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Michael Howell: FED Rate Hikes Will Trigger The Biggest Bull Run Ever — Transcript

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0:00that central banks come in and support
0:01the system. They simply have to
0:03otherwise the system would fail. I mean
0:04the whole economy will collapse. They
0:06start printing money furiously and what
0:09happens is that monetary inflation
0:11hedges go up. The price of gold, silver,
0:14bitcoin, all these assets tend to
0:17skyrocket in size. So in other words,
0:19for every 10% increase in global
0:22liquidity, you get something like a a
0:24doubling of the Bitcoin price. You don't
0:26need very much in a portfolio to give
0:28yourself very good protection. How many
0:30people have got anywhere near 3 or 4% or
0:33whatever it may be in Bitcoin? Very few.
0:36All you need to do is to have a few% of
0:38your portfolio in
0:42Quick One before we continue. If you're
0:45not subscribed yet, can you please check
0:47beneath if you clicked that subscribe
0:49button? It helps us enormally grow this
0:51channel. Thank you very much, Michael.
0:54It's great having you back here at New
0:57Era Finance and I want to dive into the
0:59topics immediately because there's so
1:02much to discuss and one of the quotes
1:04that I've heard from you in a different
1:06show was the west is bust and the world
1:09is changed.
1:11So my broad question at first is why is
1:14the west bust and what has happened that
1:17the world is changed?
1:20Well, I think the um the first thing to
1:22say is the west is bust if we focus on
1:24that first. Uh it's just basically
1:27saying that um there's a huge debt
1:29overhang um that is saddling economic
1:32growth or economic performance and that
1:34debt burden is likely to get worse not
1:36not better. And the reality is that
1:39we're living in a world of both aging
1:41demographics and what I've described
1:43before as capital wars. and those
1:46capital wars for example between the US
1:48and China uh for the dominance of um of
1:52um the dollar or the yuan system uh in
1:55the long term that is likely to morph
1:57into maybe military conflict at some
2:00stage and I think if you start to uh
2:02think about that particular avenue uh it
2:05tells you that austerity policies uh by
2:08governments are just not going to happen
2:10uh I mean it would be uh it would be a
2:11great tactical mistake uh for
2:13governments to basically cut cut back on
2:15spending at this time. So you're
2:17actually looking at a US economy for
2:19example that's running on uh with a
2:21fiscal deficit of 6% of GDP year after
2:24year uh accumulating debt and um that is
2:29likely to grow exponentially but it's
2:31not just a US phenomenon because we know
2:33that Europe is being coralled into more
2:35defense spending uh as well and um China
2:39is likely to keep pace. So the world is
2:41moving into a very different uh uh you
2:43know a very different uh shape. Um so
2:46that's number one. That's why the world
2:48is bust. But you know technically it's
2:50not bust because governments can always
2:51pay their bills. Uh I mean that's the
2:53reality of it. Uh the question is at
2:55what price and what detrimental effect
2:58does it have on the private sector and
3:00that's things we need to consider. And
3:02then the other point about the world
3:03changing which is partly to do with this
3:05but it's the fact that if you think
3:07about financial markets uh as a result
3:09of all this debt they are no longer new
3:12capital raising mechanisms uh for the
3:14private sector they're basically debt
3:16refinancing uh engines. Uh debt has to
3:19be rolled over uh you know an average
3:22period of about 5 years you take out a
3:24debt but you've got to effectively
3:26refinance it. And so the bulk of
3:28transactions in financial markets now
3:30are all about refinancing. And in a
3:32refinancing world, often the you know
3:36things look to topsyturvy. The polarity
3:38of the system changes.
3:40>> So if we talk about debt, um how big of
3:44an issue is it currently?
3:48>> Well, it's an it's an issue because I
3:50mean we just got to look around and
3:51we've got we see that uh bond yields are
3:53rising uh all around the world. I mean
3:56with probably one exception being China
3:58where yields are depressed because of
4:00the state of the Chinese economy. Uh but
4:02in the west and in Japan uh you're
4:05looking at rising uh rising yields. Now
4:07I think it would be wrong and misguided
4:10to say that this is all because of
4:12excessive government spending. I mean
4:14that's what the media like to say but
4:16that's not quite true. Uh the reason
4:18that you've got rising bond yields is
4:20that bond bond markets are readjusting
4:23to a different uh economic backdrop uh
4:26and one which is probably uh you know
4:28going back to a precoid situation where
4:32the underlying growth of the world
4:34economy is significantly higher in
4:36nominal terms than it has been for much
4:38of the last uh 10 years. uh so for
4:41example if you look at the US economy
4:43the US economy is growing in nominal
4:45terms I stress that with inflation and
4:47real growth at something like 7 to 8% uh
4:50you know peranom as a sort of trend
4:52growth rate and that is a rate that we
4:55haven't seen since the mid1 1980s now in
4:58the mid1 1980s bond markets were
5:00yielding about 8% and uh you would
5:03expect um that yields tend to move uh
5:06pretty closely with NGDP nominal GDP
5:09growth So if you look around the world,
5:11this is really what's happening. This is
5:13why bond markets are adjusting and
5:14they're adjust adjusting at a faster
5:17rate than the policy environment is.
5:20>> The first thing that comes up to my mind
5:21when you talk about the fact that the
5:23rates have been like 8 9% back in 1980 I
5:26think even they peaked at like 14% is
5:28that with the current amount of depth
5:30that there is in the system this cannot
5:33continue
5:35like at some point it's going to crack.
5:38Well, I I think the cynic in me says
5:40that maybe it does continue because
5:42governments can always finance
5:44themselves. They just basically find
5:45different avenues. U you know, if you
5:47look at how much debt has increased
5:49since year 2000. Uh I mean, in the in
5:52the American economy, public public debt
5:54is probably something like uh what 12
5:57times bigger than it was in uh uh in
5:59year 2000. I mean, that's a phenomenal
6:01increase. And including we've had a lot
6:03has gone on since then. uh we've had the
6:06GFC and we've had COVID etc. uh but then
6:09you've had a proflegate state and uh
6:11effectively you know we're still waking
6:13up every morning and we're still going
6:15to work and well a lot of us are and
6:16we're still looking at financial markets
6:18which seem uh broadly stable at least
6:20for now. So you can kick the can down
6:23the road here. The question is what cost
6:25does it does it imply? And the cost is
6:28that you're basically creating uh
6:30long-term monetary inflation. And that's
6:32the thing to thing to think about. Uh
6:34you know, we've argued that, you know,
6:36it's slightly misguided to talk about
6:38financial repression. That's not really
6:40the the full story. The full story is
6:43you're getting monetary inflation. And
6:44that's why gold and crypto are basically
6:47going up because they tend to be
6:49extremely good monetary inflation
6:50hedges. Um and you know the reality is
6:54and you know let's sort of put it in
6:56slightly wonkish terms but the reason
6:58that um you're getting this phenomena is
7:00that governments are increasingly
7:02funding at the short end of the market.
7:04Um so in other words rather than issuing
7:06a bond a longdated bond uh which may
7:09have a maturity of 10 years what
7:12governments are increasingly doing now
7:14led by the US but clearly copied by many
7:16others now is they're issuing three
7:18month or six month treasury bills and
7:20those treasury bills are like printing
7:22money um and basically that's what's
7:25going on and that percentage of debt
7:27issuance which is currently about a
7:29quarter of total debt issuance is now in
7:32in this short-term these short-term
7:34instruments it's going to grow to
7:35probably a third uh in the in the
7:37foreseeable future. So, this is the
7:39trend that we're on and it means more
7:41monetary inflation. Now, monetary
7:43inflation uh which let's let's be clear
7:47about this. Monetary inflation uh
7:49destroys your wealth. High street or
7:51main street inflation destroys your real
7:53incomes. Okay? Uh but this is a uh you
7:56know this is a a nasty uh process
7:59monetary inflation because it basically
8:01makes pe it makes people poorer in the
8:04long term. Their assets basically if
8:06their their assets don't keep up um they
8:08basically lose wealth and the assets
8:11that will keep up are the dedicated
8:13monetary inflation hedges uh like
8:16cryptocurrencies or gold. Now I can show
8:19you that or maybe evidence um that that
8:21process and if I uh maybe just swing
8:24along to uh some of these charts. This
8:27one this one is the one to think about.
8:30What this chart is basically
8:31illustrating is the sensitivity of
8:34different assets to global liquidity or
8:37to a global liquidity shock. And what it
8:40does is you can see by the height of the
8:42bars they rank the sensitivity. And what
8:46you can see on the left hand side are
8:48some of the most sensitive assets to a
8:51global liquidity shock. And then as you
8:53start to move towards the uh right hand
8:55side, you've got more traditional
8:57investments like equities or fixed
8:58income. Now fixed income tend to do very
9:01badly. Uh and you can see the two
9:03negatives are uh the yield curve and
9:0510-year US Treasury bonds. Uh they they
9:09basically uh fall in value if you get a
9:12positive liquidity shock. In other
9:13words, they're negatively correlated to
9:15global liquidity. Um, if you look on the
9:18left hand side, you'll see their
9:19Bitcoin, Ethereum, Salana, um, various
9:23combinations of those, gold, silver, uh,
9:26etc., which all have relatively high
9:28sensitivities. And the point about this
9:30analysis is what it's basically telling
9:32us uh is that in order to protect
9:35portfolios against um money printing if
9:38you like uh you've got to start skewing
9:41your portfolio more towards these
9:42dedicated monetary inflation hedges and
9:45that's really what we've been arguing
9:47for much of the last few years. Uh the
9:49world has changed. Um governments
9:51particularly in a world where
9:53geopolitics are at the forefront and
9:55aging demographics uh are sort of
9:57weighing on us. You've got to recognize
9:59that governments are going to
10:00increasingly find um you know more uh
10:04ingenious ways of funding themselves
10:06which ultimately come back to printing
10:07money. If we if we talk about monetary
10:10inflation and if you describe this
10:14entire phenomenon and the reaction and
10:16response in society brings me to the
10:19fact that it the more and more people
10:21realize that there is such a high
10:22inflation they are being forced to
10:24invest into asset classes that are
10:27outperforming the inflation but they
10:29don't have the actual experience of
10:31doing so of investing into those assets
10:34which then leads to a big bubble which
10:37at some point is going to burst. So my
10:40question then becomes is where's the
10:42risk of this entire system and where's
10:44the risk of having such a high
10:45inflation? Is it private debt?
10:49Yeah, I mean in short, yes. And I'm
10:51going to try and risk going back to
10:53another slide in the presentation and I
10:55don't know whether whether it's catching
10:57up or not. Uh but I put um u I put a
11:00slide up which is called the the debt
11:03liquidity cycle and I can describe it
11:06and what this is broadly saying is the
11:09whole nature of the financial system has
11:10changed and with it the risks that are
11:13associated with um with liquidity. Now
11:16what you've got is a world where as I
11:19outlined earlier on um debt refinancing
11:22is paramount and debt refinancing is
11:25really what capital markets are all
11:27about. Now if you pick up a textbook a
11:30finance or an economics textbook it will
11:32tell you contra-wise that actually a
11:34financial or capital market is all about
11:36raising new money for new investment
11:38spending. But there's there's not a lot
11:40of that going on right now. Um,
11:42basically financial markets are all
11:44about debt refinancing and that seems to
11:47be the the sort of the dominant feature.
11:49We would reckon that about 80% of all
11:51primary transactions in capital markets
11:54worldwide are now debt refinancing
11:56transactions. Now, if you're refinancing
11:58debt, uh what matters is balance sheet
12:01capacity. If you're investing um for new
12:04capital raising, in other words, you
12:06want to make a uh invest in a project,
12:09the cost of capital tends to be
12:11important. So, the interest rate is is
12:13maybe a key factor. But in a world where
12:16you've got to refinance your debt, it's
12:18not the interest rate that matters. Uh
12:20because you know, you've got to survive.
12:22Therefore, what you require is the
12:24capacity of the system to lend to you.
12:27Now what this says is that therefore
12:28liquidity is key to the stability of a
12:32of the modern financial system and the
12:35paradox that's at the heart of the
12:37system is that debt needs liquidity for
12:39refinancing but equally liquidity needs
12:42good quality debt as collateral because
12:45we live in a world of collateral and
12:48ever since the GFC uh we've had we've
12:51had a situation where uh again another
12:5480% or so of total
12:56uh liquidity is collateral backed. So in
12:59other words, if you want to take out a
13:01loan uh you need some form of collateral
13:03backing. Now that may be a
13:05straightforward home mortgage or it may
13:07be uh a treasury bond or a treasury bill
13:10that a financial institution posts with
13:13a lender to borrow uh or a hedge fund
13:15may do that. So what you're seeing is a
13:18world where collateral uh and repo
13:20what's called repo are really important.
13:22Now, when do you get a problem in the
13:25system? You get a problem when liquidity
13:28and debt are mismatched. And that tells
13:30you that you get you're likely to see
13:33either an asset bubble, if there's too
13:36much liquidity, or if there's too much
13:38debt to refinance, you'll get a
13:39financial crisis. And the way to monitor
13:42that is to look at the stability of the
13:44repo and collateral markets. And the two
13:46variables or uh things that we reckon
13:50are worthwhile monitoring are what's
13:52called sofa spreads. So that's uh the
13:55system overnight funding rate in the US
13:58which is the old euro dollar rate if you
14:00like. Um and look at that relative to
14:02fed funds target rates and then look at
14:05the move index which is an index of bond
14:07volatility. And that's telling you how
14:09stable collateral markets basically are.
14:11Now, if you can um see um the slide that
14:15I'm about to put up um here, you uh
14:18hopefully you can see this, which is
14:20looking at the history of the debt
14:22liquidity ratio for the advanced
14:24economies worldwide. And what this is
14:27basically telling us is that that
14:29particular process is indicating that
14:33the cycle of of liquidity in debt uh
14:37causes a fluctuating ratio of debt to
14:41liquidity. And when you get spikes in
14:43the debt liquidity ratio, what you find
14:46um is that the system effectively fails.
14:50uh you get a refinancing crisis and
14:53basically assets sell off as there's a
14:55scramble for liquidity uh which is
14:57necessary to finance the debts and at
14:59that point the central banks come in.
15:02Now the reason that central banks come
15:04in is that the paradox that equally is
15:07associated with the system is that new
15:09credit basically rests on old debts. So
15:13you simply cannot afford to default
15:16debts in the system. uh and that's the
15:18whole nature of our monetary system and
15:21this has become even more exaggerated
15:23over the last few years. So it's
15:25absolutely paramount that central banks
15:27come in and support the system. They
15:28simply have to otherwise the system
15:30would fail. I mean the whole economy
15:32would collapse as we saw sort of briefly
15:34uh at the time of COVID or in the 2008
15:37crisis. So central banks come back with
15:39elacrity. They start printing money
15:41furiously and what happens is that
15:44monetary inflation hedges go up. So
15:46they're creating monetary inflation. The
15:49price of gold, price of silver, Bitcoin,
15:52Ethereum, all these assets tend to
15:55skyrocket in size. And the most
15:57sensitive of those according to recent
15:59history has been cryptocurrencies.
16:02>> Yes. Because probably those assets are
16:04the most riskiest ones. So if there is
16:08um more liquidity into the markets or if
16:10there is more QE into into the markets,
16:13those tend to do really well. We've seen
16:15one of those signals where a few weeks
16:18ago we've had the news coming out from
16:20Bessant where he's doubling down on um
16:24the liquidity that he wants to inject
16:26into the markets and quite suddenly
16:28Bitcoin broke out on that specific day
16:31um and is currently trading around
16:32$80,000.
16:35Is that a signal where you could say
16:37okay the Fed and also um the government
16:41in the US in general is likely going to
16:44inject more liquidity into the markets
16:46to keep or to to basically continue the
16:50system that we currently have.
16:52>> Yes. And I think that what I mean I
16:55think the media in in many cases misread
16:58that Bessant move. Uh I mean all he's
17:01doing is acting at the margin. I mean,
17:03this is although you could argue that
17:05he's doubling the size of buybacks,
17:07buybacks, treasury buybacks are tiny,
17:09tiny, tiny uh part of the bond markets.
17:12The reason that it's important though is
17:15that what he's trying to do is not
17:17necessarily to influence yields. What
17:20he's trying to influence is volatility
17:22in the market. And what he wants to do
17:24is to create an orderly bond market. And
17:26that's what uh policy makers are really
17:30uh in the game for. Now the associated
17:32point which is is important to
17:34understand in this context is that at
17:37the same time or actually a couple of
17:40days before Fed chair Walsh said in the
17:44FOMC presser that one of the things that
17:46they intended to do was to keep uh bank
17:49reserves uh at uh adequate or ample
17:52levels. In other words uh banks have got
17:55enough liquidity. That's another way of
17:57saying that money markets need to be
17:59liquid. Now the reason that money
18:00markets need to be liquid is that if you
18:03if you achieve that you get stability in
18:06repo markets and all this I all this all
18:10these moves about um treasury buybacks
18:13keeping volatility in the bond market
18:15down that suppresses the move index. One
18:17of the key indicators I said to look at
18:19was the move index how stable it is.
18:22Bessence keeping a lid on that.
18:24Similarly, at the same time, Walsh is
18:26operating to basically keep the repo
18:28market stable. So, what you're doing is
18:30you're really controlling both ends
18:32here, collateral stability and repo
18:34liquidity. And that's really what
18:36they're trying to do. And I think the
18:38key signal that we got out of um or what
18:40we've had in the last few weeks uh is
18:42not really about interest rates. I
18:44interest rates don't matter at all in
18:46the modern world. Uh I mean, that's a
18:48that's a big statement. It's
18:49exaggerated, but let's let's put this
18:51into context. What really matters is the
18:53stability of the repo collateral markets
18:56because in a debt refinancing world this
18:58is really uh ensuring uh or governing
19:00the stability of the system. It may well
19:03be that they decide they want to push
19:05interest rates up. But the paradox in
19:07that is that if you think about what's
19:10going on, uh if you've got a government
19:12sector now that is facing a huge
19:15interest bill, which clearly the
19:17American economy is, what that means is
19:19they're transferring incomes uh to the
19:22private sector. They're paying the
19:23private sector to hold their debt. And
19:26because the government is a huge huge
19:28net borrower now, uh that means that's a
19:31big income transfer. So the paradox is
19:34if you increase interest rates in the
19:35US, you're actually giving the private
19:37sector more cash. Well, that's a
19:39stimulus, not not a not a contraction.
19:42And that's what we got to think about.
19:43The polarity has changed. We're in a
19:46topsyturvy world where rising interest
19:47rates don't really mean the same thing
19:49as they did before. Now, ironically, if
19:52they raise interest rates, they may give
19:55the bond markets a tad more stability,
19:58okay? because the bond markets are
19:59crying out for higher short-term rates.
20:02So, a little uh you know, a little push
20:04up uh inching you know, Fed funds up by
20:0725 bips uh may well uh satisfy the bond
20:11markets and therefore bond markets bond
20:12market yields could drop a little bit.
20:14Volatility could fall back and you know
20:17we're back to the same party. But the
20:19key point about this is is that what
20:21Bessant and Walsh have more or less said
20:23is that this is the regime that they're
20:25continuing. They want to fund the US
20:28government at the short end of the
20:29market which means maintaining liquidity
20:31in the system and my view what my view
20:33is that crypto and gold took that as a
20:36cue and that's why they took off.
20:39>> Interesting.
20:41So I think you also mentioned u when I
20:44was preparing this where you said the
20:46cycle end has been postponed and that's
20:49why you see gold and bitcoin go up um
20:51recently. But if I understand you
20:53correctly, you're also expecting these
20:55two assets to continue to do well,
20:56especially if there's going to be a
20:58world where the interest rates are going
20:59to go up and they basically need to
21:01inject even more liquidity into the
21:03system.
21:04>> No question. I mean, that that that's
21:06that's going to happen. They have no
21:08choice. I mean, you know, if you start
21:10to think about, you know, what's going
21:12on, I mean, number one is you've got
21:13aging demographics right across the
21:15West. Okay. Um clearly no politicians
21:19are standing up at the moment and say we
21:20are going to take away uh pension uh or
21:23social security benefits. I mean it will
21:25be a huge uh vote loser. So no no one
21:28has got uh the balls to do that. Uh it
21:31will be many years before that happens
21:32although it will happen at some stage
21:34clearly. Um the other thing that we've
21:36got as I indicated is we've got this
21:38capital war or geopolitical tension
21:40worldwide. Now, in a world where you've
21:42got Russia, you in a rattling saber, uh,
21:45and you've got China, uh, doing, you
21:47know, whatever China is doing, but it's
21:50a clearly a competitive threat, there is
21:52no way that governments in the west can
21:54actually turn towards austerity
21:55policies. So, they've got to keep
21:57spending, right? The tax base, the tax
21:59base has been squeezed out. Uh, so it's
22:02impossible to get any more tax juice out
22:04of uh out of out of taxpayers, and
22:07therefore, you've either got to print
22:08money or or raise debt. Well, it's a lot
22:11more difficult to issue debt comfortably
22:14in a world where interest rates are much
22:16bond yields are much higher. So, you
22:18basically turn towards money printing
22:20which is going to the front end of the
22:22market. Now, the thing is that no one is
22:24no one is going to stand up no
22:25politician and no policy maker is going
22:27to stand up and say, well, look, hey, uh
22:30we've decided we're going to print
22:31money. Okay, it doesn't work like that.
22:33Uh but they're doing it because they're
22:34issuing their funding at the short end
22:37of the market. And the point about that
22:39is that if you fund at the short end of
22:41the market, it's the banks that tend to
22:43buy that debt. And if the banks buy the
22:46debt, the bank balance sheets increase.
22:48And that is basically funding through uh
22:51money supply growth rather than taking
22:54uh uh taking funds out of existing
22:56savings. Uh and that's really the
22:58crucial point. So this is all about
23:00monetary growth. Now why has chair wash
23:02suddenly out of nowhere uh broken uh you
23:06know 20 years or 30 years of history and
23:09suddenly resurrected the monetary
23:11aggregates and saying that M2 growth or
23:14money supply should be part of a
23:15monetary policy framework. Well, of
23:17course it should be and it was foolish
23:19to actually drop it in the first place.
23:21But I think what he's giving himself is
23:23a sort of way out to say well it's not
23:26really interest rates you would be
23:27thinking about. You got to think about
23:28money supply growth. But it may well be
23:31uh one, two, three years before the
23:34monetary aggregates really start to
23:36spell trouble. And that means they're
23:38buying time. And this is all about
23:40buying time.
23:42>> Investing into the crypto markets can be
23:44quite tricky, especially if you see the
23:47chart of Ethereum. If you invested into
23:49that in 2021 and you're still holding
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24:28You know what's interesting is that the
24:30entire concept and context of interest
24:33rates and therefore the yield market or
24:36the bond markets, it's so different than
24:39what most people actually think it is.
24:42Like if you go into a regular FM forcy
24:44meeting where the expectations are that
24:47there will be a 25 bips rate hike or
24:49whatsoever there's a ton of fear on
24:52social media and amongst investors that
24:55expect the markets to to basically do
24:57poorly after that. But if I listen to
25:00you correctly it's actually not a bad
25:02case.
25:04>> It's not it's not a bad case at all. I
25:05mean what really matters is what happens
25:07to the repo collateral markets. So, you
25:09know, I would venture and I mean I may
25:11be wrong, but it would be my uh my
25:14assumption that if they decided that the
25:16next FOMC to raise policy rates by 25
25:19basis points, uh the long ending of the
25:21bond market would actually rally. Um
25:24now, that would be contrary to what a
25:25lot of the media are projecting, but I
25:27think that could be that's quite
25:28feasible and that would actually be
25:30clearly a good thing.
25:32It's it's uh that's so if the bond
25:35markets are going to become a little bit
25:37more stable, what's your pro projection
25:40for the coming few years ahead, what
25:41type of interest rates are we going to
25:43see?
25:45Well, the answer to the question is is
25:47actually very straightforward. Uh and
25:49that really depends on the rate of
25:50underlying economic growth. Now, if you
25:53take I mean, let's take the US economy
25:55as a benchmark. uh as I as I said you're
25:58looking at something like 7 to 8%
26:00nominal GDP growth right now clearly
26:03that is made up of two elements one is
26:05real growth um uh you know in other
26:08words underlying productivity of the
26:09economy etc and the other is inflation
26:12right um now add those two together you
26:15get NGDP growth and it's that underlying
26:17level which really determines the yields
26:19on the bond market so if you go back to
26:22the um let's say the mid 1980s uh you
26:26We're looking at um nominal growth in
26:29the economy of about 7 to 8%. There's
26:31clearly a lot more you know a lot more
26:32inflation than we're seeing now but uh
26:34that was the case and equally what we
26:37were seeing were bond yields of around
26:39that uh around that level. Now what we
26:42where we are now is we're looking at
26:44bond yields which are you know nearer 5%
26:46than 8%. uh but I think that you'll
26:49you've got to see over the next few
26:51years uh bond yields rise up to those
26:53levels assuming that NGDP growth
26:56continues there. Now if you've got a
26:58government that is spending uh spending
27:00furiously and you've got a budget
27:02deficit of 6% of GDP that is a lot of
27:05demand that the government sector is
27:06injecting into the system and as I say
27:08they're monetizing that so you've got to
27:10expect even though you may get growth
27:12you're going to get more inflationary
27:13growth coming out of that. uh which is
27:15why the bond markets are under upward
27:17pressure and you know I would fully
27:20expect yields at the 10-year uh tenor in
27:23the US to test 6% uh in the you know in
27:25the foreseeable future um and possibly
27:28go higher. One of the things that's
27:30keeping a lid on that to some extent and
27:33in fact the only tool they've got is to
27:35issue uh more debt at the front end of
27:37the market. Now, you see where I'm going
27:40with this? Because if they, in other
27:42words, what they're doing is they're
27:43they're starving long-term funds like
27:46pension funds and insurance companies
27:48who like bonds, uh, they're starving
27:50those of those type of securities, and
27:53they're issuing a lot more at the front
27:55end. Now, as I said, if you issue a lot
27:57at the front end, you're creating
27:59monetary inflation, which is storing up
28:01future problems. Uh, and you know, as a
28:04yeah, we're buying time. That's that's
28:06what's going on. But the endgame is
28:08still the same. The end game is monetary
28:10inflation.
28:12The thing is that if I listen to you and
28:14if you talk if you talk about monetary
28:16inflation like I understand it for the
28:19government's perspective but if you just
28:21have like wages are not going to follow
28:24the inflation in terms of growth on a
28:27yearly basis which means that if rates
28:29or yields are going to go to 6 7 8% the
28:33real estate markets for instance are
28:35going to suffer a lot from it I would
28:38assume so like most of the people that
28:40have a regular job or have two jobs
28:42can't really buy any property at all.
28:47>> Yeah, I think that's uh that that's
28:49true. You go back to the 1970s and you
28:54know what happened then was wages did go
28:56up uh and real estate prices did go up
28:59eventually. Uh there were better hedges.
29:02Uh we didn't obviously didn't have
29:03cryptocurrency then but the gold market
29:06was uh was good. Uh precious metals
29:08performed well. Commodity markets
29:10generally did very well. Um the era of
29:13the 1970s was all about uh soaring
29:16commodity prices rather like we've got
29:18now. Uh and broadly in a monetary
29:21inflation environment, you tend to do
29:22well out of hard assets. Now there may
29:25be differences this time uh in the sense
29:27that uh you've got uh you've got a lot
29:30of young people who can't get onto the
29:32housing ladder and I clearly you know
29:34empathize with that. that that's clearly
29:36an issue and you've got uh maybe a
29:38restructuring of the uh of the
29:40industrial and commercial real estate
29:42markets because of AI or because of
29:44technology. So there are different there
29:46there are structural issues to face but
29:48but generally the the uh the the
29:51statement is correct that hard assets
29:53should do well in an environment where
29:55you've got more monetary inflation and I
29:57think that's the case. There may be
29:58better things to look at. As I say, gold
30:00will likely go up and you've also got
30:03crypto which is um you know uh clearly
30:05an exciting area to look at. But you
30:07know this is what we're what we're
30:09looking at which is which makes this
30:11very unusual is we're looking at a world
30:13where debt uh is a problem and it's a
30:16problem for everybody. And in fact the
30:19country that has the biggest debt
30:20problem by far is China. And that's the
30:23one you got to start thinking about. And
30:26what happens if the Chinese, which they
30:28are in fact, but what happens when the
30:29Chinese start to print money? Uh what
30:32assets will the Chinese buy? Um now we
30:35didn't we we would normally say that in
30:38actual fact given the structure of the
30:39Chinese economy and the fact that they
30:41have banned crypto uh crypto trading and
30:44crypto investment that the avenue that
30:47they tend to go down for monetary
30:49inflation hedges is gold. And um
30:53hopefully if you can see this chart
30:55which I I'm going to put up now but
30:57hopefully this chart will demonstrate uh
31:00that particular process as to what's
31:02going on in Asia. And um I don't know
31:05well hopefully you can see this but what
31:07this is demonstrating is the growth of
31:12People's Bank of China that's PBOC
31:14liquidity and the price of gold bullion.
31:17Now, um, contrary to what many
31:20commentators argue that the gold market,
31:23uh, catapulted higher after the Russian
31:25invasion of Ukraine, actually the key
31:27catalyst was the People's Bank of China
31:29printing money. And the reason that
31:31they're printing money is that China has
31:34a huge debt problem. Now, spoiler alert,
31:37what has happened in every other in
31:39every other instance uh in history where
31:42there have been big debt problems, when
31:44there's been big debt burdens,
31:46essentially policy makers have printed
31:48money. And China's no different. They
31:51can't afford to default debt in the same
31:53way as the Americans can't afford to
31:54default debt. So, they've got to devalue
31:56it, and they've got to get their price
31:58level and their wage levels up. And
32:00China can probably do that against the
32:02background of strict capital controls uh
32:05and compliant banks and big forex
32:07reserves. But that's what's going on in
32:09China. And my reckoning is that's why
32:11the gold market is going up. That's the
32:13the key factor. You haven't really had
32:15the great debasement in the west yet.
32:17That's coming. Okay, that's that's cream
32:20on top, right? This is what's happening
32:22right now in China. Now, we wrote a
32:24piece in our Capital Wall Substack uh a
32:28couple of days ago which said, "Let's
32:30investigate uh the proposition that
32:32China uh has no impact on the crypto
32:36market because you've got a sealed
32:39economic and financial system that
32:41prevents people buying." That's
32:43absolutely that's plausible. Okay. uh
32:46you would think that would be the case,
32:47but we looked at the data and actually
32:50the People's Bank of China has a big
32:52impact on the crypto markets too. And
32:54that may be an indirect influence, but
32:57it's certainly there and that may be a
32:59spillover via the real economy and via
33:01the gold market into crypto, but it's
33:03having a big effect, too. So, you know,
33:05what you've got to throw in here is it's
33:07not just the US, it's not just the US
33:09and Europe, it's the US, Europe, and
33:11Asia, which are all in the same boat.
33:14And that's why you've got this monetary
33:15debasement. Uh will it continue? Yes. Uh
33:18will it cause a financial crisis? I
33:20don't know. It could do. But the problem
33:22is is that as you're seeing more and
33:24more debt, uh liquidity has got to keep
33:26pace. And it's quite likely given the
33:29fact they can't afford to default debt
33:31that liquidity is going to keep pace.
33:32And it's a bit like saying, well, okay,
33:34this is going to end. Well, I would say,
33:36well, look at, you know, let's go back
33:37to 1900 and look at the purchasing power
33:40of a dollar or or sterling pound or the
33:44equivalent of what the euro would have
33:46bought in year 1900 and look at what it
33:48would buy today. And the answer is it
33:50would buy cents uh rather than uh you
33:53know anything else. It would it would be
33:54a fraction of what it was worth u you
33:57know 130 odd years ago. But the fact is
34:00we've survived. The financial systems
34:02have had their ups and downs, but
34:03they're still intact. People are still
34:05spending money. Politicians and policy
34:07makers have kicked the can down the
34:09road. But look how much the gold market
34:11has gone up in that time. Uh look how
34:13much you know stock markets have gone
34:15up. Bond markets may well have been
34:16dreadful performance. But that's the
34:18reality.
34:20I think you mentioned before that there
34:22might be a case that we're going to have
34:24financial crisis coming out of this
34:26cycle and I wanted to ask you two
34:29questions on that in the sense that
34:31first of all
34:33how in what way is it different from the
34:35great financial crisis and second what
34:38are some signals that you might be
34:39looking at in terms of data or behavior
34:42from the policy makers that might say
34:45okay we're getting into a worse period
34:47going ahead from
34:51Well, I mean the answer is that that it
34:52could it it could occur. You you could
34:55get a financial crisis. Um and that
34:58financial crisis is you know largely
35:02could largely occur because I keep
35:05saying that balance sheet is important
35:07uh in terms of understanding the
35:09capacity of the financial system uh to
35:11roll over debt. But the problem is
35:13within the financial system it's become
35:15very complex where you have a lot of
35:17overlapping balance sheets. Okay. Uh and
35:19that's because of the rise of things
35:21like shadow banking and you know A lends
35:24to B, B lends to C, C lends to D etc.
35:27And um you know before you know it you
35:30get one failure and you get uh that
35:32gives rise to a multitude or or or 26
35:35you know alphabetic failures and so the
35:37whole thing is multiplied and that
35:38that's really the risk. Um so we don't
35:42really know the extent to which there is
35:43balance sheet overlap but we suspect
35:45it's quite large and that's why the
35:47policy makers have got to make sure that
35:49markets remain liquid uh money markets
35:51in particular so the funding is
35:52available. Now the Federal Reserve has
35:54gone out of its way to try and do this.
35:56They've got things. They've got a
35:57mechanism called the standing repo
35:59facility which facilitates additional
36:02lending if there are crises and we hope
36:05that is a good uh crisis uh protection
36:09tool. We don't know because it hasn't
36:11really been tested and the reality is
36:14that it probably will fail in a crisis
36:16because these things always do. So, you
36:19know, the reaction of the policy makers
36:21will have to be print more money. That's
36:23the only thing they can do. They've got
36:24to keep markets liquid and if they trip
36:26up and they fall behind the requirements
36:29of the debt markets, they're going to
36:31have to catch up and print more
36:32liquidity. So this is the reality. So
36:34what you've got is a strong trend in
36:36monetary inflation, but make no mistake,
36:38there's a cycle as well. That cycle is a
36:40buying opportunity, right? Uh it's not a
36:43selling opportunity. So if you see the
36:45price of gold coming back or Bitcoin
36:46coming back, it's well worth buying it.
36:49there seems to be a lot of buying uh you
36:51know there's a flaw uh where buying
36:53comes back in quite quickly and I think
36:55we've seen that recently.
36:56>> Yeah. I mean I I'm looking at the
36:59markets. I've been going through a few
37:01crypto cycles before but especially when
37:03the sentiment is as awful as it has been
37:05with Bitcoin just prior to the statement
37:07that came out. Um there are a lot of
37:10people sidelines. So every little dip
37:12that we see are quickly being bought up
37:15and then price consolidates for a little
37:17bit of little bit of time and then
37:18there's another pretty strong severe
37:21move on Bitcoin going up but it never
37:23really comes back down again. So if I
37:26hear you correctly,
37:27>> the ones that are waiting for a bottom
37:29in October for the so-called fouryear
37:31cycle are probably going to be left
37:32behind.
37:34>> Yeah. I mean there's there's no there's
37:35no four-year cycle as far as we can see.
37:38I mean the cycle is different. the cycle
37:39is more like a refinancing cycle based
37:43around debt which is a five to six year
37:45cycle. Um and you know I mean in fair
37:48play I mean I I've been arguing that
37:50this year would be not a great year for
37:52Bitcoin um um simply because the
37:55liquidity cycle is losing momentum but
37:58that loss of momentum is largely because
38:00the real economies uh have been so
38:02strong they're sucking liquidity out of
38:04financial markets. Uh now one of the
38:06things again we wrote this up in our
38:08capital war substack but one of the
38:10other mechanisms of uh of liquidity
38:13creation particularly in the US is
38:15something that we've called treasury QE
38:18uh to differentiate it from Fed QE and
38:20the Treasury QE process is all about
38:23spending money in the real economy and
38:25funding that through the Treasury bill
38:28market uh which is really encouraging
38:30the banks to actually buy those bills
38:32and fund the fund the government. Now,
38:34in theory, that shouldn't have a big
38:37effect on financial assets. Okay? Um, it
38:41will have an effect on real assets for
38:43sure. And that really poses the
38:45question, are are cryptocurrencies real
38:48assets or are they financial assets? And
38:51we've long leaned towards the idea that
38:53they're more financial assets. But
38:55actually interestingly and what this
38:57piece actually looked at was how
38:59sensitive crypto is to the Treasury QE
39:02dimension as well as the Fed QE. And the
39:05answer is they're very sensitive to
39:07Treasury QE. So what you've got going on
39:10is the Treasury spending money and
39:12monetizing that spending and it's coming
39:15through in higher crypto prices.
39:18The only thing that I hear from you or
39:20if I listen to you is that you I might
39:23be wrong but if they the cycle expands
39:26again so there's four five to six years
39:28when it comes to the liquidity cycles we
39:30are extending the current one um what I
39:34kind of see in the markets is that the
39:36volatility goes up by 10fold so we've
39:39just had a big expansion on the gold
39:41price also being pushed due to uh
39:43liquidity that's going to be increased
39:45in China most likely Bitcoin follows
39:48through and every cycle it starts to
39:50become more exponential or becomes
39:52bigger which then also means that these
39:56shocks are going to be more painful
39:59after that. So my question then becomes
40:02like how would you build a portfolio if
40:06you are just an average investor if the
40:08volatility is as high as it is?
40:11Well, the I mean the answer my my answer
40:14with that to that would be uh I mean
40:16first of all one of the ways you control
40:18volatility is by diversifying
40:21and you don't put all your eggs in a
40:23high volatile basket. Um so in other
40:25words if you've got assets that are
40:27highly volatile um you basically have
40:30less of them. Now, one of the I mean
40:32going back to my Substack and one of the
40:34other things that we wrote several weeks
40:35ago was to say given the sensitivity of
40:38Bitcoin or Ethereum or crypto in general
40:41to mon to uh to liquidity and monetary
40:43inflation, you don't need very much in a
40:46portfolio to give yourself very good
40:47protection because they're so leveraged.
40:50So you will find that looking at the
40:52statistics and anyone can do these
40:53calculations but if you look at the last
40:56um uh 10 years and looking at the
40:58performance of Bitcoin against global
40:59liquidity you'll find that the
41:01multiplier is about 10 times or
41:03thereabouts. So in other words for every
41:0510% increase in global liquidity you get
41:08something like a a doubling of the
41:10Bitcoin price. Now that that clearly
41:13means that you're giving you get you've
41:15got a lot of insurance uh protection uh
41:17if anything goes wrong. So we said look
41:20all you need to do is to have a few
41:22percent of your portfolio in Bitcoin uh
41:25or or maybe you know maybe a bit more in
41:28gold if you want the diversification
41:30hedge but you don't need much of it. Now
41:32the question is how many people thinking
41:34generally have got anywhere near um you
41:37know 3 or 4% or whatever it may be in
41:39Bitcoin. The answer is no. Very few.
41:43>> Depends on which audience you're uh
41:45you're targeting.
41:45>> Of course. Yeah. I mean there are some
41:47that are wedded to it and may have 100%
41:49in Bitcoin but the average you know it's
41:52you know it's an inch deep and a mile
41:54wide isn't it the average so you know um
41:58a lot of people have
41:59>> if I if I go to my social media audience
42:01I think uh the percentage is a little
42:04bit higher than that but
42:06>> um I don't hear you talk about the
42:07equity markets or the indices at this
42:09point.
42:11Well, I think the, you know, the the
42:13issue with the indexes is is that they
42:16look uh they they to my mind look more
42:19vulnerable because um if you get I mean
42:23let let me try and describe the the
42:25process of what happens. I mean the way
42:27that we envision how the world works is
42:29you've got two pools of money. You've
42:31got money in the financial markets and
42:33you've got money in the real economy.
42:34Okay? All money that is anywhere must be
42:37somewhere. So if it's in the real
42:38economy, it's not in the financial
42:40sector and similarly vice versa. Now
42:43bond markets get all their traction from
42:45the financial sector. So if liquidity is
42:48being lost in the financial sector, bond
42:50yields will rise and that's what we're
42:52seeing right now. If you get more money
42:54going into the real economy, which we
42:55have, things like commodity markets will
42:58rise strongly. The real economy will
43:00gain traction. That's exactly what we're
43:02seeing. But if you think about it in
43:03terms of in equity speak in the
43:05financial sector the PE multiple is
43:08formed the rating of the of the equity.
43:11So as bond yields rise and liquidity in
43:13the financial sector drops P multiples
43:16contract as the real economy starts to
43:19gain traction and economic growth speeds
43:21up. The E the earnings tends to go up.
43:24So if you look at the transition as the
43:26cycle matures, initially you've got a
43:29big kicker on the PE u and not much
43:32earnings then you start to get earnings
43:34picking up and then as the cycle matures
43:36the PE multiple comes under downward
43:38pressure and earnings keeps going until
43:41you start to see an economic slowdown.
43:43Now in our view what you were likely to
43:44start seeing uh this year and we've been
43:47wrong because we thought that Wall
43:49Street would be largely rangebound this
43:51year. uh our view was that rising bond
43:53yields would basically contain the PE
43:56multiple and you wouldn't get such a big
43:58earnings kicker that we've had. So we've
44:00been surprised by the E number uh and
44:03we've been surprised as well by the fact
44:05that PE have held up. Now, if you
44:07extrapolate that thought, what we're
44:09saying is, you know, this is just
44:11really, you know, delaying things. And
44:13what you'd expect to see is in 2027,
44:16you'd expect to see weaker earnings
44:18growth. Um, and you'd expect to see a P
44:21multiple that probably contracts because
44:23you've got still upward pressure on bond
44:25yields. So, I wouldn't say equities, I
44:27think, are going to be a great a great
44:29place to be. I'm not suggesting there
44:31will be a crash, but I think that, you
44:33know, you're looking at underperformance
44:35and you've had a good run out of
44:36equities already. And so, you know, my
44:39view, and as I say, I've been wrong this
44:40year, but we've been saying to people
44:42top slice and go into commodities. Uh,
44:45that's been a good trade clearly. Uh,
44:47but, you know, maybe people would have
44:48hung around in equity markets longer,
44:50but there the equities are much more
44:52cyclical than many of these other
44:54assets. They're risk assets. I I don't
44:56know the exact numbers, but I think that
44:58the fragility of the indexes right now
45:01is that there's not much liquidity
45:03required in order to move it upwards. I
45:05think that the net liquidity on the
45:06index market is relatively low at this
45:08point.
45:09>> Yeah, it's true. And that that's because
45:10of a lot of passive investing.
45:12>> Yeah, exactly. Um what's the role of AI
45:16um in this entire context? Would that be
45:19the reason why you see the earnings
45:21still pick up momentum?
45:23It
45:23>> it's possible. Um it's I mean I I'm I'm
45:27old enough and cynical enough to know
45:28that um you know we we've been through
45:30this situation before. If you go back to
45:33uh the Y2K bubble or uh or around those
45:36times I mean think of what happened with
45:38fiber optic cable uh and a company
45:40called Global Crossing uh which was then
45:43the darling of the stock market like
45:44sort of the Nvidia of the of the day and
45:47uh you know people couldn't get enough
45:49of fiber optic cable that was the the
45:51future. Uh clearly that fiber optic
45:53cable is still around. Uh but global
45:55crossing isn't. It went into chapter 11
45:57sort of within 5 years and that's the
46:01nature of capitalism. Uh and what
46:03happened was the margins on fiber optic
46:06is collapsed. Uh and you can see maybe
46:08the same thing happening. Uh competition
46:10is fierce. Uh and whether that's from
46:12other AI companies uh in America or
46:15whether it's from the Chinese, who
46:17knows? Uh but I think that that's going
46:19to be a problem. So um you know I'm a
46:22great believer in AI. Whether I'm a
46:25great believer in specific AI companies
46:27is a different question.
46:29>> I think um um one of the interesting
46:32factors here is as well that if the
46:34interest rates are going to go up in
46:36order to invest into those tech
46:39companies or AI companies, it becomes
46:41more expensive to hold the depth which
46:44then would also push down the earnings
46:47rate or the earnings data. And by I I
46:50just had at doubt on the show and he
46:52said
46:53>> the current markets are basically
46:54overpricing positivity and once the pri
46:58the earnings data come in and they are a
47:00little bit worse than expected it will
47:02have a shock impact to the underlying
47:04asset.
47:05>> Yeah, I think very reasonable statement.
47:08>> So
47:10how much longer can those index markets
47:12continue to go up if your expectancy is
47:15that the interest rates are going to go
47:16up?
47:19Well, I don't think it's well, as I
47:21said, I don't think it's about policy
47:22rates or Fed funds rates. And I think
47:24the the irony is that you may well get a
47:27rally in the bond markets if the Fed
47:29decides it's going to hike rates a
47:31little bit, right? Um because the
47:33markets will get some uh you know, some
47:35reassurance that the Fed is at least
47:37being disciplined here. So, uh I I
47:40wouldn't say that's that's necessarily
47:42concern. What the concern is is whether
47:44the liquidity situation continues. Now
47:47we've got a lot of um challenges to face
47:50in terms of liquidity. One of those is
47:53the fact that the real economies are
47:54buoyant and clearly real economies need
47:56liquidity as well as the financial
47:57system and the real economies can crowd
48:00out financial markets unless policy
48:03makers are alert or adept at actually
48:05putting liquidity into the system. Okay.
48:08What you've also got to think about is
48:10that there's a lot of debt to uh be
48:12issued to be refinanced and more
48:15particularly uh if you look back at the
48:17uh at the COVID environment, there was a
48:20lot of debt then that was refinanced uh
48:23to the later years of this decade uh the
48:26so-called debt maturity wall which is
48:28coming back uh in the next few years and
48:30that means there's another big debt um
48:33you know surge of refinancing for the
48:35markets to cope with. So that's going to
48:37put quite a load uh onto uh onto the
48:40shoulders of liquidity which is why the
48:42central banks need to be alert here uh
48:44or at least maintain money market
48:46liquidity and this all comes back to the
48:48stability of the repo collateral markets
48:50which one hopes hold up but you know we
48:53need to monitor
48:55>> what it suggests that investing into or
48:57holding bonds makes becomes interesting
48:59again after all those years
49:02>> investing in bonds
49:04>> well I mean from a yield perspective
49:06yeah I that yeah I mean I mean the I
49:09mean bonds are investment in bonds is
49:11really a mathematical exercise. So, you
49:13know, what really matters is your
49:15starting yield. And, you know, if you've
49:18got a starting yield of 5% and you think
49:22about um uh yields rising uh by another
49:26um what let's say 100 basis points, make
49:29the maths make the maths um um
49:32straightforward. Uh and you've got a
49:34duration of 10 years on the bond, uh
49:37then you're going to see a capital loss
49:39of about 10% on your holding a bond.
49:42Now, if you've got a 5% carry, that
49:44means you're only facing a 5% uh loss
49:47overall on your total return. And you
49:50get the idea of how the how the math
49:52could work. So, in other words, if
49:54you're only talking about uh a 50 basis
49:56point rise in yields, then you're sort
49:58of breaking even. So, you're absolutely
50:00right to say that the higher the yield
50:02base goes, the more attractive the bond
50:04markets are. And of course, we have a
50:06big constituency out there who have to
50:09buy government debt. I mean that that's
50:10the reality.
50:12>> Um so yeah, we're we're getting to more
50:15interesting periods. The bond markets
50:16are functioning uh more normally now
50:19than they were at any time in the last 5
50:21years because the COVID nonsense. I mean
50:24basically push yields into neg negative
50:26territory. And I mean that was that's
50:28just insanity. uh you know I I used to
50:31be at Saloron Brothers and the the the
50:33book that everyone uh was required to
50:36read uh at Salon Brothers was a book
50:38called the history of interest rates by
50:40Sydney Homer which went back four
50:42millennia I think in terms of the
50:44history of interest rates and nowhere in
50:46that pages is there any reference at all
50:48to zero or even negative interest rates.
50:51It just didn't happen. This is this is a
50:53you know this is a new world the policy
50:55makers bought us into and it's a mad
50:57world because if you have negative
50:59interest rates you clearly incentivize
51:01people to take on more debt. That's
51:03precisely what we don't want to do.
51:05>> If um if we have such an enormous amount
51:08of debt to refinance at what point it
51:11becomes a risk for the entire financial
51:12system?
51:14>> Well, it's always a risk and there's no
51:15question about that. But it but the
51:17point is as I as I've said look the long
51:19history of financial systems is that you
51:22just end up kicking the can down the
51:24road. The question is is what is the
51:26gold price um that is sort of that
51:30you're looking at uh behind you. And the
51:32fact is that you know the gold market in
51:35uh in what 19 in 1970 was $35 an ounce
51:39and here we are now at um you know skyh
51:42higher levels. So you've seen a pretty
51:44decent return on gold over that period.
51:46And if you look simply at the period
51:47since n sorry so since year 2000 I think
51:50I'm correct in saying that the S&P is up
51:52six or seven times uh in that period
51:55since year 2000 uh but the gold market
51:57is up 12 13 times and bitcoin is some
52:00magnitude more than that but anyway u
52:03but you get the idea so in other words
52:05this is just kicking the can down the
52:07road you may get a financial crisis but
52:09that you know the paradox here is that
52:11you will just spur policy makers to
52:13print even more liquidity because they
52:15realize that the place has been too too
52:17slack.
52:18>> If we um if we look ahead from now and
52:20it's now 2026 um if we do another show
52:24in 2030,
52:27what would need to happen for you to say
52:29well I clearly have been wrong about the
52:31cycle?
52:35Uh well, I think that uh wrong. Well, I
52:39think if there's um some magic way of
52:43funding debt um that we haven't thought
52:47of, but I I I you know, I mean, in in in
52:50thousands of years of history, I mean,
52:52that's that's never appeared. uh you
52:54know it's possible the Martians land and
52:56they they bring gold from another planet
52:58and everyone's happy but I mean the
53:01reality is you've basically got to fund
53:03debt and effectively as I keep stressing
53:06uh financial markets now debt
53:08refinancing mechanisms and in a world of
53:10debt refinancing it's basically all
53:12about money printing
53:14>> and that's that's that's it
53:16>> there are two factors that might may be
53:18a concern which is you don't know what
53:20AI is going to do in the coming few
53:21years um and I I think secondly, you
53:24also don't know what Trump is going to
53:26do.
53:27But other than that, I think markets are
53:29going to remain the same, right?
53:31>> Well, that's right. But I mean, what you
53:32know, okay, what what could Trump do? I
53:35mean, well, let's not let's not get on
53:37that right, but let's let's say you know
53:39what the worst situation is that
53:41basically you get some sort of kinetic
53:43war. Okay. Uh but then how do they
53:46that's got to be funded so they print
53:48money. I mean that's really been the
53:49history of wars. uh you know your um u I
53:53think it was was it Cicero who said that
53:55your uh that your military capacity is
53:57based on how much money you can create
54:00um and that was you know true in Roman
54:02times. So you know this is this is you
54:04know another spur to money printing.
54:07>> Mhm.
54:08It's been fascinating to listen to you
54:10again um um at Newer Finance and I
54:13wanted to ask you the final question
54:15which is
54:17for my audience that tries to understand
54:19the bond markets and tries to understand
54:22liquidity in the markets. What would be
54:24your key takeaway that you would give to
54:26anyone that's listening and tuning in?
54:29Well, the first thing to say is if you
54:31want to understand the bond markets,
54:33don't read the financial media because
54:34they they are they they've got it
54:36completely wrong right now. Uh I mean
54:39it's the bond bond markets bond yields
54:41are going up much more because of strong
54:44economic growth than the fact that
54:46governments are um uh are basically
54:48being proflegate with debt. That that's
54:50not the reason. Um it's it's a lot it's
54:54it's a lot more complicated than they
54:56tend to argue. And I think if you look
54:58at the if you look at global equity, I
55:00mean we track global equity around the
55:02world. We've been doing that for 30 over
55:0430 years. U and it's a concept that we
55:07devised I mean back in the late 1980s.
55:10But broadly speaking it it's you know
55:13it's it's it can be done. It's not a
55:14straightforward exercise but you've got
55:16to understand the liquidity mechanisms.
55:18And as I said the easiest way to
55:20understand is to look at some of the
55:23indicators. And the first indicator is
55:25to look at the repo markets uh and to
55:27look at what sofa spreads are. The
55:30second thing to look at is uh to look at
55:33uh bond volatility through the move
55:34index. And the third thing to look at is
55:37something which is again wonkish which
55:39is term premium in the bond markets
55:41which is the risk premium that bond
55:43markets that bond investors demand. But
55:45the easiest way to monitor that is
55:48rather than doing it directly is to look
55:49at the slope of the yield curve. Uh, and
55:51that's another way of of understanding
55:53it.
55:54>> Well, as I said, thanks again for
55:57spending the time and explaining
55:58everything surrounding these topics with
56:00us. Um, I'm sure that people will be
56:02interested to learn more. So, where can
56:05people find you?
56:07>> Well, as I've mentioned, um, we do a
56:09Substack. It's called Capital Wars. Uh,
56:12we write, um, two, three times a week
56:14on, uh, on relevant topics. We do stuff
56:17about crypto. We provide a lot of data.
56:19uh we do general uh analysis as well of
56:22uh what the financial markets are doing.
56:24Uh there's also uh I wrote a book
56:27although it's getting a little bit dated
56:28now was written before COVID but the
56:30broad idea is the same with the same
56:32title called capital wars and if you
56:35want uh more data or an institutional uh
56:39service then we have a website which is
56:41called glindexes.com.
56:44Thank you very much, Michael. And uh
56:46hopefully we can have you on the show in
56:48a in a few months time again to explain
56:51whatever craziness there is happening in
56:54the markets.
56:55>> Look forward to it. Thank you.

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