Speaker 1Welcome to the Atomic Level, the show where we decode the matters of wealth, one insightful conversation at a time with the leading minds in finance, business, and tech, so that you can grow and protect your net worth, and most importantly, your net happiness. I am Chris Snook. Today, I welcome back the one and only Michael Howell, Capital Wars. Welcome to the show, Michael.
Speaker 2Great to be here, Chris. Good to see you again.
Speaker 1Yes, great to see you again. So last time we had you on, and for those logging into the live room as it fills up here, welcome to have Michael back. We are going to spend the next 70-ish minutes or so going as deep as you can with this man while we have him. But for those who are new to Michael, and I can't imagine why you would be, but if you are, welcome to his world. He is the founder of Cross Border Capital, and he authored the famous book, Capital Wars. And he has a number one in UK and a consistent top 100, top 10 mostly, sub stack here on his work, and one of the largest and most. I think we are somewhere in the neighborhood of 70 right now as we are recording this. He has been the top two, and in several metrics was number one for engagement. So very blessed to have you back. And what we are going to center this discussion around today is I have got a lot of the peers that we have interviewed, including guys that I know you respect, that respect you back, Mike Green, several others, Alexandra Damsker, who you may or may not have discovered yet, but who has done some great things, and others. But have supported your work and have some questions. They have submitted them to me through DMs because I asked them. Some of them may even be in the live room now, so we will see that. We are going to get to those questions. We are going to look at the thesis that you have laid out. We are going to uncover it and robustly challenge it where it needs to be and just illuminate it for folks. Because most of the people that listen to this show anyway have enough money where they need to be invested. They need to understand what is happening. But that K-shaped economy hits them really hard, right? Because their money is at work in one vector of it, and their body. And their business is at work in the other level. And those two things can be more disconnected right now. And we want to pick your brain on what that means. But the central question that we are going to start with as we get into this, Michael, is what happens when the world has more nominal liquidity than ever, but the financial system's capacity to transform collateral into usable credit becomes constrained or contracts? That's the central question I want to focus on today. We'll get into more, but first thoughts on that. Let's unpack that as a high level.
Speaker 2Well, let's try and understand what that means. So if there's a lot of liquidity, that's clearly a positive factor for markets, for economies, et cetera. But you're really saying that what happens if collateral is under a cloud? Well, I mean, the fact is that those two things are, I would say, kind of inconsistent. Because if you've got a situation where liquidity is abundant, but collateral is challenged, then the liquidity base is going to start to collapse. And the fact of the matter is that we're in a world now, and we've been in a world for 20-odd years where collateral is dominant and collateral is driving the pool of liquidity. That's the main sport. And, you know, we've got to look very intensively at the repo collateral markets to understand how liquidity gets generated. So I'd say that at the outset, I mean, it's kind of difficult to square that circle because if you've got lots of liquidity, you clearly have got decent collateral. If that collateral gets impaired, the liquidity base will drop away. So what conditions.
Speaker 1So that's, yeah, so that's a good, let's start with just that part, right? So is liquidity, so here's a question, and I know you've written extensively about where this is, right, in the last couple of weeks especially, right? But take this around with it. So just to start that off with something simple. Is liquidity actually abundant or is it just highly leveraged?
Speaker 2Well, the answer is it's both. It's leveraged and it's abundant. And part of that abundance is actually leveraged. So, you know, the way that the system works is that essentially you, the way that the modern system works is you've got effectively a reserve base and that reserve base could include collateral and that is levered up in some form. That leverage can be, you know, is dictated by a number of factors. Leverage at the moment is pretty decent. It's relatively high. I would venture it's not as high and not as much as a concern as we saw in 2008, 2009. But it's clearly there. And one of the things that is critical for that is really the integrity of the treasury market. And what I mean by that is not just the level of yields, it's also the amount of volatility that you get within the market. Now, basically what we've been seeing is a yield reversal in the U.S. We've also seen bouts of volatility. But in my view, what Treasury Secretary Besant is deliberately trying to do is to try and reduce volatility in the market. And that's what I read his policies to be directed at. So the buybacks and the shift towards bill issuance is effectively trying to do that. So they've got their eye very clearly, as far as I can see, on the collateral markets. They don't want to crunch liquidity in the financial system. What ideally they would do is, and this is my read of the Fed at the moment, the Fed strike Treasury, because I think they're working hand in hand. What they're trying to do is to let the markets dictate rate policy. So in other words, the Fed is following what the markets are saying. The markets are kind of dictating, you know, step by step. I mean, they're lagging, but they're following that direction. And at the same time, they're trying to reduce volatility in the markets. So essentially, liquidity generation remains intact. So my characterization of that, we can get back to, I mean, this is a slight deviation, but my characterization of that is that the Fed is going half speed relative to what it's been doing before.
Speaker 1Okay. So you've quantified this recently at, I think, $197 trillion when we talk about global liquidity. And as that number increasingly reflects collateral reuse and leverage rather than fresh base money, right? If that number is more top towards reuse versus fresh base money, are we confusing the appearance of liquidity with underlying capacity to absorb a shock? Or are you not worried and why?
Speaker 2Well, I think there are two issues here. I mean, one is, to what extent is the system? Is it vulnerable to some deleveraging? That's point number one. And secondly, is that pool of liquidity adequate for what is really needed at the moment? So on the first question, is it vulnerable to a deleveraging? It is. It's always vulnerable. But what really matters and what seems to matter a lot is the volatility of the collateral markets. So if you've got stable markets, okay, where you can be pretty sure what the value of a piece of collateral is, and let's think of a U.S. Treasury. So if that Treasury, that bond price is pretty stable, you can use that collateral with alacrity. I mean, everyone will accept it. If it's volatile and you're uncertain what its value is going to be in two days' time or one week or three months' time, then you're going to give a bigger haircut to that and you're not going to lend so much money against it. So it's a little bit like saying, you know, if you're buying real estate, is the bank going to lend you a home mortgage against that real estate if the housing market is highly volatile? They're going to lend you less, okay? If they think house prices are always going to go up, they're always going to be more willing to lend to you. But if, you know, in a price deflation or in a volatile price environment, the lender is going to step back and it's exactly the same with the collateral markets. So point number one is, yes, if you get a very volatile, out-of-control bond market, there are very bad liquidity consequences for that. The second point is, is there enough liquidity in the system to basically do its job? Now, the question is, what is the job? And that's really the $64,000 question. My point is that financial markets today are very much about refinancing existing debt, okay? They're not the textbook model which says they're about raising new capital for new spend. That doesn't really happen. I mean, okay, partially the AI capex boom at the moment, but that's in the context of the last two decades. That's relatively small, a relatively small event, I'm trying to say. What happens is that most of the activity in capital markets, 80% of it is rolling over existing debt. And that's what you need balance sheet capacity and liquidity for, okay? Now, the problem we've got is you've now got a ballooning federal deficit. You've got the AI capex spend coming through. That's new debt on top of a lot of debt that has been termed out, which is coming back into the system. And that debt was termed out from the COVID crisis. Now, if you back up one step and you say, "What is the real problem?" The real problem is that debt has to be refinanced by liquidity. So what you need is a stable relationship between debt and liquidity. If there is insufficient liquidity, you'll get refinancing problems. If there is too much liquidity, you've got an asset bubble. Now what we've had in the last five years or so since COVID is a big asset bubble. And that asset bubble has been a combination of two things. One is the policy makers always acted to solve problems with printing liquidity. Whatever happens, they throw more cash into the system, okay? So that's number one. Number two is that they slashed interest rates to near zero, okay? And that policy was, in my view, a reckless policy because slashing interest rates to zero is encouraging or incentivizing people to take on more debt. And debt is the problem, right? So what you're doing is you're trying to solve the problem by creating an even bigger problem in the future. And if you slash interest rates to such low levels, you not only encourage new debt, but you encourage people who have got existing debt to turn that debt out and refinance it. And that's what happened. And that debt is coming back into the system to be refunded, basically, 26, 27, 28, 29, 20, 30. All those years are going to see big inflows of debt that is debt, an echo effect from the COVID crisis. And that clearly is a big issue. So the capacity of the system is being challenged by this big increase in debt. So if you look at the debt liquidity ratio, which we plot, it's been rock bottom levels, I mean, historic lows for much of the last five years or so, which has fueled an asset bubble. But it starts to rocket higher in the next two or three years, because what's happening, the debt burden is growing, and the liquidity cycle is turning down. And those are the problems that we've got to face. So, you know, although I'm optimistic long term about asset markets, because I think there's got to be a lot of money printing, don't forget the cycle, the cycle can, you know, just destroy trends, certainly in the short term.
Speaker 1So you're not going to give a financial advice, and I'm certainly not giving anybody financial advice. There's your disclaimer for anyone listening to this live or on replay. However, I want to bring this into the real world. So this week, because everything you just said, I want to ground in like a real world thing that just came across my desk, right? So I've had several of these come across. But this one was actually interesting. And here's the conundrum. So the conundrum is, there's a deal that got put in front of me for syndication, meaning, you know, they're looking for checks, right? And it's a 229 unit, multifamily luxury building in West Plano, Texas. I know a lot about the markets of Texas and Arizona, and they're because that's where we have footprint and offices. And that's where we care to, you know, hire people, things like that. So anyway, so it's relevant to me there. That's not a bad market to be in, right? Texas is not a bad market. Certainly the Dallas quarter, West Plano, that's not a bad market to be in. And this building is under, it's already under contract. It's got a 5.3 guaranteed fixed APR on the financing, on the refinancing or on the debt side. They're buying it for roughly 20 grand below replacement cost per door, right? So this thing is being sold at a seven cap to the investors. So this is a 50% discount to where it sold last in 2021. So this, this 229 luxury unit condo or whatever you want to call it, apartment complex in a, in a growing market is selling at a 50% discount. That's the collateral hit. And I'm trying to figure out, is that a good buy today or does it get worse from here? And again, I'm saying that as like every, everybody's trying to figure that out. In other words, you're not trying to catch the falling knife. Well, where is, it's pretty hard to argue with something that you're buying below replacement costs, unless you think those replacement costs are going to go lower. And that, that's hard to, that's hard to debate, right? How could replacement costs go lower when diesel's $899 in California? Like it's hard to, it's hard to think that's going to happen. Yep. So what are your, like, how do you ground what you're saying? Who do I listen to? Right? Because people are distracted, the Fed, the this, the that. It's like the signal versus noise ratio is what I think you're really trying to suss out for folks. But like, when you're looking at a real deal like that, that seems like a good deal to maybe allocate to. But again, without it being financial advice, how do you, how do you advise someone look at this? What metrics? Well, I
Speaker 2think the first question is, what is your time horizon? If your time horizon is five to 10 years, it's a pretty good deal because even if it goes lower in the short term, you're going to make money. Okay. And you, if you can finance that over that time horizon without any problem, without recourse to the banks or whatever, great. That's not a bad deal. You know, making a good return always, always makes sense. The question is, could you get it cheaper in three months time? And the answer is probably yes. So you've got to recognize the cycle in all this.
Speaker 1I think some people are trying to figure out, are we in 2000? And I'm not saying this is a good analogy, by the way. I'm just, I'm just kind of summarizing feedback, DMs, things I get, questions that I, that I'm trying to summarize. Right? I think people are trying to figure out, are we in 1929 or 2007? Are we in 2010? Right? Like, in other words. Right. In pre whatever, and we should wait till 2010 when we can really pick it up for scratch. Or are we just going to ride that out? Or, you know, it's 1929 and 2026 analogous. We've talked a little bit about you see a slowdown, not a recession. I don't want to jump too far ahead, but just, you know, ground us in a little bit of that as we keep moving forward on some of the metrics that you track.
Speaker 2Right. I mean, we're, we're certainly not in a 1929 situation. I mean, that's for sure. There's not the same degree of leverage in the banking system. That we saw then. And I think if you draw that same analogy with 2089, equally, you can say there's not that leverage as far as one can see. Okay, so there's not that sort of problem that you might see a cascade of bad debts running through the system. It's not to say there won't be bad debts. But I think the, you know, the issue that we've got to face is that it's very difficult for policymakers to tighten policy, either fiscal policy or monetary policy in a world where there's lots of debt. And that's really the core issue. You start to squeeze a little bit, and things start to unravel. And I think that the policymakers, as far as I can see, and I mean, this is famous last words, of course. But from the experience that we've seen in the last 10 years, they are very nervous about overtightening. And they want to tighten, I mean, for prudent reasons, but they really can't stomach it. So what you're seeing is this sort of half-hearted move. Now, what does that mean? Does it mean you get economic imbalances like inflation in the system? I think undoubtedly. Yes. And I think that you've got, you know, a level of inflation that may not be, I mean, we're not talking hyperinflation here. But if we're talking about one or two percentage points extra of inflation every year, that clearly matters to a lot of people, both at the income level and at the wealth level. And after all, you know, I mean, God bless him that, you know, Donald Trump always says the quiet bits out loud. And he said, whatever it was last week, we're going to monetize the deficit. Now, you know, that may be, maybe he wasn't supposed to say that line, but he said it. But that's what seems to be happening.
Speaker 1Yeah. So I want to bring us back. I want to reference, I know you respect Michael Green, and he shares similar respect in return. He gave me a clarifying thing through the DMs when I told him I was having you back on, said, do you have anything you think would be productive to ask him? And he said to nuance out the difference between persistent flows and predictive flows. And as it relates to that, and I'll tie that into maybe this collateral multiplier that you've mentioned, even as move rises, and like what you see potentially as the trigger to leverage institutions taking haircuts, like tie some of those things together. But I wanted to give Mike, you know, a chance to kind of help us learn more by having you suss out the difference between what you think are persistent flows versus predictive flows.
Speaker 2Well, I think that what, if I understand what Mike is talking about, I think that's a good question. And I assume it's to do with passive. And I assume what he's trying to say, or what he's saying here is that if you've got a passive universe that's been fueled by 401k plans, a lot of those are, if you like, predictive flows or flows that you could, you could predict based on employment numbers. And this is just, you know, playing with the percentages that you're going to get, provided you get employment growth, and you get wage growth, you know that you're going to get a certain allocation coming in. the market every, you know, every month, every year. And given the fact that these things are indexed, you know, the potential is they're going to go into different assets, into different stocks or different assets. And I think that, you know, he's, you know, he's really nailed this whole question because it's something that no one's really thought about in depth. And I think what it shows is that you actually, the amount of true asset allocation that's going on in the system is kind of is de minimis now. I mean, people just effectively have got a formula they're using just to, you know, to allocate their money and whether that's, you know, 60, 40 or 70, 30 equity bonds or whatever the number is, who knows, but that is not a proper asset allocation. And we've got to start thinking more seriously about what asset allocation means in the future when you've got a world, which I would characterize as being a world of monetary inflation.
Speaker 1Yeah. So that's, I think that's the, you know, to me, that's the most relevant kind of real world question is most people have their money at work through some kind of passive structure, advisor, ETF, what have you. And there's nothing inherently, A, wrong with that, but the momentum is there, the inertia is there. So like you could, you could be the anomaly and escape the herd, but at the end of the day, the majority of the market is going to move based on that predictability, right? And then there's the people listening to this that are trying to make sure that they're not just taking somebody's word for it and that they're putting their own noodle on it and thinking about, well, where's my asset mix based on the time and my needs. So depending on where they are in the age curve or in the life, curve what do you think the new portfolio looks like if you'd be so bold to to say i think it starts to move this way this much alt and specifically this kind or this much emerging and this much kind like what do you what do you think it looks like if it's not the 60 40 70 30
Speaker 2traditional i think if you if you go back and look at history it's always a pretty good guide to these things and if you go back to maybe maybe the benchmark is when um you know nixon took the u.s off gold or took the world off gold and you had effectively a fiat monetary system so let's talk about the you know very early 1970s and the period since then so we're talking about 50 60 years now in that period if you look at the growth of federal debt uh federal debt has grown uh on average each year by about eight and a half percent okay so that's a pretty high compound rate of growth when you think that inflation average main street inflation in the u.s has been slightly shrinked over that period okay so you've had real growth in federal debt over that period um global liquidity the measure that i look at uh went up a tad more than eight and a half percent so eight and three quarter percent the gold price went up eight and three quarter percent per annum okay s&p 500 gave a return of just shy of 10 so what you've got is effectively let's look at the growth of federal debt the growth of federal debt over that period if you look at the the growth of federal debt over that period if you look at that period if you look at that period if you look at that period if you look at that period if you look at that period if you look at that period if you look at that period if you look at that period if you look at that period and if you think that monetary inflation is going to start to increase you've got to start thinking about which assets are going to benefit most from that monetary inflation because if you look at bond markets they don't they don't cut it bond markets over that period and this was a period of let's say modest or moderate monetary inflation um but at times actually it was it was a period where it was significant because it takes into account the 70s and it takes into account a period in the 80s when there was very rapid monetary inflation um in that period bond markets 10-year bonds delivered a return of just over six percent and five-year bonds five-year treasuries were just over five percent so about 100 basis points shy of that so what you've got is bond markets that are clearly underperforming in the long term uh in terms of that regime now my view is that if you what's driving global liquidity or what's driving liquidity is federal debt or let's say government debt because effectively how are they going to afford that debt they can't tax this anymore or surely not um no one's going to cut spending there's probably more demands on that spending with aging societies and the need for more for more defense so what you've got is at least uh i would argue seven to eight percent per annum compound uh in federal debt growth maybe it's more uh we would suspect if there's a recession it goes it balloons even higher but let's take that figure as an average so therefore you're going to get global liquidity growth of a similar magnitude because otherwise if you don't get liquidity growing at the same pace of debt you've got a financial crisis because you need to refinance that debt periodically uh the existing debt if you get liquidity growing at that pace you're going to get gold moving up at a similar clip but we know that it's going to be a lot of money and it's going not just about um you know the demand for gold it's the effective supply that's there as well and if you've got the chinese and its satellites buying lots of gold in their central banks then gold is going to do better than that over the long term i'm not saying this is a straight line move but you've got to look at the effect over a long period of time uh gold should do well that would also lend itself to things like cryptocurrencies if you believe in cryptocurrencies because they're monetary inflation to have or or demonstrably so but it comes back to the fixed income markets and say you're not really going to get a return out of fixed income on that sort of basis unless interest rates go up to the sort of levels that we're talking about here eight nine percent now i don't think that's possible um so i think you've got this gap between fixed income returns and um let's say equity returns and gold returns so these are the sort of assets that you want in the medium term not necessarily the assets you want in the next six months but the ones you want in the next six years and my view is that if there's a setback in the markets you've got to start buying into the markets
Speaker 1not selling them so i i want to i want to pull on that thread and tie back to the comment that um you referenced that trump made recently and again without it being whether he meant it or not i want it to be layman's term tied all together right because the stats say that the smart people that are going to be able to buy into the markets are the smart people that are listening to this at a minimum uh are talking or their money's being managed by people that may be smarter than them but more often than not have an eighth grade reading education now you don't have to be book smart to get rich but you do have to be wise to hold on to it and know who to hire and so in the spirit of that if i was going to explain this to an eighth grader what does it mean to monetize the deficit because those words get thrown around but a lot of times that they sound like somebody's doing something but they don't really have a picture to work from like what does it mean to monetize the fed or monetize the balance sheet or monetize the deficit i don't want to focus on the fed because i think that one's been covered but you you know that comment let's say that we do that let's say we monetize the deficit what you were just explaining is kind of how that would look right but what is the specifics if you're talking to an eighth grader about it like what does it mean like what is being monetized what does it do well
Speaker 2let's let's think of two alternatives and let's assume that let's say the let's say that the federal government uh spends uh a million bucks and um it basically has to fund that so let's assume it funds that um by selling a bond um to a long-term institution it sells a treasury bond uh 30-year bond to a long-term institution a pension fund or insurance company that comes out of existing savings it's not monetized everyone's happy okay presumably um but effectively you've just uh taken existing savings and you're not monetizing it's not monetizing it's not monetizing it's not monetizing it's not and that's gone into fund the government the government borrowing okay second option is that what happens is that the government spends again and it issues a very short-term note a bill and the banks say well okay we're going to buy that bill and what happens is the bank's balance sheets expand the pool of savings in the economy is not touched but monetary growth expands because if the bank's balance sheets expands that's an expansion of money supply now if you get the deficit that effectively is monetization and why is it bad because it we know from experience it leads to inflation now what is inflation it could be asset prices rising or it could be mainstream prices rising yeah and
Speaker 1i think that's the key is not what is inflation where is inflation yeah because where it is is what it is meaning if i'm buying eggs at the store or buying gas and they're 30 higher or me then where it is is what it is the inflation is real to me if the inflation is in asset prices and i don't own assets i just can't buy that house that was a million dollars that's now four but i was never going to buy it anyway so it doesn't really matter you know what i mean to that person if i'm if i'm worth 30 40 50 100 200 million and i gotta put money somewhere and i buy the house for four that you know now i can pick up for two but in 10 years because of inflation and assets is going to be worth 10 and i'm going to have to buy a house and somebody else is going to have to park 10 million somewhere that's long term and not going to just erode well then i know i've got a buy whether i lose a million in the short term or whether i buy it at a discount doesn't matter because inflation and assets is where it is so what it is helps me my point is is that i think that k-shaped reality is the the middle class millionaire is feeling really broke right now like they are very constrained because they're rich enough to like be okay but then they also have tuitions and they have they have all these other things that come with that and so before we even get down to the other part of society it's falling further and further behind before we get into ai i think you just have this productive class of folks that are that are starved for answers and confused by the metrics and don't know where to look like they can listen to you and in one way go okay well my portfolio is going to do well but if i'm not selling it if i'm not living off of it what's my business going to look
Speaker 2like exactly wealth is not money
Speaker 1so what what do you recommend they spend their time focused on like in in your work just in your research like where should they spend more time consuming your research whether it's on the move index whether it's on the cloud like because you cover so much ground but like where should they like lean in and and what kind of topics would you say they should look up when they're on your
Speaker 2channel well i think the i think the key thing chris is to say where to ask the question where are we in the cycle i mean that that's an important element and what there is is there is a liquidity investment cycle that tends to move over a five to six year period uh it fluctuates it goes up and it comes down by definition uh but you've got to understand where we are in that cycle and you know plainly for much of the last three years we've been on an upswing of that cycle because uh expanding liquidity have lifted the values of many many asset classes what we're starting to see now is an inflection in that cycle the liquidity investment cycle is a leading indicator it would tell us what to do and what not to do and it's going to tell us what to do and it's going to us what asset markets are going to do over the following six to 12 months. And we saw an inflection in that cycle in late 2025. So in our view, you will like to see a challenging 2026, first of all for the bond markets, then for the equity markets, and ultimately for the commodity or real markets. And you normally get that sequencing. So bonds are the most sensitive to changes in liquidity, then comes equities, then comes real assets. So we think we're in the downswing. And the question is, why are we in a downswing? It's not really because the Federal Reserve or any other central banks are tightening aggressively at the moment. I mean, that may come, but I doubt it. Anyway, that may come. The reason is that the real economy is so strong. And the thing you've got to remember in terms of understanding how the cycle of liquidity works is that all money that's anywhere must be somewhere. So if it's in the real economy, it's not in the financial sector. And if it's in the financial sector, it's not in the real economy. And what we've got now is more and more evidence that one part of the K, or whichever part you think of, is actually doing really well. So you look at another print that came out today, New York Fed manufacturing survey, the Empire State Survey that was released today, one of the highest figures we've had for years, indicating a booming New York economy. We're going to get another print on Monday from the Philly Fed, and I bet that's another knockout figure. So it looks as if, if certain areas of the economy are doing really well. Well, given the fact you've got a, what, near 6% deficit, federal deficit, and you've got this AI capex boom, it's no wonder the economy's doing well. But that is absorbing liquidity from financial markets.
Speaker 1Yeah, and I think you just nailed it. I mean, you know, the reality is, is that this isn't about which one's doing better. It's about, do I have a plan for two totally disparate economies? Because my money's at work in the financial economy, and I'm at work. Theoretically, if I'm still working in the real economy, and I need a plan to win, whatever that means, in both, if I'm, if I'm the listener, right? Like, I have to have a plan for my business. I gotta, I gotta be brutally honest. What's happening? What, what are the forces at my back, at my head in that world? How do I navigate that? And then, if my money's at work over here, passively or not, is that on the right plan for winning in that economy? And then I've got to just recognize, I'm managing, I'm riding two horses. Yeah, because I think we talk about stuff like it's one freaking economy. And the reality is, it's not one. It's not one economy. It's not even an income class. There are income classes, but there are two just totally different games being played.
Speaker 2Yeah, exactly. And that's the financial sector weakens, so the real economy strengthens and vice versa. And that's why the paradox that many people can't understand is why, why are stock markets or financial markets always performing strongly at the, in the midst of recessions? And that's simply because money has migrated back from the real economy, where it's needed, into financial markets.
Speaker 1Yeah. I want to shift back to your, you touched on what happens when liquidity does what it's going to do as it relates to cryptos, if you believe in cryptos, but you put a piece together in July, I think it was July 29th. Yeah, July 29th, he did a piece on Bitcoin and crypto and some things like that. But just to touch on that, because historically, you know, Bitcoin has behaved as very sensitive. When it comes to an expression of global liquidity, meaning if you look at the chart, it pretty much maps it almost to a T as M2 rises or falls, right? And it's been very sensitive there. But now we're seeing an ownership shift, especially during this most recent winter after we hit the all-time high. And then as we pulled back kind of 50% haircut, and it's just kind of staying there. So as it, as it relates to where it is today and leveraged speculators or long-term holders, which have always been there, right? The purists become less of the, the, the, the, the dominant buying cohort and it moves more into ETFs and corporate treasuries, right? At what point would you be convinced that Bitcoin is moving from a speculative liquidity trade to a actual monetary reserve asset?
Speaker 2When its volatility starts to come down? I think that's probably going to be a 30% vol.
Speaker 1Would that be a 20% vol? Would that be, where would you see the vol be?
Speaker 2I think, I think it's difficult to be, you know, hard, not about what the number is going to be, but I think if you see a declining trend, it's telling you that this asset is becoming more institutionalized. Okay. This is how it's done.
Speaker 1Right. So depending on your time horizon, again, without advice, you're not saying to own an asset or not. You're just saying, depending on your time horizon, if your time horizon is 10 to 20 years, the vol is a feature, not a buck because you, because basically you're just dollar cost averaging in, or you're trying to buy it now, or you're trying to do something now, and then just know in 20 years, whenever this all normalizes, if it's, if it's still there and it hasn't gone to zero, it's going to be worth a F ton more than it is today. Right. That's, that's person A. Person B goes, I've already, I'm done with it. I already have an, I don't care, whatever, you know, give me some gold and silver. Right. Like that, that's, that's somebody else. And that's fine. It's not, not here to convince somebody. Now let's talk about stables because you mentioned crypto, but let's talk about stables specifically because of their tie to US treasuries. What is your, what is your thought around how stables move in this market related to as liquidity rises or contracts and, and they become more of a, um, buyer of US treasuries? Um, what is, what is your impact? Do you, do you think they have a major impact? Do you think that plays out more slowly? What is your thoughts there on the bond markets and on, on
Speaker 2the trend? Well, my, my honest answer is I'm, I can't at the moment see the value necessarily of buying stable coin for a US resident. Okay. But I can see a huge, huge, huge, huge, huge, huge, huge, huge advantage in buying stable coin for a foreign investor. So I think the real impact is going to be international, not domestic US because, you know, increasingly we're going to move towards tokenization of assets. So why not just do that yourself through a tokenized treasury bill or something? You could do that. So I think it's the offshore market, which is the really interesting one. And I think that, you know, again, that, you know, if you're in Turkey or in Africa or wherever it may be, you're going to be able to buy stable coin for a foreign investor. So I think that's going to probably prefer these stable coins and you can trade them 24 seven.
Speaker 1Yeah. I mean, anecdotally, and again, it's not a door, it's just a, it's just a signal that I'm watching, you know, anecdotally, the interest coming out of Latin America specifically with some of the business cash management stuff that we do or that we have, you know, eyes on, um, related to holding, you know, four and a half, 5% yields in treasuries, like in moving out of your currency into USDC or one of those, right. Is, is the appetite. Is there, right. It's, it's coming out of the Latin American markets and other places. So as you think about this impact on inflation and debasement, you could, you could argue the same thing. So, um, all right, let's go into, uh, an audience question here while I shift gears. Um, one of the things that, uh, okay. So Alexandra Damsker, uh, had her on the show. Um, she's, she's, uh, a bunch of things in SCTN. Uh, she's, she's phenomenal. So if you haven't checked her out, she's worth checking out and writes a lot. She wrote, Chris, ask him about, um, he's described money rotating out of financial assets and into the real economy. You just mentioned that CapEx and defense single biggest destination right now is AI data centers. More of that is being paid for with borrowed money and out of cashflow. Um, is that spending draining the liquidity you track or is it keeping the cycle alive?
Speaker 2It's keeping the real economy cycle alive, but it's draining cash from the financial cycle. So, um, I think that's a good question. I think that's a good question. So in, in that regard, it's, um, it's two yeses. Uh, I mean, clearly if you've got, um, uh, AI CapEx spend, uh, you're seeing a rundown of, um, of treasury, of, um, of money in treasuries, corporate treasuries. Um, and that money is being put to work in the real economy equally if they're raising new debt finance and that comes out of existing, um, savings pools, uh, then the financial system is depleted, but it basically means that the real economy is going is, is rolling on. Now, I think in that context, I think it's a good question. I think it's a good question. I think one's got to think about not just the AI CapEx spend, uh, that particular model, which is clearly good for the U S economy, but also think about what the federal government is doing. Because one of the things that I would characterize the policy, recent policy shift is away from fed QE towards what I've called treasury QE. And that may be a subtle shift, but I think it's a really important one to understand because this could go on for some time. And what's more, it's supporting the economy, uh, but also creating, um, if you like more monetary inflation within the system. And let me describe what that process is. So one of the things that many people will have noticed, although it's a sort of wonkish or bit in the weeds comment, um, is that treasury secretary Besson is doing a lot of funding at the short end of the market. So he's basically using bills to finance the government deficit. Now I've characterized this policy or his policy generally as not the stated three, three, three policy, sorry, 3% inflation, 3% growth, um, 3 million barrels of oil a day, but three, three, three 30. And the 30 is the percentage of debt that is, uh, that comprises treasury bills, very short dated debt. And currently that's about 22, 23%, but the share is going to rise. Now, why is that going on? Because the question you've got to ask is who buys those, that sort of debt, the banks love that stuff. Okay. They like short dated debt because it matches, the liabilities on their balance sheets. So if the federal government is basically spending lots of money bank deposit accounts are rising but the banks are not matched perfectly duration wise so they need another asset on the other side of their balance sheet which matches a deposit liability in duration terms and that will be a treasury bill or a very short-dated note so they tend to be big buyers of this stuff so what you've got is government spending if you like uh on procurement or whatever which is basically being funded by bills and that can just keep going so it's a treasury qe which is basically encouraging the banks to buy government debt but that's monetization of the
Speaker 1deficit so we can keep going yeah so the so the other question then becomes you know do these these private credit private uh collateral pricings that don't appear daily right because they're just not public so they don't you don't see them every day they don't get marked to market every day do you see it as potentially a slower recognition of loss in the current environment or would something trigger you to believe that there was a slower recognition of loss there that would become risk and then where does that play out first or most as it relates to the shooting wars right because if they continue longer um then you know what happens when it comes to the actual risk of the insurance companies or the like some of the other players that are that the people's passive money is in that they may not even know right the the they're a stakeholder but they don't really know it they're just getting their fixed income because you mentioned earlier about this problem that we have this gap income and equities so um i guess where does the shooting wars play into this as it relates to flows and what are you seeing cross-border happen now that has you focusing on risk areas well i
Speaker 2mean that that's really a gm political question which is sort of out out not really my skill set but what i would say is that my view is that i don't believe there's going to be any great escalation in kinetic wars but i think there is another cold war if you like going on uh which is what i describe as capital wars uh which is where you've got this essentially uh bifurcated world where the u.s and china are separating themselves from each other and i think that what you can see playing out in the gulf what you can see playing out between ukraine and russia is part of that same game which is trying to isolate china from let's say key resources worldwide um and um that may not be as i say kinetic war i mean or it's only a war kinetically by proxy a little bit like uh we saw in the cold war during the uh 60s and 70s uh and that's going to probably keep going but broadly speaking what you've got is uh an attempt to try and segment the world into two blocks and as far as i can see that's basically happening and that's going to happen uh and the u.s is trying to encourage certain areas i mean a key one would be japan uh maybe they're not encouraging europe right now but they certainly seem to be encouraging japan and my my view for a long time has been that if you believe in making america great again you've got to first make japan great again because japan is the key bulwark against china and that's what i think everything everything i see in japan is basically pointing that
Speaker 1way i i'm glad you said that i want to go there actually i want to pick your brain on that more i i've um i think that's because i i would say i know enough to be dangerous about that and and i've i've kind of said for the last several months maybe maybe last six to nine months there was a point where i was like the plumbing hasn't changed but the direction of the water is right and and there's this kind of collision happening when when japan started to raise rates for the first time and some of those things and and you just made a very clear statement um make america great again you got to make japan great again you know what are the they're up for another election as well like and without getting to the other side what are the actual data on flows showing is happening there like is there momentum there or is it kind of still just you know old world carry trade banging in with the new world hopeful carry trade like dynamics what is happening there from the flows standpoint well
Speaker 2i think there are there are two questions i mean what what is happening as regards the japanese economy and the other is what is happening with regard to maybe the yen carry trade now i think in my experience um the yen carry trade uh was a lot bigger proportionally um two or three decades ago than it is now and i think it's always been treated as a bogey um so people are always concerned about it and so it's a little bit like you know when there's concern in the markets they always haul out the the sort of specter of the yen carry trade to spook people but it's not really i don't think a big issue right now okay so i wouldn't put a lot of weight on that i think that what you're seeing in japan is pretty straight forward adjustment to a much faster rate of growth of the nominal economy okay so you got to remember that if you go back into the um 2000 the decade of the 2000s the japanese economy in nominal terms including inflation um grew at a negative rate on average through that decade okay so there was price deflation and there was ultimately recession uh and that wasn't a great look okay and why was that because of a huge debt um a burden so the debt weighed on the japanese economy and this was the after the era of bridges yeah building bridges to nowhere and all this sort of stuff so the japanese economy basically shot itself in the foot by having too much debt what they did is they restructured that debt be really beginning about 2012 with abinomics that debt was restructured um the economy was restructured and they also uh got the bank of japan to buy that uh buy government debt in the market aggressively and that effectively monetized the debt now there is only one way from experience that you can get rid of a huge debt load in a credit money economy okay we all live in credit money economies the only way you get rid of debt is to monetize it uh plain and simple you cannot default it and the reason you cannot default it is that if you look at how new credit is formed particularly in a collateral based world uh you can't default it and the reason new credit rests on the integrity of old debts so you simply cannot default debts so you've got to make those debts a whole the whole time only way you get rid of debt is effectively to monetize so that's what japan was doing and you see the consequences in the yen now if you look at where the japanese economy is now uh the growth rate of nominal gdp is heading towards five percent well above where interest rates are interest rates in the long term have to match that nominal gdp growth so the fact that japan is lagging in interest rate policy and maybe deliberately uh means that they're trying to weaken the yen and i still think the yen is in a bear market and notwithstanding the efforts of treasury secretary best and al uh i think you're going to see a still weaker yen so the backdrop is that's good for japan inc because it makes them more competitive and it basically holds the chinese
Speaker 1feet to the fire so yeah in a way we're trying to you know because of their their totalitarian structure they can you know they can kind of subsidize losses until they can't but but they have they have the ability to go longer than most people right and they've been doing that for decades so so that's we're getting close right yeah we're getting close okay so all right so look out in the 2027 because it's you know we're coming out of uh q3 into q4 hard here um do you see a bond rally rather than his ported toward you know pointed basically towards you know uh lower long-term yields and and slower growth but what do you see do you see a bond rally or or stagflation and why well i think
Speaker 2the i mean the answer is that if you look uh and i i'm uh i looked at this data the other day so it's kind of fresh in my mind but you can actually do an analysis where you can get data uh from the u.s treasury and from the uh the british bank of england and it will give you a of interest rates which you can splice together which goes all the way back to 1700 long-term government bond yields okay the average yield um on u.s uk government debt over that period was a tad shy of five percent okay that's the long-term average so what you can say with the bond markets now is that the madness is over we've come out of the zero interest rate or one percent two percent government bond yields and we're back to something which is like a long-term average i'm going to say that yields aren't going to rise a little bit from here but i think we're somewhat near a point where you can actually sensibly invest in bonds now if you believe like us that the liquidity cycle is rolling over then you've got to say that maybe this is indicating tighter financial conditions and a move towards more safe assets uh by investors and everybody that i speak to and everybody i advise are very underweight bonds right now and i think that that's the thing to remember that if it's an asset class which is not really being uh applied uh people are going to start to uh demand more bonds it's the one asset that the media are completely anti and i get the point in the long term but you know the trouble is that long term is a series of short terms and we've got to live through those short terms and maybe the next short term is one where you've got uh bond markets doing pretty well because economy is slow now if you hold that thought and you say well okay what we've got now is um rising interest rates and we've got to live through those short terms and maybe the next short term is a series of short terms and we've got to live through those short terms and we've got to live through those short terms and we've got to live through those we've got a firming us dollar and we've got oil prices which if you bootstrap from the diesel price are over 160 bucks a barrel, okay? That is enough to crimp the economy. And I'm not saying it's recessionary, but it's likely to be a slowing economy into 27. And fiscal policy is not going to have the same impetus next year that it had this year. So what you've got all in is a situation where it's quite likely the bonds may get some sort of impetus over that period. But what I'm saying is, it's not such a bad period to be thinking about bonds going forward. Now, that's nominal bonds. Then you've got to think about tips, inflation protected. If you look at the history of financial assets, it is extremely hard to make 3% real over the long term, okay? Tips are currently guaranteeing that for you. So that's not a bad thing to think about.
Speaker 1Yeah, that's right. Right. Makes sense. Makes sense. You know, the thing that I wonder, so what I heard in there was going to be my next question, but I think you already kind of answered it, which was, are we in a structurally new cycle? And if not, when will we be in a structurally new liquidity cycle? And how much of that changes if the circular AI economy spend something happens to it, right? In other words, whatever, right? It doesn't work. It changes. It changes dramatically. Does that do something to that timing around a structurally new liquidity cycle? So where do you think we are? And then what courses would change that would have you change your mind?
Speaker 2Okay. Well, if you want corroboration of what I'm saying about where we are in the liquidity cycle, one of the best ways to monitor it is to monitor the spread between 10-year bonds and five-year bonds. And that gives you an idea of the, that's the slope of the long-term bond. That's the long end of the curve. And without getting too wonky, that's measuring the term premier pretty much within the, on the bond market. And that moves about six months after liquidity does. So it tends to follow the liquidity cycle. So if we're correct about where we're, what we're saying, you should be seeing a flattening in the 10-5 curve through time. And I think there's further flattening to go. And it's been flattening through this year, which was the one clear non-consensus trade at the beginning of this year. Everybody thought the yield was going to steepen and it's flattened. Okay. We thought it was going to flatten because liquidity was coming down. Right. But it's still got further flattening to go. So that's, that's point number one. And then I think that the next thing we've got to think about is what then happens to the real economy over the next, over the next 12 months. And I would argue that we're likely to see a slowing, not a recession. Now, if we're in a world of capital wars, okay, where there's intense competition, particularly with China, it would be, let's say, foolish for policymakers to try and create a recession. They simply can't take that risk. And so what I think they've got to do is to basically try and cool the economy as best they can by maybe following the markets. So that's what I think, that's my reading of what Fed Chair Walsh is saying. He's saying, let's forget this forward guidance stuff. And in fact, let's revert to a model where basically the Federal Reserve follows what the market, the bond markets are saying. And it seems, as if that's what they're tracking. So the two-year note yield is pushing up and basically Fed funds is following that. And what you're starting to see now is evidence that the two-year yield is beginning to top out. So that may be saying we're close to, you know, that sort of, that bottom in the liquidity cycle. It's not there yet. My view is it doesn't happen until maybe Q1, 2027, but we're getting close to it. I remember liquidity is the leading indicator. But we've got to start.
Speaker 1I think your piece earlier this week, I can't remember if it was the 12th or the 13th, but I think you had a piece this week that showed the data of the M2 kind of declining the last 90 days or whatever. It's kind of, it's been on slightly contract curve. And so you're seeing Fed policy kind of say, we're going to allow that to continue. We're going to kind of make that continue to kind of help cool things off so that we keep some level of hands on the wheel if there is such a thing anymore for them. Um, so back to the real world, then, you know, as it relates to people that are dealing in the real world economy, if you're, if you're in fixed income right now, because your, your time horizon is maybe your final decade, maybe your final 15 years, hopefully people live a lot longer, but you know, your North is 65, let's say, and you're listening to this and you've lived in a world that no longer exists, but you still have a portfolio that's betting on the world continuing a little bit longer. You know, this, this risk curve, you know, that you're getting pushed out on to, to get your hurdle rate met is, is the thing that everybody talks about, right? It's dangerous because you're not really at the point in life where you want to take risk or you can. 3% tips is wonderful, but 3% doesn't, you know, doesn't make the rest of your fixed income work. Yeah. Although it's 3% real.
Speaker 2That's real. You're going to get the inflation kick as well.
Speaker 1Yeah. So fair enough. So, but. The point being three to six is like your fixed income tranche. Like if you're on that and you're, and you're dealing in the real world, trying to make your medical bills and make other things meat, food, and whatever, your consumption is only in those two things right now, like gas, food, and medical, right? I mean, if you're in that part of life, how do you, how do you defend against what's coming? Because at this point, you're probably just trying to make sure you keep your life where it is, not go backwards, right? Like you're not really worried about making more. Yeah.
Speaker 2You want to preserve what you've got, right? So the question is, is this is what the distinction I make between saying, do you want to think in terms of financial repression, which is all about trying to preserve your income, or you want to think about monetary inflation, which is about trying to protect your wealth. And in my view, the monetary inflation angle is by far and away the most important one. So the question we've got to ask is that if you've got federal debt, and let's just take federal debt as an example, and it's not a question of just hitting on the U.S., because the U.S. is probably in a better place than most places. Europe is in a dire situation, but the U.S. is a lot more transparent with its data.
Speaker 1It's the prettiest cow in the slaughterhouse, right?
Speaker 2Yeah, yeah, exactly. So, which is not a bad place to be, I suppose. At the end of the day, you know, what you've got is growth in federal debt, which is running at probably, let's say, 7% to 8% per annum. So you've got to think about which assets in my portfolio, if that 7% to 8% reflects monetary inflation, which assets do I own that will beat that hurdle rate? Well, fixed income won't do that in the long term. All my points about fixed income are basically a short-term positioning. Okay, in the long term, that won't wash. Gold should do that, because gold always does, okay? It matches the increase in federal debt. It's not going to be a straight line, but it normally does in the longer term. And as I said, if you've got the Chinese buying gold as well, then that's important. The second thing you can say, I think, with some conviction is that the other thing that you probably need to own is technology. Now, I'm not going to say buy technology right today, because clearly there's a valuation question. But in the long term, what we know is that technology, NASDAQ, tends to be a strong earnings growth or strong return area, and it has done over the medium term. So you want technology, because that's likely to be a winner. Which other assets should you own? I would think probably some crypto. And as I've tried to argue, crypto is so leveraged to liquidity, you probably don't need much, okay? But again, you diversify your monetary inflation hedges. And then you might say, well, okay, within the equity markets, what am I going to do as well? And I would say probably thinking about resources are a pretty good thing to think about. So looking at oil, that could be an important area. So one of the reasons. Sorry, I was going to say, one of the reasons that oil is important to think about is one of the strongest relationships over the long term is the oil to gold ratio. And if you look at that ratio, it always. Sorry, the ratio of gold to oil always comes back to an average of about 20 times. So if you think this is correct, and you say, well, okay, the gold price today is circa $4,000 an ounce. And if you think this is correct, and you say, well, okay, the gold price today is $4,000 an ounce. Divide that by 20, and that's what the oil price should be. And if you look back in history, that's been a pretty rock solid figure, with no great evidence of a change in trend. So if that's correct, let's start thinking the math through. So if you've got growth of 7% to 8% per annum in monetary inflation, that means the gold price in 10 years time is going to be an ounce of gold, which means that the oil price could be significantly higher, $400 a barrel, right? Now, in that situation, you want energy companies. And energy companies have been hugely out of fashion. But that's one of the things to start thinking about. Now, people say to me, and people said to me at the beginning of this year, where I said, I thought the oil price was going to go up significantly higher, based only on that 20 times ratio, that I was insane. But in my view, if you look at what's happening in the markets now, look at what the diesel market's doing. You're bootstrapping an oil price equivalent of $150 60 already, and I think it's going to go higher. So that's the background. So I would be looking at those areas of the market in equities. Probably you want prime residential real estate as well, because that's always done well in the long term. And that's how a portfolio should be thought about. It should be thought about from the perspective of monetary inflation. Now, let me stress again that that is a long-term strategy, and it may not be the best performer in the next three to six months, because we're in a downswing of liquidity where things are going to tighten. And you may want some bond protection short-term, but you don't want the bonds long-term.
Speaker 1Right. And I think that's kind of what you're saying is maybe, from your perspective, buying the bond protection short-term so that you can lean into the discounts that might be available in other assets that are quality, which you just listed out several, while they get haircut. So I'm going to go to Mike Schneider. Mike Schneider in the live chat. Give him a shout out. Don't know who he is, but he sent in a question, and it relates to your last comment around gold. So he wanted to just know, does the demand from CCP and the People's Bank of China, is that the largest factor deferring the price of gold or determining the price of gold moving forward? That's his question. My only add-on to that would be, are there other ones? If not, whether it be a reset or some kind of recalibration of it on our own balance sheet here in the U.S. Like, which one do you think is the biggest determining factor of the price of gold moving forward?
Speaker 2Oh, I think my view is unquestionably China.
Speaker 1You're just over there, three weeks before.
Speaker 2Yeah. Now, let me just run through the reasons why that is, okay? The first thing is that if there was a, to go, to answer the other point about the U.S. first, Chris, so could you get a recalibration of the U.S. gold stock? Well, it clearly is possible. I mean, there's no reason why it shouldn't happen. But the fact is, I can't believe that the markets would be as naive as to not be able to look through that already. So they must realize that this is an asset on the U.S. balance sheet. It must be part of any analysis, any sensible analysis of the worth of U.S. Inc. So, you know, I mean, I wouldn't think it would be that material, but it may allow Besson to do a little bit of clever mathematics. Who knows? Let's come back to China. The biggest anomaly that you've got in the markets right now is the differential between U.S. Treasury yields at whatever it may be, 5.3%, and Chinese 10-year bonds, which are yielding about 1.6 or thereabouts, okay? That differential is eye-wateringly large, okay? It's never been as big as that before. And what is it telling us? Well, if you take the Chinese view, they would say, well, okay, this is basically telling us that there is an escalating risk premium on U.S. assets because nobody trusts the U.S. anymore. And so U.S. Treasury bonds are yielding 5.3%, you know, basically almost 400 basis points more than Chinese bonds because we're trusted and America isn't, okay? That's complete rubbish, obviously. And the reason that that's rubbish is that what the bond markets, what yields are basically determined by is predominantly underlying nominal GDP growth. So if you look at the 5.3% figure in the U.S., that is largely telling us that the U.S. economy is growing a tad above that level. It's growing at probably 6% trend. Now, why are bond yields moving up? Why are bond yields moving up in Japan, U.S., Europe, etc.? Because nominal growth in all these economies has taken a huge step up relative to what we saw in the 90s and 2000s, okay? And it's as simple as that. The bond markets are just adjusting to faster GDP growth. Well, hold that thought. Okay, why are Chinese bonds at 1.6%? Could it really be that the Chinese economy is not truly growing at the figure that the CCP say it's growing at, which is 4% to 5% real? It's actually honestly growing at somewhere near a 1.5% nominal. So what China is actually experiencing is actually debt deflation. And that's what you see if you go there. The economy is clearly suffering from this degree of deflation. Why? Because they've got huge amounts of debt overhanging them and they can't get out of that debt. And isn't this exactly the same as Japan went through 15 years ago? Correct. Okay. So what is the only way out for the Chinese? They've got to print money. Now, that's difficult in the current geopolitical setup, because that would surely mean that you're going to get a weaker Chinese yuan, rather like you've got a weaker Japanese yen. And so nobody would accept the fact that the Chinese yuan crashes. So the Chinese won't go do that. So what I think is they're operating what I call a dual circulation system, where they're basically insulating the internal value of the yuan from the external value. They've got capital controls. They have doubled down on those capital controls, particularly with regard to crypto in the last six months, to make it really difficult for people to do anything. They've got compliant state banks, and they've got huge forex reserves. So they can basically manage this process, keep the dollar yuan rate pretty much fixed anyway, it's a manipulated rate, they can fix that, and then start printing money domestically. And if they print money to try and lift the level of prices and wages, what is the average Chinese investor going to do? Well, they don't really invest in equities there. The real estate market's on its back. So they go for gold and silver. And so that's what they're buying. Retail demand for gold and silver in China is sky high. The Shanghai Gold Exchange is the marginal pricer of gold in the world economy. No longer Comex or London. And if you look at the data, just plot a chart, we do that. And I'll put one after this call on Twitter. Look at a chart between the size of the People's Bank's balance sheet and the gold price. The two move together. So if the Chinese expand liquidity, the gold price goes up. And they, I think, have to expand liquidity by at least 30%.
Speaker 1Okay, so you answered the question with some real data and went deeper, so people can draw their conclusions. Thanks, Mike, for submitting that one. And I've got one more question. And then I've got five favors to ask before we go, because I want to respect the rest of your time. So my final question is, from your perspective today, are we in a perpetual contest between collateral inflation and currency debasement? And or have we actually solved the debt problem that everyone's talking about that continues to escalate with no end in sight? So where do you land on that equation? And does it matter? Well, it matters hugely,
Speaker 2because I think what you've got, I mean, let me just sort of unpack that. So the way that I see things is that what you have is a situation where debt is growing exponentially. I think we all agree with that. Because if you look at the federal deficit of federal debt, as I said, look at the numbers from the Congressional Budget Office. And the Congressional Budget Office numbers are growing at about 7% per annum, or thereabouts. But you've got to add an extra percent for extra. Additional defense spending, in my view, because I think the figures are too conservative. So you're looking at probably a compound rate of near 8% compound growth for debt, okay? So that is what you're looking at for debt. If you get equilibrium in the system without a financial crisis, I mean, you've got to get liquidity growing at that same rate. So the debt liquidity ratio has got to move up together. Now, your question was, is that currency debasement? Well, clearly printing money is. So if you print all this liquidity, you're going to get a lot of debt. So you've got to get liquidity. The gold market is going to go up. And what you will see is the dollar gold price rise, and the dollar will devalue against gold. Everybody else is doing this. The Europeans may have to do that even faster. The Japanese have done it already and doing more. The Chinese will join in as well. So it may be that the US dollar, as you say, is the most beautiful cow in the slaughterhouse. That's probably correct. It falls against gold, but it rises against other paper currencies. So that's how I would tend to look at it. So on the question of collateral quality, I think that's something that is clearly uppermost in Scott Besson's mind. And I think that's one of the reasons that they're doing the operations they're doing. And I think he's doing a great job. I mean, he's been ridiculed in the media. But at the end of the day, what Scott Besson's doing is basically buying off the run treasuries, often at 60 cents in the dollar and retiring them. That's a great trade for the US taxpayer. Okay, but people don't think about that. They think about the volatility. So improving collateral quality the whole time. So I think they're alert to that question.
Speaker 1You bring up a very, I'll make this final point, let you kind of make the last comment on this, and then we'll finish up. But you know, what you just said about Besson, it takes a lot harder work and a lot more financial engineering to retire something with a net benefit to the taxpayer when you live in a democracy where you can't get credit for that stuff because the power cycles change every 24 months. You can't get credit for that stuff because the power cycles change every 24 months. You can't get credit for that stuff because the power cycles change every 24 months with midterms and every, you know, and every, whatever it is, 48 months, right, with a presidential election. Whereas in China, you can do everything you said, which actually, you know, the basis, the currents does all that stuff. But because you have this totalitarian control, and you can kind of socialize everything, it gives you just more options without having to work as hard, right? I'm not saying it's not equally demanding. I'm just saying that you can do things you can't do in a free society. Right. So what are your, what are your thoughts on that challenge? Because again, whether without of being a political thing i mean the financial engineering of it um is one thing and then the interpretation and the media coverage is at another and do you do you think that's in a disadvantage for the u.s right now um compared to its peers because in every other market basically socialism is already accepted and kind of the status quo or you know here we're still trying to hold on to that last vestige of hope that you know we can we can have yeah well that means
Speaker 2And spoiler alert, I mean, it's coming for you guys too. And the fact is the governments everywhere are basically short of funds. We're in a capital war where you've got effectively big government controlling economies more and more. So you could say, actually, I mean, the paradox in this is that the US may be fighting for freedom, but it's basically converging more and more on the Chinese model of big government. And that's inevitable, I think. And basically, they are scrambling around for revenue sources. And there will be wealth taxes because that's the thing that they can try and tax. It's easy within the system now because everything is calibrated. It's digital numbers. It's easy to do. So that's what I would figure is going to go on. And I think, sadly, we're all going to get more and more wealth taxes. And that's the way to do it. If you're living, I mean, you think about it, if you're living in a monetary inflation where asset prices are going up the whole time. It would be kind of odd if governments didn't try and tax them. So you've got to find ways of mitigating that, which is maybe why crypto is an interesting avenue to the extent that it lies outside that calibration.
Speaker 1Well, and there's 70,000 pages in the IRS code worth of coupons, as I like to say. Some people call them loopholes and incentives. But at the end of the day, they're coupons right from the manufacturer. So you just have to get more smart about engineering your coupon strategy as a wealthy individual and recognizing. You're playing within the letter of the rules they wrote when you do it. And and you know that if you don't do it, you're going to get hammered. Right. Because it's kind of Michael, it's been an absolute pleasure. I want to let you get back to your day. Five favors, everybody, before you go. First one is all the algo stuff. Right. Like the thing. Give it the heart. Throw some hearts in there for Michael's fantastic hour change here. That helps make sure the replay gets circulated on all places where it goes. And if you're on Substack, share it if you're on Apple and Spotify or YouTube or wherever you're listening to this. Subscribe to him, please, if you haven't already. If you're one of his subscribers, upgrade if you haven't upgraded. If you're new to me, I'd love to have you follow or subscribe, whatever that works like. But most importantly, comment, send in your questions. We covered a lot of ground. We probably stirred some some hornet's nest. So feel free to weigh in on the debate. The conversation is more important than than the thesis or my my two cents added to it. So we welcome that. And the fifth thing would be just. You know, keep keep reading stuff like this and stay engaged and let me know how we can help you and let Michael know how you can help him. So anyway, thanks, buddy. I appreciate you being on. All the best over there.
Speaker 2Great pleasure. Thanks, Chris.
Speaker 1Thanks, everybody. Have a great rest of 2026.
Speaker 3See you. Thanks. See you. Thank you.
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