#249 Alasdair Macleod - Top 5 assets to own in a crisis

Welcome to the State of the Markets Podcast. I am Paul Rodriguez of ThinkTrading.com. I'm Tim Price or PriceValuePartners.com. And our very special returning guest is Alistair McLeod. Alistair McLeod, welcome back to the show. Very much my pleasure. Thank you for asking me. So for those of us that are listening to you, he won't know you and I suspect you're nearly all of them will. Could you give us a quick price, a quick buyer, please? Well, yeah, I mean, I've been in the securities industry since 1970. And I've been a breaker, I've been an investment manager and I've been a banker and a researcher. And really, for the last 20 odd years, I was slightly more than 20 years. I've been rarely writing on economics. And with the banking background, obviously, looking at credit markets and the difference between money and credit in law, which is something that I've rarely been studying very, very carefully over the last 20 years or so. So that, if you like, gives me my information basis from my sub-stack, which you'll find on McLeodfinance.com. And everybody, welcome. That's who I am and where I am. And would you say that money and credit are not well understood even by the practitioners of modern investment management and practice? Yeah, I would say that and not only that, but it's not understood by economists, which is, I think, probably far more important. So economic commentators writing on what they believe money. I mean, actually, what they're writing about is imaginary money. I think it was originally an early 19th century term for currency, but I quite like it. Currency is credit. You know, it's not money. And certainly, I find that economists have got no idea how bank credit is actually created. They don't understand it. They've never looked at a balance sheet. They've never understood the accounting behind it from a bank's point of view. This is something which really evolved initially out of Roman law. It was the Romans invented banking, the Chinese invented paper money but called paper currency. But, you know, it was really in this country, the UK, taken up by the goldsmiths who, back after the glorious revolution, they found that people wanted to have the goldsmiths to look after their gold silver, et cetera, et cetera, while the country was in uproar. And out of that, they suddenly discovered that actually what they could do is they could say to people, "Look, I tell you what, if you make it over to me, we will give you 6% on your, you know, on those assets. Come hell or high water, and that's what happened." And so, on the back of that, they started creating credit. Because if you're a, you know, if you're a credit worthy chap, you can say to anybody, "Yeah, I'll lend you some, you know, here's a note, you know, which can be drawn on me, so that I can give you credit." That's what back credit is, basically. So, for people who, like, I realize that with all this stuff, I'm a bit of a geek, because I like to get into the weeds with it. And when you're explaining to the sort of man on the street or the woman on the street, they become, they are sort of glaze over a bit because they're like, "Well, okay, well, why does that matter?" So, to throw that out to you as a question, why does it matter to somebody's running a business or trying to manage their finances? Well, day to day, it probably rarely doesn't matter. You know, matters more to him is, "Can I get credit or can I not?" But when you have the situation we have today of the entire G7 membership with the possible exception of Germany, really being in Hawk, up to there is. And I'm talking about governments here. And then the stability of the purchasing power of their currencies does begin to matter. And it matters not so much as far as your business is concerned, because you just sort of carry on day to day, and you let, if you like, the future, take care of itself. But as far as protecting your own wealth, your own assets, it rarely does matter that you've got to understand what the earth is going on in financial markets. And that's rarely our audience. I mean, those are the people we're talking to. Those are the people who know, I think, getting concerned as to where things are going. I mean, actually everybody I talk to in the UK thinks, "Oh God, it's terrible, isn't it? Where are we going?" And so on. But this is an opinion, which is being echoed all around Europe, also around the United States, and also in Japan. So it's a, you know, it's not just us, everybody, sort of thinks, you know, we're going to hell in a handcar. But they don't actually understand really what is happening. And therefore, how it is going to affect their wealth. I mean, at the moment, they've still been chasing yeas, eyes, docks and all the rest of it. No, okay. They're off the top of it and questions are being asked. Let's put it that way. But people are reactive, rather than anticipatory, I think, when it comes to protecting their assets, their wealth. And that's something that we've got to, you know, sort of just help nubs them along to understand what the dangers are. And for them to take action accordingly. So the UK national debt officially is three trillion, but it's probably maybe, maybe multiple times that it's fairly accounted for. The US national debt is officially $40 trillion. And again, that's just the unbalanced sheet stuff. So the real figure is probably multiple times that in terms of the complete, a complete reset of the monetary system, as we know it, that's existed since 71. How close do you think we are to that reset moment? Well, I mean, I'm not keen on the term reset. A lot of people who see the dangers that you accept the current situation is completely untenable. Oh, absolutely. But a reset rather suggests that governments can fix it. No, they can't. They're powerless. I mean, I think the way to look at it is that in the past, governments have rescued the private sector from its follies. You know, the cycle of and credit expansion of contraction, you know, which leads to, you know, booms and slumps and all the rest of it. But now we have a situation where it's not the private sector, which is in trouble. I'm not saying it won't be in trouble, of course it will be. But it's governments themselves. Effectively, they've run out of road at the end of this metaphor about kicking the can down the road. I mean, you know, OK, you can kick the can once more, but there's no road. But that's a legacy of the 08 financial crisis, presumably a corporate sector banking sector problem got kicked up to the sovereign level. And now it's a sovereign level. There's no one else left to kick it up to. Well, that's right, Tim. But I mean, I would go even further and say this is something that governments have been on course forever since President Hoover and FDR started to try and intervene in the private sector. To, you know, deal with the slump. I mean, it goes, it really does go back that far. And of course out of that, you had various economists trying to think about how, you know, government can intervene. Canes with his general theory effectively produce the blueprint for government intervention from there. Excuse me. And we've been screwing things up ever since. So I think, you know, the great financial crisis, which I've never called it that because the one coming is even greater. Well, that's not the great, that's not the great war, isn't it? We've had World War one. And you know, it got nice words coming next. Yes, my grandma used to call it the Kaiser's War, which I thought was a better way to put it in. But anyway, I mean, the thing is that, you know, this is that we are at the end of a long term process. And various things happened along the way. The devaluation of the dollar by 40% in early 1934. The setting after the Breton Wood system, which itself was another step, if you like to try and keep a show on the road, then the end of the Breton Wood system. Various, I mean, we had this sort of inflation blow off in the 70s. I mean, it's been crisis after crisis after crisis. And the great financial crisis, what I prefer to term the Lehman crisis because there was that moment when, and I think you must have shared this where we were looking into the abyss. And we thought, oh, my God, how are we going to get out of this? And in Mario Draghi's later words, well, whatever it takes. Do whatever it takes. Now, I mean, this unfortunate war against Iran basically is driving up energy crisis. It will continue to grow. up energy prices. And it will drive up the values of, you know, the prices of everything else. But of course, what people don't realize is that when you get a general rise in prices, it's not the prices going up. It's the currency's perishing power declining. And that now is going to accelerate. You're going to have a slump in the private sector because they won't be able to pass on higher energy prices. Stop markets will slump as well. And so, you know, where the governance go. Well, they find that their revenue starts falling off a cliff and their welfare costs start accelerating. And then they're in the market to try and borrow more. But already, they're in the debt trap because what a debt trap is is you don't have the income to support the amount of debt that exists, let alone the debt that you're requesting to be created. So, I'm afraid that the system is just going to fall apart on its own. It's not going to be reset in that sense. I mean, we're more like, if you like, the global version of Germany in 2019-23. For some of our younger listeners who may not have experienced or may not have a memory of the crisis, just to remind you what that might have been like. It was that you would literally be seeing your bank deposit disappear and you would not have the ability to withdraw cash from the bank. That was the fear. I mean, a bank going down is one thing, an over leveraged entity collapsing and being taken over or whatever. That's one thing. But actually seeing all your deposits wiped out and cash machines empty is not something that you can forget in a hurry and the build up to it. Obviously, cheap credit and wasted opportunities by governments to bring debt down. All those things just repeat because, of course, the way the election cycles work. I think Tim's questions are really good one because it does feel like we're approaching a very similar moment. Similar to the dot-com boom and perhaps the AI boom that's going on in the moment could be a parallel to that. Where are you seeing the most pressures coming in in the markets? We've seen bond yields rising. They've just started to maybe come off a little bit. Gold and silver, obviously, have been in a consolidation this year after a fantastic run. How are you seeing the markets generally and where you think they're going to go next? Well, you say that I mean bond yields have paused, but the French would like to believe that as well. Right. Actually, to be fair, I haven't looked at French bond yields, but I do imagine they're blowing out. If you're buying French bond yields, good luck. I would say Germany's in the US are the only two worth considering. I wouldn't even consider them. The whole lot, basically, the whole of the G7 bond yields are all rising. Now, we've had a bit of a pause because the US sort of broken, the 10 years broke on the 5% level. What it's doing, I mean, if you're a chartist, you see it ticking back towards the 55-day moving average, which is currently a little under 5% or something. This is a perfectly normal correction in an ongoing bull market, bull for yields, not bonds in Germany. This is going to continue, but I think the immediate crisis. It depends when you ask this. One month is Japan, the next month is the US. It happens that as we speak, it's France, and if you look at the credit full swap rates for France and Italy now, because Italy is being destabilized by this, they are through the roof. I mean, they've rarely accelerated from something like, you know, 20 up to 90. I mean, this is huge, absolutely huge. This is the market, telling us that there is the risk, if you like, in French bonds is completely unacceptable. Yeah, I mean, of course, you've got all the riots and all the rest of it, which is bad optics. But you've also got the election next year, and it looks like Marine Le Pen is going to be the next president. And this, you know, I mean, it stares up a hornet's nest in the Eurozone, which basically is social democrat. And Merz, his popularity level is, you know, hitting new lows, virtually every week, with the AFD on the ascendancy, etc. So, I mean, there's huge change going on here. And the markets just don't know how to handle it. I mean, they just see risk, risk, risk, risk back off. To what extent, I mean, you said that markets can't handle it or don't know what to do. To what extent is it fair to make the comparison between what are living through now in the 1970s from a political and financial standpoint? Because the argument we'd make to clients is, you know, the 70s was period of monetary destabilization, war, high inflation, and higher energy prices, energy crises, equities were a disaster, bonds were a disaster. You wanted to be in commodities and real assets. It's, I think, it's, that's an interesting comparison, in particularly, to where we are today with energy prices and the consequences for other markets. And where we were in late '73, early '74. What happened in late '73 was that OPEC raised a safe reference price, not a huge amount. The price of gold fell from something like $118.90, where it bottomed on, I think I'm right, saying on the 20th of December '73. The gold price started rising, and it more or less recovered all that loss. Before, I think sort of towards the end of January, Sheikh Yimani raised the OPEC reference price by over 100%. I mean, it was something like, I think he raised it from something like, I can't remember the figures, but I mean, it was up to something like $11.50 or something like that about. And what happened to gold was that gold went up from that December the 20th, 73 bottomed, it doubled by early April into early April, doubled. Now, at the same time, bond yields were rising. The inflation scale was fully on. And for what is worth, consumer price inflation in Japan actually peaked at about 25% in '74. Bond yields. I mean, JGB, 10-year yield went up to something like 8%, 8.5%. And that's in large part, presumably, because Japan is an energy importer. Exactly, which is still the problem today. 90% of Japan's energy comes out of the Middle East, except the Americans have been filling the gap, you know, since the Hornets crisis. But the important thing to understand is that in those days, government debt to GDP was in the order. I mean, I worked it out across the G7. It was sort of 20, it was an average of 27%. I mean, today you've got. It's three times that it's more than three times than now. Yeah, yeah. I mean, the average across the G7 is around about 117%. Now, there are outliers in that, I mean, particularly Japan, and Italy. But, you know, the good guys in this are Germany, with around about 70% now. But I mean, their economy is just tanking. So that's going to rise. No, I mean, this is this is something that's only just started. I think the interesting thing is that at some stage, we're going to wake up to the true inflationary consequences of what's going on. But as I say, you know, this again is a complete misunderstanding. When we talk about prices rising, actually what we're talking about is the purchasing power of the currencies collapsing. And this time it's going to be far worse because of the dynamics of the situation today compared with 1973-04. So, what advice would you give people in a general sense? What should people do with their harder and say things? Yeah, I mean, I don't give investment advice. I think we're talking generally. But I've taken the view, you know, get the hell out of credit and get into real money. And if you don't know what they are, then you've got an education process you've got to go through. Are you surprised at the extent to which bond yields have risen around the world in every major market and every G7 market? And yet there's the not being obvious casualties yet in the investment world, i.e. banks or insurers or credit funds or some other kind of specialist vehicles. It seems to me that if you move, say 10-year US yields from half a percent, which I think was close to the low, to over 5 percent, in a space of a few years, quite a short period of time, there will be consequences, especially in a levered environment. Yeah, you're absolutely right, Tim, and Of course, I mean, if we take our minds back to pre-COVID days, there was this view that interest rates and bond deals were never going to rise again. Do you remember that battle plan never survived contact with the enemy, did it? No, exactly. So the importance of that statement is that, obviously, if you were in business, then with costless credit, what do you do? You go out and, you know, borrow as much as you can. And that's what, so, you know, our private sector is absolutely full of zombies. Governments did exactly the same thing, which is why we've got so such high debt to GDPs. I mean, this, I think, is an existential crisis. And the part of the reason that I think markets have ignored it so far is that I've observed in the past that, you know, the relationship between bond deals and this case, I was looking at guilt yields and the London equity market is that you get a bull market beginning to gather some sort of momentum. And that is then followed by what they call economic recovery, in other words, demand for credit. And that demand for credit does begin to drive up interest rates. The market continues, I mean, equities continue to go higher on that initial rise in interest rates. But that does come a time when maybe after a brief pause, interest rates then start going higher again is that second rise in interest rates that kills the equity market. So what we have seen, we saw an initial rise from more or less zero up to about five percent. We've had a consolidation moving sideways for roughly three years. So that equities have risen, if you like, at the same time, as bond deals have risen so far. But that's second rise. The one is now just underway. And that is going to kill the markets. And already we do see some of the more extreme, you know, AI stocks and semi-conductors and all the rest of it beginning to reflect doubts, if you like. So the market, I think, is actually in a topping process. But once that sort of just goes a little bit further, then it's going to crash. And we're seeing, I think, pretty much a total collapse in equities, other than perhaps mining stocks. Mining stocks are interesting because I think, initially, on a general market, equity market collapse, they could be source of funds because people always do this. They always sell the things they got profits on to cover the losses on things that they should be selling. Banks also have extended an awful lot of credit into the market. So they will be getting out of markets. They will be liquidating collateral. And, you know, Finra reckons that there's on their statistics, there's around about 1.4 trillion of leverage through brokers. And then, of course, there is the extra leverage that hedge funds have, which perhaps is more widely distributed across financial markets than just equities. So the total leverage, if you like, is looking rather like $9 trillion. And then, of course, you've got foreign investment in US equities. That's a further 25 trillion. They're going to get out. I mean, why do you hold a foreign stock? You hold a foreign stock because you think you're going to make money out of it. The moment, you know, the currency and or the market turns against you, you're out of there. So they won't raise 25 trillion, I can assure you. But you can see, suddenly, this is a market, which has bond yields get away from that 5% level into higher territory. The equity market is going to crash. It's the end of a credit bubble, which has been fueling the market. And, you know, the sentiment has always been, you know, this is momentum. You've got to be in the momentum stocks. Don't buy stocks on the fundamentals, buy them on them. You know, otherwise you underperform. We've all been there. Do you remember the dot com? This is this is more extreme than the dot com bubble. Yeah, a lot more extreme. So I remember the, as I remember, sorry to interrupt, poor, this I remember the dot com bust in, I think now it's like peaked in March 2000. The whole market didn't go down. It was the dot coms and IT stocks specifically that went down because I remember at the time we, I was working at Merrill Lynch and we'd recommended a stock called Washington Mutual, which was back then a Mutual like a building society in the States. And it did very well. So if you were in the right kind of value stocks, you did okay. It was tech that went down, but I think this time, I think I've probably inclined to agree with your perspective, which is it'll take down nearly everything because the scale of the problem is so huge. To that point, if you were tasked with trying to solve this mess out, well, that was at the Fed or know you were grand timing of the universe. How, how if, if you even can, would you go about trying to solve this predicament? Well, big problem to deal with, Alice there. Let's say what the predicament is, the predicament facing effect will be a slump in business activity and, um, inflations. I mean, people call this stagflation, but effectively, the damned if they do, the damned if they don't, I mean, do they just stand back and, you know, protect the dollar and say it was stand back and say, this is beyond resolution. We're going to basically let market forces do their thing. Exactly. But then they will have to stand back while bank credit effectively collapses. Well, it's an awful lot like the 1930s. Yeah, it is, but without, without a gold standard, if you like, protecting the value of the currency. So yeah, this is, this is very, very serious. And in any event, you would have to persuade politicians to get on board. Now politics will drive this. I'm sorry to say not economic rationale, but for many things else, the economy is something of a clue what they're doing because they're all Keynesians, New Keynesians or Manitrisse or whatever. They don't actually understand classical economics, you know, they're all macroeconomists, which is a non-science. So, um, you know, the advice from within is going to be wrong to start with because the assumptions are going to be wrong. But as far as the politicians are concerned, the politicians basically will run it. And, you know, you can be the head of the greatest central bank in the world, but basically at the end of the day when the politicians say, "Jump, you've just jumped. This is what happens." I mean, this is, this was the lesson we had from Germany in 1923. I mean, Helferinger, who was a well-known economist at the time of the German Historical School, very credible man. He was finance minister in Germany during the war. After the war, he wasn't finance minister, but he was still very, very influential in government and at the rice bank. And, I mean, he knew that the whole system was going to collapse, and he did nothing to stop it because he knew he couldn't stop it. He knew this was driven by politics. And, okay, they had their odd sort of moments of horror, like when the French marched into the war to try and sort of take their collateral, as it were, which made things a lot worse, obviously. But, you know, and Helferick actually came up with a plan to replace the rice mark, which really involved, I think, basing it on, you know, the nation's sort of farm output, if I remember correctly, wheat and all the rest of it. It was, if you liked the model, for what actually happened. And, I mean, the reason that they recovered was that it was just so horrid. The whole thing was so horrid. Everybody finally realized that it was the currency that was the problem, and the moment that really happened, and the currency had been discarded by everybody, then there was the basis, if you like, for the rice bank under Shaft to, you know, engender a recovery in the situation. But, you've got to go through that hill first, and it's the politicians who will take you there. So, we get hyperinflation followed by a global total war. I hate the term hyperinflation. That is basically how it is viewed by everybody, but actually it's a collapse in the purchasing power of the currency. That's what we face. And as to your second point, certainly, I mean, this was the point that Hayek made, and his road to Shaft, you know, you're after all this sort of mess. You get the public demanding, we need a strong leader. Of course, Germany got Hitler. So, you know, you're not necessarily out of the woods after what is laughingly being called the reset. So, you've laid out the way that the markets are going to respond. IE yields are going to continue to rise, and in this next phase, equities will be sort of in this twilight zone where that they may be rising. Pundit? The toilet of the gods. Sorry, Tim. I didn't hear what you said. Got a demo rungs, a toilet of the gods. Right. Okay. Is that because you speak German or because you're an opera buff? It's because I like the right of the Valkyrie sequence from Apocalypse Now. Yeah. All right. Okay. Neither is that. So, we're going to have equities rising, Bonyls rising. And then equities are going to flip and start to fall. The cracks are already forming. We're seeing, like, for example, I was looking at a chart of Netflix and I know Netflix is done extremely well as a kind of tech company, which is underlies its business, but it also has a lot of borrowing and it is moving into what looks like a bear market. It's actually hitting some kind of year lows and it's not looking good. So the market is actually being propped up by just a few stocks. So the breadth of the market is starting to fall away and when those central planks start to move, then we're going to start, you know, usually there is this process, but in this final stage as the analogue of the.com boom, you do get a frenzy. So it's kind of masked by sentiment, like sentiment goes so aggressively towards whatever's the flavor of the day, AI stocks, which could well have another run up to just kind of mask what's going on in the background. I'm just interested in where you think money will then flow to because if the market is falling, yields are rising. People have got a choice. They either go into short-term government debt for protection. They go into cash, which is another option. They could buy obviously gold or silver, precious metals. And then of course, there's Bitcoin as well. What do you think people will do and who do you think what asset would benefit the most? Okay. I think people basically are going to screw it up. Right. Okay. I mean, what happens? What is going to happen is the bank credit is going to contract very, very substantially. Now, this threatens banks because the banks are going to have substantial write-offs if you like. The reason the bank credit will contract is basically they're trying to liquidate their positions ahead of this. But they weren't all succeed and you referred to the chart of Netflix. If you look at the chart of the US banks, they're already showing similar sort of story, I believe. I don't follow these things closely. What I would say is that you have to prepare yourself for bond yields, which are going to rise above 10%, possibly even above 20%, I see no ceiling on bond yield rises. Why? Because when you get a collapse and the purchasing power of currency, then buyers of the issuers debt are going to require compensation. And at what level does that compensation come in? I mean, because then this is the problem with the debt trap, which I mentioned earlier. When you get the debt trap, of course, a higher rate makes it even less attractive proposition to buy the debt. So it goes higher. So it's like really the old sort of payday loan type business, where you find that interest rates go up to whatever under, but unlike a sort of payday loan operator who tries to recover things by sending in the heavies, you can't do that with the government. But you can get financial repression. Financial repression, yeah, but it's basically we're looking at something which is far larger than that, but we're looking at the destruction of the currency. And to understand this, which nobody understands, is currency, is credit, and what is happening is loss of faith in the credit. It's got nothing to do with money supply or anything like that, but you can see the events that are going to lead to that loss of faith in the credit. And that's the key point. And this is why, I mean, going back to sort of earlier in the conversation, people don't understand the difference between money, which from Roman times embodied in Roman law, getting all the way back to the 12 tables or tablets, a 448 BC, out of that evolved the financial system. And there was a very sharp delination between money, which in those days, in the earliest days was a coin, a bronze coin weighing about a Roman pond called the ice. We went through silver and eventually gold. And we got gold as represented today. What is gold represent his final settlement with absolutely no count party risk? Which is why central banks are buying it, even if individuals aren't. But importantly, it, in law, it represents something called corporeal assets. In other words, things you can actually hold, oh, land, buildings. I mean, I'm assuming that, you know, the no debts, if you like, on leads, which might affect the values. But, you know, so land buildings and those days, slaves were also, but that's gone. Thank goodness. If, you know, tangible things, this is what he represented, so gold represents the entire commodity complex. It also reflects the value, if you like, of items which are produced out of those commodities. That is corporeal. The incorporeal assets are basically aligned with credit, you know, your guilds, your currency, your equities, and even, you know, your gold ETFs, they're not physical possession. If there's an obligation of the management of an ETF company to deliver the value of gold to the shareholder, I mean, you're not even a shareholder anymore. That's gone. No, it's euro clear, for example, they're the shareholder and they own obligation to use. So you've got the chain of obligations, all that basically is an incorporeal debt. In other words, it is credit, it is a form of credit, which is matched by an obligation to deliver on the other side. It is not final settlement, and it's that credit, which is collapsing in value. If we get a complete collapse of currencies, then it's the end of financial markets full stock, completely. Until something replaces it. So, yeah, I mean, that's where we are, and this is immensely serious. The risk of that happening, I'm not saying that this is definitely going to happen, but what I do see is the end of the currency era, however, that morphs into something else. We don't know, because we don't know the future. We can only get at it, but the danger of that is increasing and increasing and increasing, and this is something which people have got to understand. Of course, governments turn around and say, "Oh, it's not a problem. Don't worry. They just go from day to day to day, and the politicians spend, spend, spend." I mean, it's very inconvenient that bond rates are making it difficult for them to fund their fancy projects and all the rest of it. That's the way they look at it. That's the way they'll always look at it. And they're autonomous. They'll blame evil speculators, that's what they normally do. Oh, absolutely. And not only that, but when things start going wrong, they restrict our freedoms. They will even take your gold from you, and ban you from buying anymore. So you've got to be very careful how you manage all this, how you're going to survive it. So to go back to Paul's earlier point, where does Bitcoin sit in your worldviews potential solutions to this? Well, basically, it's not, I forget it, I mean, that's going to die completely. It is not money. It is not even credit. It's somewhere in between the two. And it falls foul of common law in various ways. I'll give you, well, okay, let's not go into the legal side too much, but can you imagine it operating, if you like, as a currency? The way an economy works is, it doesn't work on money. It always works on currency, okay, because you're not going to go and borrow gold in order to invest in production and pay back the gold at the end of the thing. No, you don't. What you do is you buy, you borrow, you know, when you had, you know, gold standards, you took a gold substitute, which was the currency. Nowadays it's just a fake currency. You borrow that to invest in production. You have a cost of borrowing, and you understand, you do your business calculation on the basis that you are going to make a few assumptions about the value of that repayment at the end of the day. How can you do that with Bitcoin? It's completely useless. The people who like Bitcoin sort of think it's a way of getting out of firms. you know, government money printing. But I mean, this is by people who don't actually understand the difference between money and credit. And what the function of credit is. So I think having these circumstances, I think the whole of the crypto industry is dead, finished end. So the internet loves these things, these, these, this question that I'm going to ask you, and it's a difficult one, but in a crisis, what would be the top five assets that you would look to buy? In a crisis? Yeah. So let's say, let's say we're approaching the crisis. We're already approaching it. We can see the signs. What five assets would you like to move into, would you be moving into a head of it before we get to the either storm? Okay. Gold, gold, gold, gold, and silver. That's the five. Physical. Physical. Okay, okay. Stored safely. And this is, this is why, you know, I'm now a senior strategic advisor to Vongretz, who have private storage facilities in Switzerland and also in Singapore. The strongest jurisdictions in terms of property rights. And independent of any corporate entity, ownership by, let's say, a bank or anything like that, you know, you've got to be very careful about this. You can have some coinage, let's say, at home. But bear in mind that this, you know, you're going to go through violent times and, you know, people are not nice if they think that you've got some gold to rob. So, you know, you've got to be very, very careful. You don't talk to anybody. Just look after yourself and bear in mind that you're also going to have to look after your family. And those who are near to and dear to you and your community, I mean, this is, because they haven't bought into this. Do you, I mean, you know, we know from American figures, if you look at ownership of ETFs, gold ETFs in the US system, you've got portfolios worth something like 170 trillion. The value of the ETFs is roughly 0.3 percent of that. They don't own it, you know, and that's, that's even credit to that. So, I mean, they don't actually have gold exposure at all, apart from anything else, the powers that be have told us that gold is not a regulated investment, and therefore you don't own it. So, can you, can you envisage a time where in a crisis of sorts that we might actually be sort of buying things with silver pieces, potentially, because with gold, it's quite difficult. Do you think that it could come back as a, as an actual medium exchange? Yeah, it's a medium exchange. Well, I mean, it could well do. I mean, nobody ever says no to gold or silver. I think we're right around the world. There's no, there's no one that ever will refuse it, of course. I do agree with you. I mean, I think silver possibly, but I don't know where the copper comes back in. I mean, I think the problem is that until the really the last moment, people won't understand why it is that prices have gone out several thousand percent, if you like. It's only, and this was again, this was the lesson from Germany. You know, the last people to understand that is the currency going down not prices rising are the users of the currency. But the moment they understand that, you've got about three or four months of them dumping the currency just to get the hell out of it, and it's loss of value accelerating substantially towards zero at that point. It probably never quite gets to zero. I mean, you've seen seen this in St. Barbara. You've seen it in Venezuela as well. That's what's going to affect the whole world. That's what that's what Mises called the crack up boom. Exactly. Exactly. So, how you survive through that is difficult to know. Now, I think maybe slightly ahead of that, you'll be able to use your gold to buy currency, to buy property, for example. I mean, I understand. And this came out from Stefan's fight, who's Austrian writer, his autobiography. He was talking about the great inflation in Germany, and he said that for a hundred dollars, we're talking twenty twenty three, for a hundred dollars, you could buy six bedroom mansion in Berlin. A hundred dollars. Now, a hundred dollars was just under five ounces of gold. The problem with property in those circumstances was, first of all, there's an element of debt. And the second problem is that the cost of maintaining it was greater than the value of the property. And also, on top of that, the rental yield, of course, rents of fixed in advance, and they remain in place until they are reset. So, your loss of income when the purchasing power of the currency is declining very rapidly. You know, that again, the income is considerably less, than the cost of maintenance. So, you know, the last thing you want to have is property. And particularly when, you know, you're actually starving. And, you know, if you live in the city in Germany in the sort of twenty two, twenty three era, farmers weren't sending food into the city. Because they weren't getting paid if you like anything in value. So, you then had wide spread food shortages and all the rest of it, which is interesting because food rights are already being quoted, if you like, as an element of the disruption in France. But this is going to get a lot, lot worse, lot worse. So, would you also be looking, I mean, you mentioned copper. So, base metals, presumably, would be rising as well. And then potentially, could you see the oil price go much higher as well? Would you be looking at, I mean, do you have any actual, it's difficult to put targets on these things? But do you have any expectations of where the markets will go to? Yeah, the purchase metal markets. Okay. Looking at commodities, basically gold is representative of a basket of commodities. And I mean, individual commodities come and go, supply them more factors, whatever, whatever technology and so on. But if you look at a basket of commodities, then it is true to say that over a long period of time, gold is representative of their value. Now, from the research that I've done looking at the relationship between gold and commodities, I come up very, very frequently with commodities are valued at roughly 20% of where they should be on that long-term track, measured in gold. So, when we get a collapse in the perusing power of fair currency, the underlying situation in terms of the relationship these commodities with gold is that they are already ultra cheap. So, this means that a lot of the collapse in the perusing power of the currencies is going to come from a correction of that situation. Oil in particular, 20%, copper, 20%, I'm just talking on an earlier podcast about US property prices, 20%. So, this sort of 20% number just rings every time. And the reason that the commodity-to-gold relationship has gone this way is because of the distortions put it into the value of gold from a world which works entirely on fair currencies. That comes to an end. And the consequences of this are going to be extremely unpleasant, obviously. You've led me to my next question, which is, to what extent can we even trust prices in these commodities? For example, to what extent can we trust the gold price or the silver price as set in Western markets? It's supposed to say set in Shanghai. Yeah, well, I mean, Shanghai as well. We're all talking paper prices. You know, these are not gold and silver markets. They are paper markets. If you like sort of referring to the value of gold and silver, if you're dealing in, I mean, if you have a central bank, for example, or a large dealer in gold, you go direct to the refinance. You don't go to the market. And you might use the market if you like to hedge a position, but that's about it. So, it provides a reference. So, you're getting a lot of buying, being darned, if you like, without driving the price of the market, the value, you know, the paper value up. Occasionally, this leads to a situation, not such as we had, I think it was on October the 9th last year, when the lead straight silver suddenly shot up to about 40 percent, reflecting a shortage of deliverable silver. And that was the start of a run, which took it up to 120 dollars not so. Um. But you know, so I think you need to look at these paper prices, if you like, with sort of a bit of scum, I mean, don't think that the paper price today, I mean, when we're recording this, I mean, they've sort of hit gold and silver yet again. But these are market makers who know that the vast majority of dealings are off-market. They don't go through the market, therefore they're not part of the price formation, which means that they can whipsaw values up, down, up, down, sideways, whatever they want to do, just to generate trading profits. And it's an extremely profitable thing to do. I mean, it really is. To what extent is it remotely conceivable that we could return to some form of the gold standard? I think for us, that's impossible, because it requires the sort of discipline, one, which we don't have. And second, the entire economic community basically don't understand economics. So their advice, even if it was taken, and I would say it's not going to be taken because it's driven by politics rather than rational, rational, is completely wrong. So there's a complete re-education needed. The only countries that do understand this are the ones that have been isolated, if you like, from Keynesianism. And that is China and Russia. And they could go on to gold stands tomorrow. Russia is so. Very, very easily. So there's an argument which suggests there's very much in their benefits to do so in the immediate economic sense, because the central bank has its reference rate, around about 14.5%. What that does is the moment they go on to gold standard, the Russian banks basically will go and buy gold everywhere and deliver it into the central bank to get a gold substitute, which pays them 14.5%. This is actually the role of interest rates, not to try and manage the economy. So it's to manage your gold stocks, your gold backing, as it were, the currency backing, and therefore the confidence and the currency. So a slightly different question. Do you think there's any chance we could have a change in the nature of modern central banking, because it seems to me that the central banks are the problem, not the solution here? As issuers, yes, but I'm not sure that I mean, nobody wishes power easily. Well, there is that. I mean, ideally, they would wake up and understand, look, our function is actually not to intervene in the economy. It is to ensure that the currency that we issu is redeemable in gold, on demand from the holder of the currency. We get back to that, which not even the 1844 Act, Bank Charsher Act, rarely fully understood. If we get back to that, then there is a long-term future. And okay, it's not going to banish the sort of fluctuations in bank credit, the lead to boom and slump and all the rest of it. But there will be far less disruptive than a situation where the central bank intervenes and smooth things over, basically, by replacing commercial bank credit with central bank credit. Building up debt, if you're like along the way, until it finally all collapses, which is really what we're talking about. I just don't see at the moment that we're going to emerge into the situation where what I've just said is actually properly understood by the authorities. It may happen. If there were some. Would you like to see it? If there was some form of gold standard that the central banks went on or adopted, wouldn't as the. An argument I've heard in this regard is as the economy is growing and the money supply grows. The restrictive amount of gold, which is its advantage because, of course, you can't print it and therefore it can't be debased, becomes a problem because you can't create more of it to increase the money supply to allow the economy to grow. That seems the price doesn't change. Well, I mean, the whole point about gold is that it maintains its purchasing part over long periods of time. The reason it does that is that the above-ground stock grow at roughly the same sort of rate as the global population. There is also a substantial reserve of gold being used for non-monitorial purposes and formed jewelry or whatever. So. An electronic. That's if you like, is the extra supply if you like for monetary purposes. No. It's always worked in the past. It will work in the future for reasons that the classical economist really began to understand, particularly before the First World War and were particularly rejected, if you like, in the 1920s. The counterparty risk problem that you've mentioned. You've got a solution to it. Tim, I've heard you talk about this before as well. You obviously have got a fund to manage and position in this way. If I could just ask Tim, how do you deal with this counterparty risk problem? Because it's something I've, obviously, I've heard you talk about before. The problem we have or the challenge we have is that, as as alluded, the authorities don't really like gold as an asset, so we have to make some compromises within the fund to how we get our gold exposure. We handle the counterparty. You should buy also any mining stocks. Hopefully cheap, well-managed, cash-generative, well-reserved companies. Probably the single biggest factor for us is lengthy life of mine. Right. If somebody listening to this says, I'd like to find out how I can invest in gold. I don't want to have it in my home. I don't want to have it in my business. What you're saying about, you've got to own the actual real product. You can't have somebody in between. You've found a solution to that. Would they come to you to find out about this? Is this something that's in your sub-stack or where would they get details? Yeah. I mean, I write about this in the sub-stack all the time. And what I also try and do is try to explain the economics behind it. The difference between money and credit. I mean, gold mines are interesting. I suspect that there will be a source of funds for people who make a huge losses once the AI think crashes and equities effectively go down towards 10% of where they are today. And that's even measured in depreciating currencies. But once the initial selling of mines is over, I think that there will be a very quick switch back into gold mines, silver mines, commodity producers in general, energy, oil companies, and so on. As a way of benefiting from the crisis as it were, hedging out of the crisis. But if this goes on, and I can't see how it's going to stop, may stop, but if this goes on to the point where currencies are destroyed, I'll have NSW, I'll have, um, um, um, Barboy. It's going to say reducing, it's getting some sort of memory left. So, um, then under those circumstances, financial markets generally are finished. I mean, they, they, they, they will cease to exist because they are, uh, all credit and, uh, destroy the credit, you just, you know, markets no longer there. It's gone. So, and the other problem you've got, and this was something that was, um, pointed up by David Webb and his book, The Great Taking, is that you don't actually own, uh, shares, let's say, in these mines. They're all sort of centrally owned through Euroclear, whatever, whatever. So, in law, um, uh, mining company, um, as it has, as it's shareholder, Euroclear, and Euroclear then has obligations to you as a shareholder. Now, that's fine. It can promise to deliver that, there's obligations. Meanwhile, it does what it wants with, um, what you think of your shares. It will allow people to borrow them, whatever it will use them for collateral to secure the whole system. So, if you, unless you actually own a certificate, um, you know, you are beholden to the system as it were. Um, but even then, if you own the certificate, what you've got to do is you've got to be prepared to ride the thing out, um, so that once things stabilize, some sort of value can then come back into the value of your shareholder. Um, it's, it's, it's a, it's a complex thing. The simple answer really to all this, uh, Paul is that you can only, I mean, you know, you can play that game and you will do it extremely well as long as you remember that, um, the final collapse means that the only thing that will, will retain its value is real money. In law, in everybody's common law, which of course is gold and secondly silver. So, whilst you were talking about the low in gold in December 1970. 23 I decided to fact check you in real time to see if you were correct, which you are absolutely correct That was the low and you were absolutely right. It did double by I think April that year the following year and Looking at the chart right now and from when you were on last time last last September actually it was and doesn't time fly We'd seen an explosion in the gold and silver price, which is obviously something that you and Tim had been predicting for some time And it came to a bit of a head of course as these things do and now sentiment is extremely negative on gold and silver people are just not interested in it and It's in this big consolidation which is almost perfect from The point of view of it being ripe for a reversal is that something that you're expecting in the in the short term even though you're obviously your view is very well laid out for the longer term Well, I'm I'm not in the position that Tim is in who's got to sort of Perform so he's got to do timing and all the rest of it in trading. I just tell everybody look Don't trade this because you get slaughtered. The answer is just stack and just sleep at night Be a hodler. Yeah, be a hodler. No, that's not cool. Well, what's the equivalent for gold? What a godler Gold bug. I think they say no, but I mean a real money a real money enthusiast. I mean, this is the whole this is the whole point and I mean, you know, I have I get correspondence from my sub-stack list and you can see that actually despite everything I say they think they think like traders They have this human emotion and what they're saying is in effect. I buy gold so it goes up And I can sell it at a profit But they're getting it completely asked about face Actually, you buy gold to get out of credit. That is the answer and nobody at the moment actually really appreciates that I mean, it's it's the thinking if you like a head a bit happening of the crack up boot You got to get out of credit. That is the point about a crack up boom When finally people realize that they got it get out of credit, you know, they will sell the currency. They will sell Anything like, you know, which is tied to the currency in order to buy real goods corporeal assets But yeah, and food obviously in all restaurants stop by what they can while they can What I'm trying to tell people is that is way the way they should look at gold now It is not something to trade. It is something with to protect yourself Against what is increasingly certainly going to happen. That is the point I was so pleased that you mentioned CDS prices and It was something that I was watching very closely During the the previous crisis the build up and it's something I've kind of recommended a few times for people to watch as The indicators that market stress is coming in. I just wanted to explain for people who don't know what that is credit Default swaps are basically you can think of them as insurance on government bonds and how much it costs to ensure a government bond and If you think about Insure against default against default. Yes. Sorry. Yes. Thank you for that so If you think about your car and you ensure your car, you're not allowed to have two insurance policies on your car That's illegal. You can only have one principle of insurable interest, isn't it Possibly I'm not sure what the technical term for it is, but you're just not allowed to because of course if that car if you have an accident You can't claim from two insurance companies makes perfect sense Credit default swaps aren't like that. You can take there effectively you can be buying as many of these Contracts as you like and if the government bond Does default then you can get paid out so during the previous crisis The the cost of these bonds started to to explode and I was looking at like you mentioned the The French bonds went from 20 to about 90 did you say it was 80 or 90? Yeah, so and it is really not far behind Right, well, I was looking at Iceland trading around 600 and moving higher and having discussions with people who said that everything was fine It's fine in Iceland and so it doesn't take You know much analysis to say nothing. No, it really isn't the market is saying that there's a huge problem here and that was when we had Short-term interest rate futures showing that there was massive stress between the banks because the banks didn't try each other and so overnight borrowing went through the roof and What's amazing about this whole situation is how the system can sort of carry on Until it hits this point where it then just implodes and then plows and becomes It just is so fast that people just can't react which is exactly what you were saying before and That's why I guess it's a sensible strategy just to have something that Gets you into something that's non-financial i.e. Gold as a kind of regular Like process and then you're kind of if if nothing else you've you've got some form of edge Yeah, no, that's that's that's right and I you know the problem I mean, we don't know the future. Let's let's be straight about that, but What I would say is that when you get a crisis of the sort that is building It could happen overnight Literally and you'll find markets are shut in your trap The answer is be prepared scouts motto be prepared If you're gonna crack if you're gonna panic panic early panic early exactly That's it's all about protecting yourself. I mean the days of trying to accumulate wealth by trading by Buying things you perceive to be cheap and all the rest of it those days are gone It's now it's now maximum danger for In court-poreal assets, which is basically credit and credit related instruments Just get out of them get into gold Which is the real money am I right in saying that the cost of say a UK or an American home in terms of gold in say the 50s or the 60s is about the same as it is now I've seen sort of memes and things going around and I haven't checked it myself, but it but it sounds I mean look if we all go back to You know if you think about 10 20 30 years ago We'll say something like I remember when you could go out for a night out ride the tube buy a few pints and still get a change of a They've changed still have changed from a fiver and people think you serious and it's like but people you like people who are older than us We're saying the same things about a pound or 50p and you're going know that can't be possible and now You know, it's a hundred quid for a night out pretty much and then maybe in 10 years time it'll be all we used to go out for a hundred Quidditch costs a thousand now, so What is stable in all of this? How's the goal Paul you're Paul you're being very optimistic. I don't think we got that I tell you what put it into context, you know This this business about the purchasing power of gold remaining pretty constant ever long periods of time Back in 1750 you could have gone to a coffee house in the city called Jonathan's which actually was the four runner of the London Stock Exchange London Stock Exchange came out of that Jonathan basically was populated by jobbers who had a terrible reputation And people who are interested in speculation and investment and all respite and you could buy a cup of coffee for a penny An old penny, yeah If you work out the value of that penny In gold we get you had to go through silver and gold and all the rest of it And you know you've got a pound Exchangeable into gold the value of the sovereign is now what seven hundred and seventy quid or something You end up with a price of about three pounds fifty wow Was it caused for Starbucks in the city at the moment? Yeah, that's that's amazing amazing How's that for stability? Yeah Yeah, it's so you know, obviously we're of a certain age and and now sort of accumulating gold for the long term What is the long term but we've also got younger listeners who probably are so Infactuated by AI and crypto to a certain extent and and other things. It's very easy to forget Autumn to for this to be masked as as as an opportunity at least at a hedge. I mean, I'm very much in favor of technology I like technology. I you know, I'm not going to go into the ins and outs of why I think Bitcoin does Does a job and but I understand what you're saying But This is the in common law this is the important yeah, I mean I understand you've got to pay your taxes in in in sterling and it's got to go It's got to go it's got to be sold to pit to to do that and I get that it's got no legal status. But also what do people do? The economy is driven by what the masses will do. And if the masses decided to turn to Bitcoin, then they'll turn to Bitcoin. It doesn't really matter what the legal status is. Yeah, but I can see no reason for them to do so. I mean, there are lots of enthusiasts who, if you like or enthusiastic about technology, I'm for a time. Bitcoin was correlating quite closely with the Nasdaq index. Why? It was the same crowd, basically. Yeah. The argument that this is money. No, it's not. It is not. It is just another speculation. Well, that's absolutely true. That's absolutely true. But yeah, but the point is that I remember talking to Dixie Deville, who's been on the podcast and he's a long-term listener and she was saying about, you know, how, as she grew up, she would always put some of her salary into gold. And I was thinking, God, how pressing is that? I mean, how, how, how, what foresight would you have to be doing that at a young age? You just don't, you just don't think about it sensible. Very, very sensible. I mean, I guess there are a lot of people who have that thought process and obviously Tim has been one of the biggest advocates. Whilst I, because of the way I look at markets from a typical point of view, I will get drawn into trends in other markets. But the whole point of that is you do have to then be a trader. You do have to then watch the pot. You can't just have it there and walk away. Whereas what you're saying is something that will last the test of time. I mean, in 10, 20 years time, it will still be, it will be a strategy that will remain. But, you know, we don't know that about any of the, you know, FTSE 100, S&P 500 stocks, whether there's still going to be there and certainly government bonds, there's going to be more of them. We can pretty much guess that. On a final, because I'm short on time now, as a final comment, I would say that one of the problems that the British government has is that I think roughly one-third of its debt is in index linked, GILTS. Just imagine how the cost of that is going to be as the currency collapses. Just one very quick final point with regard to other currencies. Of course, they can't all drop against themselves. Is there a single currency? I know you don't like the idea of any currency, but is there one that in the crisis you think would be favored, like maybe the Swiss franc or the yen, or is that trying to get you just say yen pool? What's your math that was soap and water? Well, no, the yen will rally during a crisis. Not necessarily. Well, it did in the last one. The answer to your question is that if we're looking at G7 countries, it's a race to the bottom. And so you don't want to be in that race, pool stop. I think currencies that will survive are the ones that go on to a gold standard to protect themselves from the mess that we're making, that we've made for ourselves. And that I would see certainly to be the case with the Russian rule, which no begins. And I also see it with the Chinese you are, because the Chinese have accumulated a lot of gold off-balance sheet, as it were. And they're putting in place the mechanism for the gold market to be on their doorstep, rather than over here. Amazing. It's all moving that way. That would be such a turn up for the markets that I don't think they could get their head around it. That's an amazing call. Tim, as there's short on time, do you have any final questions? No, we're good to go. Because I was going to say, let's leave media picks and just promote his sub-stack, because obviously I don't want to detain him any longer. Alistair, people are going to want to hear more from you, I'm sure. It must be just burst for the exits with stout opens and short blades. Where can they, where can they find you? You on Twitter, I know you've got a sub-stack, a sub-stack. The sub-stack is where I do my analysis and writing and that's McLeodfinance.com. McLeod, C-U-L-E-O-D, finance.com. Right. So Mac is in an Apple Mac, McLeodfinance.com. We'll put links, we'll show it on the screen, links in the show notes. Alistair, what a pleasure it is to have you on the show. I really enjoyed our part and I look forward to the next one. Thank you so much. And thank you for inviting me. Take care. Thank you. All the best. Thanks, Alistair. Yeah, bye Tim. Thanks everybody. This podcast is for entertainment purposes only. Please do your own research or contact a professional advisor. [Music] [Music] [Music] [Music] [Music] [Music] [Music]