Brian Hirschmann: The Looming Crisis Wall Street Isn't Preparing For
Summary
Macro Warning: The guest argues a Global debt crisis is likely, driven by excessive sovereign debt, leading to high inflation and rising rates across countries.
US Equities: He views US equities as a historic bubble that may fall 50-80% depending on inflation, advising caution and potential hedges.
US Housing: A US housing bubble is highlighted with record-worse affordability, price-to-rent, and price-to-income metrics, suggesting vulnerability to higher rates.
Bonds Outlook: He is strongly bearish on US Treasuries and global government bonds, expecting default via inflation and the end of bailout-era dynamics.
Gold Thesis: Bullish on Gold, expecting allocations to rise materially in a crisis, potentially more than doubling prices from current levels.
Gold Miners: Prefers Gold miners, especially Gold developers, which he says trade near 20% of intrinsic value and could outperform gold and producers.
Bitcoin View: Bearish on Bitcoin, arguing crypto’s effective unlimited supply undermines value and considering put options as part of a broader equity-risk hedge.
Transcript
Right now, US government debt to GDP is around 120%. And if you look back at the last 200 years, virtually all countries with 120% debt to GDP defaulted. And so that tells us it's very very hard to get out of this situation without a crisis once the the government debt level gets this high. And so the outlook is very grim for Treasury bonds, but I think the outlook is very good for gold. Brian Hirschman, managing partner of Hirschman Capital. It is so wonderful to welcome you back to the show and great to see you again, Brian. It's been way too long. Really appreciate you taking the time to join me today. >> Thank you. It's great to be back here. >> It's been a long time, 18 months since our last conversation and we were talking about gold at the time and I believe the price has more than doubled since then. So, I'm just thrilled to have you back on and so much has happened in the world in the last 18 months. So Brian we have to start where we always start with our guest and that is with that big picture macro view the framework in which you are looking at the world how you are thinking about the economy markets what's on your radar what what are you paying attention to these days what's your outlook and as you know Brian on this show you can take all the time you need to set the table when it comes to that big picture macro view. >> Sure. And before we talk about what I think, I think we should look at what Warren Buffett, the world's greatest investor, is doing. And right now, his cash allocation is near an all-time high. At the same time, other investors cash allocation is near an all-time low. So, it seems like Buffett is following his own advice by being fearful when others are greedy. And I think we should probably do the same. Now, the last time I was on the show, I said it was the most dangerous time in US financial history because it was the first time in that any major economy had had three large bubbles all at the same time. And since then, the situation has gotten even more dangerous since all three of those bubbles have gotten even bigger. And I continue to think that all three of those bubbles are likely to burst at the same time. And that could be soon and it could be very sudden. But that should be positive for gold and extremely positive for certain gold mining equities such as the ones that my fund invests in. Now the first of the three bubbles is the US equity bubble and nearly all reliable metrics, all reliable valuation ratios indicate that this is the most overvalued US market ever. price to sales, price to replacement cost, price to gross value added, price to GDP, price to cyclally adjusted earnings, they all indicate that the the the US stock market needs to fall more than 50% just to get back to a a normal valuation. And if, as seems likely, we head into a inflation crisis, then the US stock market would need to fall more than 80% if it returns to the same valuation that it was at around 1980 during the last US inflation crisis. The second bubble is the US housing bubble. And right now, price to rent and price to income and home affordability ratios are now at or near their worst levels ever. And they're even worse than they were during the 2000's housing bubble, which nearly caused a depression. In Los Angeles, for example, where I'm from, somebody with the median income needs to spend 90% of their income on housing to be able to afford the median priced home. And at the same time, nationally, home listings and days on market are increasing. So, it seems like the bubble may be getting closer to bursting. And the third bubble is in bonds. Right now in the US, long term uh long-term interest rates are still relatively low. They've increased some, but they're still relatively low, even though US government debt is at levels that have nearly always led to default. And the consensus is that none of these bubbles matter because the government will bail out the economy and markets like it always has in the past. But that couldn't be more wrong. If the government could always bail out the economy, it would have been discovered 2,000 years ago, not just now, not just in recent years. Instead, I think the this era of bailouts is over because for the last 40 years, every time there's been a downturn, there's been lots of government stimulus and all that stimulus has now pushed the US government's finances to the breaking point. So during the next recession, instead of a bailout, I think we're likely to get a very likely to get a government debt crisis with very high interest rates and sustained high inflation. The problem is the US has this toxic combination of high budget deficits, high government debt to GDP, elevated inflation and high borrowing from foreigners. And this is and the high deficits and high debt to GDP are a problem because it means our government debt is growing faster than the US government's capacity to pay. And the high inflation is an issue because it means the government has already started to default through inflation. And high borrowing from foreigners is a problem because foreign borrowers tend to be more fickle and they're tougher to control with regulations. And there's lots of studies that show that countries with lots of foreign borrowers tend to have more crises and tend to have crises sooner. In fact, since 2014, since 1914, there's been 21 instances of other countries with this same combination of four toxic factors. And all 21 of those countries defaulted relatively quickly and their median average annual inflation over the subsequent four years was 18% per year. And none of them was able to avoid sustained high inflation through recession or through QE or some central bank policy because the problem is if a government is defaulting through inflation then bailouts and QE and rate cuts only cause more inflation because if investors already worried about a government having excessive debt and then it says it's going to bail out banks and bail out companies and therefore take on more liabilities. then investors will only be more worried about the government's debt and more worried about inflation in the future as the government defaults through inflation. So instead of a bailout, we're likely to get a doom loop where the government debt crisis causes a private sector recession which in turn or a private sector crisis which in turn worsens the government debt problems. And that's similar to what happened in Greece in 2010 or similar to what's happened in Argentina in recent years. And it's important to remember that these problems are global. Seven of the world's 10 largest real estate markets are very overvalued, if not bubbles. And higher bond yields could crash those real estate markets, just as the US real estate market uh bubble popped in response to higher interest rates in 2006. And the bond bubble is also global because government debt to GDP is near an all-time high. And debt in many countries is at or near levels that have always led to default. Japan, Italy, France, UK, and Brazil are examples of countries with very high or dangerous debt levels. And so a crisis in one country could easily spread across the world. And sure enough, since 2020, rates have been rising across the world. So we may that may be a sign that we're in the early innings of the inevitable global government debt crisis. And so I think in some the next crisis should be the worst of our lifetimes, but that should be an incredible opportunity for investors in select gold mining equities. >> Okay, let me ask you this, Brian. The most dangerous time in our investing lifetimes. Are we just past the point of no return then? Because you've been talking about this for a while. >> Yeah, that's a good question. I think can we fix this situation and I think history tells us that we can't fix it. The core problem is the US government has too much debt and if the government has too much debt then it's going to lose its ability to prop up the bubbles and equities. And so to in order to avoid this crisis, we would need to fix our our government's debt problem. But the problem is that when markets are relatively calm, like they are now, politicians are very reluctant to make the the short-term sacrifices to improve the the government's long-term solveny because they're always very worried about their election in in two years or their election in four years. And it takes a long time to see the benefits of the of painful austerity of of budget cuts and stuff like that. And so that's why politicians in the US in recent years have done basically nothing to improve the the deficit. And then the problem is once the crisis starts then it's too late to implement austerity to start raising taxes and to cut spending because the higher borrowing costs from the crisis that overwhelms the benefit of tax increases and spending cuts and that's why the the European pigs portal Portugal Italy Ireland Greece and Spain they weren't able to uh cut their way they weren't able to get themselves out of the the debt crisis in around 2011 that was going on in Europe, they had to get bailed out by other countries in Europe and by the ECB. And even if a government starts implementing austerity before the crisis starts, it often times fails to improve the situation because it reduces GDP growth, which then increases the government budget deficit. And we saw how little countries imp improved their government debt to GDP in Europe and the US between the time of the global financial crisis and the time of the pandemic. Even though a lot of them were implementing austerity, budget cuts, tax increases and so on. And I think the the quick way to summarize it is right now US government debt to GDP is around 120%. And if you look back at the last 200 years, virtually all countries with 120% debt to GDP defaulted. And so that tells us it's very very hard to get out of this situation without a crisis once the the government debt level gets this high. And so the outlook is very grim for Treasury bonds, but I think the outlook is very good for gold. >> This episode is brought to you by VANX Rare Earth and Strategic Metals ETF. Ticker symbol REMX. Rare Earths are the hidden backbone of modern technology and defense, powering everything from smartphones and electric vehicles to fighter jets and wind turbines. 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We probably added a few trillion in that in that time frame. So Brian, the cause of the next crisis then does that lie at the feet of the government? Is it the government that kind of got us into this predicament then? >> Yeah, that's an interesting question. Who's responsible? I think ultimately investors are are responsible since they allowed the the government to get away with this borrowing. But I think really if you if we want to say what's the the cause because right now the the Fed uh maybe they could they could hike interest rates and that would uh pop the the bubbles in equities and real estate eventually but then we would have a terrible crisis because there's so much debt that's built up in the system and we have these two gigantic bubbles in equities and real estate. So the Fed isn't going to do that. No, no sane person would do that. So really the where the problem started and other people have made this uh point is we shouldn't we've been bailing out the private sector, the economy, the markets every time there's been a minor downturn for the last 40 years and we shouldn't have been doing that. The time to fix the problem was back in the early 80s. Uh we should have we should have allowed recessions and not always bailed out continental Illinois, not always bailed out emerging markets were having crises and not always aggressively cut rates when it looked like there'd be a recession. Because if we hadn't done that, we wouldn't have such high uh consumer debt and government debt and corporate debt levels right now. Because when investors and borrowers think that the government is always going to bail them out in a downturn, that encourages encourages them to be more reckless and to borrow more and to lend to more risky companies and invest in more risky companies. And all this reckless behavior has led to these gigantic bubbles we have right now. These very high corporate government corporate governor debt levels. And now this leaves us in a situation uh that we can't get out of without a a really bad crisis. So I think both both investors and consumers or both investors and the government are responsible to a certain extent. And what's going to trigger it? Well, the thing is anything can when the market is this overvalued, when there's this much debt in the system, anything can trigger the crisis. For example, in in 1929 before the stock market crash, in 2000 before the this dot bubble crash, in 1987 before that stock market crash, there wasn't really a big event. I think anytime you have really overvalued markets and too much debt in the system, any little anything that causes a bit of selling can feed on itself. There's so much margin debt out there right now. And so we don't need to predict exactly what's going to be the trigger. Any little thing can can be the trigger when things are this overvalued. A good analogy is that an overvalued market, it's like a a ruler, a a vertical ruler balanced on somebody's hand. Any little gust of air can knock it over and and cause the crash. >> Well, we should also talk about um gold. That is an area you favor. Gold has been on an absolute tear this year. I know again I would mention in the 18 months since you and I last spoke, it's doubled in price. It's sitting above 4,000 and some change today as we are recording on Monday, November 17th, um just after 100 p.m. Eastern. So I guess question for you um because when I look at gold's performance compared to you know the per performance of equities even is gold has gold been behaving as it should as it as expected what has kind of been more of your take on gold's performance and is it does it make sense that it's done so well while equities have also done well >> yeah I think since I was last on the show as we mentioned gold prices have have doubled. So hopefully somebody listened when we when I recommended them last time. But >> this I will say that this Brian this channel loves gold. So I feel like there you have some gold holders out there. >> Nice. Yeah. So I'm sure somebody somebody listened and but even despite the fact that gold prices have doubled since we last spoke, global investors portfolio allocations to gold are still far less than they were during at their peak during the last inflation crisis around 1980. And when investors increase their portfolio allocations to gold, assuming the prices of other assets stay the same, then that means the price of gold also has to increase because the supply of gold is essentially fixed in the short term. There's a little bit that's produced for mines each year, but that's that's very small. And as we talked about uh last time, gold does very well if concern about inflation and defaults increase because it's the one asset that's nobody's liability. And it also doesn't depend on fixed coupon payments far in the future the way bonds do. And so if we get this stagflation scenario that decimates bonds and equities and real estate, then investors should rush to gold. And that of course will cause their portfolio allocations to gold to increase also. And at the same time that will cause gold prices to increase. And so if investors were to take their allocation back to where it was in 1980 at its peak, then the gold price would actually more than double from here. But I think there's many reasons to think that the next crisis, and we talked about this a little bit last time, the next crisis should be far worse than the recession around 1980 because consumer debt, corporate debt, government debt are much are much higher now and we have much bigger asset bubbles now than we did then. But if we don't have a crisis, then based on the last 55 years of of history since the gold standard uh ended around 1971, gold actually looks expensive because investors portfolio allocations are above their historical average. But I think a crisis is is almost certain and that's why I I expect gold prices to go much higher over the next uh few years. And then as far as equities, I think that's a a really good question because the last time investors gold portfolio allocations were this high around 1979 to 1982, the valuation of US equities was around 75 to 80% lower. So we've never seen a a situation where we have such high gold portfolio allocations and equity valuations are also are extremely extremely high. But I think you don't need everyone to be bearish in order for the gold price to skyrocket. Gold is a very small asset class compared to bonds and compared to equities and compared to real estate. So if you get a small increase in concern about default and inflation, it can lead to a huge increase in the gold price. A 1 percentage point shift in investors portfolios from bonds to gold would cause a huge increase in increase in the gold price because gold is such a small percentage of investors portfolios. So I think the important thing to remember is we're headed for the mother of all financial crisis and based on history. Gold portfolio allocations should go much higher and that means gold prices should go much higher but gold is not as undervalued as it was relative to equities or in absolute terms. And so that means I'm now starting to look at things like buying puts on equities or assets correlated with equities. Uh since that's those sorts of trades have become relatively more attractive and could be a good complement to our our gold mining equity investments. >> Okay. So if I heard you correctly, gold more than double from here. So we're just above 4,000. 8,000. Is that the price target then? I think if it goes back to the same peak portfolio allocation that was at in >> and what was that in terms of percentage or I don't know. >> Uh that's that's a good question. I actually since my competitors don't want to listen to this I don't want to I don't want to give away too much but hopefully uh the information I'm I'm still sharing will be helpful. But I'd say it's it's still a relatively low percentage. And even the percentage it got to around 1980, if an investor if a client came to me and said, I have this much of my portfolio allocated to gold and gold mining equities, I would say that's that's very reasonable. That doesn't seem excessive at all. So I think it could if it goes back to that same portfolio allocation, then it would actually go to more than 8,500. And as I mentioned, I think the next crisis uh will almost certainly or is highly likely to be worse than the 1981. And therefore, it's it's very reasonable to think we'll go above uh 8500. But again, that's a peak valuation. So I I certainly wouldn't be buying gold. I would probably be selling uh selling our gold mining equity investments uh well before then. But that is the that is the potential. That is a reasonable target if we have a crisis, which I think we're highly likely to. >> It's so interesting. Okay. So, in the last couple of months, you've heard the term, I'm sure, the debasement trade. You've also probably seen like the headlines. It was u Morgan Stanley um made headlines for like the allocation or for the portfolio should be like um instead of the 6040 60 2020 20% being gold. I imagine that also bodess well for the thesis. What just more of a general thing um what were what has been like your thought process on like the debasement trade starting to become a bit more mainstream? >> Yeah, I think it's what you I think I would I'm not surprised, right? I've been warning for a while that I've been saying for a while that gold is very undervalued and has tremendous upside and we're heading for an inevitable government debt crisis that is going to involve the US government defaulting through inflation. So it's not at all surprising that the the debasement trade is uh becoming more popular. But as you asked about before and I think it was a very good question, it is strange that the debasement trade is becoming so popular when equity valuations are still too high. But I I think gold valuations are still uh there's still a lot of upside there as we talked about and the valuations of the gold mining equities in my portfolio are are still incredibly low. So still very bullish on on those for sure. >> Yeah. So um gold still has plenty of room to run. And you've mentioned gold mining um equities companies. It's a topic that has come up a few times on the channel. It's definitely coming up more often and I'm definitely I'll tell you this, Brian. I am not an expert on the gold miners. I am starting to learn just from various guests who have been talking about it. Um Chris Whan is one. Um Axel Murk is another who've talked about it. But I guess um the question is uh gold or gold mining companies like what should folks invest in? Yeah, as we were just talking about, I think if we have the crisis, gold should more than double, but because it's portfolio allocations are already high compared to the last 55 years, they gold may not appreciate much before the crisis happens. Uh, but gold miners, select gold miners look much better, I think. And essentially, there's three categories of gold mining equities. You have producers, developers, and explorers. And producers are the companies that are already mining gold uh already producing cash flow and they seem undervalued but not dramatically undervalued. And then that leaves us with the explorers and developers and that's those are the the categories that you've cleverly called venture capital with hard hats and the >> I stole that from someone else but yeah thanks. >> I like it. I like it. Very very catchy. And within that venture capital with hard hats category uh explorers that's the earlier stage venture capital because these companies oftentimes don't yet have a gold deposit and so there's lots of geological risk and many of these companies actually fail to discover a a dep a profitable deposit and so I dis dislike I prefer not to invest there because there's more geological risk. I prefer investing in developers, which would be more late stage venture capital. And those are companies that are not yet producing gold, but plan to do so by building a mine. And they already have a deposit that they expect to be very profitable. And when gold rises, developers tend to appreciate much more than gold and producers. And that's analogous to how Silicon Valley venture capital funds tend to go up more than the S&P 500 during a an equity bull market. And in fact, during the last big gold bull market from 19779 to 1980, developers and explorers went up around 2300%. which was far more than the increase of gold around 160% or the increase in producers around 290%. But despite that, over the last several years, we've had rising gold prices, but Toronto Stock Exchange developers, they've actually underperformed producers and up until this year had underperformed the gold price, which is the opposite of what you would expect when the gold price is going up. And as a result, our portfolio of gold mine developers, they're trading at only around 20% of their intrinsic value, 20% of the present value of their future cash flows. There's many times in the past where we've bought developers when they were trading at a discount to intrinsic value and then sold them later as they got closer to intrinsic value. And so that means even if the gold price doesn't increase, I think our fund could increase more than 300%. And so I think our gold mining equities clearly offer better value than the the gold price and the gold mining index and they could do very well even if there's not a crisis whereas with gold I think to get in a big upside from here you need a crisis to happen. >> Okay. And you were talking earlier about like the mother of all crisis crisis to hap you need that to happen um for gold to have that big upside. But I guess my question for you from an investor perspective on gold um is that kind of looking at it as more like an insurance policy or wait just wealth preservation like how what is the framework that you think about from o owning it is it just yeah like more of an insurance policy for that mother of all crises. >> Yeah. Yeah. No, I think that's a good way to think about it. Why does it make sense for investors own gold? It's it's negatively correlated with equities and and bonds and or not certainly not perfectly correlated and as a result when those asset classes get crushed during a an inflation crisis then gold should do well and it reduces the volatility of people's portfolios and yes as you said it it very much acts like insurance in in those situations but sometimes uh insurance is a good value when when the gold price is is low, when portfolio allocations are low, and sometimes insurance can be too expensive. When >> do you think it's expensive now? Yeah. Like at 4,000? >> I think it's I think it's definitely more expensive than it was 18 months ago. I think it's clear our gold mining equities are still are not expensive. We're still a good value. I personally don't own any gold. My fund doesn't own gold because it's clear it's much better. It's a much better risk return to old it own it through to get exposure to it through gold mining equities. I would say if you think there's a crisis going to be a crisis uh it's still got a lot of upside uh more pro should double uh in the when the crisis happens but if you think there's not going to be a crisis then it looks expensive but you know look it's it's trading above portfolio allocations are above their average for the last 55 years so it's unquestionably more expensive than when I last recommended it on the show 18 months ago and more expensive than um most of the the vast majority of time since 1971, but this is the probability of a severe government debt crisis has never been higher and I think is extremely high. So I think investors should definitely have some exposure to gold right now. >> Yeah, makes sense. Okay. There have been a lot of narratives around like gold's rise this year um from like uh foreign central bank buying um and whatnot. What what have been the narratives that you think have been complete misconceptions for gold's rise? >> Yeah, I I talked about a few of those in my my letter uh that I wrote a few months ago. I think it's it's funny because gold is one of the oldest asset classes and but I feel like it's one of the also probably the mis most misunderstood asset class or one of the most misunderstood asset classes and I always hear these uh these strange uh explanations for what's driving the gold price that don't make a lot of sense. I think uh one thing I had heard that I talked about in my letter is that tariffs were driving the gold price and I walked through some of the data and the letter is available on my website showing that that explanation makes very little sense. Another thing that I had heard was that the Chinese central bank was driving the purch the increase in the gold price and I also went through that data in my letter and showed that it the buying there was too small to explain the increase in the gold price. Another common thing you hear is that the gold ETF is driving the the gold price increase and that al in the gold ETF is also too small to explain the gold price doubling over the last 18 months. So I think what's been going on I think when I was last on the show gold was very undervalued. investors had a portfolio allocation that was around the average of the last 55 years even though the probability of a debt crisis was extremely high. And so it made sense for them to increase their their portfolio allocations. And then we had some events over the last 18 months and I think a lot of those were may may have been kind of like the snowflakes that triggered the avalanche because gold was so undervalued that it was inevitably going to rise and uh so any small little thing uh could be the the trigger. So, we had US dollar weakness. We had inflation persistence. We had a worsening fiscal outlook across the world with higher 30-year yields in the US, the UK, Germany, and Japan. We had concern about the safety of sovereign debt due to discussions about confiscating Russian uh Russian reserves. And we had concern about the credibility of the US due to tariffs and Trump's meddling with the Fed. And I think all these factors encouraged institutional investors to increase their allocation to gold and that's what's led to the the increase in the gold price. But I think the key message is it's hard to predict exactly what's going to or almost impossible to predict what's exactly is going to move the gold price in the short term. But I think inevitably we're going to have a crisis and the gold price should surge in that situation. And so it's better to get exposure to the the sector now rather than trying to time the perfect entry point. >> You know, another um area I want to go with um or I want to explore with you, Bitcoin, because Bitcoin has often been touted as like a fiat uh replacement as we are recording. Bitcoin is fell below 95,000 this morning. It is at 92,464 as we're recording at this moment. Um your thoughts on Bitcoin? Yeah, I think Charlie Mer called Bitcoin dementia and Warren Buffett called Bitcoin rat poison squared and Charlie Munger also said that Bitcoin was like a veneerial disease and I think those are reasonable descriptions because >> Bitcoin although it has limited supply the problem is cryptocurrencies in general in aggregate have unlimited supply. In fact, there's over 27 million different cryptocurrencies that have been created. And these cryptocurrencies, they all compete with each other. And so, they're therefore somewhat interchangeable. And that means that effectively, Bitcoin doesn't have limited supply. It actually has unlimited supply because it's somewhat interchangeable with all these other cryptocurrencies. And anything with unlimited supply is essentially worthless. It's so and so it reminds me of the tulip bubble in the 1600 or the baseball card bubble when I was a little kid or the NFT bubble in 2022. Buffett said that if someone offered him all the Bitcoin in the world for $25, he wouldn't buy it. And I I think that's correct. Bitcoin is probably almost worthless in the long run. And gold is very different because there aren't new types of gold that are being created. So gold is actually truly scarce unlike Bitcoin. The Bitcoin proponents, the Bitcoin bros like to claim that it has this network effect that's going to protect it from competition, but its market share of cryptocurrencies is actually fallen from around 100% 12 years ago to less than 60% today. And so that's very different from something like the the Google search engine that actually did have a network effect, that actually did have competitive advantages. and therefore maintained its market share because it actually was inconvenient to switch to a competitor's product. Whereas with cryptocurrencies, it's super easy to switch to a stable coin or swip switch to another cryptocurrency. This the cost of switching is is almost zero. And a lot of these other cryptocurrencies, they have major advantages over Bitcoin because they have faster transactions or cheaper transactions or they have more features such as smart contracts and or they have more developers and they're coming up with new features that give themselves advantages over Bitcoin all the time. And we if we wanted to, we could even copy the Bitcoin code and make a few improvements and then launch a better version of Bitcoin next week. And so something that's so easily duplicated doesn't have a a long-term competitive advantage. If we could create a duplicate of gold out of thin air, then gold wouldn't be worth anything. But of course, that's not the case. Gold has these durable competitive advantages over other elements. For example, platinum has a much higher melting point, and platinum is much less malleable. And so that's why gold has maintained its its market share of precious metals over the last 6,000 years. And the Bitcoin proponents like to criticize gold and say that it's inferior because physical gold is difficult to store and transfer. But you can trade gold electronically using ETFs or futures or even using the blockchain. And I think if if something is digital only, that's actually a disadvantage because that means you can easily create duplicates and you can easily create clones. So I wouldn't be surprised if Bitcoin loses more than 95% of its value over the next few years if as it crashes with the US equity bubble. And when I mentioned earlier that we're considering buying put options on assets that are correlated with equities, uh, Bitcoin puts definitely be under consideration, but we'll have to study the taxation and liquidity and option pricing and stuff like that. >> Yeah. Explain to me like um the, you know, wanting to um buy some puts, when would you do that or like what are you waiting for or like what just if you can I um elaborate a bit more there. Yeah, I think the the timing is impossible to to tell. So, I think we it's always very difficult when to tell when bubbles are going to burst. Uh it's true with uh US equities when we were talking about before and it's even more true with something like Bitcoin that has almost no has zero fundamental value and is trading just on emotion and fear of missing out and stuff like that. So I think whether the exact option whether we would buy a put option one month out or farther out it it depends on the pricing but if we decided to do that I think it the decision would be based more on uh liquidity and the price of the options and it wouldn't be based on any firm view on exactly when Bitcoin is going to crash. I do want to ask you about uh the Fed because you know just last week um the markets didn't like this, the stock market didn't like this, but it's pretty much a tossup as to whether or not the Fed will cut in December. So more of my question for you is how are you thinking about the Fed and does the Fed's like rate policy really matter? Does it matter? Yeah, I think similar to Buffett, I don't try to predict uh what the Fed is going to do in the short term. I'm just looking for undervalued investments and and holding and holding them for the long term. But I agree, investors, they're super focused on the questions about what the Fed is going to do. But I don't think it really matters in the long term, regardless of what the Fed does. US equities are a bubble and over the long term the gold miners we're invested in look very undervalued. I think ultimately we're heading for this stagflation on steroids scenario and the Fed is going to be trapped and it's going to lose control of interest rates. It's similar to what we talked about last time with with fiscal dominance where once the debt crisis starts, if the Fed tries to cut interest rates, inflation is is going to go higher. If the Fed hikes interest rates, then that's going to raise borrowing costs for the government and make the debt crisis even worse and also increase inflation. If the Fed tries to implement QE during a inflation crisis, that's going to lead to higher interest rates actually and higher inflation because investors will perceive it as the government stuffing bonds into the central bank because the government is afraid to sell them to investors. And so that's why Kiwi uh stops working during a debt crisis. And that's why countries like Brazil and and Turkey haven't been able to implement uh QE in in recent years. But I think investors, they've become like junkies, kind of addicted to government bailouts through the Fed's rate cuts. And during this ne during the next recession, we're not going to get a a Fed bailout through big rate cuts. We're probably going to get increasing interest rates and unfortunately that's probably going to decimate a lot of investors and so I think the the Fed is going to be one of the sources of the next crisis, not the savior like it usually is. >> Yeah. And that's kind of like that doom loop you were referencing earlier. I know we only have a little bit of time left. Um, I heard that David Swinson was an adviser of yours while you were at Yale and um, of course, uh, the late David Swinson, he was the CIO of the Yale Endowment Fund. I was wondering if you might be able to share like some lessons or anything that you learned from, um, from him. >> Yeah. Uh, that's a great question. David Swenson was perhaps the the greatest endowment ever, endowment manager ever, one of the best institutional investors uh ever. And there there's so many uh things I can say uh in response to that. He had such a big influence on my investment philosophy. One thing you know the first thing he taught us would he he I took his course and he was my senior essay adviser and one of the first things he taught us was nobody can predict the market in the short term. Nobody can predict exactly when recessions are going to happen. So it's much better to take a a long-term horizon uh long-term perspective. He was also very critical of funds that are paid just based on assets under management and just take a and therefore focus just on marketing and trying to keep their current clients rather than to earn um high returns for their clients. And so with my fund, I've tried to uh set things up differently. We don't charge a management fee, only a performance fee above a 6% hurdle rate. So I only do well if the client earns a high return. I only do well if the client does well. And Swenson was shifted the Yale endowments portfolio to more hedge fund style investments because the incentive uh alignment was much better there. Swinson is also famous for uh shifting uh the Yale to to private equity and to venture capital and to hedge funds because the the returns there seemed better than they were in in mutual funds due to better incentive alignment and less competitive markets and less illquid markets where there was more opportunities. But I think he would probably agree that the outlook now for venture capital and for private equity is is not good because those asset classes are although they've done very well over the last 40 years. They have they're essentially highly they're generally leveraged companies oftentimes lower quality companies that are riskier. They have a lot of exposure to the US stock market. They're dependent on the markets for financing and for selling assets. They're very illquid asset classes. And so if the US stock market falls more than 70%, I would expect those asset classes to fall even more than 70%. And so it's not surprising that we've seen endowments like Yale and Harvard reducing their exposure to private assets. Um but uh but yeah, that I think those are some some good points. >> Before I let you go, Brian, um what is something that is keeping you up at night these days? Um that's been on your mind, that risk for you, and then to counter that, what is something that's making you optimistic or hopeful? Yeah, I think for my fund a lot of the things that worry most investors should actually be good for gold. So I think the thing I don't worry as much about an invasion of Taiwan or a terrorist attack or a stock market crash or a recession or more tariffs or another pandemic. Those should generally be positive for gold. But a sustained gold price decline that could certainly cause a temporary decline in the fund's portfolio. I think as we talked about the the valuations of the portfolio are are low. So we may not the our investments may not decline much if that were to happen. And I think we're headed for the crisis for a crisis soon and which should send gold higher as we talked about. But as far as what I'm optimistic about, you know, I've been traveling outside the US some this year and there's still so many people that say it's their dream to live and work in the US. And so I've been talking about a lot of challenges that the US faces now. But I still think it's a better economic and political system than in many other places. And so when stock market valuations improve, when currency valuations improve, when real estate valuations improve, I think the US should be a a very good opportunity. >> And where can folks find you um learn more about the work that you're doing at Hershman Capital and any parting thoughts for this audience? The floor is all yours. >> Yeah, sure. So, thanks again for having me. I I manage a fund that even though it's been called the world's most bearish hedge fund, we've outperformed the S&P 500 over the last 11 years, very taxefficient and as I mentioned, very good incentive alignment. And my fund's website is hcap.lc and I'm available on Twitter uh at hcapl. So, thanks again for having me. >> Brian Hirschman, managing partner of Hman Capital. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. I really, really appreciate you and I look forward to our next conversation. Thanks again, Brian. >> My pleasure. Thank you.
Brian Hirschmann: The Looming Crisis Wall Street Isn't Preparing For
Summary
Transcript
Right now, US government debt to GDP is around 120%. And if you look back at the last 200 years, virtually all countries with 120% debt to GDP defaulted. And so that tells us it's very very hard to get out of this situation without a crisis once the the government debt level gets this high. And so the outlook is very grim for Treasury bonds, but I think the outlook is very good for gold. Brian Hirschman, managing partner of Hirschman Capital. It is so wonderful to welcome you back to the show and great to see you again, Brian. It's been way too long. Really appreciate you taking the time to join me today. >> Thank you. It's great to be back here. >> It's been a long time, 18 months since our last conversation and we were talking about gold at the time and I believe the price has more than doubled since then. So, I'm just thrilled to have you back on and so much has happened in the world in the last 18 months. So Brian we have to start where we always start with our guest and that is with that big picture macro view the framework in which you are looking at the world how you are thinking about the economy markets what's on your radar what what are you paying attention to these days what's your outlook and as you know Brian on this show you can take all the time you need to set the table when it comes to that big picture macro view. >> Sure. And before we talk about what I think, I think we should look at what Warren Buffett, the world's greatest investor, is doing. And right now, his cash allocation is near an all-time high. At the same time, other investors cash allocation is near an all-time low. So, it seems like Buffett is following his own advice by being fearful when others are greedy. And I think we should probably do the same. Now, the last time I was on the show, I said it was the most dangerous time in US financial history because it was the first time in that any major economy had had three large bubbles all at the same time. And since then, the situation has gotten even more dangerous since all three of those bubbles have gotten even bigger. And I continue to think that all three of those bubbles are likely to burst at the same time. And that could be soon and it could be very sudden. But that should be positive for gold and extremely positive for certain gold mining equities such as the ones that my fund invests in. Now the first of the three bubbles is the US equity bubble and nearly all reliable metrics, all reliable valuation ratios indicate that this is the most overvalued US market ever. price to sales, price to replacement cost, price to gross value added, price to GDP, price to cyclally adjusted earnings, they all indicate that the the the US stock market needs to fall more than 50% just to get back to a a normal valuation. And if, as seems likely, we head into a inflation crisis, then the US stock market would need to fall more than 80% if it returns to the same valuation that it was at around 1980 during the last US inflation crisis. The second bubble is the US housing bubble. And right now, price to rent and price to income and home affordability ratios are now at or near their worst levels ever. And they're even worse than they were during the 2000's housing bubble, which nearly caused a depression. In Los Angeles, for example, where I'm from, somebody with the median income needs to spend 90% of their income on housing to be able to afford the median priced home. And at the same time, nationally, home listings and days on market are increasing. So, it seems like the bubble may be getting closer to bursting. And the third bubble is in bonds. Right now in the US, long term uh long-term interest rates are still relatively low. They've increased some, but they're still relatively low, even though US government debt is at levels that have nearly always led to default. And the consensus is that none of these bubbles matter because the government will bail out the economy and markets like it always has in the past. But that couldn't be more wrong. If the government could always bail out the economy, it would have been discovered 2,000 years ago, not just now, not just in recent years. Instead, I think the this era of bailouts is over because for the last 40 years, every time there's been a downturn, there's been lots of government stimulus and all that stimulus has now pushed the US government's finances to the breaking point. So during the next recession, instead of a bailout, I think we're likely to get a very likely to get a government debt crisis with very high interest rates and sustained high inflation. The problem is the US has this toxic combination of high budget deficits, high government debt to GDP, elevated inflation and high borrowing from foreigners. And this is and the high deficits and high debt to GDP are a problem because it means our government debt is growing faster than the US government's capacity to pay. And the high inflation is an issue because it means the government has already started to default through inflation. And high borrowing from foreigners is a problem because foreign borrowers tend to be more fickle and they're tougher to control with regulations. And there's lots of studies that show that countries with lots of foreign borrowers tend to have more crises and tend to have crises sooner. In fact, since 2014, since 1914, there's been 21 instances of other countries with this same combination of four toxic factors. And all 21 of those countries defaulted relatively quickly and their median average annual inflation over the subsequent four years was 18% per year. And none of them was able to avoid sustained high inflation through recession or through QE or some central bank policy because the problem is if a government is defaulting through inflation then bailouts and QE and rate cuts only cause more inflation because if investors already worried about a government having excessive debt and then it says it's going to bail out banks and bail out companies and therefore take on more liabilities. then investors will only be more worried about the government's debt and more worried about inflation in the future as the government defaults through inflation. So instead of a bailout, we're likely to get a doom loop where the government debt crisis causes a private sector recession which in turn or a private sector crisis which in turn worsens the government debt problems. And that's similar to what happened in Greece in 2010 or similar to what's happened in Argentina in recent years. And it's important to remember that these problems are global. Seven of the world's 10 largest real estate markets are very overvalued, if not bubbles. And higher bond yields could crash those real estate markets, just as the US real estate market uh bubble popped in response to higher interest rates in 2006. And the bond bubble is also global because government debt to GDP is near an all-time high. And debt in many countries is at or near levels that have always led to default. Japan, Italy, France, UK, and Brazil are examples of countries with very high or dangerous debt levels. And so a crisis in one country could easily spread across the world. And sure enough, since 2020, rates have been rising across the world. So we may that may be a sign that we're in the early innings of the inevitable global government debt crisis. And so I think in some the next crisis should be the worst of our lifetimes, but that should be an incredible opportunity for investors in select gold mining equities. >> Okay, let me ask you this, Brian. The most dangerous time in our investing lifetimes. Are we just past the point of no return then? Because you've been talking about this for a while. >> Yeah, that's a good question. I think can we fix this situation and I think history tells us that we can't fix it. The core problem is the US government has too much debt and if the government has too much debt then it's going to lose its ability to prop up the bubbles and equities. And so to in order to avoid this crisis, we would need to fix our our government's debt problem. But the problem is that when markets are relatively calm, like they are now, politicians are very reluctant to make the the short-term sacrifices to improve the the government's long-term solveny because they're always very worried about their election in in two years or their election in four years. And it takes a long time to see the benefits of the of painful austerity of of budget cuts and stuff like that. And so that's why politicians in the US in recent years have done basically nothing to improve the the deficit. And then the problem is once the crisis starts then it's too late to implement austerity to start raising taxes and to cut spending because the higher borrowing costs from the crisis that overwhelms the benefit of tax increases and spending cuts and that's why the the European pigs portal Portugal Italy Ireland Greece and Spain they weren't able to uh cut their way they weren't able to get themselves out of the the debt crisis in around 2011 that was going on in Europe, they had to get bailed out by other countries in Europe and by the ECB. And even if a government starts implementing austerity before the crisis starts, it often times fails to improve the situation because it reduces GDP growth, which then increases the government budget deficit. And we saw how little countries imp improved their government debt to GDP in Europe and the US between the time of the global financial crisis and the time of the pandemic. Even though a lot of them were implementing austerity, budget cuts, tax increases and so on. And I think the the quick way to summarize it is right now US government debt to GDP is around 120%. And if you look back at the last 200 years, virtually all countries with 120% debt to GDP defaulted. And so that tells us it's very very hard to get out of this situation without a crisis once the the government debt level gets this high. And so the outlook is very grim for Treasury bonds, but I think the outlook is very good for gold. >> This episode is brought to you by VANX Rare Earth and Strategic Metals ETF. Ticker symbol REMX. Rare Earths are the hidden backbone of modern technology and defense, powering everything from smartphones and electric vehicles to fighter jets and wind turbines. Van Ec recognized this early, launching the rare earth and strategic metals ETF, ticker symbol REMX, 15 years ago, well before supply chain security became a global priority. Today, China dominates the production and refining capacity of rare earths, creating real challenges for global supply chain security as these materials are essential for technological innovation, clean energy, and national security. That's why countries all around the world are racing to build their own supply chains and reduce reliance on China. As this global shift continues, investment in the rare earth ecosystem is growing rapidly. From mining to advanced manufacturing, investors can gain access to this powerful trend through REMX. Visit vanck.com/remx Juliia to learn more. Yeah, 120% for that US federal debt to GDP ratio. The US debt sits north of 38.2 trillion. I feel like gosh, it's probably sky. I wish I could I should go back and look at what it was 18 months ago. We probably added a few trillion in that in that time frame. So Brian, the cause of the next crisis then does that lie at the feet of the government? Is it the government that kind of got us into this predicament then? >> Yeah, that's an interesting question. Who's responsible? I think ultimately investors are are responsible since they allowed the the government to get away with this borrowing. But I think really if you if we want to say what's the the cause because right now the the Fed uh maybe they could they could hike interest rates and that would uh pop the the bubbles in equities and real estate eventually but then we would have a terrible crisis because there's so much debt that's built up in the system and we have these two gigantic bubbles in equities and real estate. So the Fed isn't going to do that. No, no sane person would do that. So really the where the problem started and other people have made this uh point is we shouldn't we've been bailing out the private sector, the economy, the markets every time there's been a minor downturn for the last 40 years and we shouldn't have been doing that. The time to fix the problem was back in the early 80s. Uh we should have we should have allowed recessions and not always bailed out continental Illinois, not always bailed out emerging markets were having crises and not always aggressively cut rates when it looked like there'd be a recession. Because if we hadn't done that, we wouldn't have such high uh consumer debt and government debt and corporate debt levels right now. Because when investors and borrowers think that the government is always going to bail them out in a downturn, that encourages encourages them to be more reckless and to borrow more and to lend to more risky companies and invest in more risky companies. And all this reckless behavior has led to these gigantic bubbles we have right now. These very high corporate government corporate governor debt levels. And now this leaves us in a situation uh that we can't get out of without a a really bad crisis. So I think both both investors and consumers or both investors and the government are responsible to a certain extent. And what's going to trigger it? Well, the thing is anything can when the market is this overvalued, when there's this much debt in the system, anything can trigger the crisis. For example, in in 1929 before the stock market crash, in 2000 before the this dot bubble crash, in 1987 before that stock market crash, there wasn't really a big event. I think anytime you have really overvalued markets and too much debt in the system, any little anything that causes a bit of selling can feed on itself. There's so much margin debt out there right now. And so we don't need to predict exactly what's going to be the trigger. Any little thing can can be the trigger when things are this overvalued. A good analogy is that an overvalued market, it's like a a ruler, a a vertical ruler balanced on somebody's hand. Any little gust of air can knock it over and and cause the crash. >> Well, we should also talk about um gold. That is an area you favor. Gold has been on an absolute tear this year. I know again I would mention in the 18 months since you and I last spoke, it's doubled in price. It's sitting above 4,000 and some change today as we are recording on Monday, November 17th, um just after 100 p.m. Eastern. So I guess question for you um because when I look at gold's performance compared to you know the per performance of equities even is gold has gold been behaving as it should as it as expected what has kind of been more of your take on gold's performance and is it does it make sense that it's done so well while equities have also done well >> yeah I think since I was last on the show as we mentioned gold prices have have doubled. So hopefully somebody listened when we when I recommended them last time. But >> this I will say that this Brian this channel loves gold. So I feel like there you have some gold holders out there. >> Nice. Yeah. So I'm sure somebody somebody listened and but even despite the fact that gold prices have doubled since we last spoke, global investors portfolio allocations to gold are still far less than they were during at their peak during the last inflation crisis around 1980. And when investors increase their portfolio allocations to gold, assuming the prices of other assets stay the same, then that means the price of gold also has to increase because the supply of gold is essentially fixed in the short term. There's a little bit that's produced for mines each year, but that's that's very small. And as we talked about uh last time, gold does very well if concern about inflation and defaults increase because it's the one asset that's nobody's liability. And it also doesn't depend on fixed coupon payments far in the future the way bonds do. And so if we get this stagflation scenario that decimates bonds and equities and real estate, then investors should rush to gold. And that of course will cause their portfolio allocations to gold to increase also. And at the same time that will cause gold prices to increase. And so if investors were to take their allocation back to where it was in 1980 at its peak, then the gold price would actually more than double from here. But I think there's many reasons to think that the next crisis, and we talked about this a little bit last time, the next crisis should be far worse than the recession around 1980 because consumer debt, corporate debt, government debt are much are much higher now and we have much bigger asset bubbles now than we did then. But if we don't have a crisis, then based on the last 55 years of of history since the gold standard uh ended around 1971, gold actually looks expensive because investors portfolio allocations are above their historical average. But I think a crisis is is almost certain and that's why I I expect gold prices to go much higher over the next uh few years. And then as far as equities, I think that's a a really good question because the last time investors gold portfolio allocations were this high around 1979 to 1982, the valuation of US equities was around 75 to 80% lower. So we've never seen a a situation where we have such high gold portfolio allocations and equity valuations are also are extremely extremely high. But I think you don't need everyone to be bearish in order for the gold price to skyrocket. Gold is a very small asset class compared to bonds and compared to equities and compared to real estate. So if you get a small increase in concern about default and inflation, it can lead to a huge increase in the gold price. A 1 percentage point shift in investors portfolios from bonds to gold would cause a huge increase in increase in the gold price because gold is such a small percentage of investors portfolios. So I think the important thing to remember is we're headed for the mother of all financial crisis and based on history. Gold portfolio allocations should go much higher and that means gold prices should go much higher but gold is not as undervalued as it was relative to equities or in absolute terms. And so that means I'm now starting to look at things like buying puts on equities or assets correlated with equities. Uh since that's those sorts of trades have become relatively more attractive and could be a good complement to our our gold mining equity investments. >> Okay. So if I heard you correctly, gold more than double from here. So we're just above 4,000. 8,000. Is that the price target then? I think if it goes back to the same peak portfolio allocation that was at in >> and what was that in terms of percentage or I don't know. >> Uh that's that's a good question. I actually since my competitors don't want to listen to this I don't want to I don't want to give away too much but hopefully uh the information I'm I'm still sharing will be helpful. But I'd say it's it's still a relatively low percentage. And even the percentage it got to around 1980, if an investor if a client came to me and said, I have this much of my portfolio allocated to gold and gold mining equities, I would say that's that's very reasonable. That doesn't seem excessive at all. So I think it could if it goes back to that same portfolio allocation, then it would actually go to more than 8,500. And as I mentioned, I think the next crisis uh will almost certainly or is highly likely to be worse than the 1981. And therefore, it's it's very reasonable to think we'll go above uh 8500. But again, that's a peak valuation. So I I certainly wouldn't be buying gold. I would probably be selling uh selling our gold mining equity investments uh well before then. But that is the that is the potential. That is a reasonable target if we have a crisis, which I think we're highly likely to. >> It's so interesting. Okay. So, in the last couple of months, you've heard the term, I'm sure, the debasement trade. You've also probably seen like the headlines. It was u Morgan Stanley um made headlines for like the allocation or for the portfolio should be like um instead of the 6040 60 2020 20% being gold. I imagine that also bodess well for the thesis. What just more of a general thing um what were what has been like your thought process on like the debasement trade starting to become a bit more mainstream? >> Yeah, I think it's what you I think I would I'm not surprised, right? I've been warning for a while that I've been saying for a while that gold is very undervalued and has tremendous upside and we're heading for an inevitable government debt crisis that is going to involve the US government defaulting through inflation. So it's not at all surprising that the the debasement trade is uh becoming more popular. But as you asked about before and I think it was a very good question, it is strange that the debasement trade is becoming so popular when equity valuations are still too high. But I I think gold valuations are still uh there's still a lot of upside there as we talked about and the valuations of the gold mining equities in my portfolio are are still incredibly low. So still very bullish on on those for sure. >> Yeah. So um gold still has plenty of room to run. And you've mentioned gold mining um equities companies. It's a topic that has come up a few times on the channel. It's definitely coming up more often and I'm definitely I'll tell you this, Brian. I am not an expert on the gold miners. I am starting to learn just from various guests who have been talking about it. Um Chris Whan is one. Um Axel Murk is another who've talked about it. But I guess um the question is uh gold or gold mining companies like what should folks invest in? Yeah, as we were just talking about, I think if we have the crisis, gold should more than double, but because it's portfolio allocations are already high compared to the last 55 years, they gold may not appreciate much before the crisis happens. Uh, but gold miners, select gold miners look much better, I think. And essentially, there's three categories of gold mining equities. You have producers, developers, and explorers. And producers are the companies that are already mining gold uh already producing cash flow and they seem undervalued but not dramatically undervalued. And then that leaves us with the explorers and developers and that's those are the the categories that you've cleverly called venture capital with hard hats and the >> I stole that from someone else but yeah thanks. >> I like it. I like it. Very very catchy. And within that venture capital with hard hats category uh explorers that's the earlier stage venture capital because these companies oftentimes don't yet have a gold deposit and so there's lots of geological risk and many of these companies actually fail to discover a a dep a profitable deposit and so I dis dislike I prefer not to invest there because there's more geological risk. I prefer investing in developers, which would be more late stage venture capital. And those are companies that are not yet producing gold, but plan to do so by building a mine. And they already have a deposit that they expect to be very profitable. And when gold rises, developers tend to appreciate much more than gold and producers. And that's analogous to how Silicon Valley venture capital funds tend to go up more than the S&P 500 during a an equity bull market. And in fact, during the last big gold bull market from 19779 to 1980, developers and explorers went up around 2300%. which was far more than the increase of gold around 160% or the increase in producers around 290%. But despite that, over the last several years, we've had rising gold prices, but Toronto Stock Exchange developers, they've actually underperformed producers and up until this year had underperformed the gold price, which is the opposite of what you would expect when the gold price is going up. And as a result, our portfolio of gold mine developers, they're trading at only around 20% of their intrinsic value, 20% of the present value of their future cash flows. There's many times in the past where we've bought developers when they were trading at a discount to intrinsic value and then sold them later as they got closer to intrinsic value. And so that means even if the gold price doesn't increase, I think our fund could increase more than 300%. And so I think our gold mining equities clearly offer better value than the the gold price and the gold mining index and they could do very well even if there's not a crisis whereas with gold I think to get in a big upside from here you need a crisis to happen. >> Okay. And you were talking earlier about like the mother of all crisis crisis to hap you need that to happen um for gold to have that big upside. But I guess my question for you from an investor perspective on gold um is that kind of looking at it as more like an insurance policy or wait just wealth preservation like how what is the framework that you think about from o owning it is it just yeah like more of an insurance policy for that mother of all crises. >> Yeah. Yeah. No, I think that's a good way to think about it. Why does it make sense for investors own gold? It's it's negatively correlated with equities and and bonds and or not certainly not perfectly correlated and as a result when those asset classes get crushed during a an inflation crisis then gold should do well and it reduces the volatility of people's portfolios and yes as you said it it very much acts like insurance in in those situations but sometimes uh insurance is a good value when when the gold price is is low, when portfolio allocations are low, and sometimes insurance can be too expensive. When >> do you think it's expensive now? Yeah. Like at 4,000? >> I think it's I think it's definitely more expensive than it was 18 months ago. I think it's clear our gold mining equities are still are not expensive. We're still a good value. I personally don't own any gold. My fund doesn't own gold because it's clear it's much better. It's a much better risk return to old it own it through to get exposure to it through gold mining equities. I would say if you think there's a crisis going to be a crisis uh it's still got a lot of upside uh more pro should double uh in the when the crisis happens but if you think there's not going to be a crisis then it looks expensive but you know look it's it's trading above portfolio allocations are above their average for the last 55 years so it's unquestionably more expensive than when I last recommended it on the show 18 months ago and more expensive than um most of the the vast majority of time since 1971, but this is the probability of a severe government debt crisis has never been higher and I think is extremely high. So I think investors should definitely have some exposure to gold right now. >> Yeah, makes sense. Okay. There have been a lot of narratives around like gold's rise this year um from like uh foreign central bank buying um and whatnot. What what have been the narratives that you think have been complete misconceptions for gold's rise? >> Yeah, I I talked about a few of those in my my letter uh that I wrote a few months ago. I think it's it's funny because gold is one of the oldest asset classes and but I feel like it's one of the also probably the mis most misunderstood asset class or one of the most misunderstood asset classes and I always hear these uh these strange uh explanations for what's driving the gold price that don't make a lot of sense. I think uh one thing I had heard that I talked about in my letter is that tariffs were driving the gold price and I walked through some of the data and the letter is available on my website showing that that explanation makes very little sense. Another thing that I had heard was that the Chinese central bank was driving the purch the increase in the gold price and I also went through that data in my letter and showed that it the buying there was too small to explain the increase in the gold price. Another common thing you hear is that the gold ETF is driving the the gold price increase and that al in the gold ETF is also too small to explain the gold price doubling over the last 18 months. So I think what's been going on I think when I was last on the show gold was very undervalued. investors had a portfolio allocation that was around the average of the last 55 years even though the probability of a debt crisis was extremely high. And so it made sense for them to increase their their portfolio allocations. And then we had some events over the last 18 months and I think a lot of those were may may have been kind of like the snowflakes that triggered the avalanche because gold was so undervalued that it was inevitably going to rise and uh so any small little thing uh could be the the trigger. So, we had US dollar weakness. We had inflation persistence. We had a worsening fiscal outlook across the world with higher 30-year yields in the US, the UK, Germany, and Japan. We had concern about the safety of sovereign debt due to discussions about confiscating Russian uh Russian reserves. And we had concern about the credibility of the US due to tariffs and Trump's meddling with the Fed. And I think all these factors encouraged institutional investors to increase their allocation to gold and that's what's led to the the increase in the gold price. But I think the key message is it's hard to predict exactly what's going to or almost impossible to predict what's exactly is going to move the gold price in the short term. But I think inevitably we're going to have a crisis and the gold price should surge in that situation. And so it's better to get exposure to the the sector now rather than trying to time the perfect entry point. >> You know, another um area I want to go with um or I want to explore with you, Bitcoin, because Bitcoin has often been touted as like a fiat uh replacement as we are recording. Bitcoin is fell below 95,000 this morning. It is at 92,464 as we're recording at this moment. Um your thoughts on Bitcoin? Yeah, I think Charlie Mer called Bitcoin dementia and Warren Buffett called Bitcoin rat poison squared and Charlie Munger also said that Bitcoin was like a veneerial disease and I think those are reasonable descriptions because >> Bitcoin although it has limited supply the problem is cryptocurrencies in general in aggregate have unlimited supply. In fact, there's over 27 million different cryptocurrencies that have been created. And these cryptocurrencies, they all compete with each other. And so, they're therefore somewhat interchangeable. And that means that effectively, Bitcoin doesn't have limited supply. It actually has unlimited supply because it's somewhat interchangeable with all these other cryptocurrencies. And anything with unlimited supply is essentially worthless. It's so and so it reminds me of the tulip bubble in the 1600 or the baseball card bubble when I was a little kid or the NFT bubble in 2022. Buffett said that if someone offered him all the Bitcoin in the world for $25, he wouldn't buy it. And I I think that's correct. Bitcoin is probably almost worthless in the long run. And gold is very different because there aren't new types of gold that are being created. So gold is actually truly scarce unlike Bitcoin. The Bitcoin proponents, the Bitcoin bros like to claim that it has this network effect that's going to protect it from competition, but its market share of cryptocurrencies is actually fallen from around 100% 12 years ago to less than 60% today. And so that's very different from something like the the Google search engine that actually did have a network effect, that actually did have competitive advantages. and therefore maintained its market share because it actually was inconvenient to switch to a competitor's product. Whereas with cryptocurrencies, it's super easy to switch to a stable coin or swip switch to another cryptocurrency. This the cost of switching is is almost zero. And a lot of these other cryptocurrencies, they have major advantages over Bitcoin because they have faster transactions or cheaper transactions or they have more features such as smart contracts and or they have more developers and they're coming up with new features that give themselves advantages over Bitcoin all the time. And we if we wanted to, we could even copy the Bitcoin code and make a few improvements and then launch a better version of Bitcoin next week. And so something that's so easily duplicated doesn't have a a long-term competitive advantage. If we could create a duplicate of gold out of thin air, then gold wouldn't be worth anything. But of course, that's not the case. Gold has these durable competitive advantages over other elements. For example, platinum has a much higher melting point, and platinum is much less malleable. And so that's why gold has maintained its its market share of precious metals over the last 6,000 years. And the Bitcoin proponents like to criticize gold and say that it's inferior because physical gold is difficult to store and transfer. But you can trade gold electronically using ETFs or futures or even using the blockchain. And I think if if something is digital only, that's actually a disadvantage because that means you can easily create duplicates and you can easily create clones. So I wouldn't be surprised if Bitcoin loses more than 95% of its value over the next few years if as it crashes with the US equity bubble. And when I mentioned earlier that we're considering buying put options on assets that are correlated with equities, uh, Bitcoin puts definitely be under consideration, but we'll have to study the taxation and liquidity and option pricing and stuff like that. >> Yeah. Explain to me like um the, you know, wanting to um buy some puts, when would you do that or like what are you waiting for or like what just if you can I um elaborate a bit more there. Yeah, I think the the timing is impossible to to tell. So, I think we it's always very difficult when to tell when bubbles are going to burst. Uh it's true with uh US equities when we were talking about before and it's even more true with something like Bitcoin that has almost no has zero fundamental value and is trading just on emotion and fear of missing out and stuff like that. So I think whether the exact option whether we would buy a put option one month out or farther out it it depends on the pricing but if we decided to do that I think it the decision would be based more on uh liquidity and the price of the options and it wouldn't be based on any firm view on exactly when Bitcoin is going to crash. I do want to ask you about uh the Fed because you know just last week um the markets didn't like this, the stock market didn't like this, but it's pretty much a tossup as to whether or not the Fed will cut in December. So more of my question for you is how are you thinking about the Fed and does the Fed's like rate policy really matter? Does it matter? Yeah, I think similar to Buffett, I don't try to predict uh what the Fed is going to do in the short term. I'm just looking for undervalued investments and and holding and holding them for the long term. But I agree, investors, they're super focused on the questions about what the Fed is going to do. But I don't think it really matters in the long term, regardless of what the Fed does. US equities are a bubble and over the long term the gold miners we're invested in look very undervalued. I think ultimately we're heading for this stagflation on steroids scenario and the Fed is going to be trapped and it's going to lose control of interest rates. It's similar to what we talked about last time with with fiscal dominance where once the debt crisis starts, if the Fed tries to cut interest rates, inflation is is going to go higher. If the Fed hikes interest rates, then that's going to raise borrowing costs for the government and make the debt crisis even worse and also increase inflation. If the Fed tries to implement QE during a inflation crisis, that's going to lead to higher interest rates actually and higher inflation because investors will perceive it as the government stuffing bonds into the central bank because the government is afraid to sell them to investors. And so that's why Kiwi uh stops working during a debt crisis. And that's why countries like Brazil and and Turkey haven't been able to implement uh QE in in recent years. But I think investors, they've become like junkies, kind of addicted to government bailouts through the Fed's rate cuts. And during this ne during the next recession, we're not going to get a a Fed bailout through big rate cuts. We're probably going to get increasing interest rates and unfortunately that's probably going to decimate a lot of investors and so I think the the Fed is going to be one of the sources of the next crisis, not the savior like it usually is. >> Yeah. And that's kind of like that doom loop you were referencing earlier. I know we only have a little bit of time left. Um, I heard that David Swinson was an adviser of yours while you were at Yale and um, of course, uh, the late David Swinson, he was the CIO of the Yale Endowment Fund. I was wondering if you might be able to share like some lessons or anything that you learned from, um, from him. >> Yeah. Uh, that's a great question. David Swenson was perhaps the the greatest endowment ever, endowment manager ever, one of the best institutional investors uh ever. And there there's so many uh things I can say uh in response to that. He had such a big influence on my investment philosophy. One thing you know the first thing he taught us would he he I took his course and he was my senior essay adviser and one of the first things he taught us was nobody can predict the market in the short term. Nobody can predict exactly when recessions are going to happen. So it's much better to take a a long-term horizon uh long-term perspective. He was also very critical of funds that are paid just based on assets under management and just take a and therefore focus just on marketing and trying to keep their current clients rather than to earn um high returns for their clients. And so with my fund, I've tried to uh set things up differently. We don't charge a management fee, only a performance fee above a 6% hurdle rate. So I only do well if the client earns a high return. I only do well if the client does well. And Swenson was shifted the Yale endowments portfolio to more hedge fund style investments because the incentive uh alignment was much better there. Swinson is also famous for uh shifting uh the Yale to to private equity and to venture capital and to hedge funds because the the returns there seemed better than they were in in mutual funds due to better incentive alignment and less competitive markets and less illquid markets where there was more opportunities. But I think he would probably agree that the outlook now for venture capital and for private equity is is not good because those asset classes are although they've done very well over the last 40 years. They have they're essentially highly they're generally leveraged companies oftentimes lower quality companies that are riskier. They have a lot of exposure to the US stock market. They're dependent on the markets for financing and for selling assets. They're very illquid asset classes. And so if the US stock market falls more than 70%, I would expect those asset classes to fall even more than 70%. And so it's not surprising that we've seen endowments like Yale and Harvard reducing their exposure to private assets. Um but uh but yeah, that I think those are some some good points. >> Before I let you go, Brian, um what is something that is keeping you up at night these days? Um that's been on your mind, that risk for you, and then to counter that, what is something that's making you optimistic or hopeful? Yeah, I think for my fund a lot of the things that worry most investors should actually be good for gold. So I think the thing I don't worry as much about an invasion of Taiwan or a terrorist attack or a stock market crash or a recession or more tariffs or another pandemic. Those should generally be positive for gold. But a sustained gold price decline that could certainly cause a temporary decline in the fund's portfolio. I think as we talked about the the valuations of the portfolio are are low. So we may not the our investments may not decline much if that were to happen. And I think we're headed for the crisis for a crisis soon and which should send gold higher as we talked about. But as far as what I'm optimistic about, you know, I've been traveling outside the US some this year and there's still so many people that say it's their dream to live and work in the US. And so I've been talking about a lot of challenges that the US faces now. But I still think it's a better economic and political system than in many other places. And so when stock market valuations improve, when currency valuations improve, when real estate valuations improve, I think the US should be a a very good opportunity. >> And where can folks find you um learn more about the work that you're doing at Hershman Capital and any parting thoughts for this audience? The floor is all yours. >> Yeah, sure. So, thanks again for having me. I I manage a fund that even though it's been called the world's most bearish hedge fund, we've outperformed the S&P 500 over the last 11 years, very taxefficient and as I mentioned, very good incentive alignment. And my fund's website is hcap.lc and I'm available on Twitter uh at hcapl. So, thanks again for having me. >> Brian Hirschman, managing partner of Hman Capital. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. I really, really appreciate you and I look forward to our next conversation. Thanks again, Brian. >> My pleasure. Thank you.