Michael Howell: $10,000 Gold in a World of Monetary Inflation and Debt on Top of Debt on Top of Debt
Summary
Monetary Inflation: The podcast discusses the persistent rise in the gold price as a reaction to ongoing monetary inflation, driven by increasing government debt that is unlikely to be repaid but rather rolled over.
Global Liquidity Trends: Michael Howell emphasizes the importance of liquidity flows in financial markets, noting that liquidity is expanding due to the need to refinance growing debt, which is a key driver of market behavior.
Investment Strategy: In a world of monetary inflation, traditional government bonds are seen as poor investments, while assets like gold and Bitcoin are recommended as effective hedges against inflation.
Liquidity Cycle: The current liquidity cycle is nearing its peak, having expanded for 35-36 months, and investors should be cautious of potential market downturns as liquidity inflects downward.
Debt and Financial Stability: The podcast highlights the critical balance between debt and liquidity, with high debt-to-liquidity ratios potentially leading to financial crises due to refinancing challenges.
Global Economic Outlook: The discussion covers geopolitical and economic tensions in regions like the US, UK, and China, with a focus on how these affect liquidity and market stability.
Future Asset Allocation: As the liquidity cycle progresses, asset allocation should shift towards commodities and defensive stocks, with a focus on long-term trends in monetary inflation.
China's Influence: China's significant liquidity injections and its role in setting the gold price are discussed, with implications for global commodity markets and potential shifts in the financial system.
Transcript
Look at what the gold price is doing. It's sort of making new highs every day because people are realizing uh increasingly that we're in this world of monetary inflation. Debt ain't going away. And what's more, governments uh are not going to repay that debt. They're simply going to take out more debt and we're getting debt on top of debt on top of debt and hence it's monitoring inflation. [Music] Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Michael, thank you very much for joining us today. How are things in the great city of London? >> Well, hi James. Great to be here. I think they're pretty well. I mean, a few uh a few problems at the or tensions at the edges, but uh generally okay. >> I want to touch on some of those edges in a little bit, but before we do that, I want to get your views on the global economy and and for those people who might not be familiar with your work uh with you and your team at Crossber Capital, why don't you tell us what exactly you do? >> Okay. Well, our focus is um almost entirely on looking at money flows or liquidity flows. uh we focus on uh uh on the shifting money flows around the world and particularly we uh construct uh uh measures of global liquidity. So we're really answering the question um money moves markets and where is that money going? Um and that's really the the sort of our big picture. Um you know the economy clearly matters but uh it's not really the primary driver of uh financial markets. That's all about liquidity, >> right? So when you look at capital or you look at liquidity, it's going to go to where it can get the highest rate of return. And that's what you're trying to measure. >> Yeah. It's it's basically saying that you've got two pots of money. One pot of money is uh is driving the real economy and the other pot of money is driving financial markets. Uh if money is in one place, it's not in the other. Uh you know, all money that's anywhere must be somewhere. But effectively, uh we're focusing on that on that financial pool. And that financial pool as you rightly say will go to where returns are expected to be the highest. Uh and uh you know what we're seeing now is a market that is being driven by liquidity. Lots of liquidity in fact. Uh that liquidity uh is continuing to expand. Although we got to bear in mind that it's been in an expansion mode now for what 35 36 months. So it's getting fairly long in the tooth. Uh we got to be concerned about some upcoming inflection. So, let's dig into it. We have a lot going on in the world right now. We have a government shutdown in the US. France appears to be in total chaos. The prime minister resigned just after 27 days in office. 500 p.m. in two years. The UK, there's a lot happening there. Every time I pull up social media, it looks like there's mass protesting going on. And of course, in the country where I reside, Canada, it's like a sinking ship because of the policies put forth by this Liberal government in the last 10 years. And I know when you look at these events, you can't look at them in isolation. And uh that's why you and your team look at liquidity flows. So when you do that, what are liquidity flows telling you right now about the health of the global economy? >> Well, I think you got to step back and you got to look at the uh the long-term trends and you got to look at the cycle as as well. Uh and I think the the messages, you know, can differ. But you know the under the underlying fact is that we're in an economy that is driven by debt. And that is really why a lot of things I think seem to many people unreal or surreal even. Um and that debt driven economy is really acting in uh in somewhat unusual ways. uh you know for example if you've got a lot of government debt and a lot of government transfer payments going to the private sector uh increases in interest rates can actually be quite a good thing because the private sector is getting more income from the government. So there are some kind of perverse effects that you've got to kind of wade through in terms of understanding this. But what we really got to come back to is why is debt so large? Why is debt expanding and how is that connected with liquidity? And the fact of the matter is that uh over the last few years for various reasons and those re reasons are partly China, partly demographics, aging demographics, uh partly very low interest rates or zero interest rates, there's been huge debt accumulation. Now the fact about debt is that debt doesn't really go away. And in fact, in a credit based economy, you can't default debt because debt is collateral. So you've got to effectively keep rolling it over. And that rollover process requires liquidity. So effectively what we're looking at in terms of understanding financial markets is that financial markets are refinancing mechanisms. They're no longer new capital raising mechanisms. In other words, they're not there to supply uh funds for capital investment as the textbooks say. They're there to provide funds to roll over debt. And that means that the economy is sort of being wired in a very different way. And a lot of the reactions that people see uh happening in the economy seem as I said surreal or or even perverse. Now if you want to get rid of debt or you want to roll over debt should I say more accurately you need that liquidity and liquidity therefore is expanding. It's trending higher because debt is trending higher. So over the long term what we're seeing is an expansion in debt and an expansion in liquidity. And that expansion on liquidity is what we think of as monetary inflation. Uh in a world of monetary inflation, you need a very very different asset allocation. Uh you don't want to be holding government bonds. Uh they're likely to be a very poor returning asset. You're likely to lose in real terms uh holding nominal government bonds. What you really need are hedges, monetary inflation hedges, things like gold and probably Bitcoin. Look at what the gold price is doing. It's sort of making new highs every day because people are realizing uh increasingly that we're in this world of monetary inflation. Debt ain't going away. And what's more, governments uh are not going to repay that debt. They're simply going to take out more debt. And we're getting debt on top of debt on top of debt. And hence, it's monetary inflation. This October, Wealthian's putting the spotlight on silver with expert interviews, deep analysis, and a special in-depth report from our partners at SCP Resource Finance. To receive this report and other exclusive benefits, you can sign up to become an accredited investor with Wealthon at wealth.com/acredited or by finding the link in the description below. Speaking of silver, Wealthon will be on the ground in Toronto for the SCP Resource Finance second global silver conference happening on Thursday, October 23rd. Legendary investor Eric Sprat headlines the event alongside 15 silver mining companies presenting their top projects. It's a must attend for anyone serious about investing in silver. Tickets, both in person and virtual, are now available. Find out more in the description below. And so right now you're sharing your screen and you have a slide up there called the global liquidity cycle. Maybe you can just explain that to us and what is it telling us? >> Yeah. Well, I've just spoken about the trend in liquidity. The trend is going up. It's growing exponentially. It's growing in line with the rise in debt. We know that debt is growing very fast. But on top of that, what you've got to understand is there is a cycle of liquidity. And that cycle of liquidity is really reflecting the short-term refinancing needs of an economy. So what you see here is a cycle of global liquidity. This is a cycle uh that goes all the way back to the mid1 1960s. Uh it's shown here as an index and it's measuring if strictly the momentum of liquidity that's moving through world financial markets. And we've overlaid on that graph a sine wave, a very smooth sine wave. you can see as the red dotted line. Now that sine wave uh has an average frequency of around 5 to six years. That 5 to six year frequency is actually the average maturity of debt in the world economy. And that's why we're seeing this fluctuation in terms of that five to sixyear cycle. As you can see from the latest prints, we're at relatively high levels. uh that liquidity cycle, the black line, has actually shifted significantly higher since the low point that we saw in October of uh 2022. Uh so from that point, we're really looking at uh 35 36 months of expansion. That's quite long for a liquidity cycle as you can see from history, but it has propelled markets higher. And the point that we keep reiterating is that you know part the real economies and the fact that you know economists I suppose are always scratching their head to say is this recession or is this expansion no one really knows right now. The liquidity cycle have been absolutely normal. It's been a very standard liquidity cycle and if you look at financial markets financial markets have been behaving in an absolutely normal fashion. You look at asset allocation. Asset allocation has moved strongly towards credit markets, equity markets. They've migrated through equity markets in a very normal sequence. So, it's been technology first. It's migrated to financials. Small cap have come through. Now, we're looking at mining stocks and commodities. It's it's absolutely plain vanilla. What we got to be concerned about, as that chart is illustrating, is we're somewhat near the peak of the cycle. Pick of the cycle's not in yet, but this is what we got to monitor very closely because when in when liquidity inflects downwards, what you start to get are tensions in financial markets, it becomes more difficult to roll over debt. Those tensions express themselves in financial crisis and risk assets tend to plunge in value and that's what we got to be alert to. So, at some stage in the next 12 months, you're likely to see uh Wall Street lower. you're likely to see Bitcoin coming off uh you know significantly. You're likely to see gold pulling back. Uh but these are probably from our perspective buying opportunities because at the end of the day liquidity is trending higher the whole time under this monetary inflation regime and the need to keep rolling off or keep rolling over uh and funding debt. >> And I'm sorry Michael, how long did you say a typical liquidity cycle will last for? >> Five to six years. So it says there 65 months which is between five and six years. So let me let me just demonstrate first in terms of another slide which is looking at the average length of a cycle. So this let me stress again is looking at liquidity. It's not looking at the real economy. It's not looking at the length of a stock market cycle. This is the length of a liquidity cycle. But liquidity is the driver of those two areas. Now the dotted line is an average cycle and that average has been uh measured over the 1970 to 2025 period. So it's a a long span when we're talking of uh you know over 50 years of data. The red line is basically looking at the current cycle the latest cycle. The low point of that cycle the zero point in the middle of the graph uh was recorded in October of 2022. So you can see moving from that middle point towards the right how the cycle has expanded and it's now uh affecting it's now effectively testing uh those previous highs or the previous peaks that we saw or we see in an average cycle. So that's what's been happening. Okay. Uh we've got to be alert to the fact that what goes up comes down because it's cyclical. Now if you look at this slide, what it's telling you is that asset allocation process. uh we think of a cycle the liquidity cycle is shown there. Uh we also illustrate uh on the left the normal asset allocation cycle how that tends to move and what you can see is that we've divided the liquidity cycle up into four phases but those four phases on the right hand side relate to different asset classes. So equity markets tend to do really well in the upswing of the cycle uh really between what we've labeled rebound and calm. The commodity uh area tends to pick up strongly around the peak of the cycle. So between late calm and the speculation phase. Cash does really well uh in relative terms and absolute too but certainly in relative terms on the way down as you move risk off uh and it becomes you more uh more difficult to make money in financial markets. Generally cash is a good uh a good asset class then and then longdated government debt tends to do best around the trough of the cycle when liquidity conditions are pretty tight and economies are just starting to roll down probably quite significantly. So that's how the cycle unfolds. Now if you look at this following slide which is a traffic light diagram which basically says uh on the left asset classes on the right industry groups within the stock market. This is how they normally unfold. Now if you look at those four phases that we've identified the four if you like seasons of the liquidity cycle rebound calm speculation turbulence you can see there in the rebound phase. So bear in mind this began in October of 2022, equity markets and credit markets are really the best areas to be in at that stage. Um as we move to the right, you move to the calm phase. Credits start to labor a little bit. I mean the returns start to weaken. Uh and by the time you get to speculation, you want to be out of credits. Equities still do well in those first two phases. Rebounding calm. Once you get to speculation, you get an amber traffic light which is saying just be careful here. Uh you know things are beginning to inflict and then turbulence. You don't want equities at all. Commodity markets do well as I indicated between the calm and speculation phases. The green traffic light is there. You don't want them in rebound. You don't want them in turbulence. And bond duration as I've labeled it which is actually government bond uh longdated government bonds that they do well around the turbulence phase. industry groups. You take a look at that first half of the liquidity cycle, rebound and calm, you want cyclicals, that's the upswing. Uh you want defensive stocks in the downswing. Technology does best in the first half of the cycle. Then you move through to financials around midcycle. Energy commodities tend to do well uh around the peak of the cycle. Small cap does well late in the cycle. The dollar does poorly late in the cycle. International markets do best late in the cycle. You know what's different this time? Absolutely nothing. This is an absolutely plain vanilla cycle. Uh and you know we seen we see no difference. The economy different question. Economy looks very different. Economies have flatlined uh in every region worldwide since the end of COVID. But stock markets risk assets have gone up. Been a normal cycle. >> Michael uh a quick question. You said this cycle might end in the next 12 months or so. Okay. And is that assumption all based on the typical length of a cycle? It's based on typical length of a cycle. It's also based on something else which I'm going to turn on to which is uh maybe this relationship and this is saying let's try and understand how financial markets work in this new debt driven world. What it says is that the heart of the system is liquidity and debt. The paradox that underlies this is that liquidity needs debt uh because liquidity is collateralbased and it says on that uh label on the uh left hand side uh using world bank data that almost 80% of all lending now is collateral-based. Now that could be as simple as a home mortgage. uh it could be as complicated as a financial derivative that requires uh some form of government bond US treasury uh to uh to back it as collateral. So what you've have is 80% of all lending worldwide is now collateral backed and therefore liquidity needs good quality debt. But debt needs liquidity for refinancing. So you've got this spiral if you like or this uh this axis that we can see in the center of that diagram. And what you need for financial stability is a robust or stable debt liquidity ratio. If you don't have that, you start to get a breakdown in the repo collateral markets which are indicated on the left hand side of the diagram. And the two uh factors to watch or two indicators to watch there are the move index which is a measure of the volatility in the collateral markets in other words in the bond markets and something called sofa spreads. uh sofa is the in the key interest rate in the US system uh that has surpassed Euro dollar rates as the key rate to watch and if that spread against Fed funds target starts to blow out then you've got a problem. Now to indic to illustrate that this is the chart that really underlies that and this is looking at the ratio of debt to liquidity in the world economy. These are for the advanced countries and this data goes all the way back to 1980. Now what it says is that the average line there which is drawn at about 200%. Is uh where you get an equilibrium. So if the amount of debt in the world economy is roughly twice the amount of liquidity uh you've got a stable environment where debt can be refinanced quite easily. If it goes significantly above that, so there's inadequate liquidity, you get refinancing tensions. And those an those an those annotations that I put on the chart illustrate where you get financial crisis. They all coincide with very high ratios of debt to liquidity. So financial crises fundamentally in modern economies are basically refinancing crises. Uh inability to roll over debt. go to the other extreme when there's ample liquidity, when the amount of liquidity uh is beyond what the debt markets need, then you get asset bubbles because the vent tends to be risk assets. And what you can see is all those illustrations or uh uh annotations which illustrate bubbles. And what we've just come through is what we've called here the everything bubble. Uh that's clearly been a huge bubble that has inflated everything over the last 10 years. uh it's been there for two reasons. One is that policy makers responded to every crisis by injecting liquidity and secondly they decided to take interest rates down to virtually zero in some cases negative levels and that meant that debt could be refinanced very cheaply and so a lot of debt was turned out into the latter part of this decade. Now uh in my years when I worked at Salomon Brothers, the US investment bank uh you know 20 odd years ago uh we uh were schooled uh on a book called the history of interest rates by Sydney Homer. Uh that book which is a sort of uh doen of uh interest rate watchers uh covers 4,000 years of interest rate history. Nowhere in those pages is there any evidence of zero interest rates. So what we've just had through the COVID and post um GFC periods are an anomaly in terms of world history. That's how out of line we've been. And that has incentivized this huge take up of debt. It's been a whopping great policy error. And we're likely to suffer from it. And that suffering is coming through monetary inflation. Now what you can see on the graph is that the orange line starts to move up uh above the dotted line. That's saying that a lot of debt is coming due to be refinanced. And here is the evidence of that. So this shows the increase in the a in the annual debt role. This is the extra amount each year that the world economy has to finance in terms of extra debt coming due. And you can see this is counted in uh thousands of billions. So trillions of dollars. So two, three, four trillion uh additional each year. And this is bunched towards the end of the decade. So it really starts to pick up from 26 through 27 and that financing tension is going to be there and it's going to be worrying markets. Now is there evidence of that happening? Well, take a look at this. This is one of the indicators I suggested which is the sofa spread. This is looking at um uh repo rates, repo interest rates, interest rates in the repo markets, the refinancing markets, which are the key markets for monitoring financial stability. And that spread is shown against Fed funds target. What you can see there is a normal zone that I've put in gray where that spread normally sits. And you've got a danger zone that I've indicated uh that dotted line. and just look at the incidents recently or over the last year of increasing tensions in the repo markets. Now, this is something we've got to watch. They've climbed up recently and they breached that danger zone. What you're actually beginning to see now is evidence of them coming down a bit, but broadly speaking, that looks to be uh, you know, a uh a worrying long-term picture. The other thing to look at is the move index. This is showing volatility in the um in the collateral markets and what that is basically indicating is that you've got uh suppressed volatility at the moment. It's not a problem right now but you can see what can happen that volatility can explode. Now in my view what you what you're seeing right now is that the US Treasury and the Federal Reserve are actually deliberately suppressing volatility through buybacks of Treasury debt and other other mechanisms. Uh but you know this is a problem that if you squeeze a balloon uh it tends to bulge somewhere else. So this is the danger we've got to watch. Now the latest iteration is to start thinking in these terms. what is the Federal Reserve doing and what is the Federal Reserve intend to do over the next six to nine months and this is showing the growth of Fed liquidity. Now Fed liquidity measures the amount of liquidity that the Federal Reserve injects into US money markets uh on a uh this is on a weekly basis but it's their weekly injections. Now this is not the balance sheet. This is the liquidity um injections. They are the the the liquidity uh driven part of the balance sheet. And what this is showing is you're actually moving to a period where you see a net contraction, a net withdrawal of liquidity by the Federal Reserve. And that is a worrying state to be in. Um, one of the things that you've heard uh, Secretary Besson say and you've also heard Steven Miran say, the new FOMC appointee, is they do not want the Federal Reserve's balance sheet to expand anymore. They think that QE policies are reckless. Uh, they think they've destroyed the uh, if you like the balance between wealth uh, or the distribution of wealth in the US economy. It's been grossly unfair and it's now Main Street's turn. So what you're starting to see, I think, is a shift, a subtle shift from Federal Reserve liquidity creation to Treasury, US Treasury liquidity creation. And that shift is pushing money into the real economy. Uh and that is something the financial markets will have to suffer. This is the problem you've got upcoming which is showing that the bond markets are already starting to suffer. The orange line is excess reserves of US banks which directly derived from that Fed liquidity uh injection. So if the Fed liquidity shrinks, US banks reserve shrink and that's what that orange line is illustrating right now. And the black line measures the number of trade fails in the US bond markets. In other words, that's a failure to deliver uh bonds in a trade. If you get liquidity problems, there are a lot more trade fails. If there's a lot more trade fails, you get volatility. If you get volatility, there won't be so much lending and the whole liquidity uh mechanism will start to shutter down. And this is the risk that the uh authorities are currently running. >> So, Michael, there's a lot to unpack there and I just want to uh make sure I understand what you're saying. So currently under the current um economic situation that we find ourselves in the 10 years trading around 410 420 the 30-year I believe it's at 470 480 and you're saying when we run into this financial crisis it's because of the government's inability to refinance or roll over their current debt and investors I guess at that time one year two years out they're going to say you know what 4% doesn't cut it 5% doesn't cut it we want 6% or we want 7% %. Do I have and and these higher interest rates is what's going to cause this uh financial crisis. Do I have that right? >> You have that largely correct, James. Yeah, I think the I mean the point is one is that there's not the liquidity there to do the trading. So in other words, that markets are they they have a scarcity of liquidity. So there's there's actually an inability uh to to buy debt or to do things. So you got to remember that there is a huge amount of leverage in the system and who is who has been the marginal buyer of treasuries uh in the last 12 months or so? It's been hedge funds. Uh what we know is that uh traditional bond buyers for example the Chinese or the Japanese uh or international buyers haven't really been there in the same sizes they were. And so uh the Treasury has been very reliant on something called the hedge fund basis trade. Now, that's a fairly wonkish concept, but the fact is that hedge funds have been uh buying a lot of the debt and they've been shorting futures uh and it's, you know, it's effectively a roundtpping exercise, but it has meant there's been underlying demand for treasuries. The trouble with that trade is that it's number one leveraged and number one dependent on low volatility or number two dependent on low volatility in the markets. And what we're saying here is that that is at risk of unraveling given what the Federal Reserve is doing or slated to do in terms of liquidity injections going forwards. And so there are some incompatibilities here in terms of uh policy uh policy intentions. >> I like the way you framed that incompatibilities. So, and why don't we talk about that a little bit deeper because we have this conflict that's going on between the White House and the Fed. And the Fed has been very reluctant to cut rates. They did so just recently. They took it down another 25 points, first time since December of 2024. But then you have a White House uh that wants interest rates a lot lower. And you touched on Steven Moran. He gave a speech not too long ago and he said the current policy is way too restrictive. and he suggests uh or the white house has also suggested but cutting the fed funds rate by 200 basis points. So you have this battle going on and what will that do to this current situation and and and I guess my other question is if we do get a in the next year or two years if the white house does become I guess if they're able to control monetary policy what does that do to inflation? Okay. Well, let let's uh let's take those in reverse order. I mean, the first thing to say is what about inflation? Uh let's think of inflation. Uh and way that we treat inflation is to basically separate uh inflation into two elements. The first element is what you would call monetary inflation. Okay? So, that's devaluing your paper money. In other words, sort of trashing the currency. Um and that's broadly what's going on because just take a look at the gold price. uh the gold price is soaring and I'm going to show you a chart right at the beginning of this presentation which highlights how the world has changed and this is this chart. Now this needs a ton of explanation but it's pretty straightforward and that's saying that if you look at that orange line that's the gold price. Now as we speak the gold price is testing $4,000 an ounce and it's likely to go higher. The black line is real interest rates. It's the rate on tips. In other words, treasury inflation protected securities. And what you would normally expect to see is that the gold price moves inversely to those real interest rates. Real interest rates have been plotted on the left hand axis upside down to show that that that inverse relationship. So when real interest rates fall, that black line goes up. And when real interest rates fall, you'd expect the gold price to go up. uh when real interest rates climb, in other words, they black line on the page drops, you'd expect the gold price to come down. And the simple reason is that the cost of carry uh on uh uh for gold uh tends to be uh the opportunity cost rather tends to be higher uh when you've got competition from real interest rates in the tips market. Gold obviously doesn't give you any carry. So if you look at that chart, I've circled the period in early 2022 when there was a very clear breakout or breakdown between that in that relationship. And what it shows is that real interest rates have actually climbed, but the gold price has just shot upwards. And that is a we're in a different world. And that different world is a world of monetary inflation. And let me just quickly illustrate what that problem is. That problem is shown here in terms of the fiscal deficit. And this is what I was saying right at the beginning about distinguishing the trend from the cycle. And this is the trend that uh the US is facing. But let's be let's be clear here. This is what the west is facing. America may even be uh you know one of the cleanest shirts in the laundry in this regard. Uh you know if you're sitting in Europe things look a lot lot worse than this. uh you know, viz France as we speak. Uh I mean, it's a disastrous situation, but you know, let's be clear, Britain is in probably an equally bad state. Uh where we, you know, we're going to be testing some of these frontiers in the next few weeks in Britain when there's another budget and everyone realizes that the emperor has no clothes. Uh I mean, the fiscal situation is dire. What you're looking at here is the structural deficit, the fiscal deficit in the US as a percent of GDP. Now, these are not my figures. These are figures that come from the Congressional Budget Office. All we've done here is to basically up the figure they've put in there for defense spending. So, we assume that defense spending goes up to 5% of GDP, which is the NATO target. I think that's probably a reasonable assumption given what's going on. And that is the difference between our numbers and what the uh C what the CBO is saying. But broadly uh what you're seeing anyway is a big increase in what we call structural deficit. The structural deficit comprises social security, Medicare, defense, and interest payments. Okay? So things that you can't effectively avoid. So they're structural. There's no discretionary spending in this at all. That structural deficit is climbing. It's trending higher. The black dotted line is debt as a percent of GDP held by the public. Look at that. That just grows exponentially. I mean, we're currently about 100%. But by 2050, you know, I'll be long gone by then. But, you know, hey, 250% of GDP. I mean, our grandkids are going to be, you know, absolutely stuffed wrecked by this policy. And this is why gold is going up. Now this may be a heroic assumption but this is basically what's going on and what you see here is again that debt to GDP the black dotted line and what I've said is let's just be let's just keep a simple model here let's say that the debt burden that the US faces is constant in in gold terms is that realistic well I think it's pretty realistic since year 2000 US debt has increased by around about between 9 and 10 times. So the stock of federal debt is 9 to 10 times. Just pause and think about that. Higher in 25 years. That's a big jump. Okay. What's the gold price done? It's gone up 13 times. So gold has more than kept up with federal debt. So this is saying let's just keep that relationship constant. And what do you see for the gold price? I mean, it just grows exponentially. So, if that's the right relationship, which I I think it is, you're looking at by the mid 2030s a 10,000 an ounce uh gold price. Uh I mean, that should focus the mind. Um so, that's the monetary inflation element. In terms of high street inflation, you've also got to take into account what's happening to costs. Those costs could be oil prices. Uh they could be the benefits of technology. They could be cheap Chinese goods or maybe now more expensive Chinese goods. So put those two elements together into a cocktail, monetary inflation and costs. And then you got some idea of what high street inflation is going to do. And I would suggest that high street inflation because of this big monetary inflation is going to in the medium term uh going to be higher than we've been used to in the last decade. Uh, I don't think it's going to be dramatically higher. Let's be sure. We're not looking at hyperinflation, but we are looking, I think, at significantly higher rates of inflation. And after all, isn't that what the politicians want because they want to try and devalue this debt. So, that's that's the picture, you know, going back to to that part of the story. Now to pick up I think what we were uh we were saying uh back here in terms of uh the cycle what you've also got is a problem near-term because you've got this downsizing if you like of the Federal Reserve and you've got this upsizing of the Treasury and the Treasury if you take a look at this chart maybe it's a tad wonkish but it basically is saying look you can inject money into the system not just through the Federal Reserve the Treasury Treasury can do it too because the treasury issues treasury bills and if those treasury bills which they are tend to be bought by banks that is monetization of the deficit. So effectively banks balance sheets expand to take in um treasury bills and that expansion in banks balance sheets is an expansion in money supply. It's a monetization of the deficit. So this chart is saying look the red line is traditional QE okay Fed expanding its balance sheet the orange bit is what we tongue and cheek called not QEQE which was basically the Federal Reserve protesting and saying well actually we're really shrinking the balance sheet but the fact is they were injecting money uh through the back door through the reverse repo account the Treasury General account uh the bank term funding program and all these other acronyms uh they were doing that the orange area that's now been exhausted pretty much and so what's left is the black area which is what we call treasury QE and that is the Treasury basically printing money uh by issuing Treasury bills and that's on the up. Now why is that so important? because that aligns exactly with what Treasury Secretary Scott Besson and uh uh Steven Miran are basically on about when they're saying they want Main Street to benefit no longer Wall Street. So this money is being channeled by the federal government into US industry and it is basically doing things like taking stakes in uh in corporations, increasing defense spending etc etc. It's targeting industries. It is part of the uh you know make America great philosophy. Uh but this is coming driven by the Treasury not by the Fed. So it's not the Federal Reserve just hosing liquidity into the system willy-nilly and asset prices generally rise. This is designed to be focused spending uh on specific industries. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance at hardassetsalliance.com. That's hardassallalliance.com. Michael, you mentioned earlier that debt is a percentage of GDP is around 100% and it's going to grow significantly in the coming years. But, uh, you also said that governments never really repay their debt. All they do is just roll it over or keep refinancing it and it just keeps growing. And I believe when Trump first came to power in 2016, the federal debt was around 19 trillion. Now we're at 37 trillion or 38 trillion. It's growing by a trillion every 100 days. But um if that's the case, then so what if the debt to GDP goes to 150 or 200%. Uh as long as your economy keeps growing, you can service that debt and just keep doing the same thing. on and on and keep kicking that can down the road. >> Yeah, I mean I agree with you. I think you can, but it comes at a cost. I mean, you know, nothing's there's no such thing as a free lunch after all. But but the the cost is you get monetary inflation. And what does monetary what's monetary inflation doing? It's basically devaluing uh paper money. And but that may be what they want to do. And therefore, what you've got to think about is holding assets that are monetary inflation hedges. And those monetary inflation hedges are things like gold or bitcoin. And you know, as I've said, look, you know, just take a look since this big increase in government debt. It's not just Trump. I mean, this has been going on uh, you know, for decades. But broadly speaking, the big increase in debt occurred from about year 2000. Now, we can go back and argue why is that? Is that all to do with uh, you know, the rise of China allowing China to get in WTO, uh, etc., etc. I think there's an awful lot to go to that that explains a lot. It explains why interest rates were cut, incentivizing debt, etc., etc. But the fact is that debt has gone up by almost 10 times since that since that date. How much has the S&P gone up? It's gone up less than five times. How much has gold gone up? It's gone up 13 times. The S&P is a pretty decent monetary inflation hedge, but gold is a lot lot better. And you can see that. And if you, you know, if you want to preserve your wealth, you've got to put money into gold to some extent. And I'm not saying everything, and I'm maybe not even saying, you know, as much as 50%, but I'm saying that you've got to have a decent cycle of gold, or you've got to dedicate uh one part of your portfolio to these monetary inflation hedges. And that could be prime residential real estate. It could be gold. It could be, you know, uh big or large cap companies that have got pricing power. uh it could be Bitcoin, but all these factors, they're not government bonds and they're not, you know, small cap equities which are likely to lose money over the long term in this environment. >> So, why don't we have a deeper discussion on that and how we can protect our portfolios against the ravishes of inflation and money printing. Uh you t you touched on gold. It's up 40% on the year. Looks like it's going to keep going. We're making new highs every other day. Where do you see the gold price going? Well, I mean, I I'm going to I'm going to cheat and go back and say, look, uh, the gold price is going to do pretty much what I'm indicating here. If I can get back to that chart. Look, that's that's public debt as a percent of GDP. And the orange line is the gold price assuming, and this is the assumption that federal debt in gold terms remains constant over that period. So what that's saying is that gold is dismatching the increase in government debt. Uh this simple as that and actually we know from experience in the last 25 years it's done better than that. So maybe maybe I'm being conservative here but what it's saying is you look at you read off from that chart you can see on that left hand scale what gold does under this policy. Now, you know, do we actually get uh 250% debt to GDP by 2050? Well, you tell me. But, uh, you think you I mean, you think it's possible. I mean, certainly if you take Japan as a benchmark, it's more than possible. Uh, you know, governments won't have any problem funding it. They can always fund debt. The question we're we're saying is at what price and at what cost? And the cost here is monetary inflation. The value of the dollar is is destroyed. But then, hey, that's history, isn't it? I mean, how much is a, you know, a 1914 dollar worth now? Uh, it's pennies. Uh, but that's the history of uh of credit systems. That's what we know. Uh, but, you know, the other thing we've got to say is that, you know, let's think out of the box here and say, you know, the US is not the only country in the world. Uh, it's not not the only country in the world with problems. Uh, some countries have got even bigger problems. I alluded to Britain. I alluded to France. But there's another one out there which is even bigger which is China. And let me just shift on to China. China's problem is too much debt. And we saw earlier on the debt to liquidity ratio for the advanced economies was very low. This is the in orange the debt to liquidity ratio of China. It's very high. China's got debt problems. We know that China has problems refinancing the debt. We know that there's a lot of tensions in Chinese financial markets. They've got to get that down. And the only way they get that down is to do what Japan did a few years ago. Japan's in black here. It reduces its debt to liquidity ratio. Not by defaulting on the debt because that's not allowed. You do that by increasing liquidity. So what is China doing? It's increasing liquidity. This is the six-month change in liquidity injections by the People's Bank of China, the POC. And what you can see there, there's a huge step up in those liquidity injections. Uh, and to put that into context, this is over the six months, you know, 6 to7 uh,000 billion yuan is about one is close to $1 trillion. So, this is a big jump. Uh, they put I think they've got to do exactly the same again at least. So, at least another trillion to put put into markets. And what does that mean? Look at this one. This is the yuan gold price. Now, I would argue and you know, uh, some I'm sure many would disagree with me, but I would argue it's China that's setting the gold price, not the West. Uh, and China is controlling the physical market now. It's a big big buyer of physical gold. Uh, the Shanghai market is now the pre-minent physical market in the world. Um, London may be, you know, more dominant in other dimensions, but certainly in terms of physical gold, Shanghai is there. Uh, Chinese residents are allowed to own gold. They can't export it. And I think that what you're getting is a vast accumulation of gold in China officially. Uh, it's not being disclosed, but it's happening. The Chinese are buying uh whatever gold they can at whatever auctions occur. This is the yuan gold price. Uh our view last year was that it had to at least get to 24,000 yuan per ounce uh to actually begin to eliminate China's debt problems, devalue paper money against those debts. Uh it's got there. It was trading in that trading range for about 6 months. It's now broken higher and we're going up again. So I think they want the gold price up. And what I would summize and I could well be completely wrong here is that what China is trying to do is to reconstitute its money around gold. So gold will feature in some way in the Chinese financial system formally and that will be a great incentive for people to invest in Chinese yuan uh in the Chinese yuan and Chinese assets and I think that's what the uh the endgame is here. >> Very interesting. Uh so you're very bullish on gold. uh any views on silver and maybe we should also touch on Bitcoin. >> We can touch on silver because silver is just a leverage play on gold and silver has been depressed for so long. Uh if you recall uh back in 1980, the Hunt brothers tried to uh corner the silver market. Silver got to 50 bucks uh an ounce and where are we now? Uh we're actually back at those levels. So we're almost uh back at uh the highest level we've had for almost 50 years. So uh silver is going up and it's probably going to go up a lot lot more. So I think the silver is certainly something to have a look at under this regime. But look, I mean we've got to be straight here. Market's never moving straight lines. Uh and if there is a pullback, buy on the dip. But you know, don't go all in uh when the market's racing. Just be, you know, be cautious, play the trends. That's the important thing to look at here. Um so that's that's gold. Uh generally this chart the next one is showing Chinese liquidity which is the orange line with my projections as an index against world commodity prices. So if China starts to inject a lot of liquidity and it gets the Chinese economy revving up again, you are going to see commodity markets move higher. They're already doing that generally. Think of what the copper price has been doing as well. Well, I mean, silver is an industrial metal as well as a precious one. Uh, but you're starting to see uh a lot of commodities beginning to get traction uh with the exception right now of oil, but oil might be very political. So, let's think about Bitcoin. Uh, Bitcoin is a monetary asset as well. And this is the relationship between Bitcoin and global liquidity. Global liquidity is shown as the black line. Uh this is a very short-term indicator for sure, but a lot of people like to look at this because many people trade Bitcoin. And what you can see is movements in the black line, global liquidity. The line has been advanced by three months and the orange line is the change in Bitcoin prices uh if you like well three months three months uh behind. And what this is basically saying is that you know whenever global liquidity picks up, Bitcoin shoots higher. Whenever global liquidity comes down, Bitcoin comes off. And if we say first the global liquidity is expanding dramatically over the medium term, you want Bitcoin in your portfolio for sure. Uh if we're saying we're concerned on a 12-month view that something is going on with the Federal Reserve that may uh cause some tensions in markets, then you want to be a little bit wary about going all in right now and think about trading more prudently. >> Okay. Um I'm sorry. Did you say you have a target price on Bitcoin? Where do you see it going? Well, I didn't say how to target, but I but I mean look, I mean bit Bitcoin the way to think about it is this is that generally speaking, if you go back historically, um the relationship between Bitcoin and global liquidity has been very high. So, in other words, there's been a multiplier of about on average going back over the last decade about five times. Uh in other words, if bitco if liquidity has gone up uh 10%, bitcoin's gone up five times that, 50%. Okay, that's the normal relationship. If you look forward, you can see that that relationship is attenuating. It's becoming more uh it's becoming lessened, but it's still very positive. And our view going forward is that that relationship is about two times in the medium term. So we would argue that if you get uh a doubling of liquidity over the next few years which after all is not a big ask. I mean that's basically growing at just over 7% uh uh you know peranom. So liquidity we think is growing probably a tad more than that. So liquidity is going to double probably uh about every seven to eight years and that would say that bitcoin if liquidity doubles bitcoin is going to go up 200%. So that would be my target. So your your primary message is you got to get long uh scarce assets late in this cycle here. Gold being number one, Bitcoin being number two or real estate also. >> Well, I think you've got to you've got to I think to be accurate, what I would say is you've got to take a long-term view of this or a medium-term view and you've got to think about the trends. The trends have changed. We are in a monetary inflation world. We're not, as some people argue, in a world of financial repression. That is the wrong way to look at it. It's a world of monetary inflation. In a a world of financial repression, you don't necessarily want gold. Uh you don't necessarily, you know, you can hold many other assets. But in terms of monetary inflation, you want monetary inflation hedges, dedicated hedges. And those are things like gold, Bitcoin, uh large cap equities with pricing power, uh things, you know, in the technology space makes sense. uh I would add in that I mean US defense companies could be a great buy uh looking forward uh particularly some of the higher tech ones and you start to look at uh you know things like you know Bitcoin uh if I didn't say that Bitcoin as well these are dedicated monetary inflation hedges that's what you want in a core of a portfolio in terms of trading what I would say is that I would be watching pretty carefully because I think we're coming towards the peak in the liquidity We're not there yet. Market's going to keep running as far as I can see, uh, over the, you know, over the next few months. But the fact is, the plain fact is the Federal Reserve is slated to take liquidity out of the system. That is what they're telling us they're doing. That is what Scott Bessant is insisting they do. And that falls into the Steven Miran uh, you know, make America great, uh, you know, uh, thesis. So, you know, why should we argue with them? Um, that's what could happen. And we are therefore watching uh the liquidity cycle in the short term for some sort of inflection. Uh I'm not saying bail out now. I'm just saying be cautious. Don't chase risk too aggressively, but play the long term. Think about, you know, or buying on weakness, any weakness. If you start to get these assets coming off because the trend is compelling. Michael, when we started this conversation, I was asking you about London and how things were. And you said for the most part, things are pretty good, but there is a little bit of tension around the edges. So, I want to have a deeper discussion on what's happening within England. And every time I pull up social media, it's like there's mass protesting going on and people are very angry. Maybe you can just give me a quick overview on what's happening there from a political point of view and also an economic point of view and why people are so pissed off. >> Well, I think the the answer is yes. Yes. Yes. And yes, I mean it's all happening. U there are bigger tensions in Britain than you know I've seen in 50 years. Uh that's absolutely clear. Uh there is a significant revolt against uh government policies of allowing uh mass immigration. Uh the sort of chickens have come home to roost here. But I think that's is not just a UK phenomenon. Uh that's happening in Canada. It's happening in the US. It's happening across Europe. So you know this is we're all part of the same bundle in that regard. uh but it maybe is more more exaggerated in the UK and what's more the media is being suppressed in terms of it its full reporting. That's absolutely clear. If you drive around uh you know the the sh of of of England what you see is on display masses of St. George's flags. Those are the flags with the the white flag with the red cross uh the flag of England. And people are demonstrating their feelings uh you know very clearly by strapping these to lamp posts at heights where council workers can't tear them down. And uh that's broadly what's going on. People are trying to state you know their uh their pride in the country and they think this is being diluted uh by deliberate or or surreptitious I would say uh government policies. So that's absolutely clear that that is going on and I think a lot of the stuff that you hear on social media about uh uh the mainstream media and the government suppressing uh news about this is absolutely factual because you can just see walking around there are demonstrations. But as I say this is not just a UK local phenomenon. This is a phenomenon that you've got across Europe uh and you've got in the states and and generally in North America. So ditto there. Uh I think the problem in the UK is that the UK um is suffering from a budget crisis or certainly soon will. Uh the socialist government don't seem to understand basic economics but you know that's the history of uh of socialism. Uh the fact is that they are overt taxing people. They're spending without any control. U the budget is likely to be blown out again uh when the budget statement comes uh in November. uh taxes will go up but you know the the bond market uh is vulnerable and we can see what happened to France we can see what's happened to Japan and we've got to think about bonds in this global context so you know everything I've said about the US has got to be framed in this uh in this idea that uh or this this fact that global bond yields on upward pressure because governments just want to spend uh they've they've they've outtaxed us uh we're on the declining phase of the Laffer curve in almost every western economy. Uh and therefore they've just got to print money and that's why you know that's why this whole issue about monetary inflation is so live and you know part of the uh of this whole immigration issue I mean I wrote a uh a Substack post on capital wars uh recently about this is that you've got skyhigh uh house price to income ratios in a lot of countries. It means that families can't afford, young families can't afford uh housing. Uh that means that birth rates come down which means you get labor scarcity which means governments encourage more immigration and therefore you get the problem just spiraling out of control. Uh and that's what we're seeing. Uh this is you know a response to past monetary inflation if you like which has caused skyhigh house prices which has outpriced families. is causing declining birth rates, increasing immigration, more social tensions, and there we are, vicious circle. >> It sounds like England is suffering from many of the same problems that Canada is suffering from. But I I was recently in uh London, and I think one thing that really stood out to me was inflation. And I mean, this is everywhere you go in the world, but I was just there a year ago, and I noticed a big difference just over that one year. And uh I took a cab from Heathrow to downtown London. cost me 100 pounds. And I always find this is a good benchmark of of inflation in whatever city you go to, what it cost to get a cab from the airport to downtown. Uh a similar ride in Toronto would cost me 80 bucks. Okay. In New York, probably 70 or 80 bucks. And yet um in London it was uh 100 pounds, which is 200 Canadian dollars. >> Yeah. But you you're absolutely you're absolutely right. I mean I always used to take a great benchmark cab fares around the world. It's a very very good good guide to inflation. >> Well, Michael, this has been a great discussion. I want to thank you uh once again for spending time with us today and sharing your thoughts on what's happening. If somebody would like to learn more about you and the services that your firm offers, where can they go? >> Okay. Well, there are there are two routes. One is Capital Wars, which is a Substack. And you'll see that um crossber capital has been rebranded uh on these slides as GLI uh which is global liquidity indexes. That's because we are uh we are if you like emphasizing the data component of what we offer and you can contact us through the website to uh uh to get access to that. But that's really an institutional service where we provide a lot of data on global liquidity uh measures in 90 countries. And you're also very active on X or Twitter. What's your handle? >> Handle is crossbercap. >> Michael, once again, thank you. >> Great pleasure, James. Enjoyed it. >> Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Thank you all for watching. We'll see you again next time. [Music]
Michael Howell: $10,000 Gold in a World of Monetary Inflation and Debt on Top of Debt on Top of Debt
Summary
Transcript
Look at what the gold price is doing. It's sort of making new highs every day because people are realizing uh increasingly that we're in this world of monetary inflation. Debt ain't going away. And what's more, governments uh are not going to repay that debt. They're simply going to take out more debt and we're getting debt on top of debt on top of debt and hence it's monitoring inflation. [Music] Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Michael, thank you very much for joining us today. How are things in the great city of London? >> Well, hi James. Great to be here. I think they're pretty well. I mean, a few uh a few problems at the or tensions at the edges, but uh generally okay. >> I want to touch on some of those edges in a little bit, but before we do that, I want to get your views on the global economy and and for those people who might not be familiar with your work uh with you and your team at Crossber Capital, why don't you tell us what exactly you do? >> Okay. Well, our focus is um almost entirely on looking at money flows or liquidity flows. uh we focus on uh uh on the shifting money flows around the world and particularly we uh construct uh uh measures of global liquidity. So we're really answering the question um money moves markets and where is that money going? Um and that's really the the sort of our big picture. Um you know the economy clearly matters but uh it's not really the primary driver of uh financial markets. That's all about liquidity, >> right? So when you look at capital or you look at liquidity, it's going to go to where it can get the highest rate of return. And that's what you're trying to measure. >> Yeah. It's it's basically saying that you've got two pots of money. One pot of money is uh is driving the real economy and the other pot of money is driving financial markets. Uh if money is in one place, it's not in the other. Uh you know, all money that's anywhere must be somewhere. But effectively, uh we're focusing on that on that financial pool. And that financial pool as you rightly say will go to where returns are expected to be the highest. Uh and uh you know what we're seeing now is a market that is being driven by liquidity. Lots of liquidity in fact. Uh that liquidity uh is continuing to expand. Although we got to bear in mind that it's been in an expansion mode now for what 35 36 months. So it's getting fairly long in the tooth. Uh we got to be concerned about some upcoming inflection. So, let's dig into it. We have a lot going on in the world right now. We have a government shutdown in the US. France appears to be in total chaos. The prime minister resigned just after 27 days in office. 500 p.m. in two years. The UK, there's a lot happening there. Every time I pull up social media, it looks like there's mass protesting going on. And of course, in the country where I reside, Canada, it's like a sinking ship because of the policies put forth by this Liberal government in the last 10 years. And I know when you look at these events, you can't look at them in isolation. And uh that's why you and your team look at liquidity flows. So when you do that, what are liquidity flows telling you right now about the health of the global economy? >> Well, I think you got to step back and you got to look at the uh the long-term trends and you got to look at the cycle as as well. Uh and I think the the messages, you know, can differ. But you know the under the underlying fact is that we're in an economy that is driven by debt. And that is really why a lot of things I think seem to many people unreal or surreal even. Um and that debt driven economy is really acting in uh in somewhat unusual ways. uh you know for example if you've got a lot of government debt and a lot of government transfer payments going to the private sector uh increases in interest rates can actually be quite a good thing because the private sector is getting more income from the government. So there are some kind of perverse effects that you've got to kind of wade through in terms of understanding this. But what we really got to come back to is why is debt so large? Why is debt expanding and how is that connected with liquidity? And the fact of the matter is that uh over the last few years for various reasons and those re reasons are partly China, partly demographics, aging demographics, uh partly very low interest rates or zero interest rates, there's been huge debt accumulation. Now the fact about debt is that debt doesn't really go away. And in fact, in a credit based economy, you can't default debt because debt is collateral. So you've got to effectively keep rolling it over. And that rollover process requires liquidity. So effectively what we're looking at in terms of understanding financial markets is that financial markets are refinancing mechanisms. They're no longer new capital raising mechanisms. In other words, they're not there to supply uh funds for capital investment as the textbooks say. They're there to provide funds to roll over debt. And that means that the economy is sort of being wired in a very different way. And a lot of the reactions that people see uh happening in the economy seem as I said surreal or or even perverse. Now if you want to get rid of debt or you want to roll over debt should I say more accurately you need that liquidity and liquidity therefore is expanding. It's trending higher because debt is trending higher. So over the long term what we're seeing is an expansion in debt and an expansion in liquidity. And that expansion on liquidity is what we think of as monetary inflation. Uh in a world of monetary inflation, you need a very very different asset allocation. Uh you don't want to be holding government bonds. Uh they're likely to be a very poor returning asset. You're likely to lose in real terms uh holding nominal government bonds. What you really need are hedges, monetary inflation hedges, things like gold and probably Bitcoin. Look at what the gold price is doing. It's sort of making new highs every day because people are realizing uh increasingly that we're in this world of monetary inflation. Debt ain't going away. And what's more, governments uh are not going to repay that debt. They're simply going to take out more debt. And we're getting debt on top of debt on top of debt. And hence, it's monetary inflation. This October, Wealthian's putting the spotlight on silver with expert interviews, deep analysis, and a special in-depth report from our partners at SCP Resource Finance. To receive this report and other exclusive benefits, you can sign up to become an accredited investor with Wealthon at wealth.com/acredited or by finding the link in the description below. Speaking of silver, Wealthon will be on the ground in Toronto for the SCP Resource Finance second global silver conference happening on Thursday, October 23rd. Legendary investor Eric Sprat headlines the event alongside 15 silver mining companies presenting their top projects. It's a must attend for anyone serious about investing in silver. Tickets, both in person and virtual, are now available. Find out more in the description below. And so right now you're sharing your screen and you have a slide up there called the global liquidity cycle. Maybe you can just explain that to us and what is it telling us? >> Yeah. Well, I've just spoken about the trend in liquidity. The trend is going up. It's growing exponentially. It's growing in line with the rise in debt. We know that debt is growing very fast. But on top of that, what you've got to understand is there is a cycle of liquidity. And that cycle of liquidity is really reflecting the short-term refinancing needs of an economy. So what you see here is a cycle of global liquidity. This is a cycle uh that goes all the way back to the mid1 1960s. Uh it's shown here as an index and it's measuring if strictly the momentum of liquidity that's moving through world financial markets. And we've overlaid on that graph a sine wave, a very smooth sine wave. you can see as the red dotted line. Now that sine wave uh has an average frequency of around 5 to six years. That 5 to six year frequency is actually the average maturity of debt in the world economy. And that's why we're seeing this fluctuation in terms of that five to sixyear cycle. As you can see from the latest prints, we're at relatively high levels. uh that liquidity cycle, the black line, has actually shifted significantly higher since the low point that we saw in October of uh 2022. Uh so from that point, we're really looking at uh 35 36 months of expansion. That's quite long for a liquidity cycle as you can see from history, but it has propelled markets higher. And the point that we keep reiterating is that you know part the real economies and the fact that you know economists I suppose are always scratching their head to say is this recession or is this expansion no one really knows right now. The liquidity cycle have been absolutely normal. It's been a very standard liquidity cycle and if you look at financial markets financial markets have been behaving in an absolutely normal fashion. You look at asset allocation. Asset allocation has moved strongly towards credit markets, equity markets. They've migrated through equity markets in a very normal sequence. So, it's been technology first. It's migrated to financials. Small cap have come through. Now, we're looking at mining stocks and commodities. It's it's absolutely plain vanilla. What we got to be concerned about, as that chart is illustrating, is we're somewhat near the peak of the cycle. Pick of the cycle's not in yet, but this is what we got to monitor very closely because when in when liquidity inflects downwards, what you start to get are tensions in financial markets, it becomes more difficult to roll over debt. Those tensions express themselves in financial crisis and risk assets tend to plunge in value and that's what we got to be alert to. So, at some stage in the next 12 months, you're likely to see uh Wall Street lower. you're likely to see Bitcoin coming off uh you know significantly. You're likely to see gold pulling back. Uh but these are probably from our perspective buying opportunities because at the end of the day liquidity is trending higher the whole time under this monetary inflation regime and the need to keep rolling off or keep rolling over uh and funding debt. >> And I'm sorry Michael, how long did you say a typical liquidity cycle will last for? >> Five to six years. So it says there 65 months which is between five and six years. So let me let me just demonstrate first in terms of another slide which is looking at the average length of a cycle. So this let me stress again is looking at liquidity. It's not looking at the real economy. It's not looking at the length of a stock market cycle. This is the length of a liquidity cycle. But liquidity is the driver of those two areas. Now the dotted line is an average cycle and that average has been uh measured over the 1970 to 2025 period. So it's a a long span when we're talking of uh you know over 50 years of data. The red line is basically looking at the current cycle the latest cycle. The low point of that cycle the zero point in the middle of the graph uh was recorded in October of 2022. So you can see moving from that middle point towards the right how the cycle has expanded and it's now uh affecting it's now effectively testing uh those previous highs or the previous peaks that we saw or we see in an average cycle. So that's what's been happening. Okay. Uh we've got to be alert to the fact that what goes up comes down because it's cyclical. Now if you look at this slide, what it's telling you is that asset allocation process. uh we think of a cycle the liquidity cycle is shown there. Uh we also illustrate uh on the left the normal asset allocation cycle how that tends to move and what you can see is that we've divided the liquidity cycle up into four phases but those four phases on the right hand side relate to different asset classes. So equity markets tend to do really well in the upswing of the cycle uh really between what we've labeled rebound and calm. The commodity uh area tends to pick up strongly around the peak of the cycle. So between late calm and the speculation phase. Cash does really well uh in relative terms and absolute too but certainly in relative terms on the way down as you move risk off uh and it becomes you more uh more difficult to make money in financial markets. Generally cash is a good uh a good asset class then and then longdated government debt tends to do best around the trough of the cycle when liquidity conditions are pretty tight and economies are just starting to roll down probably quite significantly. So that's how the cycle unfolds. Now if you look at this following slide which is a traffic light diagram which basically says uh on the left asset classes on the right industry groups within the stock market. This is how they normally unfold. Now if you look at those four phases that we've identified the four if you like seasons of the liquidity cycle rebound calm speculation turbulence you can see there in the rebound phase. So bear in mind this began in October of 2022, equity markets and credit markets are really the best areas to be in at that stage. Um as we move to the right, you move to the calm phase. Credits start to labor a little bit. I mean the returns start to weaken. Uh and by the time you get to speculation, you want to be out of credits. Equities still do well in those first two phases. Rebounding calm. Once you get to speculation, you get an amber traffic light which is saying just be careful here. Uh you know things are beginning to inflict and then turbulence. You don't want equities at all. Commodity markets do well as I indicated between the calm and speculation phases. The green traffic light is there. You don't want them in rebound. You don't want them in turbulence. And bond duration as I've labeled it which is actually government bond uh longdated government bonds that they do well around the turbulence phase. industry groups. You take a look at that first half of the liquidity cycle, rebound and calm, you want cyclicals, that's the upswing. Uh you want defensive stocks in the downswing. Technology does best in the first half of the cycle. Then you move through to financials around midcycle. Energy commodities tend to do well uh around the peak of the cycle. Small cap does well late in the cycle. The dollar does poorly late in the cycle. International markets do best late in the cycle. You know what's different this time? Absolutely nothing. This is an absolutely plain vanilla cycle. Uh and you know we seen we see no difference. The economy different question. Economy looks very different. Economies have flatlined uh in every region worldwide since the end of COVID. But stock markets risk assets have gone up. Been a normal cycle. >> Michael uh a quick question. You said this cycle might end in the next 12 months or so. Okay. And is that assumption all based on the typical length of a cycle? It's based on typical length of a cycle. It's also based on something else which I'm going to turn on to which is uh maybe this relationship and this is saying let's try and understand how financial markets work in this new debt driven world. What it says is that the heart of the system is liquidity and debt. The paradox that underlies this is that liquidity needs debt uh because liquidity is collateralbased and it says on that uh label on the uh left hand side uh using world bank data that almost 80% of all lending now is collateral-based. Now that could be as simple as a home mortgage. uh it could be as complicated as a financial derivative that requires uh some form of government bond US treasury uh to uh to back it as collateral. So what you've have is 80% of all lending worldwide is now collateral backed and therefore liquidity needs good quality debt. But debt needs liquidity for refinancing. So you've got this spiral if you like or this uh this axis that we can see in the center of that diagram. And what you need for financial stability is a robust or stable debt liquidity ratio. If you don't have that, you start to get a breakdown in the repo collateral markets which are indicated on the left hand side of the diagram. And the two uh factors to watch or two indicators to watch there are the move index which is a measure of the volatility in the collateral markets in other words in the bond markets and something called sofa spreads. uh sofa is the in the key interest rate in the US system uh that has surpassed Euro dollar rates as the key rate to watch and if that spread against Fed funds target starts to blow out then you've got a problem. Now to indic to illustrate that this is the chart that really underlies that and this is looking at the ratio of debt to liquidity in the world economy. These are for the advanced countries and this data goes all the way back to 1980. Now what it says is that the average line there which is drawn at about 200%. Is uh where you get an equilibrium. So if the amount of debt in the world economy is roughly twice the amount of liquidity uh you've got a stable environment where debt can be refinanced quite easily. If it goes significantly above that, so there's inadequate liquidity, you get refinancing tensions. And those an those an those annotations that I put on the chart illustrate where you get financial crisis. They all coincide with very high ratios of debt to liquidity. So financial crises fundamentally in modern economies are basically refinancing crises. Uh inability to roll over debt. go to the other extreme when there's ample liquidity, when the amount of liquidity uh is beyond what the debt markets need, then you get asset bubbles because the vent tends to be risk assets. And what you can see is all those illustrations or uh uh annotations which illustrate bubbles. And what we've just come through is what we've called here the everything bubble. Uh that's clearly been a huge bubble that has inflated everything over the last 10 years. uh it's been there for two reasons. One is that policy makers responded to every crisis by injecting liquidity and secondly they decided to take interest rates down to virtually zero in some cases negative levels and that meant that debt could be refinanced very cheaply and so a lot of debt was turned out into the latter part of this decade. Now uh in my years when I worked at Salomon Brothers, the US investment bank uh you know 20 odd years ago uh we uh were schooled uh on a book called the history of interest rates by Sydney Homer. Uh that book which is a sort of uh doen of uh interest rate watchers uh covers 4,000 years of interest rate history. Nowhere in those pages is there any evidence of zero interest rates. So what we've just had through the COVID and post um GFC periods are an anomaly in terms of world history. That's how out of line we've been. And that has incentivized this huge take up of debt. It's been a whopping great policy error. And we're likely to suffer from it. And that suffering is coming through monetary inflation. Now what you can see on the graph is that the orange line starts to move up uh above the dotted line. That's saying that a lot of debt is coming due to be refinanced. And here is the evidence of that. So this shows the increase in the a in the annual debt role. This is the extra amount each year that the world economy has to finance in terms of extra debt coming due. And you can see this is counted in uh thousands of billions. So trillions of dollars. So two, three, four trillion uh additional each year. And this is bunched towards the end of the decade. So it really starts to pick up from 26 through 27 and that financing tension is going to be there and it's going to be worrying markets. Now is there evidence of that happening? Well, take a look at this. This is one of the indicators I suggested which is the sofa spread. This is looking at um uh repo rates, repo interest rates, interest rates in the repo markets, the refinancing markets, which are the key markets for monitoring financial stability. And that spread is shown against Fed funds target. What you can see there is a normal zone that I've put in gray where that spread normally sits. And you've got a danger zone that I've indicated uh that dotted line. and just look at the incidents recently or over the last year of increasing tensions in the repo markets. Now, this is something we've got to watch. They've climbed up recently and they breached that danger zone. What you're actually beginning to see now is evidence of them coming down a bit, but broadly speaking, that looks to be uh, you know, a uh a worrying long-term picture. The other thing to look at is the move index. This is showing volatility in the um in the collateral markets and what that is basically indicating is that you've got uh suppressed volatility at the moment. It's not a problem right now but you can see what can happen that volatility can explode. Now in my view what you what you're seeing right now is that the US Treasury and the Federal Reserve are actually deliberately suppressing volatility through buybacks of Treasury debt and other other mechanisms. Uh but you know this is a problem that if you squeeze a balloon uh it tends to bulge somewhere else. So this is the danger we've got to watch. Now the latest iteration is to start thinking in these terms. what is the Federal Reserve doing and what is the Federal Reserve intend to do over the next six to nine months and this is showing the growth of Fed liquidity. Now Fed liquidity measures the amount of liquidity that the Federal Reserve injects into US money markets uh on a uh this is on a weekly basis but it's their weekly injections. Now this is not the balance sheet. This is the liquidity um injections. They are the the the liquidity uh driven part of the balance sheet. And what this is showing is you're actually moving to a period where you see a net contraction, a net withdrawal of liquidity by the Federal Reserve. And that is a worrying state to be in. Um, one of the things that you've heard uh, Secretary Besson say and you've also heard Steven Miran say, the new FOMC appointee, is they do not want the Federal Reserve's balance sheet to expand anymore. They think that QE policies are reckless. Uh, they think they've destroyed the uh, if you like the balance between wealth uh, or the distribution of wealth in the US economy. It's been grossly unfair and it's now Main Street's turn. So what you're starting to see, I think, is a shift, a subtle shift from Federal Reserve liquidity creation to Treasury, US Treasury liquidity creation. And that shift is pushing money into the real economy. Uh and that is something the financial markets will have to suffer. This is the problem you've got upcoming which is showing that the bond markets are already starting to suffer. The orange line is excess reserves of US banks which directly derived from that Fed liquidity uh injection. So if the Fed liquidity shrinks, US banks reserve shrink and that's what that orange line is illustrating right now. And the black line measures the number of trade fails in the US bond markets. In other words, that's a failure to deliver uh bonds in a trade. If you get liquidity problems, there are a lot more trade fails. If there's a lot more trade fails, you get volatility. If you get volatility, there won't be so much lending and the whole liquidity uh mechanism will start to shutter down. And this is the risk that the uh authorities are currently running. >> So, Michael, there's a lot to unpack there and I just want to uh make sure I understand what you're saying. So currently under the current um economic situation that we find ourselves in the 10 years trading around 410 420 the 30-year I believe it's at 470 480 and you're saying when we run into this financial crisis it's because of the government's inability to refinance or roll over their current debt and investors I guess at that time one year two years out they're going to say you know what 4% doesn't cut it 5% doesn't cut it we want 6% or we want 7% %. Do I have and and these higher interest rates is what's going to cause this uh financial crisis. Do I have that right? >> You have that largely correct, James. Yeah, I think the I mean the point is one is that there's not the liquidity there to do the trading. So in other words, that markets are they they have a scarcity of liquidity. So there's there's actually an inability uh to to buy debt or to do things. So you got to remember that there is a huge amount of leverage in the system and who is who has been the marginal buyer of treasuries uh in the last 12 months or so? It's been hedge funds. Uh what we know is that uh traditional bond buyers for example the Chinese or the Japanese uh or international buyers haven't really been there in the same sizes they were. And so uh the Treasury has been very reliant on something called the hedge fund basis trade. Now, that's a fairly wonkish concept, but the fact is that hedge funds have been uh buying a lot of the debt and they've been shorting futures uh and it's, you know, it's effectively a roundtpping exercise, but it has meant there's been underlying demand for treasuries. The trouble with that trade is that it's number one leveraged and number one dependent on low volatility or number two dependent on low volatility in the markets. And what we're saying here is that that is at risk of unraveling given what the Federal Reserve is doing or slated to do in terms of liquidity injections going forwards. And so there are some incompatibilities here in terms of uh policy uh policy intentions. >> I like the way you framed that incompatibilities. So, and why don't we talk about that a little bit deeper because we have this conflict that's going on between the White House and the Fed. And the Fed has been very reluctant to cut rates. They did so just recently. They took it down another 25 points, first time since December of 2024. But then you have a White House uh that wants interest rates a lot lower. And you touched on Steven Moran. He gave a speech not too long ago and he said the current policy is way too restrictive. and he suggests uh or the white house has also suggested but cutting the fed funds rate by 200 basis points. So you have this battle going on and what will that do to this current situation and and and I guess my other question is if we do get a in the next year or two years if the white house does become I guess if they're able to control monetary policy what does that do to inflation? Okay. Well, let let's uh let's take those in reverse order. I mean, the first thing to say is what about inflation? Uh let's think of inflation. Uh and way that we treat inflation is to basically separate uh inflation into two elements. The first element is what you would call monetary inflation. Okay? So, that's devaluing your paper money. In other words, sort of trashing the currency. Um and that's broadly what's going on because just take a look at the gold price. uh the gold price is soaring and I'm going to show you a chart right at the beginning of this presentation which highlights how the world has changed and this is this chart. Now this needs a ton of explanation but it's pretty straightforward and that's saying that if you look at that orange line that's the gold price. Now as we speak the gold price is testing $4,000 an ounce and it's likely to go higher. The black line is real interest rates. It's the rate on tips. In other words, treasury inflation protected securities. And what you would normally expect to see is that the gold price moves inversely to those real interest rates. Real interest rates have been plotted on the left hand axis upside down to show that that that inverse relationship. So when real interest rates fall, that black line goes up. And when real interest rates fall, you'd expect the gold price to go up. uh when real interest rates climb, in other words, they black line on the page drops, you'd expect the gold price to come down. And the simple reason is that the cost of carry uh on uh uh for gold uh tends to be uh the opportunity cost rather tends to be higher uh when you've got competition from real interest rates in the tips market. Gold obviously doesn't give you any carry. So if you look at that chart, I've circled the period in early 2022 when there was a very clear breakout or breakdown between that in that relationship. And what it shows is that real interest rates have actually climbed, but the gold price has just shot upwards. And that is a we're in a different world. And that different world is a world of monetary inflation. And let me just quickly illustrate what that problem is. That problem is shown here in terms of the fiscal deficit. And this is what I was saying right at the beginning about distinguishing the trend from the cycle. And this is the trend that uh the US is facing. But let's be let's be clear here. This is what the west is facing. America may even be uh you know one of the cleanest shirts in the laundry in this regard. Uh you know if you're sitting in Europe things look a lot lot worse than this. uh you know, viz France as we speak. Uh I mean, it's a disastrous situation, but you know, let's be clear, Britain is in probably an equally bad state. Uh where we, you know, we're going to be testing some of these frontiers in the next few weeks in Britain when there's another budget and everyone realizes that the emperor has no clothes. Uh I mean, the fiscal situation is dire. What you're looking at here is the structural deficit, the fiscal deficit in the US as a percent of GDP. Now, these are not my figures. These are figures that come from the Congressional Budget Office. All we've done here is to basically up the figure they've put in there for defense spending. So, we assume that defense spending goes up to 5% of GDP, which is the NATO target. I think that's probably a reasonable assumption given what's going on. And that is the difference between our numbers and what the uh C what the CBO is saying. But broadly uh what you're seeing anyway is a big increase in what we call structural deficit. The structural deficit comprises social security, Medicare, defense, and interest payments. Okay? So things that you can't effectively avoid. So they're structural. There's no discretionary spending in this at all. That structural deficit is climbing. It's trending higher. The black dotted line is debt as a percent of GDP held by the public. Look at that. That just grows exponentially. I mean, we're currently about 100%. But by 2050, you know, I'll be long gone by then. But, you know, hey, 250% of GDP. I mean, our grandkids are going to be, you know, absolutely stuffed wrecked by this policy. And this is why gold is going up. Now this may be a heroic assumption but this is basically what's going on and what you see here is again that debt to GDP the black dotted line and what I've said is let's just be let's just keep a simple model here let's say that the debt burden that the US faces is constant in in gold terms is that realistic well I think it's pretty realistic since year 2000 US debt has increased by around about between 9 and 10 times. So the stock of federal debt is 9 to 10 times. Just pause and think about that. Higher in 25 years. That's a big jump. Okay. What's the gold price done? It's gone up 13 times. So gold has more than kept up with federal debt. So this is saying let's just keep that relationship constant. And what do you see for the gold price? I mean, it just grows exponentially. So, if that's the right relationship, which I I think it is, you're looking at by the mid 2030s a 10,000 an ounce uh gold price. Uh I mean, that should focus the mind. Um so, that's the monetary inflation element. In terms of high street inflation, you've also got to take into account what's happening to costs. Those costs could be oil prices. Uh they could be the benefits of technology. They could be cheap Chinese goods or maybe now more expensive Chinese goods. So put those two elements together into a cocktail, monetary inflation and costs. And then you got some idea of what high street inflation is going to do. And I would suggest that high street inflation because of this big monetary inflation is going to in the medium term uh going to be higher than we've been used to in the last decade. Uh, I don't think it's going to be dramatically higher. Let's be sure. We're not looking at hyperinflation, but we are looking, I think, at significantly higher rates of inflation. And after all, isn't that what the politicians want because they want to try and devalue this debt. So, that's that's the picture, you know, going back to to that part of the story. Now to pick up I think what we were uh we were saying uh back here in terms of uh the cycle what you've also got is a problem near-term because you've got this downsizing if you like of the Federal Reserve and you've got this upsizing of the Treasury and the Treasury if you take a look at this chart maybe it's a tad wonkish but it basically is saying look you can inject money into the system not just through the Federal Reserve the Treasury Treasury can do it too because the treasury issues treasury bills and if those treasury bills which they are tend to be bought by banks that is monetization of the deficit. So effectively banks balance sheets expand to take in um treasury bills and that expansion in banks balance sheets is an expansion in money supply. It's a monetization of the deficit. So this chart is saying look the red line is traditional QE okay Fed expanding its balance sheet the orange bit is what we tongue and cheek called not QEQE which was basically the Federal Reserve protesting and saying well actually we're really shrinking the balance sheet but the fact is they were injecting money uh through the back door through the reverse repo account the Treasury General account uh the bank term funding program and all these other acronyms uh they were doing that the orange area that's now been exhausted pretty much and so what's left is the black area which is what we call treasury QE and that is the Treasury basically printing money uh by issuing Treasury bills and that's on the up. Now why is that so important? because that aligns exactly with what Treasury Secretary Scott Besson and uh uh Steven Miran are basically on about when they're saying they want Main Street to benefit no longer Wall Street. So this money is being channeled by the federal government into US industry and it is basically doing things like taking stakes in uh in corporations, increasing defense spending etc etc. It's targeting industries. It is part of the uh you know make America great philosophy. Uh but this is coming driven by the Treasury not by the Fed. So it's not the Federal Reserve just hosing liquidity into the system willy-nilly and asset prices generally rise. This is designed to be focused spending uh on specific industries. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance at hardassetsalliance.com. That's hardassallalliance.com. Michael, you mentioned earlier that debt is a percentage of GDP is around 100% and it's going to grow significantly in the coming years. But, uh, you also said that governments never really repay their debt. All they do is just roll it over or keep refinancing it and it just keeps growing. And I believe when Trump first came to power in 2016, the federal debt was around 19 trillion. Now we're at 37 trillion or 38 trillion. It's growing by a trillion every 100 days. But um if that's the case, then so what if the debt to GDP goes to 150 or 200%. Uh as long as your economy keeps growing, you can service that debt and just keep doing the same thing. on and on and keep kicking that can down the road. >> Yeah, I mean I agree with you. I think you can, but it comes at a cost. I mean, you know, nothing's there's no such thing as a free lunch after all. But but the the cost is you get monetary inflation. And what does monetary what's monetary inflation doing? It's basically devaluing uh paper money. And but that may be what they want to do. And therefore, what you've got to think about is holding assets that are monetary inflation hedges. And those monetary inflation hedges are things like gold or bitcoin. And you know, as I've said, look, you know, just take a look since this big increase in government debt. It's not just Trump. I mean, this has been going on uh, you know, for decades. But broadly speaking, the big increase in debt occurred from about year 2000. Now, we can go back and argue why is that? Is that all to do with uh, you know, the rise of China allowing China to get in WTO, uh, etc., etc. I think there's an awful lot to go to that that explains a lot. It explains why interest rates were cut, incentivizing debt, etc., etc. But the fact is that debt has gone up by almost 10 times since that since that date. How much has the S&P gone up? It's gone up less than five times. How much has gold gone up? It's gone up 13 times. The S&P is a pretty decent monetary inflation hedge, but gold is a lot lot better. And you can see that. And if you, you know, if you want to preserve your wealth, you've got to put money into gold to some extent. And I'm not saying everything, and I'm maybe not even saying, you know, as much as 50%, but I'm saying that you've got to have a decent cycle of gold, or you've got to dedicate uh one part of your portfolio to these monetary inflation hedges. And that could be prime residential real estate. It could be gold. It could be, you know, uh big or large cap companies that have got pricing power. uh it could be Bitcoin, but all these factors, they're not government bonds and they're not, you know, small cap equities which are likely to lose money over the long term in this environment. >> So, why don't we have a deeper discussion on that and how we can protect our portfolios against the ravishes of inflation and money printing. Uh you t you touched on gold. It's up 40% on the year. Looks like it's going to keep going. We're making new highs every other day. Where do you see the gold price going? Well, I mean, I I'm going to I'm going to cheat and go back and say, look, uh, the gold price is going to do pretty much what I'm indicating here. If I can get back to that chart. Look, that's that's public debt as a percent of GDP. And the orange line is the gold price assuming, and this is the assumption that federal debt in gold terms remains constant over that period. So what that's saying is that gold is dismatching the increase in government debt. Uh this simple as that and actually we know from experience in the last 25 years it's done better than that. So maybe maybe I'm being conservative here but what it's saying is you look at you read off from that chart you can see on that left hand scale what gold does under this policy. Now, you know, do we actually get uh 250% debt to GDP by 2050? Well, you tell me. But, uh, you think you I mean, you think it's possible. I mean, certainly if you take Japan as a benchmark, it's more than possible. Uh, you know, governments won't have any problem funding it. They can always fund debt. The question we're we're saying is at what price and at what cost? And the cost here is monetary inflation. The value of the dollar is is destroyed. But then, hey, that's history, isn't it? I mean, how much is a, you know, a 1914 dollar worth now? Uh, it's pennies. Uh, but that's the history of uh of credit systems. That's what we know. Uh, but, you know, the other thing we've got to say is that, you know, let's think out of the box here and say, you know, the US is not the only country in the world. Uh, it's not not the only country in the world with problems. Uh, some countries have got even bigger problems. I alluded to Britain. I alluded to France. But there's another one out there which is even bigger which is China. And let me just shift on to China. China's problem is too much debt. And we saw earlier on the debt to liquidity ratio for the advanced economies was very low. This is the in orange the debt to liquidity ratio of China. It's very high. China's got debt problems. We know that China has problems refinancing the debt. We know that there's a lot of tensions in Chinese financial markets. They've got to get that down. And the only way they get that down is to do what Japan did a few years ago. Japan's in black here. It reduces its debt to liquidity ratio. Not by defaulting on the debt because that's not allowed. You do that by increasing liquidity. So what is China doing? It's increasing liquidity. This is the six-month change in liquidity injections by the People's Bank of China, the POC. And what you can see there, there's a huge step up in those liquidity injections. Uh, and to put that into context, this is over the six months, you know, 6 to7 uh,000 billion yuan is about one is close to $1 trillion. So, this is a big jump. Uh, they put I think they've got to do exactly the same again at least. So, at least another trillion to put put into markets. And what does that mean? Look at this one. This is the yuan gold price. Now, I would argue and you know, uh, some I'm sure many would disagree with me, but I would argue it's China that's setting the gold price, not the West. Uh, and China is controlling the physical market now. It's a big big buyer of physical gold. Uh, the Shanghai market is now the pre-minent physical market in the world. Um, London may be, you know, more dominant in other dimensions, but certainly in terms of physical gold, Shanghai is there. Uh, Chinese residents are allowed to own gold. They can't export it. And I think that what you're getting is a vast accumulation of gold in China officially. Uh, it's not being disclosed, but it's happening. The Chinese are buying uh whatever gold they can at whatever auctions occur. This is the yuan gold price. Uh our view last year was that it had to at least get to 24,000 yuan per ounce uh to actually begin to eliminate China's debt problems, devalue paper money against those debts. Uh it's got there. It was trading in that trading range for about 6 months. It's now broken higher and we're going up again. So I think they want the gold price up. And what I would summize and I could well be completely wrong here is that what China is trying to do is to reconstitute its money around gold. So gold will feature in some way in the Chinese financial system formally and that will be a great incentive for people to invest in Chinese yuan uh in the Chinese yuan and Chinese assets and I think that's what the uh the endgame is here. >> Very interesting. Uh so you're very bullish on gold. uh any views on silver and maybe we should also touch on Bitcoin. >> We can touch on silver because silver is just a leverage play on gold and silver has been depressed for so long. Uh if you recall uh back in 1980, the Hunt brothers tried to uh corner the silver market. Silver got to 50 bucks uh an ounce and where are we now? Uh we're actually back at those levels. So we're almost uh back at uh the highest level we've had for almost 50 years. So uh silver is going up and it's probably going to go up a lot lot more. So I think the silver is certainly something to have a look at under this regime. But look, I mean we've got to be straight here. Market's never moving straight lines. Uh and if there is a pullback, buy on the dip. But you know, don't go all in uh when the market's racing. Just be, you know, be cautious, play the trends. That's the important thing to look at here. Um so that's that's gold. Uh generally this chart the next one is showing Chinese liquidity which is the orange line with my projections as an index against world commodity prices. So if China starts to inject a lot of liquidity and it gets the Chinese economy revving up again, you are going to see commodity markets move higher. They're already doing that generally. Think of what the copper price has been doing as well. Well, I mean, silver is an industrial metal as well as a precious one. Uh, but you're starting to see uh a lot of commodities beginning to get traction uh with the exception right now of oil, but oil might be very political. So, let's think about Bitcoin. Uh, Bitcoin is a monetary asset as well. And this is the relationship between Bitcoin and global liquidity. Global liquidity is shown as the black line. Uh this is a very short-term indicator for sure, but a lot of people like to look at this because many people trade Bitcoin. And what you can see is movements in the black line, global liquidity. The line has been advanced by three months and the orange line is the change in Bitcoin prices uh if you like well three months three months uh behind. And what this is basically saying is that you know whenever global liquidity picks up, Bitcoin shoots higher. Whenever global liquidity comes down, Bitcoin comes off. And if we say first the global liquidity is expanding dramatically over the medium term, you want Bitcoin in your portfolio for sure. Uh if we're saying we're concerned on a 12-month view that something is going on with the Federal Reserve that may uh cause some tensions in markets, then you want to be a little bit wary about going all in right now and think about trading more prudently. >> Okay. Um I'm sorry. Did you say you have a target price on Bitcoin? Where do you see it going? Well, I didn't say how to target, but I but I mean look, I mean bit Bitcoin the way to think about it is this is that generally speaking, if you go back historically, um the relationship between Bitcoin and global liquidity has been very high. So, in other words, there's been a multiplier of about on average going back over the last decade about five times. Uh in other words, if bitco if liquidity has gone up uh 10%, bitcoin's gone up five times that, 50%. Okay, that's the normal relationship. If you look forward, you can see that that relationship is attenuating. It's becoming more uh it's becoming lessened, but it's still very positive. And our view going forward is that that relationship is about two times in the medium term. So we would argue that if you get uh a doubling of liquidity over the next few years which after all is not a big ask. I mean that's basically growing at just over 7% uh uh you know peranom. So liquidity we think is growing probably a tad more than that. So liquidity is going to double probably uh about every seven to eight years and that would say that bitcoin if liquidity doubles bitcoin is going to go up 200%. So that would be my target. So your your primary message is you got to get long uh scarce assets late in this cycle here. Gold being number one, Bitcoin being number two or real estate also. >> Well, I think you've got to you've got to I think to be accurate, what I would say is you've got to take a long-term view of this or a medium-term view and you've got to think about the trends. The trends have changed. We are in a monetary inflation world. We're not, as some people argue, in a world of financial repression. That is the wrong way to look at it. It's a world of monetary inflation. In a a world of financial repression, you don't necessarily want gold. Uh you don't necessarily, you know, you can hold many other assets. But in terms of monetary inflation, you want monetary inflation hedges, dedicated hedges. And those are things like gold, Bitcoin, uh large cap equities with pricing power, uh things, you know, in the technology space makes sense. uh I would add in that I mean US defense companies could be a great buy uh looking forward uh particularly some of the higher tech ones and you start to look at uh you know things like you know Bitcoin uh if I didn't say that Bitcoin as well these are dedicated monetary inflation hedges that's what you want in a core of a portfolio in terms of trading what I would say is that I would be watching pretty carefully because I think we're coming towards the peak in the liquidity We're not there yet. Market's going to keep running as far as I can see, uh, over the, you know, over the next few months. But the fact is, the plain fact is the Federal Reserve is slated to take liquidity out of the system. That is what they're telling us they're doing. That is what Scott Bessant is insisting they do. And that falls into the Steven Miran uh, you know, make America great, uh, you know, uh, thesis. So, you know, why should we argue with them? Um, that's what could happen. And we are therefore watching uh the liquidity cycle in the short term for some sort of inflection. Uh I'm not saying bail out now. I'm just saying be cautious. Don't chase risk too aggressively, but play the long term. Think about, you know, or buying on weakness, any weakness. If you start to get these assets coming off because the trend is compelling. Michael, when we started this conversation, I was asking you about London and how things were. And you said for the most part, things are pretty good, but there is a little bit of tension around the edges. So, I want to have a deeper discussion on what's happening within England. And every time I pull up social media, it's like there's mass protesting going on and people are very angry. Maybe you can just give me a quick overview on what's happening there from a political point of view and also an economic point of view and why people are so pissed off. >> Well, I think the the answer is yes. Yes. Yes. And yes, I mean it's all happening. U there are bigger tensions in Britain than you know I've seen in 50 years. Uh that's absolutely clear. Uh there is a significant revolt against uh government policies of allowing uh mass immigration. Uh the sort of chickens have come home to roost here. But I think that's is not just a UK phenomenon. Uh that's happening in Canada. It's happening in the US. It's happening across Europe. So you know this is we're all part of the same bundle in that regard. uh but it maybe is more more exaggerated in the UK and what's more the media is being suppressed in terms of it its full reporting. That's absolutely clear. If you drive around uh you know the the sh of of of England what you see is on display masses of St. George's flags. Those are the flags with the the white flag with the red cross uh the flag of England. And people are demonstrating their feelings uh you know very clearly by strapping these to lamp posts at heights where council workers can't tear them down. And uh that's broadly what's going on. People are trying to state you know their uh their pride in the country and they think this is being diluted uh by deliberate or or surreptitious I would say uh government policies. So that's absolutely clear that that is going on and I think a lot of the stuff that you hear on social media about uh uh the mainstream media and the government suppressing uh news about this is absolutely factual because you can just see walking around there are demonstrations. But as I say this is not just a UK local phenomenon. This is a phenomenon that you've got across Europe uh and you've got in the states and and generally in North America. So ditto there. Uh I think the problem in the UK is that the UK um is suffering from a budget crisis or certainly soon will. Uh the socialist government don't seem to understand basic economics but you know that's the history of uh of socialism. Uh the fact is that they are overt taxing people. They're spending without any control. U the budget is likely to be blown out again uh when the budget statement comes uh in November. uh taxes will go up but you know the the bond market uh is vulnerable and we can see what happened to France we can see what's happened to Japan and we've got to think about bonds in this global context so you know everything I've said about the US has got to be framed in this uh in this idea that uh or this this fact that global bond yields on upward pressure because governments just want to spend uh they've they've they've outtaxed us uh we're on the declining phase of the Laffer curve in almost every western economy. Uh and therefore they've just got to print money and that's why you know that's why this whole issue about monetary inflation is so live and you know part of the uh of this whole immigration issue I mean I wrote a uh a Substack post on capital wars uh recently about this is that you've got skyhigh uh house price to income ratios in a lot of countries. It means that families can't afford, young families can't afford uh housing. Uh that means that birth rates come down which means you get labor scarcity which means governments encourage more immigration and therefore you get the problem just spiraling out of control. Uh and that's what we're seeing. Uh this is you know a response to past monetary inflation if you like which has caused skyhigh house prices which has outpriced families. is causing declining birth rates, increasing immigration, more social tensions, and there we are, vicious circle. >> It sounds like England is suffering from many of the same problems that Canada is suffering from. But I I was recently in uh London, and I think one thing that really stood out to me was inflation. And I mean, this is everywhere you go in the world, but I was just there a year ago, and I noticed a big difference just over that one year. And uh I took a cab from Heathrow to downtown London. cost me 100 pounds. And I always find this is a good benchmark of of inflation in whatever city you go to, what it cost to get a cab from the airport to downtown. Uh a similar ride in Toronto would cost me 80 bucks. Okay. In New York, probably 70 or 80 bucks. And yet um in London it was uh 100 pounds, which is 200 Canadian dollars. >> Yeah. But you you're absolutely you're absolutely right. I mean I always used to take a great benchmark cab fares around the world. It's a very very good good guide to inflation. >> Well, Michael, this has been a great discussion. I want to thank you uh once again for spending time with us today and sharing your thoughts on what's happening. If somebody would like to learn more about you and the services that your firm offers, where can they go? >> Okay. Well, there are there are two routes. One is Capital Wars, which is a Substack. And you'll see that um crossber capital has been rebranded uh on these slides as GLI uh which is global liquidity indexes. That's because we are uh we are if you like emphasizing the data component of what we offer and you can contact us through the website to uh uh to get access to that. But that's really an institutional service where we provide a lot of data on global liquidity uh measures in 90 countries. And you're also very active on X or Twitter. What's your handle? >> Handle is crossbercap. >> Michael, once again, thank you. >> Great pleasure, James. Enjoyed it. >> Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Thank you all for watching. We'll see you again next time. [Music]