The 91-Year Debasement Trade: Why $4,600 Gold is Just the Beginning – James Grant
Summary
Market Outlook: Inflation pressures and heavy Treasury issuance are pushing long-dated yields higher, with the bond market increasingly signaling fiscal strain.
Private Credit: Significant risks highlighted in illiquid private loans, including covenant erosion, aggressive leverage, and questionable marks, suggesting a late-cycle credit reckoning.
Life Insurers: Life insurance companies owned by private equity are a focal point of concern as capital is pulled down and portfolios tilt toward higher-yield private credit.
AI Infrastructure: A potential overbuild in data centers and AI-related capex echoes past tech cycles where bubbles preceded use cases, even as leaders like Apple and Meta remain profitable.
Validation and Marks: References to Ares Management, Blackstone, and Blue Owl underscore concerns that internal scorecards and non-traded marks may mask true credit risk.
Gold: Framed as a multi-generational debasement hedge with recent bubble-like behavior, gold’s appeal includes its role outside politicized monetary systems and growing central bank interest.
Silver: Despite industrial demand from photovoltaics, price action is driven more by investment/speculative flows, making outcomes highly cyclical and sensitive to dollar liquidity.
Global Liquidity: The financial system’s dependence on accommodation collides with sticky inflation, constraining the Fed and raising pressure on leveraged balance sheets if rates stay elevated.
Transcript
Welcome back. I'm Jeremy Saffron. As we head into the weekend, the data crossing the wire is forcing the bond market's hand. According to the Commerce Department, the PCE price index, the Fed's preferred inflation gauge rose about 3.5% year-over-year. And that is colliding with a bond market already under pressure. 30-year Treasury yield back near the 5% mark. And at the same time, Q1 GDP came in at about just 2%. That growth was heavily supported by business investments tied to equipment, to software, and of course the AI buildout while the consumer savings rate fell to its lowest level since late 2022. Now, to set us up for the week ahead, uh we got lots to talk about, we're joined by James Grant, founder and editor of the Grants Invest and Interest Rate Observer. Jim, always great to have you back on Kicko News. Thanks for making the time. >> Thank you, Jerry. Nice to be here. Uh, I want to talk a little bit about this collision happening right now between inflation, debt, and the bond market because we just got another warning from the factory floor. Prices paid are spiking again. And at the same time, US public debt is sitting at a record level. 100% of GDP now. The 30-year Treasury yields back near 5%. So, so let me put this directly. When input costs are rising again and Washington is carrying this much debt, is the bond market starting to to price in fiscal dominance? The idea that the Fed can talk tough on inflation, but the Treasury interest bill increasingly limits what monetary policy can actually do here. >> Yes. Well, that is a fine essay worth of a question, Jeremy. I'm sure I can do it justice, but certainly the uh the bond market is under pressure as it ought to be. um uh there is a uh a great supply of debt >> and I think a rather measured demand for debt at these levels and um you know it's not just um uh the public debt that is uh uh clogging a little bit the arteries of our credit market there's also uh debt formation and the private sphere I'm having uh thinking particularly of a so-called private credit which is a a very fancy name for illquid debt. >> Um uh uh you know I I at France we have a way of thinking about this and what we think is that the uh where interest rates have been is almost as important as where they are going. We don't know of course where they're going uh but where they have where they have been we we have a we have an exact idea of that. And they were low enough in 2020 and 21 uh to have instigated a great deal of lending and borrowing at rates of interest that uh had never before really been seen uh so close to zero were they and uh these debts are weighing on the credit markets. They are in they are heightening credit risk in many of the transactions that were consummated in those near 0% rate users. So it is all rather a light show and good for >> journalists like myself and not so good I think for the holders of debt at the wrong prices including Germany the Federal Reserve which owns a great deal of the Treasury's finest at rates that uh perhaps it wishes it hadn't bought at >> Jim stay on this point for a second because you know in private credit and liquid debt is the real issue not just where rates are going but you know you you talked about the fact that so many loans were originated in a world where money was essentially free. I mean, how much of the risk is already embedded from the underwriting assumptions of 2020 2021? >> Well, it's no secret that much of this debt is uh was consummated at uh at rates that uh were unusual, if not unique. That's that's certainly open secret. Um but what uh we think is that u uh where this debt is housed is going to be increasingly a point of worry and contention. And we have been focused for several years now on uh life insurance companies especially those companies uh uh owned by private equity promoters. And uh what happens when the typical life company falls into the hands of a private equity group is two things. One is uh uh uh on average as a tendency not in every single case with a strong tendency is for uh capital to be reduced >> and uh that's number one and secondly is for uh the investment portfolio uh to be reconfigured to emphasize high yielding corporate claims that we know as private credit. So credit quality weakens as uh as u leverage increases. And we think that um uh if all goes badly with respect to credit risk and the uh and the business cycle that uh uh life insurance will provide um a focal point of worry and for the holders of life policies and annuities it will become an a severe po point of concern and worry. Yeah, >> that is our outlook on private credit. It's, you know, not all it's bad, but uh but you know, it was created as a workaround uh for bank regulations that styi bank lending to uh private equity uh uh promotions and um so you know that it was it was created to lend to heavily leveraged borrowers. That's an illegal, but it it could be unwise if done at uh to the extreme. >> Yeah. Yeah. I mean, you know, the the the insurance industry would would argue kind of to your point, this is exactly what they were built for. Long duration liabilities kind of matched against long duration assets with no need to sell into the market, you know, the daily market volatility, I suppose. But here's the question. I mean, what breaks that model? Is it policyholder withdrawals? Is it, you know, rating agency pressure? mark tomarket event or is it simply maybe the need to refinance underlying borrowers at a at much higher rates here? >> Yes, I think all those things, Jeremy. >> Yeah. >> Um >> interesting. You can't you can't tell what the uh what the crystallizing of force is going to be >> but there are enough possibilities to I think uh uh to make us all to to adv to to make it um uh this a place to focus our ration of worry. We can't worry about everything in the world, but you have to you have to got to pick your spots and we have pick the life insurance business as it is managed by private equity companies as that prime point of credit worry. >> Yeah. And I mean we can stay on the theme of private credit because last year on this show you warned us about the inherent risks of these loans. This week, of course, giants like Airs, Blackstone, Blue Owl used internal scorecards to reassure investors that their software borrowers were insulated from that AI disruption. But I mean, these are untraded loans often marked by the same managers who own them. So, I mean, the question, how much confidence should investors have in those marks? um limited confidence and uh there is some there are methods of testing the mark. Some securities are owned uh in public uh portfolios in fact business development companies that are publicly traded. So uh uh some analysts have gone through and and and checked the the public marks against those carried u in the private um in private structures and they often do not coincide. M >> um uh so you know yeah it's it's you um recall that the era of the 2000 2001 2002 and onward a little bit has been a time of minimal if minimal u rigor in the uh in the fine print that defines the the bond indentures and loan indentures. uh the customary uh precaution customary uh defenses uh that were um uh that were built into those legal documents have been largely stripped away not be because of nothing else but competition to lend. >> Mhm. >> It was quite intense especially when interest rates were near zero. So there has been a a general relaxation of covenant protection. And there's been a le a general rise in leverage and there has been a general um degradation in the quality of these loans and these bonds. So you know credit is forever cyclical. >> Yeah. And it would be a small miracle in the history of finance if the current cycle did not end in a crisis of uh of non-payment of um of of of poor recoveries of defaulted debt. And um this is the way the world works and and it's that the world will wag on after that is ended and chasened lenders will say nope nope not going to lend anymore. And presently the crisis and memories thereof will pass and we'll be on to a new cycle. >> Yeah. >> But for now what lies ahead of us I think is the culmination of a cycle rather than anything resembling a new beginning of a cycle. >> That's an interesting point. I mean you know we could bring up LME. We're seeing a surge in liability management exercises where distress companies shift collateral to avoid a technical default. Um, we've talked about this before. Everyone at home wants to know when is this going to happen? When is this going to happen? Uh, my question to you is more of a are we looking at a true credit cycle or or a credit cycle that's, you know, being delayed by lawyers, private marks, the amend and extend deals. uh the the the the number of uh so-called liability management exercises seemingly has peaked. >> Mhm. >> And um uh extending and pretending is not necessarily uh the optimal solution for the holder for a senior lender. I saw something scroll by on the wires. an informed piece speculated that uh now and again perhaps increasingly now uh that uh a lender is advised better advised to take the keys and to run the business rather than to postponing a day of reckoning um uh and allowing the business to run down and to deplete its capital. So I I I I to be sure there have been a number of u of institutional developments that have delayed uh the recognition of losses. Uh but nobody is ever eager to recognize losses and that is just in the nature of the human wiring. Uh so this is a cycle I think like most others and it will end as most others do and a um uh gale of fear and of contrition and of uh and of liquidation and people will finally come to terms with the marks that are rather than those that uh would be if only we didn't look. >> Yeah. >> And um you know it's it's just it's the way it is. Jeremy, always has been, always will be. >> We've seen it in history before. Uh it's why we have you on the show, sir. Um Okay. Let's uh let's talk a little bit. I mean, you brought up >> note of agism in that remark, Jeremy. I don't mind. By the way, >> we uh you know, we brought up you brought up capex there just briefly, and I wanted to kind of look at the the broader economy because business investment tied to equipment and AI is is acting essentially as the primary engine for Q1 GDP. But but the personal savings rate just dropped to a multi-year low. I mean, how does a massive corporate capex boom resolve when the end consumer is simultaneously exhausting their savings? Well, I think we have to look beyond quarterly data for longer term trends and the uh I think the um consumption and savings data um are not necessarily dispositive for what lies ahead with respect to um all this massive data center buildout. I think that perhaps another question another way of looking at it is say is the in the history of techn let me start with a premise um I would say that in the history of technological innovation um uh the bubble precedes the use case. So uh in uh in 1996 97 98 99 um um uh there was nothing wrong with the um uh with the uh projections of uh of significant change in the way the world would work in in a time of very cheap fiber optic cable and collapsing cost of computation. And the thing that was a it was it was as right as rain. That was exactly what lay before us. But what lay immediately before us uh was the runup in structures that were built to capitalize on that excitement rather than ever to earn a profit. >> And uh it was it was kind of ever thus. Uh as with credit cycles, there's a long history to this. uh railroads. We can go back to the railroad cycles of the 19th century. For a contrary um look, you can check the uh the evolution of air conditioning in the 50s. You know, it was that was there. That was a transformative product. It changed human migration patterns. It uh gave us a 12month congress. Wasn't that a innovation? Washington was uninhabitable before before the advent of air conditioning. Now we have it and the lawmakers can make laws 12 months out of the year. I those that's what they call in the trade Jeremy a mixed blessing. >> Yeah. >> But there was but uh uh there was there was nothing in the way of a of a boom in the companies like Carrier um pioneers in air conditioning. They really traded in the mid-50s at very low multiples of price to earnings. So I I I I think that um uh that exception is notable for being exception. I think that the that the the cyclical rule is that um is that uh bubble precedes adaptation. >> Yeah. >> And I would say that on that form we are looking at overinvestment in in data centers. We are looking at uh at too much buildout. we are looking at rather too much borrowing and we are looking at the prospect for uh credit difficulties um for these borrowers which in the past I'm thinking now of Facebook/Meta which has been remarkable for its business model which had nothing to do with borrowing and credit risk and um overindulgence and debt everything to do with the extraordinary leverage operating leverage of that business. So the world is changing in ways uh both that are promising with respect to the um the final day of the use cases of these marvelous uh items of ingenuity and invention and uh that that will be perhaps transformative just as the uh as the u prophets promise us. But in the meantime, we have humanity u uh doing what it always does in the presence of great hope and easy money. >> Yeah. >> And what money does in those circumstances to is to uh is to have self speculation. >> Uh interesting. I mean, you know, that that's the the historical pattern, right? The bubble the bubble often comes before the the use case. Um, so I guess that you know the technology can be real, the productivity change can be real and and the projections can even be directionally right, but the securities created to capitalize on that excitement still gets wildly overbuilt. Um, you know, some people would write me and say the push back is it it's not 1999. The biggest AI spenders today are highly profitable companies with real cash flow, not speculative startups burning IPO money. But when you look at past cycles, canals, railroads, radio, I guess, autos, the internet, did investors usually get the technology right be but but the timing and the valuation wrong. >> Well, I am thinking now to my years as a trainee when the automobile was coming into existence. >> Jeremy, that was meant to be. Make a smile at that, Jeremy. Please. >> Hey, I was trying to keep it professional there. Yeah. But the uh the turn of the the 20th century there were dozens of automakers. I guess not all of them succeeded. Of course. >> Um uh so I I I I think this is uh I I I do take the point >> that the Apples and the Metas and uh the others that are in the vanguard of this buildout are many of them uh worldclass profitably profitable companies. But um uh just because you begin with a pristine pristine credit record doesn't mean you end with one. >> Yeah. >> And the uh the dollars that are being tossed around the bills are quite extraordinary. And we'll see. Uh but uh the bond market I think is beginning to express its concern. I think the banks also are beginning to become more reluctant to lend on terms they had been lending in. Uh so I I I I believe that we are uh looking at a time of speculate excess that will give way to uh remorse and ironically enough uh the vindication of the u of the optimists who foresaw what will turn out to be a step forward and in u in uh human condition thanks to these inventions. So, I mean, you know, the the danger may not be that AI is fake. The danger is that Wall Street builds too many claims on on real technology before the profits are actually there. >> Yeah. >> The danger is that human beings just will not do what they're supposed to do, J. They ought to buy low and sell high, do they? No. >> Never. Someone's always caught carrying that bag. E um I want to bring into the the the larger markets. I mean, we got to talk about global liquidity. factor in global currency markets because uh I was reading I mean according to Bloomberg this morning the US dollar index just wrapped its worst month since June falling about 1.8%. Um if the dollar loses its high yielding status relative to global peers how quickly does that begin to drain liquidity from US financial assets? >> That's another big question. Good question but a very large one. I'm not sure that uh um my friend Trey Reich is very good on this. He points out that uh uh the Fed in December uh cut its funds rate by a quarter percent in the face of record high stock prices and uh you know record high levels of money supply and and in general an environment that uh seemed not to beg for easing liquidity and um his view and I share that view is that the uh uh uh our financialized world is highly dependent upon credit creation highly dependent upon the combinator Federal Reserve and uh this gets back to the structures the balance sheet structures that were created during the uh the levitating periods of the early 2020s. So the world needs liquidity and it needs accommodation um to satisfy uh the fixed char the payment of the fixed charges on the balance sheets of companies that did too much when they should not have done any borrowing net. Um so uh yeah the world needs liquidity. Will it get it at a time of rising uh production cost the factory gate times of I see the President Trump is raising tariffs on European auto imports as of today. Um uh we know about energy prices. We know about a little bit about the rising gently rising rate of money supply growth. So I I think that the inflation outlook is going to make it difficult for the Fed to supply the liquidity that the world wants and in some cases sorely needs >> needs. Yeah, >> that is what uh is a great question for the next few months. What what will the Fed be able to do? Will they be able to uh you know we had a cartoon on page one of Grants and the cartoon showed a certain person uh sitting at a conference table in a Senate hearing room. He looked for all the world by Kevin War. I can't be certain about that. He was he was saying in the following he said of course we can raise interest rates. Hold on a second. I I have to take this call. And um uh I presume that the call was from uh the White House. And um uh so we know that uh that imminently chairman Walsh wants to cut rates and uh we know who wants him to cut rates and we know uh points in the financial markets and uh institutions within the markets that need lower rates. But the question before the house is will they be able to get them given the trends in inflation and given the u uh the uh uh uh the the small but suggestive back up in the bond longer dated uh portion of the bond yield curve. >> Those are the questions. >> Yeah, it's an interest one because I mean if the White House wants lower rates and the bond market wants compensation for inflation and deficits, I mean who wins? the Fed, the Treasury, the the long bond. >> My money's in the bond market. >> Yeah. Yeah. Yeah. Interesting. Um, you know, you brought up those, we should get to that. It just came out over the wire, but yeah, the US wants to hike tariff rates on EU autoimp imports to 25%. The president says, um, this is relevant right now because at the same time, the ECB and the Bank of England are signaling rate hikes to combat their own energy inflation. Um, will will higher European yields force the Federal Reserve's hand to raise rates just to defend the dollar? >> No, it will not force it, but it will be one more item on the unwanted agenda of reasons not to do what the president wants the chairman to do. >> Jim, I want to bring this back home to hard assets for our Kicko audience. Uh, you emailed me. >> I was waiting for this. >> You were waiting for it. Well, this was too spicy. The Fed I I had a lot to get to. Plus, I've been away. Um, you emailed me a piece that you wrote last October titled the 911-year debasement trade. You pointed out that this multigenerational trade began in 1934 when the gold dollar was reweed and and you quoted Bernard Baroo's warning about unbalanced budgets. I mean, gold's holding above $4,500 today. Are we simply watching the continuation of that exact trade foresaw in the 1930s? Well, it's not exactly a trade, is it? That was the headline. That's my word, the headline. But it was I I always look at gold not as a trade or as a as a speculation to be sure. It can be that. >> Mhm. uh but I look on as a long-term investment in um in the tendencies of uh of paper currency used to uh uh to um uh lose their entire purchasing power 10 to zero. They have over the course of time all gone to zero sooner or later. Oftentimes it's later. So I I I so when you know gold goes to 5600 my goodness it went straight up and there's a you know um an eminent speculator I happened to uh be standing next to um in a fence some was he said I said I said I'm not going to name him but I said stamp is called a bubble and of course it's a bubble of course you know so can there be a bubble in something you like? Yeah it can be. Yeah. Yeah. >> Um and I think that uh uh that gold has exhibited some bubble-like tendencies in the past six or nine months. But uh to me uh the debasement trade trade uh investment is a multi-generational uh investment. And the thing to do is to sometimes not look to hold on. It's hard not to look. I mean >> Mhm. >> Um it was a long time before the gold you bought at $850 an ounce in 1980, January 1980 got back to that uh I think that was 2007 before it returned to that level. So, if you're going to be a long-term investor in the debasement of the dollar and of paper currency, generally, it pays to get a little bit of exercise to well get to bed early, you know, and see the doctor once in a while. So, so you're talking about uh human longevity and patience, maybe saintly patience as well as monetary tendencies. But when I get impatient, as I suppose some of your viewers might share this with me about gold not being up ought to be up, I I try to step back and say, well, you know, it's a uh the dynamics of a social democracy to to quote the the great uh Bill Fleenstein, the dynamics of a social democracy are intact and um all roads seem to be leading to inflation. uh these roads are leading to it. We don't know how long they are and we don't know how winding they are. Uh but to me that is a story of gold which is an investment in the tendency of the political arrangements on offer today in place today and uh so that's it Jarrett that's my story. So, I mean, so, so gold can be both things at once. A valid kind of monetary hedge over generations and still vulnerable to bubble-like behavior over months. >> Yes. Yeah. It's a >> it's there's a there was a there's a a book uh that came out in the 70s that was called the um the golden constant very scholarly book. I'll think of the author as soon as we're off the air. Um the golden constant uh uh documented the tendency of the purchasing power of gold uh to remain more or less steady over the course of hundreds of years and millennia. And so it's a little bit funny when you think about the golden constant to watch the price action in gold for the past six or nine months. My goodness. uh anything but constant and silver of course there's a companion book called silver the restless metal which is a nice euphemism for the for the explosive volatility of silver >> you know I want to stay on silver because you got people's ears we haven't talked about it for a moment and and you and I were chatting about this in the last time you were on the show I went back I reviewed the tape you noted previously that silver is trading on a genuine supply deficit too I mean just to put some data behind And that demand we know that photovoltaic sector alone is consuming hundreds of millions of ounces of silver annually right now completely independent on you know of the monetary side. Um I guess the question would be on the macro if if if the global manufacturing sector slows due to these higher energy costs does the industrial demand floor fall out or or does the monetary demand take over? >> Yes Jeremy. >> Yeah. All of them. All of the above. >> I don't know. I don't know. But the way you pose the question is exactly the right way to pose. That's always been the case with silver, right? There's a there are competing demands. If the the world is going to heck in a hand basket show, it's going to heck in a hand basket. >> Uh there will be a monetary demand. However, uh the uh uh the industrial demand will fade. But you know, these these metals I think are um uh they depend on investment demand. is the the uh the so-called industrial demand for silver. The so-called the industrial demand for silver is less important than um speculative demand for silver. The jewelry demand for gold is less important than the speculative or the investment demand for gold. So what you want if you are a uh a speculator on the long side in the metals, what you want of course is a collapsing dollar exchange rate. That's it. You want the bad things. >> Yeah. Yeah, >> you don't want to admit you want them, especially the mixed companies, but u that's that's what makes the mayor go. >> You know, in in that same piece that you emailed this morning, you touched on the weaponization of finance, contrasting the seizure of Iranian assets in 1979 to to the Russian assets today, noting Chancellor M's suggestion to use those funds to arm Kiev. We've talked about it before and certainly on this show, but is this shift toward weaponized finance um and the sheer architecture of of financial surveillance kind of driving institutions into gold just as much as the debt load is? >> No, not just as much, but it is one incremental source of demand, I think. >> Right. >> Um you know, um uh the president the way he ends all his emails, thank you for your attention to this matter. It it can't be purely coincidental. That was the way JP Morgan I think signed off on a a letter inviting him to get another bank. Thank you for attention. So So the Trump administration has done uh I think Yman's work in discouraging uh fiduciary institutions from uh uh discriminating on the basis of express political or monetary views. uh but certainly internationally the uh the uh the weaponization of currencies is a is a is is is one driver of demand for nond dollar assets or non- euro assets to be sure >> how do you put your head down and and not look at the daily price action on these things you know you see that swing 4600 I mean still stable base under 400 but to your point telling yourself to just >> I amant I am a hardened um uh student of the uh the Peanuts cartoons in which Lucy is holding the football for the ever hopeful and just a little bit gullible Charlie Brown. And does she ever not pull it away? Nope. She never does not pull it away. And that has been the story to a great extent with the episodic rises and pullbacks in uh we stick to gold for the moment uh since uh since January of 1980. Um not everyone is is wired to wait 20 years for the next validation of the depreciation of the currency thesis. So this gets us back to um uh to uh patience and conviction. I I think there are a lot of uh of people involved in the gold trade who had no idea what they were doing except that they knew what was going up was going up. >> Mhm. >> And uh uh it would not So you mentioned Jeremy that the gold is holding at 4500 or above right until it doesn't hold at 4500 or above. I have is there's a a a wonderful uh quotation from a former royal astron astronomer of Great Britain and um with respect to one scientific proposition he said I wouldn't bet my life on it but I would bet my dog's life and that's in a country that's a dog loving country so that that is the I think u That is perhaps a level of conviction a lot of our friends and I dare say not a few of us within shouting distance of this broadcast that um you just know in your heart and in your bones that uh this world of ours is built to inflate the monetary arrangements are inflation bound and built. >> Yeah. >> The politics witness the public debt are inflationary inherent way. Um, and you know these trends are colliding and you know what the end result will be, which is a monetary crisis that will decapitate even the great world reserve currency. All of this is written in the book of the future. We know it. >> But do we know it every day? Do we know it when you've had the worst month of your life speculating in gold when it's down uh x number of hundreds of dollars per ounce? No. You know it a little bit then, but you don't really know it in your bones the way you did when gold's on its way to 5600. So all I'm doing is is reciting the truisms of human interaction with speculative assets. It is forever a test of will and conviction uh and of resources, emotional, intellectual and what have you. So uh it's why the journalism is sometimes a better business journ than speculation. >> Yeah. Hey, and it's why we're here. Um, you know, and you brought up a good point. I mean, is that part of gold's appeal, right? Not just the inflation protection, but ownership outside of a financial system where access sometimes looks to be conditional. Um, you know, Jim, as we I would like to say a word about that. >> Yeah. And this is a I want everyone who is not in a position to hear a politically incorrect lie to log off for just about 30 seconds. >> Okay. Okay. So here is what a man named Leingwell who was a partner of JP Morgan his dates were about 1880 to 1950 or 60. Russell maybe what he said uh around the time of the Roosevelt uh calling in of gold 1932 or 33 he said that said love but he said the love of gold is inherent in man he loves it as he does land and women >> and the more you try to take it away from him the more he loves it that was approximately 11 wells quote and Um there is there is something to there's something there's something about gold that is eternal. Of course it's literally eternal, right? You can't destroy it. That's well that >> uh bulls will lament that fact during bare markets. But the uh the fact that this coin you own can have been a part of uh of the filling in Cleopatra's mer lends a great mystery to it. It lends in addition to the monetary track record of this metal lends the history of the of the coinage of gold lends to all this romance and all of the monetary theory and the monetary history and the and the and the contributions to the stability of currency. It's the institution of of convertible currencies has contri to all this. There's there's it it uh it it it it is not purely an intellectual operation >> forming a romantic attachment to the precious metals. It's not purely analytical, not purely historical. There's something mystical and romantic about it. And that I think accounts for some of the volatility. It accounts for some of the heartbreak. My goodness. I think we've all known people and certainly I have who were just emotionally and in some cases more than emotionally destroyed by what happened in 2008 >> when everything the bears on the world of credit were saying came to pass and gold gold price broke badly and the gold mining stocks broke even worse you know in preparation for the rally that was to follow with the Fed's response to the crisis of 2008 and indeed of early 2009, but yeah, it is is it is uh I I I um I keep on repeating myself, Jeremy, which I promise never to do it again on this program. >> Don't worry, my friend. Hey, listen. I mean, the I guess the nostalgia modern e economists should talk about that nostalgia, you know, the fact that >> Well, they think they they they observe and not Iraq. They say they what they mean to say is that u on its face it's anacronistic. >> Yeah. >> Everything everything in the world of money and credit is going to the intangible everything but uh this tokenization business the decentralized finance. So everything will be on the worldwide uh on on not one bitcoin. There are hundreds of them. But we are meant to believe that uh uh that uh uh that uh that that physical objects um will go the way of um of of of bearer bonds and stock certificates >> and and and to be sure I mean I whatever the the the depository trust company process is a year is measured in stocks and deposits measured in the quadrillions of dollars. What happens beyond trillion? Quadrillion. So the DTCC DTCC annual report quotes these astounding volumes of transactions and stocks and bonds and derivatives, none of which would be possible if except for the digitalization of the representation of these values. Um, and so why should there be something like a gold stand? Why should why should gold have a place in the monetary world given their irrepressible drive towards um uh towards um digitization? Well, because it turns out uh that the uh that the very physical properties of gold are what commends it uh to those positions, those people in the position of stewardship, monetary stewardship, who now have made gold um uh the second most widely held reserve asset just behind it's behind the treasury or ahead of the treasury. I don't know, but gold is making a comeback in the vaults of the central banks of all places. And I dare say it's making a comeback in the vaults of individuals principally in Asia but certainly to be sure in Europe and America as well. There's something about Matthew McClennon who runs u a marvelous international fund. I say marvelous because it's but not just because I like the portfolio management because it's done well. But he says that that gold is his monetary base which I like that it's 10% gold monetary base. >> So that's the way I look at it as well. it's the monetary base and my modern portfolio >> and to your point I mean you were talking about that I mean that whole nostalgia you know the modern economist it's not money it earns no yield and you know it has no cash flow government's no longer >> but that is cash that that's the nature of cash the cash to pay a yield that's what makes gold uh not a credit instrument it makes it money and uh uh so you know money is not a so the way it The word cash once was meant gold meant gold species was the word when it so cash was money itself uh uh the paper claims on cash whether they be bills of exchange or currencies issued by central banks those were credit instruments they still are >> you look at a dollar bill it says promise to pay that's that's not it's not money it's it's a promise so all of this is the language is absolely lead a little bit, but it's it's the ancient language of of of credit institutions. But what makes gold uh money is that uh it's nobody's counterpart. You always got it has to hold up his or her end of the bargain to make it pay. >> Yeah. >> So, I interrupted you when you're about to say the same thing, Jeremy. >> No, I I was going to say kind of very similar. I was just going to ask you. I mean, we could put it. Is gold's real power that it kind of sits outside of politics or is that exactly why politicians have historically tried to control it? >> Once again, Jeremy, the answer to those every every question you ask, the answer is yes. I mean, so Donald Trump is all about gold, right? Everything he owns is is gilded. Whether it's a ballroom or his bedroom, I guess I have never been in his bedroom. I suppose it's gilded. Um but here is a man who let us call him headstrong and uh the whole the whole point of a gold standard is to uh is to remove um the institution of money from the hands of the politicians and and put it four for square into the in the marketplace. And um in all the history of gold standards and near gold standards that state of perfection was rarely ever attained. Now somehow money is always a little bit political. >> But you know the reason that that so why doesn't the Federal Reserve own a single ounce of gold? There's a widespread misconception that the little piddling inst item on its balance sheet line item says gold certificates. It's nothing but a piece of paper that says gold certificate. It's not gold. They don't own any gold. It wouldn't own gold because the Federal Reserve is ideologically um opposed to it. regards it as abhorrent, worse than anacronistic. It it it uh it would threaten. That's why Oh, that is why um when Judy Shelton was nominated to position in the Federal Reserve Board, that was why they um the uh Federal Reserve Board, it seems to me uh uh gave every sign of mounting uh an informal but still persistent opposition to her candidacy to the relevant sentence on the relevant committee. She was regarded as uh never mind the um barbarians at the gate as they used to say about the LBO movement of the 80s. She was to have been the intellectual barbarian within the PhD standard with the halls of the doctors of economics. So the Fed regards gold as a as a uh existential threat. >> Right. And um um my friend Alex Pollock kind of playfully asked why hasn't the Fed own any gold? You know the ECB does National Bank does u uh why doesn't the Fed own any gold? And the reason is it seems to me is that it wants to it gets back to something that uh that Bill Simon uh champions point of view Bill Simon champion during the 70s. He was a fabulously successful businessman at Solid Brothers and private equity and uh but as a treasury secretary and as a free markets guy he was ideologically he was scornful of gold merely as an anacri regard as a rock. He he had a kind of a a Bitcoiner's uh preview a preview Bitcoiner a preview of a Bitcoiner's view of gold which was to uh uh castigated as a worthless uh uh you know piece of rubble. Um so that has been that's been the prevailing view at the US government since uh certainly since the uh the early 70s when gold was written out of Brett Woods uh doctrine doctor documents and because I'm beginning to stammer Jeremy I think I must go away now. >> No you're you're on to something and you brought up Judy Shelton. Of course we'll have her on the program. Um, you know, we can wrap up here, Jim, but I mean, this is interesting because in so many ways because I mean, you know, again, the Federal Reserve does not own gold. I under the Gold Reserve Act of 1934, the Fed transferred its gold to the Treasury, received those gold certificates, but that certificate is not redeemable for gold. So, if President Trump likes gold, um, Judy Shelton's nomination was rejected in part because of her sound money views, threatened the monetary orthodoxy. I mean, it tells us a lot about Washington's real relationship with gold. But let's leave it on this. I mean, is the is the issue that gold is tolerated as an asset, but not as a monetary constraint? In other words, Washington can like gold at the margin, but but the Fed cannot embrace it because gold would put it put a hard limit on discretion. >> Correct. Yeah. That's that that's the essential raic against the gold standard is that it uh >> it removes the uh uh uh the uh the judgment calls that it it takes the uh uh you know there this kind of mutual fund that's called unconstrained right it's uh so that the the portfolio manager can do whatever he wants to in whatever market he feels like in whatever quarter of the world that strikes his fancy and um There is an unconstrained element as well in our monetary arrangements. Not quite literally unconstrained because the bond market has a say, stock market has a say, currency markets certainly have a say, but the uh the freedom of action to operate in the world uh under the present arrangements, the fiat currency arrangements that that's a lot of latitude. Uh the Fed for example has declared that 2% inflation is what we need and what we must have. Who said on whose authority is that? Well, it's on the Fed's authority and other central banks share in this view. But it's a view that the the doctors of economics pulled out of their um they wore hats and pull them out of their hat. I don't but but they they they essentially they made this up. And uh so we we have this this this this incon this this this peculiar paradox in this time of so-called affordability crisis. That's what our politics are supposed to be about. And yet simultaneously we have the Fed uh seeking a rate of inflation of 2% positive 2%. What? Nobody as No, nobody asks Jerome Powell at these press conferences after the after he holds forth the FOMC meeting days. Uh, Mr. Chairman, why does the Fed continue to instigate Fed to instigate inflation at a time when inflation is the seemingly the decisive uh issue of our politics? Doesn't that seem strange? Can can you help us explain that? Uh but nobody asks. >> Yeah. Yeah. >> And Grants has never been invited. >> You believe that chair? >> Not yet. Well, I mean, you know, I mean, maybe he's staying, maybe he's not. I maybe maybe he'll have another one, maybe we won't. Um listen, we we've covered a lot here today. private credit, the O opaque markets, the AI investment boom, the long bond near 5%, gold's move a little bit on tokenization, and I guess the question of whether pol policy makers can still control the system that they created, Jim. So, I mean, for investors looking out the next several months before you and I chat again, what is maybe one signal you'd watch most closely to know whether this cycle is still kind of holding together or starting to break? So well we are officially I I read it on our mast head every two weeks we are interest rate observers. >> Yeah. >> So I'm going to say that the bond market is the uh is the place is one of the places to watch um you can watch all you like. I'm not sure what good is going to come of it. However, um if the uh if the bond market begins to believe that inflation is subtractable and that um and that um uh the new Federal Reserve with its new composition will be unable to put over the president's agenda of a lower federal funds rate. Uh that will squeeze uh leverage balance sheets. world it will put pressure on on on private equity and on credit uh corporate credit generally and um that will be quite a situation. So I think inflation and the bond market's reaction to inflation will be part of the storyline of the next couple months >> perhaps more than that. Yeah. >> Yeah. Yeah. Certainly started to to bear its head since the last time we had you on the program. Uh James Grant, founder and editor of Grant's Interest Rate Observer. A wonderful note that all of our subscribers should go and and take a look at. Uh Jim, always appreciate the historical perspective, the credit discipline, and of course the clarity. Thanks for joining us at KCO. >> Oh, thank you Jeremy. Nice to be with you. >> I appreciate your time. Thanks so much. And for our viewers, it is critical to look beyond the headline numbers and track the underlying credit flows. If you're tired of the mainstream financial networks telling you everything is fine while inflation accelerates, you're in the right place. We follow the math, the history, the hard data, subscribe to Kitco News. Like this video. Let us know in the comments how you are positioning around rates, gold, and credit risk. I'm Jeremy Saffron. Thank you for watching. Enjoy your weekend. Heat. Heat.
The 91-Year Debasement Trade: Why $4,600 Gold is Just the Beginning – James Grant
Summary
Transcript
Welcome back. I'm Jeremy Saffron. As we head into the weekend, the data crossing the wire is forcing the bond market's hand. According to the Commerce Department, the PCE price index, the Fed's preferred inflation gauge rose about 3.5% year-over-year. And that is colliding with a bond market already under pressure. 30-year Treasury yield back near the 5% mark. And at the same time, Q1 GDP came in at about just 2%. That growth was heavily supported by business investments tied to equipment, to software, and of course the AI buildout while the consumer savings rate fell to its lowest level since late 2022. Now, to set us up for the week ahead, uh we got lots to talk about, we're joined by James Grant, founder and editor of the Grants Invest and Interest Rate Observer. Jim, always great to have you back on Kicko News. Thanks for making the time. >> Thank you, Jerry. Nice to be here. Uh, I want to talk a little bit about this collision happening right now between inflation, debt, and the bond market because we just got another warning from the factory floor. Prices paid are spiking again. And at the same time, US public debt is sitting at a record level. 100% of GDP now. The 30-year Treasury yields back near 5%. So, so let me put this directly. When input costs are rising again and Washington is carrying this much debt, is the bond market starting to to price in fiscal dominance? The idea that the Fed can talk tough on inflation, but the Treasury interest bill increasingly limits what monetary policy can actually do here. >> Yes. Well, that is a fine essay worth of a question, Jeremy. I'm sure I can do it justice, but certainly the uh the bond market is under pressure as it ought to be. um uh there is a uh a great supply of debt >> and I think a rather measured demand for debt at these levels and um you know it's not just um uh the public debt that is uh uh clogging a little bit the arteries of our credit market there's also uh debt formation and the private sphere I'm having uh thinking particularly of a so-called private credit which is a a very fancy name for illquid debt. >> Um uh uh you know I I at France we have a way of thinking about this and what we think is that the uh where interest rates have been is almost as important as where they are going. We don't know of course where they're going uh but where they have where they have been we we have a we have an exact idea of that. And they were low enough in 2020 and 21 uh to have instigated a great deal of lending and borrowing at rates of interest that uh had never before really been seen uh so close to zero were they and uh these debts are weighing on the credit markets. They are in they are heightening credit risk in many of the transactions that were consummated in those near 0% rate users. So it is all rather a light show and good for >> journalists like myself and not so good I think for the holders of debt at the wrong prices including Germany the Federal Reserve which owns a great deal of the Treasury's finest at rates that uh perhaps it wishes it hadn't bought at >> Jim stay on this point for a second because you know in private credit and liquid debt is the real issue not just where rates are going but you know you you talked about the fact that so many loans were originated in a world where money was essentially free. I mean, how much of the risk is already embedded from the underwriting assumptions of 2020 2021? >> Well, it's no secret that much of this debt is uh was consummated at uh at rates that uh were unusual, if not unique. That's that's certainly open secret. Um but what uh we think is that u uh where this debt is housed is going to be increasingly a point of worry and contention. And we have been focused for several years now on uh life insurance companies especially those companies uh uh owned by private equity promoters. And uh what happens when the typical life company falls into the hands of a private equity group is two things. One is uh uh uh on average as a tendency not in every single case with a strong tendency is for uh capital to be reduced >> and uh that's number one and secondly is for uh the investment portfolio uh to be reconfigured to emphasize high yielding corporate claims that we know as private credit. So credit quality weakens as uh as u leverage increases. And we think that um uh if all goes badly with respect to credit risk and the uh and the business cycle that uh uh life insurance will provide um a focal point of worry and for the holders of life policies and annuities it will become an a severe po point of concern and worry. Yeah, >> that is our outlook on private credit. It's, you know, not all it's bad, but uh but you know, it was created as a workaround uh for bank regulations that styi bank lending to uh private equity uh uh promotions and um so you know that it was it was created to lend to heavily leveraged borrowers. That's an illegal, but it it could be unwise if done at uh to the extreme. >> Yeah. Yeah. I mean, you know, the the the insurance industry would would argue kind of to your point, this is exactly what they were built for. Long duration liabilities kind of matched against long duration assets with no need to sell into the market, you know, the daily market volatility, I suppose. But here's the question. I mean, what breaks that model? Is it policyholder withdrawals? Is it, you know, rating agency pressure? mark tomarket event or is it simply maybe the need to refinance underlying borrowers at a at much higher rates here? >> Yes, I think all those things, Jeremy. >> Yeah. >> Um >> interesting. You can't you can't tell what the uh what the crystallizing of force is going to be >> but there are enough possibilities to I think uh uh to make us all to to adv to to make it um uh this a place to focus our ration of worry. We can't worry about everything in the world, but you have to you have to got to pick your spots and we have pick the life insurance business as it is managed by private equity companies as that prime point of credit worry. >> Yeah. And I mean we can stay on the theme of private credit because last year on this show you warned us about the inherent risks of these loans. This week, of course, giants like Airs, Blackstone, Blue Owl used internal scorecards to reassure investors that their software borrowers were insulated from that AI disruption. But I mean, these are untraded loans often marked by the same managers who own them. So, I mean, the question, how much confidence should investors have in those marks? um limited confidence and uh there is some there are methods of testing the mark. Some securities are owned uh in public uh portfolios in fact business development companies that are publicly traded. So uh uh some analysts have gone through and and and checked the the public marks against those carried u in the private um in private structures and they often do not coincide. M >> um uh so you know yeah it's it's you um recall that the era of the 2000 2001 2002 and onward a little bit has been a time of minimal if minimal u rigor in the uh in the fine print that defines the the bond indentures and loan indentures. uh the customary uh precaution customary uh defenses uh that were um uh that were built into those legal documents have been largely stripped away not be because of nothing else but competition to lend. >> Mhm. >> It was quite intense especially when interest rates were near zero. So there has been a a general relaxation of covenant protection. And there's been a le a general rise in leverage and there has been a general um degradation in the quality of these loans and these bonds. So you know credit is forever cyclical. >> Yeah. And it would be a small miracle in the history of finance if the current cycle did not end in a crisis of uh of non-payment of um of of of poor recoveries of defaulted debt. And um this is the way the world works and and it's that the world will wag on after that is ended and chasened lenders will say nope nope not going to lend anymore. And presently the crisis and memories thereof will pass and we'll be on to a new cycle. >> Yeah. >> But for now what lies ahead of us I think is the culmination of a cycle rather than anything resembling a new beginning of a cycle. >> That's an interesting point. I mean you know we could bring up LME. We're seeing a surge in liability management exercises where distress companies shift collateral to avoid a technical default. Um, we've talked about this before. Everyone at home wants to know when is this going to happen? When is this going to happen? Uh, my question to you is more of a are we looking at a true credit cycle or or a credit cycle that's, you know, being delayed by lawyers, private marks, the amend and extend deals. uh the the the the number of uh so-called liability management exercises seemingly has peaked. >> Mhm. >> And um uh extending and pretending is not necessarily uh the optimal solution for the holder for a senior lender. I saw something scroll by on the wires. an informed piece speculated that uh now and again perhaps increasingly now uh that uh a lender is advised better advised to take the keys and to run the business rather than to postponing a day of reckoning um uh and allowing the business to run down and to deplete its capital. So I I I I to be sure there have been a number of u of institutional developments that have delayed uh the recognition of losses. Uh but nobody is ever eager to recognize losses and that is just in the nature of the human wiring. Uh so this is a cycle I think like most others and it will end as most others do and a um uh gale of fear and of contrition and of uh and of liquidation and people will finally come to terms with the marks that are rather than those that uh would be if only we didn't look. >> Yeah. >> And um you know it's it's just it's the way it is. Jeremy, always has been, always will be. >> We've seen it in history before. Uh it's why we have you on the show, sir. Um Okay. Let's uh let's talk a little bit. I mean, you brought up >> note of agism in that remark, Jeremy. I don't mind. By the way, >> we uh you know, we brought up you brought up capex there just briefly, and I wanted to kind of look at the the broader economy because business investment tied to equipment and AI is is acting essentially as the primary engine for Q1 GDP. But but the personal savings rate just dropped to a multi-year low. I mean, how does a massive corporate capex boom resolve when the end consumer is simultaneously exhausting their savings? Well, I think we have to look beyond quarterly data for longer term trends and the uh I think the um consumption and savings data um are not necessarily dispositive for what lies ahead with respect to um all this massive data center buildout. I think that perhaps another question another way of looking at it is say is the in the history of techn let me start with a premise um I would say that in the history of technological innovation um uh the bubble precedes the use case. So uh in uh in 1996 97 98 99 um um uh there was nothing wrong with the um uh with the uh projections of uh of significant change in the way the world would work in in a time of very cheap fiber optic cable and collapsing cost of computation. And the thing that was a it was it was as right as rain. That was exactly what lay before us. But what lay immediately before us uh was the runup in structures that were built to capitalize on that excitement rather than ever to earn a profit. >> And uh it was it was kind of ever thus. Uh as with credit cycles, there's a long history to this. uh railroads. We can go back to the railroad cycles of the 19th century. For a contrary um look, you can check the uh the evolution of air conditioning in the 50s. You know, it was that was there. That was a transformative product. It changed human migration patterns. It uh gave us a 12month congress. Wasn't that a innovation? Washington was uninhabitable before before the advent of air conditioning. Now we have it and the lawmakers can make laws 12 months out of the year. I those that's what they call in the trade Jeremy a mixed blessing. >> Yeah. >> But there was but uh uh there was there was nothing in the way of a of a boom in the companies like Carrier um pioneers in air conditioning. They really traded in the mid-50s at very low multiples of price to earnings. So I I I I think that um uh that exception is notable for being exception. I think that the that the the cyclical rule is that um is that uh bubble precedes adaptation. >> Yeah. >> And I would say that on that form we are looking at overinvestment in in data centers. We are looking at uh at too much buildout. we are looking at rather too much borrowing and we are looking at the prospect for uh credit difficulties um for these borrowers which in the past I'm thinking now of Facebook/Meta which has been remarkable for its business model which had nothing to do with borrowing and credit risk and um overindulgence and debt everything to do with the extraordinary leverage operating leverage of that business. So the world is changing in ways uh both that are promising with respect to the um the final day of the use cases of these marvelous uh items of ingenuity and invention and uh that that will be perhaps transformative just as the uh as the u prophets promise us. But in the meantime, we have humanity u uh doing what it always does in the presence of great hope and easy money. >> Yeah. >> And what money does in those circumstances to is to uh is to have self speculation. >> Uh interesting. I mean, you know, that that's the the historical pattern, right? The bubble the bubble often comes before the the use case. Um, so I guess that you know the technology can be real, the productivity change can be real and and the projections can even be directionally right, but the securities created to capitalize on that excitement still gets wildly overbuilt. Um, you know, some people would write me and say the push back is it it's not 1999. The biggest AI spenders today are highly profitable companies with real cash flow, not speculative startups burning IPO money. But when you look at past cycles, canals, railroads, radio, I guess, autos, the internet, did investors usually get the technology right be but but the timing and the valuation wrong. >> Well, I am thinking now to my years as a trainee when the automobile was coming into existence. >> Jeremy, that was meant to be. Make a smile at that, Jeremy. Please. >> Hey, I was trying to keep it professional there. Yeah. But the uh the turn of the the 20th century there were dozens of automakers. I guess not all of them succeeded. Of course. >> Um uh so I I I I think this is uh I I I do take the point >> that the Apples and the Metas and uh the others that are in the vanguard of this buildout are many of them uh worldclass profitably profitable companies. But um uh just because you begin with a pristine pristine credit record doesn't mean you end with one. >> Yeah. >> And the uh the dollars that are being tossed around the bills are quite extraordinary. And we'll see. Uh but uh the bond market I think is beginning to express its concern. I think the banks also are beginning to become more reluctant to lend on terms they had been lending in. Uh so I I I I believe that we are uh looking at a time of speculate excess that will give way to uh remorse and ironically enough uh the vindication of the u of the optimists who foresaw what will turn out to be a step forward and in u in uh human condition thanks to these inventions. So, I mean, you know, the the danger may not be that AI is fake. The danger is that Wall Street builds too many claims on on real technology before the profits are actually there. >> Yeah. >> The danger is that human beings just will not do what they're supposed to do, J. They ought to buy low and sell high, do they? No. >> Never. Someone's always caught carrying that bag. E um I want to bring into the the the larger markets. I mean, we got to talk about global liquidity. factor in global currency markets because uh I was reading I mean according to Bloomberg this morning the US dollar index just wrapped its worst month since June falling about 1.8%. Um if the dollar loses its high yielding status relative to global peers how quickly does that begin to drain liquidity from US financial assets? >> That's another big question. Good question but a very large one. I'm not sure that uh um my friend Trey Reich is very good on this. He points out that uh uh the Fed in December uh cut its funds rate by a quarter percent in the face of record high stock prices and uh you know record high levels of money supply and and in general an environment that uh seemed not to beg for easing liquidity and um his view and I share that view is that the uh uh uh our financialized world is highly dependent upon credit creation highly dependent upon the combinator Federal Reserve and uh this gets back to the structures the balance sheet structures that were created during the uh the levitating periods of the early 2020s. So the world needs liquidity and it needs accommodation um to satisfy uh the fixed char the payment of the fixed charges on the balance sheets of companies that did too much when they should not have done any borrowing net. Um so uh yeah the world needs liquidity. Will it get it at a time of rising uh production cost the factory gate times of I see the President Trump is raising tariffs on European auto imports as of today. Um uh we know about energy prices. We know about a little bit about the rising gently rising rate of money supply growth. So I I think that the inflation outlook is going to make it difficult for the Fed to supply the liquidity that the world wants and in some cases sorely needs >> needs. Yeah, >> that is what uh is a great question for the next few months. What what will the Fed be able to do? Will they be able to uh you know we had a cartoon on page one of Grants and the cartoon showed a certain person uh sitting at a conference table in a Senate hearing room. He looked for all the world by Kevin War. I can't be certain about that. He was he was saying in the following he said of course we can raise interest rates. Hold on a second. I I have to take this call. And um uh I presume that the call was from uh the White House. And um uh so we know that uh that imminently chairman Walsh wants to cut rates and uh we know who wants him to cut rates and we know uh points in the financial markets and uh institutions within the markets that need lower rates. But the question before the house is will they be able to get them given the trends in inflation and given the u uh the uh uh uh the the small but suggestive back up in the bond longer dated uh portion of the bond yield curve. >> Those are the questions. >> Yeah, it's an interest one because I mean if the White House wants lower rates and the bond market wants compensation for inflation and deficits, I mean who wins? the Fed, the Treasury, the the long bond. >> My money's in the bond market. >> Yeah. Yeah. Yeah. Interesting. Um, you know, you brought up those, we should get to that. It just came out over the wire, but yeah, the US wants to hike tariff rates on EU autoimp imports to 25%. The president says, um, this is relevant right now because at the same time, the ECB and the Bank of England are signaling rate hikes to combat their own energy inflation. Um, will will higher European yields force the Federal Reserve's hand to raise rates just to defend the dollar? >> No, it will not force it, but it will be one more item on the unwanted agenda of reasons not to do what the president wants the chairman to do. >> Jim, I want to bring this back home to hard assets for our Kicko audience. Uh, you emailed me. >> I was waiting for this. >> You were waiting for it. Well, this was too spicy. The Fed I I had a lot to get to. Plus, I've been away. Um, you emailed me a piece that you wrote last October titled the 911-year debasement trade. You pointed out that this multigenerational trade began in 1934 when the gold dollar was reweed and and you quoted Bernard Baroo's warning about unbalanced budgets. I mean, gold's holding above $4,500 today. Are we simply watching the continuation of that exact trade foresaw in the 1930s? Well, it's not exactly a trade, is it? That was the headline. That's my word, the headline. But it was I I always look at gold not as a trade or as a as a speculation to be sure. It can be that. >> Mhm. uh but I look on as a long-term investment in um in the tendencies of uh of paper currency used to uh uh to um uh lose their entire purchasing power 10 to zero. They have over the course of time all gone to zero sooner or later. Oftentimes it's later. So I I I so when you know gold goes to 5600 my goodness it went straight up and there's a you know um an eminent speculator I happened to uh be standing next to um in a fence some was he said I said I said I'm not going to name him but I said stamp is called a bubble and of course it's a bubble of course you know so can there be a bubble in something you like? Yeah it can be. Yeah. Yeah. >> Um and I think that uh uh that gold has exhibited some bubble-like tendencies in the past six or nine months. But uh to me uh the debasement trade trade uh investment is a multi-generational uh investment. And the thing to do is to sometimes not look to hold on. It's hard not to look. I mean >> Mhm. >> Um it was a long time before the gold you bought at $850 an ounce in 1980, January 1980 got back to that uh I think that was 2007 before it returned to that level. So, if you're going to be a long-term investor in the debasement of the dollar and of paper currency, generally, it pays to get a little bit of exercise to well get to bed early, you know, and see the doctor once in a while. So, so you're talking about uh human longevity and patience, maybe saintly patience as well as monetary tendencies. But when I get impatient, as I suppose some of your viewers might share this with me about gold not being up ought to be up, I I try to step back and say, well, you know, it's a uh the dynamics of a social democracy to to quote the the great uh Bill Fleenstein, the dynamics of a social democracy are intact and um all roads seem to be leading to inflation. uh these roads are leading to it. We don't know how long they are and we don't know how winding they are. Uh but to me that is a story of gold which is an investment in the tendency of the political arrangements on offer today in place today and uh so that's it Jarrett that's my story. So, I mean, so, so gold can be both things at once. A valid kind of monetary hedge over generations and still vulnerable to bubble-like behavior over months. >> Yes. Yeah. It's a >> it's there's a there was a there's a a book uh that came out in the 70s that was called the um the golden constant very scholarly book. I'll think of the author as soon as we're off the air. Um the golden constant uh uh documented the tendency of the purchasing power of gold uh to remain more or less steady over the course of hundreds of years and millennia. And so it's a little bit funny when you think about the golden constant to watch the price action in gold for the past six or nine months. My goodness. uh anything but constant and silver of course there's a companion book called silver the restless metal which is a nice euphemism for the for the explosive volatility of silver >> you know I want to stay on silver because you got people's ears we haven't talked about it for a moment and and you and I were chatting about this in the last time you were on the show I went back I reviewed the tape you noted previously that silver is trading on a genuine supply deficit too I mean just to put some data behind And that demand we know that photovoltaic sector alone is consuming hundreds of millions of ounces of silver annually right now completely independent on you know of the monetary side. Um I guess the question would be on the macro if if if the global manufacturing sector slows due to these higher energy costs does the industrial demand floor fall out or or does the monetary demand take over? >> Yes Jeremy. >> Yeah. All of them. All of the above. >> I don't know. I don't know. But the way you pose the question is exactly the right way to pose. That's always been the case with silver, right? There's a there are competing demands. If the the world is going to heck in a hand basket show, it's going to heck in a hand basket. >> Uh there will be a monetary demand. However, uh the uh uh the industrial demand will fade. But you know, these these metals I think are um uh they depend on investment demand. is the the uh the so-called industrial demand for silver. The so-called the industrial demand for silver is less important than um speculative demand for silver. The jewelry demand for gold is less important than the speculative or the investment demand for gold. So what you want if you are a uh a speculator on the long side in the metals, what you want of course is a collapsing dollar exchange rate. That's it. You want the bad things. >> Yeah. Yeah, >> you don't want to admit you want them, especially the mixed companies, but u that's that's what makes the mayor go. >> You know, in in that same piece that you emailed this morning, you touched on the weaponization of finance, contrasting the seizure of Iranian assets in 1979 to to the Russian assets today, noting Chancellor M's suggestion to use those funds to arm Kiev. We've talked about it before and certainly on this show, but is this shift toward weaponized finance um and the sheer architecture of of financial surveillance kind of driving institutions into gold just as much as the debt load is? >> No, not just as much, but it is one incremental source of demand, I think. >> Right. >> Um you know, um uh the president the way he ends all his emails, thank you for your attention to this matter. It it can't be purely coincidental. That was the way JP Morgan I think signed off on a a letter inviting him to get another bank. Thank you for attention. So So the Trump administration has done uh I think Yman's work in discouraging uh fiduciary institutions from uh uh discriminating on the basis of express political or monetary views. uh but certainly internationally the uh the uh the weaponization of currencies is a is a is is is one driver of demand for nond dollar assets or non- euro assets to be sure >> how do you put your head down and and not look at the daily price action on these things you know you see that swing 4600 I mean still stable base under 400 but to your point telling yourself to just >> I amant I am a hardened um uh student of the uh the Peanuts cartoons in which Lucy is holding the football for the ever hopeful and just a little bit gullible Charlie Brown. And does she ever not pull it away? Nope. She never does not pull it away. And that has been the story to a great extent with the episodic rises and pullbacks in uh we stick to gold for the moment uh since uh since January of 1980. Um not everyone is is wired to wait 20 years for the next validation of the depreciation of the currency thesis. So this gets us back to um uh to uh patience and conviction. I I think there are a lot of uh of people involved in the gold trade who had no idea what they were doing except that they knew what was going up was going up. >> Mhm. >> And uh uh it would not So you mentioned Jeremy that the gold is holding at 4500 or above right until it doesn't hold at 4500 or above. I have is there's a a a wonderful uh quotation from a former royal astron astronomer of Great Britain and um with respect to one scientific proposition he said I wouldn't bet my life on it but I would bet my dog's life and that's in a country that's a dog loving country so that that is the I think u That is perhaps a level of conviction a lot of our friends and I dare say not a few of us within shouting distance of this broadcast that um you just know in your heart and in your bones that uh this world of ours is built to inflate the monetary arrangements are inflation bound and built. >> Yeah. >> The politics witness the public debt are inflationary inherent way. Um, and you know these trends are colliding and you know what the end result will be, which is a monetary crisis that will decapitate even the great world reserve currency. All of this is written in the book of the future. We know it. >> But do we know it every day? Do we know it when you've had the worst month of your life speculating in gold when it's down uh x number of hundreds of dollars per ounce? No. You know it a little bit then, but you don't really know it in your bones the way you did when gold's on its way to 5600. So all I'm doing is is reciting the truisms of human interaction with speculative assets. It is forever a test of will and conviction uh and of resources, emotional, intellectual and what have you. So uh it's why the journalism is sometimes a better business journ than speculation. >> Yeah. Hey, and it's why we're here. Um, you know, and you brought up a good point. I mean, is that part of gold's appeal, right? Not just the inflation protection, but ownership outside of a financial system where access sometimes looks to be conditional. Um, you know, Jim, as we I would like to say a word about that. >> Yeah. And this is a I want everyone who is not in a position to hear a politically incorrect lie to log off for just about 30 seconds. >> Okay. Okay. So here is what a man named Leingwell who was a partner of JP Morgan his dates were about 1880 to 1950 or 60. Russell maybe what he said uh around the time of the Roosevelt uh calling in of gold 1932 or 33 he said that said love but he said the love of gold is inherent in man he loves it as he does land and women >> and the more you try to take it away from him the more he loves it that was approximately 11 wells quote and Um there is there is something to there's something there's something about gold that is eternal. Of course it's literally eternal, right? You can't destroy it. That's well that >> uh bulls will lament that fact during bare markets. But the uh the fact that this coin you own can have been a part of uh of the filling in Cleopatra's mer lends a great mystery to it. It lends in addition to the monetary track record of this metal lends the history of the of the coinage of gold lends to all this romance and all of the monetary theory and the monetary history and the and the and the contributions to the stability of currency. It's the institution of of convertible currencies has contri to all this. There's there's it it uh it it it it is not purely an intellectual operation >> forming a romantic attachment to the precious metals. It's not purely analytical, not purely historical. There's something mystical and romantic about it. And that I think accounts for some of the volatility. It accounts for some of the heartbreak. My goodness. I think we've all known people and certainly I have who were just emotionally and in some cases more than emotionally destroyed by what happened in 2008 >> when everything the bears on the world of credit were saying came to pass and gold gold price broke badly and the gold mining stocks broke even worse you know in preparation for the rally that was to follow with the Fed's response to the crisis of 2008 and indeed of early 2009, but yeah, it is is it is uh I I I um I keep on repeating myself, Jeremy, which I promise never to do it again on this program. >> Don't worry, my friend. Hey, listen. I mean, the I guess the nostalgia modern e economists should talk about that nostalgia, you know, the fact that >> Well, they think they they they observe and not Iraq. They say they what they mean to say is that u on its face it's anacronistic. >> Yeah. >> Everything everything in the world of money and credit is going to the intangible everything but uh this tokenization business the decentralized finance. So everything will be on the worldwide uh on on not one bitcoin. There are hundreds of them. But we are meant to believe that uh uh that uh uh that uh that that physical objects um will go the way of um of of of bearer bonds and stock certificates >> and and and to be sure I mean I whatever the the the depository trust company process is a year is measured in stocks and deposits measured in the quadrillions of dollars. What happens beyond trillion? Quadrillion. So the DTCC DTCC annual report quotes these astounding volumes of transactions and stocks and bonds and derivatives, none of which would be possible if except for the digitalization of the representation of these values. Um, and so why should there be something like a gold stand? Why should why should gold have a place in the monetary world given their irrepressible drive towards um uh towards um digitization? Well, because it turns out uh that the uh that the very physical properties of gold are what commends it uh to those positions, those people in the position of stewardship, monetary stewardship, who now have made gold um uh the second most widely held reserve asset just behind it's behind the treasury or ahead of the treasury. I don't know, but gold is making a comeback in the vaults of the central banks of all places. And I dare say it's making a comeback in the vaults of individuals principally in Asia but certainly to be sure in Europe and America as well. There's something about Matthew McClennon who runs u a marvelous international fund. I say marvelous because it's but not just because I like the portfolio management because it's done well. But he says that that gold is his monetary base which I like that it's 10% gold monetary base. >> So that's the way I look at it as well. it's the monetary base and my modern portfolio >> and to your point I mean you were talking about that I mean that whole nostalgia you know the modern economist it's not money it earns no yield and you know it has no cash flow government's no longer >> but that is cash that that's the nature of cash the cash to pay a yield that's what makes gold uh not a credit instrument it makes it money and uh uh so you know money is not a so the way it The word cash once was meant gold meant gold species was the word when it so cash was money itself uh uh the paper claims on cash whether they be bills of exchange or currencies issued by central banks those were credit instruments they still are >> you look at a dollar bill it says promise to pay that's that's not it's not money it's it's a promise so all of this is the language is absolely lead a little bit, but it's it's the ancient language of of of credit institutions. But what makes gold uh money is that uh it's nobody's counterpart. You always got it has to hold up his or her end of the bargain to make it pay. >> Yeah. >> So, I interrupted you when you're about to say the same thing, Jeremy. >> No, I I was going to say kind of very similar. I was just going to ask you. I mean, we could put it. Is gold's real power that it kind of sits outside of politics or is that exactly why politicians have historically tried to control it? >> Once again, Jeremy, the answer to those every every question you ask, the answer is yes. I mean, so Donald Trump is all about gold, right? Everything he owns is is gilded. Whether it's a ballroom or his bedroom, I guess I have never been in his bedroom. I suppose it's gilded. Um but here is a man who let us call him headstrong and uh the whole the whole point of a gold standard is to uh is to remove um the institution of money from the hands of the politicians and and put it four for square into the in the marketplace. And um in all the history of gold standards and near gold standards that state of perfection was rarely ever attained. Now somehow money is always a little bit political. >> But you know the reason that that so why doesn't the Federal Reserve own a single ounce of gold? There's a widespread misconception that the little piddling inst item on its balance sheet line item says gold certificates. It's nothing but a piece of paper that says gold certificate. It's not gold. They don't own any gold. It wouldn't own gold because the Federal Reserve is ideologically um opposed to it. regards it as abhorrent, worse than anacronistic. It it it uh it would threaten. That's why Oh, that is why um when Judy Shelton was nominated to position in the Federal Reserve Board, that was why they um the uh Federal Reserve Board, it seems to me uh uh gave every sign of mounting uh an informal but still persistent opposition to her candidacy to the relevant sentence on the relevant committee. She was regarded as uh never mind the um barbarians at the gate as they used to say about the LBO movement of the 80s. She was to have been the intellectual barbarian within the PhD standard with the halls of the doctors of economics. So the Fed regards gold as a as a uh existential threat. >> Right. And um um my friend Alex Pollock kind of playfully asked why hasn't the Fed own any gold? You know the ECB does National Bank does u uh why doesn't the Fed own any gold? And the reason is it seems to me is that it wants to it gets back to something that uh that Bill Simon uh champions point of view Bill Simon champion during the 70s. He was a fabulously successful businessman at Solid Brothers and private equity and uh but as a treasury secretary and as a free markets guy he was ideologically he was scornful of gold merely as an anacri regard as a rock. He he had a kind of a a Bitcoiner's uh preview a preview Bitcoiner a preview of a Bitcoiner's view of gold which was to uh uh castigated as a worthless uh uh you know piece of rubble. Um so that has been that's been the prevailing view at the US government since uh certainly since the uh the early 70s when gold was written out of Brett Woods uh doctrine doctor documents and because I'm beginning to stammer Jeremy I think I must go away now. >> No you're you're on to something and you brought up Judy Shelton. Of course we'll have her on the program. Um, you know, we can wrap up here, Jim, but I mean, this is interesting because in so many ways because I mean, you know, again, the Federal Reserve does not own gold. I under the Gold Reserve Act of 1934, the Fed transferred its gold to the Treasury, received those gold certificates, but that certificate is not redeemable for gold. So, if President Trump likes gold, um, Judy Shelton's nomination was rejected in part because of her sound money views, threatened the monetary orthodoxy. I mean, it tells us a lot about Washington's real relationship with gold. But let's leave it on this. I mean, is the is the issue that gold is tolerated as an asset, but not as a monetary constraint? In other words, Washington can like gold at the margin, but but the Fed cannot embrace it because gold would put it put a hard limit on discretion. >> Correct. Yeah. That's that that's the essential raic against the gold standard is that it uh >> it removes the uh uh uh the uh the judgment calls that it it takes the uh uh you know there this kind of mutual fund that's called unconstrained right it's uh so that the the portfolio manager can do whatever he wants to in whatever market he feels like in whatever quarter of the world that strikes his fancy and um There is an unconstrained element as well in our monetary arrangements. Not quite literally unconstrained because the bond market has a say, stock market has a say, currency markets certainly have a say, but the uh the freedom of action to operate in the world uh under the present arrangements, the fiat currency arrangements that that's a lot of latitude. Uh the Fed for example has declared that 2% inflation is what we need and what we must have. Who said on whose authority is that? Well, it's on the Fed's authority and other central banks share in this view. But it's a view that the the doctors of economics pulled out of their um they wore hats and pull them out of their hat. I don't but but they they they essentially they made this up. And uh so we we have this this this this incon this this this peculiar paradox in this time of so-called affordability crisis. That's what our politics are supposed to be about. And yet simultaneously we have the Fed uh seeking a rate of inflation of 2% positive 2%. What? Nobody as No, nobody asks Jerome Powell at these press conferences after the after he holds forth the FOMC meeting days. Uh, Mr. Chairman, why does the Fed continue to instigate Fed to instigate inflation at a time when inflation is the seemingly the decisive uh issue of our politics? Doesn't that seem strange? Can can you help us explain that? Uh but nobody asks. >> Yeah. Yeah. >> And Grants has never been invited. >> You believe that chair? >> Not yet. Well, I mean, you know, I mean, maybe he's staying, maybe he's not. I maybe maybe he'll have another one, maybe we won't. Um listen, we we've covered a lot here today. private credit, the O opaque markets, the AI investment boom, the long bond near 5%, gold's move a little bit on tokenization, and I guess the question of whether pol policy makers can still control the system that they created, Jim. So, I mean, for investors looking out the next several months before you and I chat again, what is maybe one signal you'd watch most closely to know whether this cycle is still kind of holding together or starting to break? So well we are officially I I read it on our mast head every two weeks we are interest rate observers. >> Yeah. >> So I'm going to say that the bond market is the uh is the place is one of the places to watch um you can watch all you like. I'm not sure what good is going to come of it. However, um if the uh if the bond market begins to believe that inflation is subtractable and that um and that um uh the new Federal Reserve with its new composition will be unable to put over the president's agenda of a lower federal funds rate. Uh that will squeeze uh leverage balance sheets. world it will put pressure on on on private equity and on credit uh corporate credit generally and um that will be quite a situation. So I think inflation and the bond market's reaction to inflation will be part of the storyline of the next couple months >> perhaps more than that. Yeah. >> Yeah. Yeah. Certainly started to to bear its head since the last time we had you on the program. Uh James Grant, founder and editor of Grant's Interest Rate Observer. A wonderful note that all of our subscribers should go and and take a look at. Uh Jim, always appreciate the historical perspective, the credit discipline, and of course the clarity. Thanks for joining us at KCO. >> Oh, thank you Jeremy. Nice to be with you. >> I appreciate your time. Thanks so much. And for our viewers, it is critical to look beyond the headline numbers and track the underlying credit flows. If you're tired of the mainstream financial networks telling you everything is fine while inflation accelerates, you're in the right place. We follow the math, the history, the hard data, subscribe to Kitco News. Like this video. Let us know in the comments how you are positioning around rates, gold, and credit risk. I'm Jeremy Saffron. Thank you for watching. Enjoy your weekend. Heat. Heat.