: for votes, put their hand up and say, look we're
Speaker 2: going to raise taxes.
Speaker 3: I mean, nobody's going to do that.
Speaker 2: So what you've got is this funding dilemma, which really
Speaker 2: comes back to the fact that the real strength of
Speaker 2: economies comes back to whether they've got, you know, a
Speaker 2: reserve asset. So the US dollar is in a prime
Speaker 2: situation because the US is a pristine borower internationally at
Speaker 2: least until it's normal, and that makes funding the US
Speaker 2: deficit a lot easier than if you had to fund
Speaker 2: maybe the British deficit, or a deficity in an African
Speaker 2: country or a smaller Asian country.
Speaker 3: These are a lot more problematic.
Speaker 2: And so what you need is that integrity of the markets,
Speaker 2: and that's why the Treasury and the Federal Reserve, in
Speaker 2: my view, are so putting such a high priority and
Speaker 2: maintaining the stability of US debp markets.
Speaker 1: You mentioned like the PBOC, if you watch other central
Speaker 1: banks like the PBOC, but if sort of in two
Speaker 1: thousand and eight, all these interest rates got it reset down.
Speaker 1: Then even though we have different countries, different central banks
Speaker 1: with different priorities, they all sort of got SYNCD onto
Speaker 1: that cycle. And then furthermore, with PBOC, for example, they're
Speaker 1: currently printing or injecting hundreds of billions of dollars into
Speaker 1: the real estate markets to prop that up currently right now.
Speaker 1: And so that's just global liquidity. And then a lot
Speaker 1: of global equity can go into global assets like commodities
Speaker 1: or bitcoin, or even potentially back into the United States.
Speaker 1: Is that sort of the way that you look at
Speaker 1: this global equity exactly?
Speaker 3: I mean a lot of this is fungible.
Speaker 2: I mean, it would already depend I mean in China,
Speaker 2: they've made announcements that they're going to basically issue debt
Speaker 2: for refer real estate, I mean the real estate support.
Speaker 2: I mean, the question is who buys the debt. That's
Speaker 2: really the critical thing with every financial system, you know,
Speaker 2: whatever the nationality, what really matters is whether the debt
Speaker 2: is brought by a credit provider or whether it's.
Speaker 3: Brought by private saver.
Speaker 2: If it is brought by a private saver, it's just
Speaker 2: basically switching money from one pot to another.
Speaker 3: So there's no net effect.
Speaker 2: If you're giving or if it's the credit provider like
Speaker 2: a bank, who is buying the debt, then what you're
Speaker 2: doing is monetizing the debt. In other words, that's what
Speaker 2: textbooks will tell you was a bad thing, because you're
Speaker 2: creating a lot of excess liquidity. And my view is
Speaker 2: that that's what the gold market and that's what bitcoin
Speaker 2: and currently telling right now is there is concern about monetization.
Speaker 2: Now if you look at what Janet's been doing in
Speaker 2: a treasure executor, Janet Yellen's been doing basically, I think
Speaker 2: she's been very astute in managing the.
Speaker 3: Supply of coupon debt in the US.
Speaker 2: And what she's done is created given the fact that
Speaker 2: we know that there's got to be a lot of
Speaker 2: demands on the coupon market, given the fact the deficit
Speaker 2: is two trillion a year or running at that sort
Speaker 2: of clip, there's got to be a lot of coupon issuance.
Speaker 2: And otherwise, anything which is of a maturity of more
Speaker 2: than about a year, So anything any Treasury security that
Speaker 2: plays a coupon is deemed to be coupon debt, and
Speaker 2: the Treasury normally has a preference for sort of issuing
Speaker 2: debt around about seven years or there or thereabouts. But
Speaker 2: what she's done is very carefully avoided the longer end
Speaker 2: of the market for issuance, focused on the shorter end,
Speaker 2: and in particular use bill finance as a plug for
Speaker 2: any swings in the deficit. Now, that's actually pretty astute management,
Speaker 2: at least in the short term. I mean, she'll be
Speaker 2: caught out in the long term almost unquestionably, But in
Speaker 2: the short term it's helped the treasury market, and it's
Speaker 2: probably meant that yields are actually lower at the longer
Speaker 2: end now than they should really be by rights, so
Speaker 2: the yield curve is flatter than it would be it
Speaker 2: should be steeper right now. But generally speaking, there's been
Speaker 2: quite quite a you know, quite a clever move by
Speaker 2: the Treasury and actually how they've how they run things.
Speaker 3: In the US.
Speaker 1: But the problem's sorry ahead, go ahead, tell me what
Speaker 1: the problem.
Speaker 2: The problem is, quite simply is that what's happening is
Speaker 2: that if you're assuing so much short dating coupon debt,
Speaker 2: you know words at the front end of the market
Speaker 2: one two year dead and you're assuming a lot of bills,
Speaker 2: it's the banks who tend to light that error of
Speaker 2: the market. They buy those treasury securities and that is
Speaker 2: pure monetization. So you're actually feeding, you know, the wolf
Speaker 2: who is creating the monetization or if that anamitude works,
Speaker 2: but effectively, that's.
Speaker 3: What's going on. So America now is is, you know.
Speaker 2: Doing what Milton Friedman has been counseling against for decades
Speaker 2: and decades and decades.
Speaker 3: It's effectively printing.
Speaker 1: Money right by issuing the short term bills. I mean
Speaker 1: it's basically injecting money directly into the economy. I mean
Speaker 1: we consider in the US, if I had one hundred
Speaker 1: dollars note, it's one hundred dollars bill. I mean she's
Speaker 1: basically issuing so that's a that's a that's a bill,
Speaker 1: that's a note with the zero day you know, coupon
Speaker 1: if you will, right, and she's basically issuing the same
Speaker 1: thing into the market, which is just short term cash. Now,
Speaker 1: you said that it's brilliant for her to do that. Now,
Speaker 1: I guess in an MMT lens, maybe not from an
Speaker 1: Austrian lens, but it's keeping the system alive, if you will.
Speaker 1: But you said that she'll probably be caught out a
Speaker 1: called out in the long term. So what does that mean?
Speaker 2: Well, I'm thinking, I mean, there's a rule thumb, there's
Speaker 2: no hard and fast rule here that the Treasury tends
Speaker 2: to fund the deficit about eighty percent with coupon and
Speaker 2: about twenty percent with bills. Now, that's, as I say,
Speaker 2: not a not set in stone, but that's really been
Speaker 2: the benchmark many people have looked at. And what Gianik
Speaker 2: did about where we now nine twelve months ago is
Speaker 2: actually flipped that round. So it was almost eighty percent
Speaker 2: bills and twenty percent coupon. So there was a very
Speaker 2: significant shift. There was a huge amount of bill finance
Speaker 2: going through the system, and that's actually ebbed down a bit.
Speaker 2: But generally speaking, looks as if the trending bills is
Speaker 2: going to be higher than we saw before, and that
Speaker 2: might be a concern, but there's a lot of there's
Speaker 2: a lot of opportunistic moves going on. But the fact
Speaker 2: that she starved the market temporarily of coupons supply was
Speaker 2: something that I think, in my view, has actually kept
Speaker 2: yields lower than they would otherwise be. I mean, I
Speaker 2: think the US ten years should be over five percent now,
Speaker 2: given everything else that's going on, the inflation backdrop, the economy,
Speaker 2: et cetera, et cetera. But you know, they're moving in
Speaker 2: that direction, but they're not there yet. They're being held back.
Speaker 1: Now. You had talked about earlier about basically we have
Speaker 1: this pool of collateral which is the base of the system,
Speaker 1: and how important that is. And so in this debt
Speaker 1: based monetary system, it seems like because money is created
Speaker 1: through debt issuance, if I go to if I go
Speaker 1: get credit, then the dollars are created into existence, which
Speaker 1: means the dollars of the liability against the debt, which
Speaker 1: then the debt becomes the asset itself. And then that
Speaker 1: debt is the asset or the collateral the base of
Speaker 1: the system, which then collateralizes other debt. So that's sort
Speaker 1: of this Ponzi scheme, if you will, right, So then
Speaker 1: debt is collateralizing more debt, collateralizing more debt, which is
Speaker 1: part of the reason why they can't allow any of
Speaker 1: this collateral to sort of lose value, because then it
Speaker 1: will unwind the entire base of the system. Is that
Speaker 1: the way? Is that a good way to say that?
Speaker 3: Correct? Yeah?
Speaker 2: I think it was actually if my history is correct,
Speaker 2: it was Alexander Hamilton who first made that observation that
Speaker 2: the stability of the US financial system depending on a
Speaker 2: solid government bond market, and that's what has transpired pretty
Speaker 2: much ever since. So if you get that system being challenged,
Speaker 2: then there is an issue.
Speaker 1: Now.
Speaker 2: I think the challenge that well, we all face, not
Speaker 2: just America, because the dollar is the global financial asset.
Speaker 2: But what we all face is the fact that at
Speaker 2: the moment, something like eighty percent of the world savings
Speaker 2: surplus savings go into US financial assets. I mean, and
Speaker 2: I'm watering a large amount, but if you look up
Speaker 2: to counter that, US government outlayers are up forty percent.
Speaker 3: Since the COVID crisis.
Speaker 2: Now, the second number, the forty percent, is telling us
Speaker 2: that the fiscal situation, the budget is running out of control,
Speaker 2: and that is likely to undermine the integrity of the
Speaker 2: treasury market in the longer term. That's the concern. Now, that,
Speaker 2: in my mind, is why you've got these jumps going
Speaker 2: on in the gold price and in bitcoin. And I
Speaker 2: just think of bitcoin because it acts very much like this.
Speaker 2: It's moving rather like exponential gold. It's moving at a
Speaker 2: much faster place than gold, but it's moving in the
Speaker 2: same direction.
Speaker 3: Now.
Speaker 1: Bitcoin is one of my main topics. I'll be speaking
Speaker 1: at the Bitcoin conference here in Nashville coming up in
Speaker 1: two months, So if anybody in the audiences listening wants
Speaker 1: to come see me in Nashville, use codemark Moss to
Speaker 1: save ten percent on your tickets and come join me there.
Speaker 1: So I want to definitely about bitcoin with you, Michael,
Speaker 1: but kind of going back to this sort of cycle
Speaker 1: that we're in. So we're printing money to continue to
Speaker 1: kick the can down the road. We have to continue
Speaker 1: to issue more debt to refinance the existing debt, and
Speaker 1: basically this is debasement, right, So they're debasing the currency.
Speaker 1: So acts at prices are going up because the value
Speaker 1: the purchasing power of those dollars are going down. So
Speaker 1: if you think about it in those lens, then trying
Speaker 1: to understand the financial market. So if you think about
Speaker 1: the financial market looking at the stock index s and
Speaker 1: P five hundred, or let's use the NASDAC, then it
Speaker 1: almost seems like the price of those assets is moving up,
Speaker 1: not because as I started out talking about Stanley Drugammeller,
Speaker 1: not because of what's happening in the economy, not because
Speaker 1: of their earnings or their profitability or any of those things,
Speaker 1: but really it's moving up as a function or an
Speaker 1: inversion of the debasement. That's the way that it looks
Speaker 1: like to me. So fundamentals are out and we just
Speaker 1: look at the debasement or the liquidity moving the asset
Speaker 1: prices up. And so one tell me if that's correct.
Speaker 1: And then then observation number two, which I want to
Speaker 1: get into, when it looks like different assets move at
Speaker 1: different rates. So in your research, you know, on your substack,
Speaker 1: which we'll link in the notes down below for everybody,
Speaker 1: they should definitely check it out. You can show that
Speaker 1: gold moves on liquidity, but bitcoin moves many times more
Speaker 1: on liquidity. So I guess question number one do we
Speaker 1: do we look at fundamentals out and now looking at
Speaker 1: the basement or liquidity moving asset prices up like that?
Speaker 1: And then two, why are different assets moving at different
Speaker 1: prices like that?
Speaker 3: Well, I think that your observation is correct.
Speaker 2: Basically there is an underlying force, and the underlying forces
Speaker 2: is the flow of liquidity and markets. My view is
Speaker 2: that it's it's global, it's a global liquidity dimension. It's
Speaker 2: not just a US centric one. You've got to look
Speaker 2: into it. You've got to check whateverything is everything is
Speaker 2: going on globally.
Speaker 1: Yeah, and just just to interject, I mean you already said,
Speaker 1: like the Switzer Switz Bank is already interjecting money into
Speaker 1: the US markets, and so is the PBOC, and so
Speaker 1: is every other market in the world. It's like George
Speaker 1: soros imperial circle, So like all that money just sort
Speaker 1: of comes into these global assets, right exactly.
Speaker 3: Yeah, I mean you can actually go back.
Speaker 2: I mean, George Soros's imperial circle is a very interesting thesis.
Speaker 2: It's almost exactly the same as the as maybe the
Speaker 2: more popular and probably maybe more transparent milkshakee theory that
Speaker 2: Bread articulated many times, which I think is a very
Speaker 2: neat way of looking at it. And basically that we're
Speaker 2: in that frame. So you've got to look at a
Speaker 2: global money and you've you've got to accept the fact
Speaker 2: that liquidity is fungible worldwide. But there are these dominant trends,
Speaker 2: and it's very clear that you've got certain trends which
Speaker 2: are stronger than others. You've got to you've got to
Speaker 2: you've got a gold and a bitcoin trend. Those look
Speaker 2: pretty well established. You've also got a US tech trend.
Speaker 2: That's another one that looks pretty well established. But what's
Speaker 2: going what's going on behind that is that liquidity is
Speaker 2: a major feature driving them now. It so happens that
Speaker 2: these falling with the catchup without being too wonkish of
Speaker 2: being long duration assets. And basically, if you've got a
Speaker 2: long duration asset, it tends to be very sensitive to liquidity,
Speaker 2: and a long duration asset is something that has a
Speaker 2: long term payback if you think about it.
Speaker 3: Now, you've got.
Speaker 2: Other assets which fall somewhat beneath that. You've got things
Speaker 2: which are more cyclical, maybe things that are more connected
Speaker 2: with the business cycle. I would maybe counter what I've
Speaker 2: just said by saying that liquidity is not the only factor.
Speaker 2: You've got to also take into account of the business
Speaker 2: cycle itself, because that will actually change sentiment or investors
Speaker 2: feeling feeling towards the markets. If you get a recession there,
Speaker 2: they're less likely to invest in even in these trends.
Speaker 2: They'll be disrupted. They want to go for safer assets
Speaker 2: in that environment. But generally speaking, you've got the underlying
Speaker 2: trend which is being driven by liquidity, and maybe the
Speaker 2: cycle a cycle of investment sentiment, which is more akin
Speaker 2: to maybe the swings in a traditional business cycle. So
Speaker 2: i'd look at that in terms of the sensitivity of assets. Again,
Speaker 2: you were correct. We did an analysis and this was
Speaker 2: you know, I drew up immediately what you might say
Speaker 2: as a health warning or a wealth warning here, because
Speaker 2: this is based on historic analysis.
Speaker 3: But if you look at.
Speaker 2: Data, what the data shows is that every ten percent
Speaker 2: increase in liquidity, you tend to get a fifteen percent
Speaker 2: increase in the gold bullion price. Now that's over the
Speaker 2: medium term, and that's what seems to have transpired. If
Speaker 2: you look at bitcoin. The answer, and this is what
Speaker 2: I say is a caveat, it's really in the period
Speaker 2: of the last ten years, bitcoin has actually had a
Speaker 2: multiplier about five times. In other words, it goes up
Speaker 2: fifty percent for every ten percent increase in liquidity.
Speaker 3: Now that will not be.
Speaker 2: What it's what's going to happen going forward, but it
Speaker 2: still may be a high number. And that's the thing
Speaker 2: I think you've got to remember.
Speaker 1: Why will that not be what it Why would that
Speaker 1: not be moving forward?
Speaker 2: Well, because I think what you've got is you've got
Speaker 2: an adoption effect. So in other words, in the very
Speaker 2: early stages, bitcoin was a comparably in liquid asset. Now
Speaker 2: it's a more liquid asset, and I'm talking about liquid
Speaker 2: being here at market depth. And the fact is that
Speaker 2: you've had a lot of investors who are already there.
Speaker 2: You may have others who will come in. But I
Speaker 2: think that this sensitivity, once the market becomes more institutionalized,
Speaker 2: the sensitivity of the market to short moves in global liquidity,
Speaker 2: in short term moves will be less or I would
Speaker 2: imagine it would be less.
Speaker 3: I mean, never say never.
Speaker 2: Of course, it may be that that's actually a robust figure,
Speaker 2: the fifty percent, but I would counselor that it probably isn't.
Speaker 1: And that's because as the as the market cap of
Speaker 1: bitcoin gets bigger than the asset itself becomes more liquid
Speaker 1: as far as the daily trading volume, I mean, I
Speaker 1: can get more in and more out, and so as
Speaker 1: it becomes a more heavily traded asset, then it's a
Speaker 1: lot harder to move. That's why the sensitivity goes down.
Speaker 3: Yeah, yeah, exactly right, exactly right. So that's correct. But
Speaker 3: then you see, if you go back, I mean, you
Speaker 3: keep drawing the or dry.
Speaker 2: The example of Stan Drockamiller, I mean Stan Drockermiller learned
Speaker 2: a lot of what he was doing in global investing
Speaker 2: by looking at Japan in the nineteen eighties, and that's
Speaker 2: what I remember him, and he was he was then,
Speaker 2: you know, very clued in to what was happening to
Speaker 2: liquidity in the Japanese market, and liquidity was a key,
Speaker 2: key factor driving the nicky higher and higher and hire.
Speaker 3: It wasn't about valuation.
Speaker 2: A lot of the traditional value investors piled out of
Speaker 2: Japan in nineteen eighty four, but the market kept rising
Speaker 2: for another six years or seven years.
Speaker 1: Well couldn't you say the same about Turkey's stock market
Speaker 1: or Zimbabwe's stock market as well? All those asset prices
Speaker 1: in the stock market are making new all time highs
Speaker 1: in normal.
Speaker 3: Attack exactly exactly. And I draw the analogy.
Speaker 2: And I'm not suggesting this is maybe a fair analogy,
Speaker 2: but it's a point to ponder. This is an example
Speaker 2: I give with people to say that, you know, don't
Speaker 2: invest in bitcoin or all coins or whatever, because they're
Speaker 2: basically you know, the their empty assets or whatever, or
Speaker 2: their fictition's assets. My example is to go back to
Speaker 2: Germany in nineteen twenty three with a hyperinflation. Now in
Speaker 2: nineteen twenty three, just before Germany saw this massive inflation
Speaker 2: as the government the game was printing loads of money.
Speaker 2: And I'm stressed the fact we're not going to get
Speaker 2: hyper inflation in the US. But the direction is important.
Speaker 2: I think in that case, many older generations invested their
Speaker 2: wealth in government bonds because that was the world they knew,
Speaker 2: They depended on the government, They thought the government was reliable.
Speaker 2: They kept their money in bonds. That's what they'd always done,
Speaker 2: that's what their parents and grandparents had done, and they
Speaker 2: got wiped out. The younger generations instead did.
Speaker 3: Not invest in bonds.
Speaker 2: They they've invested in the stock market and they basically
Speaker 2: kept their wealth. And what you saw in Germany in
Speaker 2: the nineteen thirty I say, in nineteen twenties, well, obviously
Speaker 2: you know unfortunate consequences is there was a massive wealth
Speaker 2: distribution shift from the older generations to the younger generations.
Speaker 2: And I've got no evidence for this, but I would imagine,
Speaker 2: I would strongly believe that through that period the older
Speaker 2: generations were schooling their children, say you're absolutely mad to
Speaker 2: invest in stocks. Here you know, why don't you fall
Speaker 2: back on the reliability of government bonds because.
Speaker 3: They've always worked.
Speaker 2: You know, what are these pieces of paper you're trading
Speaker 2: for company securities? I mean, they're completely worthless, but actually
Speaker 2: we know that they weren't. And isn't that exactly the
Speaker 2: same argument that the older generations are saying to the
Speaker 2: younger generations now about bitcoin and all coins. You know,
Speaker 2: the younger generations basically gravitating these instruments because they're probably
Speaker 2: very good monetary inflation, the hedges, and they understand them.
Speaker 1: Yeah, I mean, there's certainly that we can dig into that.
Speaker 1: There's also that in times of high inflation, hyperinflation, however,
Speaker 1: you wanted to find that what happens is it turns
Speaker 1: into a culture of gambling, right. John Mayner Kean said
Speaker 1: that that Vladimir Lennan told them that the best way
Speaker 1: to destroy capitalism was to debouch the currency through inflation.
Speaker 1: They could arbitrary steel wealth until all relation is lost,
Speaker 1: and the best way to get rich was gambling and
Speaker 1: theft and so of what we see when societies start
Speaker 1: breaking down. And so was it just two weeks ago,
Speaker 1: Game Stop was back back in the news. Everybody's you know,
Speaker 1: Yolo into game Stop, and so not that there's really
Speaker 1: any valuation there. I think in hyper in Germany maybe
Speaker 1: they were buying notes of equities of maybe productive companies.
Speaker 1: So it's a little bit different, I think than buying
Speaker 1: game Stop or you know, some some all coins, meme
Speaker 1: stocks or whatever. But certainly to the point that you're making.
Speaker 1: I mean Bitcoin, obviously, I'm a big believer in Bitcoin
Speaker 1: is a new alternative asset. Do you think so? Bitcoin
Speaker 1: is the first time we've seen an asset that has
Speaker 1: true scarcity, so fixed supply of twenty one million, and
Speaker 1: do you think that has something to do with it?
Speaker 1: I mean, if you look at whether it's real estate
Speaker 1: or art, it's always the scarce assets that move many
Speaker 1: multiples higher than the existing assets, right, And so in
Speaker 1: this type of environment where we're seeing unlimited money printing
Speaker 1: against the face of an asset that has a fixed supply,
Speaker 1: I mean, how does that interact?
Speaker 3: Well, I think you're absolutely right. I mean, this is it?
Speaker 3: What is it? I mean, you'd know better than me.
Speaker 3: What is the living twenty one million bitcoin? I think
Speaker 3: is it? Yeah?
Speaker 1: Twenty one million bitcoin is the is the max supply?
Speaker 1: It's the first time that we've seen an asset that
Speaker 1: has true scarcity, a digital asset with true scarcity. Obviously,
Speaker 1: like a Mona Lisa. There's one Mona Lisa, so it's
Speaker 1: true scarcity as well. But the first time we've seen
Speaker 1: a digital asset with true scarcity, and so it's hard
Speaker 1: to imagine where that goes. But I think we're seeing that.
Speaker 3: Yeah, I think that's right.
Speaker 2: I mean, the only question one's got a raise. I mean,
Speaker 2: you know, there have been other examples of scarce assets
Speaker 2: primary real estate, mona lisas or whatever, but their price
Speaker 2: goes up. I mean, that's what we know they hold
Speaker 2: their value. Bitcoin is an example that certainly should do.
Speaker 2: I think the question that you know I've posed many
Speaker 2: times in the last few years is, I mean, is
Speaker 2: there a chance that you get some of the equivalent
Speaker 2: to the Gold Act in the US and ninety thirty
Speaker 2: four where the Gold Act basically made it illegal for
Speaker 2: private individuals to hold gold. The penalty of I think
Speaker 2: it was a seventy year jail center. Its a really
Speaker 2: hefty US dollar normal fine at the time, So that
Speaker 2: focused the attention.
Speaker 3: Now, could the administration do something similar?
Speaker 2: I would doubt that now I think the I think
Speaker 2: that you know, the horse has bolted. So I think
Speaker 2: it's very very difficult. Big coins a global asset, it's
Speaker 2: not under the control of the US administration, and how
Speaker 2: much they made late like that, and I believe I'm
Speaker 2: correct in saying that Trump, you know, over the weekend,
Speaker 2: actually endorsed the whole idea would never be any constraints
Speaker 2: on nacrypto.
Speaker 1: Yeah, so just to catch you up on that, I
Speaker 1: mean that has been the number one uh sort of
Speaker 1: people who don't believe in bit when that's of their
Speaker 1: number one attack vector is like, but the governments will
Speaker 1: make it illegal and obviously there's good reason for that
Speaker 1: with Acts sixty one h two where they made called illegal.
Speaker 1: To your point, but yes, not only did Trump endorse it,
Speaker 1: but we had other leading candidates Vivi Gramaswami, he was
Speaker 1: out endorsing it. RFK Junior has been out endorsing it
Speaker 1: and receiving a campaign cont in that. But more importantly,
Speaker 1: last week the House passed a bill that basically, so
Speaker 1: we have a couple things going on. We have multiple
Speaker 1: states that are breaking apart from federal government. And so
Speaker 1: now Montana, Oklahoma was the latest one that basically passed
Speaker 1: a law. The state passed a law to protect people's
Speaker 1: right to own bitcoin, custody bitcoin. And so the states
Speaker 1: are now moving in advance of the federal government. But
Speaker 1: then the federal government, the House passed a bill that
Speaker 1: also guarantees citizens' rights to own bitcoin self custody bitcoin.
Speaker 1: And so to your point, I mean, could that be
Speaker 1: overturned and you know whatever, Sure, I mean, everything's a possibility,
Speaker 1: but as it looks right now, they have gone above
Speaker 1: and beyond and actually put sort of what the Constitution
Speaker 1: does is guarantee those rights. And so that's a pretty
Speaker 1: big deal. And to the point that you made, yes,
Speaker 1: I mean, even if the US said, hey, we'll kill
Speaker 1: you on site if you have it doesn't stop the
Speaker 1: rest of the world from moving in advance of that.
Speaker 1: So I think to your point, the house the horse
Speaker 1: has bolted the horses out of the bar, and it's
Speaker 1: too late to close those doors. So kind of if
Speaker 1: we look at this lens then and we have this
Speaker 1: tech trend as you called it, So there's certainly AI's
Speaker 1: that's sort of driving markets like Nvidia, you know, it's
Speaker 1: catching that. I think copper is even this old metal
Speaker 1: that's starting to sort of move on this tech trend,
Speaker 1: if you will. Maybe that's the energy transition, you know,
Speaker 1: as well as the AI right, massive data centers, things
Speaker 1: like that. I've mapped out about every fifty years, we
Speaker 1: have these condroit and waves, these K waves, and every
Speaker 1: fifty years there's like this technological revolution that happens, and
Speaker 1: each one of those seems to drive financial markets. So
Speaker 1: with had the industrial revolution, we had steam engines, railways,
Speaker 1: we had steel electricity heavy equipment, we had oil automobiles
Speaker 1: mass production ninety seventy one. We had microprocessors which brought telecommunications,
Speaker 1: personal computers, Internet, and now we have this like next
Speaker 1: tech boom, and each one of those dry drove financial markets.
Speaker 1: So back to that trend. So we have this tech trend,
Speaker 1: which is why I referenced the NASDAK not the S
Speaker 1: and P five hundred, so sort of got this Nasdaq
Speaker 1: and obviously bitcoin crypto overall is sort of driving that.
Speaker 1: And then if we look at we have these global
Speaker 1: liquidity cycles that seem to be happening globally every four years,
Speaker 1: and these these tech So we have the tech trend,
Speaker 1: we have the NASDAK represented sort of moving off of
Speaker 1: debasement and based off of sort of the way you
Speaker 1: framed it up. And I want to get deep into this.
Speaker 1: This the pool of collateral, the base of the system
Speaker 1: is so important we can't let it collapse. So we're
Speaker 1: going to have to keep kicking the can down the road.
Speaker 1: So we're going to have to keep debasing, and it's
Speaker 1: going to keep pushing prices up higher. And then that's
Speaker 1: in the backdrop of this tech crypto AI boom. Do
Speaker 1: you think it makes sense to sort of be a
Speaker 1: warm buffet and be more concentrated in your bets, put
Speaker 1: your eggs in one basket and watch the hell out
Speaker 1: of that basket, as I think he said, instead of
Speaker 1: this diversified thing. It's like, no, Like, we can pretty
Speaker 1: clearly see that these are trends that are going to happen.
Speaker 1: They have to continue happening, at least the base cases
Speaker 1: that they'll continue to happen. And we can see what's
Speaker 1: happening with with the tech stocks and bitcoin, and so
Speaker 1: maybe it's time to sort of focus more on that
Speaker 1: or no.
Speaker 2: Well, I think it comes down to I think it's
Speaker 2: a very interesting debate. I think it comes down basically
Speaker 2: to what. So, first of all, your time horizon, so
Speaker 2: you know, if you've if you've got if you're a
Speaker 2: young a young guy who can you know is going
Speaker 2: to be saving or working for the next forty years,
Speaker 2: then you can take a long term view and maybe
Speaker 2: short term volatility doesn't matter too much in that regard.
Speaker 2: You're right also to say that the most successful investors
Speaker 2: did not diversify or do not diversify.
Speaker 3: They concentrate.
Speaker 2: However, what they face is en route is significant volatility. Caines,
Speaker 2: who you cited earlier, was actually also somebody who didn't
Speaker 2: believe in diversification. He believed, in his phrase, was I
Speaker 2: put to all my eggs in one basket, and I
Speaker 2: watched the basket very closely. And you know that's and
Speaker 2: that's you know something I think one's got to think about.
Speaker 2: If you believe that these are the these are the
Speaker 2: safe assets of the future, then I would definitely got
Speaker 2: to go along with that. And you know, I happen
Speaker 2: to believe strongly that these these are important. I'm not
Speaker 2: going to say I've got all of my investments in
Speaker 2: bitcoin or in associated vehicles, but I think you know,
Speaker 2: I've got substantial amounts because I think that the real
Speaker 2: thread out there is monetary inflation, and where we are today,
Speaker 2: which is very different to where we've been at any
Speaker 2: time in my investment career over the last you know,
Speaker 2: thirty forty years, is that governments are really in a
Speaker 2: situation where they can't really do very much. All they
Speaker 2: can do is, we keep saying, is to kick the
Speaker 2: can down the road. Now you think of the alternatives
Speaker 2: to that. The alternatives would require a revolution in demographics,
Speaker 2: which we're clearly not going to get. It would require
Speaker 2: the ability of the government to hike interest it significantly
Speaker 2: to discipline the markets. But they can't really do that
Speaker 2: because if they do that, the debt interest builds skyrockets,
Speaker 2: and then you get it, you get an even worse
Speaker 2: situation with debt growing exponentially. And they probably don't want
Speaker 2: to cut interest rates too much either on the other side,
Speaker 2: because the incentivize people to take up too much debt,
Speaker 2: so they're really stuck. And you know, there's an old
Speaker 2: saying in Ireland that if you want to travel to Dublin,
Speaker 2: don't start from here, and that's where we are, unfortunately.
Speaker 2: So I think the fact is that what you what
Speaker 2: you're going to see over the next few years is
Speaker 2: government's increasingly kicking the can down the road, and it's
Speaker 2: those that have got maybe the bigger boots on, like
Speaker 2: the US, which is going to succeed rather more than
Speaker 2: some of these smaller countries who haven't got the same
Speaker 2: resources or haven't got an international currency at the dollar.
Speaker 1: Yeah, so you said that the US is a pristine
Speaker 1: borrow and tell it's not. So, I think to the
Speaker 1: point that you're making, I mean, that's obviously I agree,
Speaker 1: and I'm also trying to make that same point. And
Speaker 1: if we look at ancient history as well as current history,
Speaker 1: that's what it tells us. So it's going back to
Speaker 1: Turkey and Zimbabwe I referenced earlier, or Venezuela, Argentina, name
Speaker 1: your country. What we see is they're all going to
Speaker 1: print until the printer doesn't work anymore. None of them
Speaker 1: just say, well, fold up shop, just shut it down.
Speaker 1: Like they all just go and tell it doesn't work.
Speaker 1: And so it's like the law of diminishing returns, and
Speaker 1: so that sort of seems to be the way it's
Speaker 1: going to continue to go. They're just going to keep
Speaker 1: kicking the can until the can doesn't kick anymore. But
Speaker 1: you said the US is a pristine bar until it's not.
Speaker 1: What we're seeing is, obviously with the rise of the bricks,
Speaker 1: sort of the decentralization or maybe deglobalization of the world,
Speaker 1: if you call it that. You know, China and Russia
Speaker 1: have both been openly claiming to be de dollarizing since
Speaker 1: what twenty fourteen, about a decade now, And what we're
Speaker 1: seeing is even now, like in Saudi Arabia with the oil,
Speaker 1: is like the surpluses are not being recycled back into
Speaker 1: dollars or treasuries now, they're being recycled into gold. And
Speaker 1: maybe that's part of the reason Golled is also catching
Speaker 1: such a bid right now. And I'm just curious what
Speaker 1: you think about that dynamic. And if that's the US
Speaker 1: as a Christine Biro until it's not, does that sort
Speaker 1: of shorten the runway that they might have as countries
Speaker 1: starts sort of recycling into other assets.
Speaker 2: Yeah, I think this is a this is a key area,
Speaker 2: and I'm not sure I've got the answers, but I
Speaker 2: think I can, you know, I can pose post some
Speaker 2: questions here. I think the you know, the interesting point
Speaker 2: and the interesting maybe opposite correlation that one sees is
Speaker 2: that whenever the Chinese current account, SERPENTUS or trade surplus rises,
Speaker 2: the dollar goes up. And we shouldn't be seeing that
Speaker 2: should be the other way around. So what's happening is
Speaker 2: there's yet another price in the international financial system that's
Speaker 2: not working properly. It's working perversely. Now why is that
Speaker 2: the case? And I think there's you know, a number
Speaker 2: of reasons why you may be seeing that. One could
Speaker 2: be that, in actual fact, China is a dollar rised economy.
Speaker 2: So it's a little bit like saying, I don't want
Speaker 2: to push this an energy too far. Is it a
Speaker 2: little bit like the state of California? Okay, So what
Speaker 2: you've got is a dollar rised economy. If California was
Speaker 2: hugely successful, what would that mean for the value of
Speaker 2: the dollar? Well, difficult to say, is the short answer.
Speaker 2: And I think that's the case with China. China is
Speaker 2: pricing everything in dollars. Then, you know what, it's not
Speaker 2: necessarily telling us anything about the demand for you are Chinese?
Speaker 2: You are because it's basically sitting on dollars. Now, you
Speaker 2: could argue against me and say, well, of course China
Speaker 2: is now pricing on a lot of its goods or
Speaker 2: oil in particular from Saudi Arabia in Chinese you are,
Speaker 2: and therefore it's getting paid in Chinese you are. But
Speaker 2: the or sorry, Saudi Arabia is getting paid in Chinese
Speaker 2: you aren't. But the key thing is that Saudi Arabia
Speaker 2: is not keeping money in Chinese you are. It's shifting
Speaker 2: into gold or it's probably plying it back into dollars.
Speaker 2: And the critical day is when the sound is decided
Speaker 2: they want to save in you are. That day has
Speaker 2: not come yet, and I think it's going to be
Speaker 2: an awful long way off. And I would venture that
Speaker 2: simply because if you look at what's happening in the
Speaker 2: Chinese markets, and this is the.
Speaker 3: Big problem that China is God is.
Speaker 2: Of course they've got capital controls, and what you're looking
Speaker 2: at is a situation where the U are looks to
Speaker 2: me to be a fundamentally recurrency, even despite the fact
Speaker 2: that there's a swapping great trade surplus.
Speaker 3: Capital wants to leave. Now.
Speaker 2: I would venture that if capital controls disappeared in China,
Speaker 2: you would see a wave of money leaving the Chinese
Speaker 2: you are and going into international diversification in international assets.
Speaker 2: It may well go into things like gold in much
Speaker 2: bigger size if it could. It may well go into
Speaker 2: things like bitcoin if it could. So these are interesting
Speaker 2: things to speculate upon. Chinese savers have got a lot
Speaker 2: of money, and the bottom line to this is I
Speaker 2: didn't think they can get off the dollar hook very
Speaker 2: easily at all. And one of the reasons I think
Speaker 2: the dollar goes up when the Chinese surplus expands is
Speaker 2: simply because increasingly the Chinese are not depositing their money
Speaker 2: in US banks. They're depositing it in fringe banks in
Speaker 2: other words, in the Middle East or in Asia, and
Speaker 2: the recycling abilities of these banks to actually push it
Speaker 2: back into the system, is actually more challenged than a
Speaker 2: conventional US bank. So you've actually lost the elasticity of
Speaker 2: supply in terms of the recycling of dollars, which explains
Speaker 2: what the dollar is a lot furtherer than people think.
Speaker 1: Now.
Speaker 2: I think that could go on, but that doesn't detract
Speaker 2: from the fact that I think the goal outperforms the dollar,
Speaker 2: and I think that bitcoin outperforms the dollar. But I
Speaker 2: still would maintain that the paper dollar is still, you know,
Speaker 2: significantly better than maybe the euro or the British pound
Speaker 2: or the Japanese end.
Speaker 1: Yeah, so that's the you know, back to all these examples,
Speaker 1: but like the dollar milkshake theory, where it sort of
Speaker 1: becomes the last, the strongest lasting currency, as a lot
Speaker 1: of people say, it's the cleanest shirt in the dirty laundry,
Speaker 1: so to speak. But it's totally possible. And what I
Speaker 1: see is that the dollar gains strength against other currencies,
Speaker 1: but it loses against herd assets, so it's losing against commodities. Yeah,
Speaker 1: so in that example that you gave there, so basically
Speaker 1: China is still working in dollars, but because some of
Speaker 1: these banks that they're putting their dollars into, it's not
Speaker 1: as easy to get them back into the global system,
Speaker 1: so thereby it's lowering the amount of circulating dollars. The
Speaker 1: big problem is that most of the debt around the
Speaker 1: world is denominated in dollars, So if the amount of
Speaker 1: circuiting dollars go down, it makes it harder to repay
Speaker 1: that debt, which makes the value of those go up.
Speaker 1: I guess, and this is now this is going way outside,
Speaker 1: but maybe there's something to think about in light of
Speaker 1: where we're at with Russia, Ukraine and so forth. And
Speaker 1: now China and Russia have now sort of stepped up
Speaker 1: their military cooperation. But I think maybe the Biden administration
Speaker 1: is what we'd say in the US, has jumped the shark,
Speaker 1: so to speak, by seizing Russia's assets and now saying
Speaker 1: they have to pay for war damages. And now Russia
Speaker 1: is like, tip for tat, well we'll just take back
Speaker 1: US assets. And so it wouldn't be that far of
Speaker 1: a stretch of imagination to think that some of these
Speaker 1: nations might just say, well, we're just not going to
Speaker 1: pay that debt back.
Speaker 2: Yeah, I think that's I mean, you know, people do
Speaker 2: strange things when they have their wealth threatened. You know,
Speaker 2: we saw that in nineteen what was it, nineteen forty
Speaker 2: one with Japan, when the US froze Japanese bank accounts
Speaker 2: in the US to stop Japan buying oil in dollars,
Speaker 2: and that was something that actually led to, you know,
Speaker 2: obviously the beginnings of World War two or American American
Speaker 2: parts aspecially in World War Two.
Speaker 3: So a lot of these things can actually have very
Speaker 3: very very big consequences.
Speaker 1: Okay, so we'll kind of wrap this thing up It's
Speaker 1: been a great conversation. I appreciate you taking the time.
Speaker 1: But let's just kind of if we recap this. The
Speaker 1: world got put into these Well, one, we've seen central
Speaker 1: banks of the world sort of change the way they
Speaker 1: intervene in markets and being much more willing to intervene.
Speaker 1: The time tables of how they intervened markets has been
Speaker 1: stepped up, and now I mean they don't even intervene.
Speaker 1: They already have icon credit cards, but swap lines set
Speaker 1: up and things like that. We see these four year
Speaker 1: cycles or these liquidity cycles sort of moving and sync. Potentially,
Speaker 1: we have this massive base of collateral that's super important,
Speaker 1: so they can't let that dip. So that's one reason
Speaker 1: why that that wheel has to continue turning that the
Speaker 1: basement is moving, asset price is higher, and we have
Speaker 1: the tech trend on top of that. Some assets are
Speaker 1: more sensitive than others, tech assets, bitcoin, ethereum, as you've
Speaker 1: pointed out in your research, and there doesn't seem to
Speaker 1: be any way to stop this train from just continuing
Speaker 1: down this path until something happens and we don't know
Speaker 1: what that is. Does that kind of frame this up?
Speaker 3: I think I think that's correct, But I think that,
Speaker 3: you know, one of the things I think to think
Speaker 3: about here is to say that you know, if you
Speaker 3: if you go back to listen to what a lot
Speaker 3: of economists would argue, They say that these levels of
Speaker 3: debt to GDP or public debt to GDP that we're
Speaker 3: looking at perspectively whatever it may be, one hundred and
Speaker 3: fifty GDP are unsustainable. That's wrong. History shows its sustainable.
Speaker 3: That's the worry.
Speaker 1: How does history? How does how does history show? Everyone
Speaker 1: says the report from Hereschman Capital that every nation that's
Speaker 1: ever gone over one hundred andy percent failed. The only
Speaker 1: one that's ever survived was Japan or Japan?
Speaker 3: Has Britain?
Speaker 2: Did Britain survived through the nineteen forties and fifties, Well,
Speaker 2: I think public debt to GDP hitting two hundred and
Speaker 2: fifty percent, so way way above where US levels are now. Now,
Speaker 2: did that mean that the British economy was a roaring success. No, Rather,
Speaker 2: the country what you saw was basically decades of stagflation.
Speaker 2: And I would argue that British economy has never recovered
Speaker 2: from that from that episode. So one of the costs
Speaker 2: of taking on large amounts of unproductive public debt and
Speaker 2: paying for it with funny money is you actually destroy
Speaker 2: your economic system. You get very slow growth, and that
Speaker 2: may be a cost of that. But it doesn't mean
Speaker 2: to say that it's unsustainable. It's fully sustainable because basically
Speaker 2: the government is that is the debtor, and the government
Speaker 2: can always print money itself, and that's pretty much what
Speaker 2: it's doing. So the problem comes if you've got a
Speaker 2: foreign if you're borrowing in foreign currency, and you don't
Speaker 2: have the ability to do that. So I think what
Speaker 2: you're looking at, and this is one of the things
Speaker 2: that I think you've you know, you've you've articulated very
Speaker 2: well in terms of your observations, is that what you're
Speaker 2: looking at is a lot of debt machines around the
Speaker 2: world now where these governments, be at the Eurozone or
Speaker 2: be at the US, which are just creating debt and
Speaker 2: they're basically funding it themselves. And that's the that's the
Speaker 2: world we're in, and therefore that is what I call
Speaker 2: monetary inflation. And you want a protection against monetary inflation.
Speaker 2: The obvious one is gold equities are not bad, prime
Speaker 2: real estate is not bad. But what has come through
Speaker 2: to shine, you know, excues the pun is basically bitcoin
Speaker 2: in the last five years, and that shows that it's
Speaker 2: performing my exponential gold and why shouldn't it continue because,
Speaker 2: as we rightly point out here, it's got it's the
Speaker 2: only asset we can think of there's got a limited supply.
Speaker 1: Why do you this is this is going out on
Speaker 1: a kind of stretching this question here. Why do you
Speaker 1: think an analyst like Peter Schiff, who seemingly knows so
Speaker 1: much about you know, ostering economics and understands this so well,
Speaker 1: just cannot see any value in bitcoin?
Speaker 2: Well, I don't know, really, I find that I find
Speaker 2: that hard to believe. I mean, the question is is
Speaker 2: what is intrinsic value anyway? And that it's always a
Speaker 2: philosophical point, but you know, something is worth, something has
Speaker 2: a value if somebody else thinks it does. And if
Speaker 2: people believe that bitcoin is a store of value, then
Speaker 2: it is a store of value by definition because people
Speaker 2: will accept it. So that's one of the criterion of money.
Speaker 2: So I think that's true. I mean, you know, we
Speaker 2: can debate long and hard about whether you know, is
Speaker 2: a paper dollar got.
Speaker 3: Any value in it?
Speaker 2: Because there's there's no intrinsic value in that there's a
Speaker 2: promise to pay, and I suppose with bitcoin there is
Speaker 2: an implicit promise to play.
Speaker 3: In there or redeemedly the token.
Speaker 2: So I find it's very typical at all while the people,
Speaker 2: you know, while the people are saying what they're.
Speaker 1: Saying, Yeah, I agree, I mean it all value is subjective,
Speaker 1: and but but then you have to recognize that then
Speaker 1: to the point of intrinsic value, then that means there's
Speaker 1: some utility in that value. And I think maybe that's
Speaker 1: the argument he makes. But it's like, how else can
Speaker 1: you send money peer to peer digitally censorship resistant? Right,
Speaker 1: And so there's a lot of utility there that's not there.
Speaker 1: But well, Michael, we've we've kind of run the course
Speaker 1: on the on the time here. I really appreciate you
Speaker 1: taking the time. I subscribe to your substack. It's great information.
Speaker 1: I'm going to link to that down below for everybody
Speaker 1: that's listening. The Capital War's book If you really understand
Speaker 1: global liquidity, which I think you should, is what I've
Speaker 1: been paying attention to. Check out that book. We'll link
Speaker 1: to that down below. Anything else you want to point
Speaker 1: out while we're here, Michael, I didn't think so.
Speaker 2: I think that you know what, what you've got to
Speaker 2: watch is the three things that I've probably mentioned. You've
Speaker 2: got to watch what the FED is doing. You can
Speaker 2: look at that every Thursday, four thirty pm some time
Speaker 2: with the H four point one release. That's worth looking at.
Speaker 2: Look at the People's Bank of China what it does
Speaker 2: in the markets, and also check out what's happening to
Speaker 2: the value of collateral, of which the best heads up,
Speaker 2: in my view, is to look at something like the
Speaker 2: move index, the index of volatility in bond markets, which
Speaker 2: is a pretty good guide to the size of haircuts
Speaker 2: that credit providers will give on collateral. So we'll give
Speaker 2: you some sense as to how you know what the
Speaker 2: collateral multiple could be. And those three together are very
Speaker 2: good insightful factors for understanding global aquidity.
Speaker 1: Yeah, all right, we're going to wrap it up with that.
Speaker 1: Thank you so much, Thanks so much.
Speaker 3: Man, pleasure. Thank you.