Transcripts

 

Erik: Joining me now is ECRI co-founder Lakshman Achuthan. Lak It's great to get you back on the show. For most of our listeners are familiar with your work, those who are not should just put Lak name into the search box at Macrovoices.com we go fully into the long-term business cycle and cycles analysis work that Lak's firm.

Economic Cycles Research Institute focuses on in some of those past interviews. I wanna dive into the current situation, though, Lak, because you are Mr. Cycles. You think about the world in cycles. I love your work, but hang on, you told me something off the air about how you guys have this idea of an economic regime change.

It seems to me. Although the cycle's work is very important, and I get it. I respect it, but I think president Trump and Secretary Bessent are intending policy changes that are really literally on the scale of re-architecting the global financial system. Now, I'm not saying that they're going to achieve all of those goals, but.

That's what they seem to be out to do. And it seems to me that potentially puts a real speed bump in reading cycles that are normally based on just, the normal ebb and flow of economics. How should we think about cycles analysis in a world where President Trump and secretary Bessent really are intending changes that are pretty much unprecedented?

Lakshman: That escalated quickly. That was a big question, but I It's great to be back with you. I I I think that's really at the heart. Your question just cuts right to the chase. It's at the heart of decision making in a world where, the rules are changing and and so you have to do a lot, you have to have an interesting framework, I would say.

And I'm very grateful for the cycle framework because it has a tried and true history of navigating what I would call a regime change. You're talking about re-architecting the global economy. I agree. It, it seems like there's some version of that. It's hard to say literally what, but there's some, something's going on.

And cycle work does. Extend back farther than people may realize to the early part of the last century. And there have been a lot of regime change actually changes of kind of the economic lay of the land over that timeframe. I'll rattle off a few, a little trip down memory lane.

You have the panic of 1907 which It was the creation of the Fed. So that's a, it's changing some of the rules of the game, right? You have as World War I ends, you have the end of globalization. And income tax, reduces the reliance on tariffs. That's a huge shift in the way global trade was going on.

In the first half of the thirties, you have Smoot Hawley Tariff Act, the Depression, the end of the Gold standards, the New Deal. There's a lot of huge things going on. More recently. And you could tell I'm a cycle guy when I say this is recent. But you have the Nixon shock in the seventies.

There you have some tariffs. You have the end of the gold dollar link, the Bretton Woods set up and stagflation shows up. That's a new thing relatively new in this century. You've got the housing bubble the financial crisis, the huge bailouts with QE. And then post COVID, you've got that unprecedented is a word that gets used a lot, but unprecedented, massive fiscal stimulus, extreme QE, and all the supply chain stuff that happened.

So these regime changes. Have occurred the cycles continue to happen, right? And if and this is important to remind everyone what we're doing with cycle work is watching for the inflection point, is the cycle going to turn and go the other way? So if we have one job at ECRI, that's our job.

Is it gonna turn and go the other way? The rules can change. The magnitude of the swings can get larger and smaller as the structure of the economy changes over all these decades. But this inflection point monitoring and kind of risk of question actually is pretty darn stable. And all those times I just listed, the cycle indicators didn't break down.

They kept getting the direction correct and more importantly the timing of the direction. And now I'm talking about growth. I'm not talking about markets, but the timing of the direction they were able to get very well. So in the current environment, the reason this is a problem, and this is embedded in your or original question, the reason this is a problem is 'cause when the rules change.

Models break down and nine outta 10 people listening, whether they're explicitly doing it or implicitly taking it in when they take in information, are relying on models. Where there's an estimation of some sort of relationship that has occurred in the recent past, the last five or 10 years, and it's optimized for the next whatever year or something, and you say, oh, 'cause those are the rules that last several years.

It's gonna happen that way in the immediate future during regime change. That's absolutely untrue. However, these cycle indicators continue to get the direction right? So it's in that context that we come into 2025 and you have as you said, this re-architecting perhaps going on of the global economy, and how do the indicators work?

Quite frankly, they work the way they always do. They got the direction right.

Erik: Let's go ahead and talk about how the cycles interpret the last six months or so. Let the amount of time that we've seen these significant policy actions from Secretary Bessent and President Trump starting to affect markets.

How do the cycles interpret those, that period of time when those events occurred, and what do they tell us about what comes next?

Lakshman: I'm gonna refer to a couple of charts that are available that I'll make available that you can make available. Back in basically liberation days, right? It's in April or so. And we had ended 2024 all set up for, there's a slowdown. We're having a slowdown in growth. There's no hard landing. And inflation, while it's still sticky, is gonna stay in check. And in, in April, our indicators were still signaling a slowdown ahead, but there was no recession.

And before Liberation Day that was our view. There was no nothing in our world, nothing too radical. Then you have liberation Day, you have all of the. Headlines and quite a bit of angst about a hard landing or a recession. That was the mood. It, people may or may not remember this, but that's what it was.

So in July, after there's you have a little bit time after after all that news came out. Our forward-looking indicators on growth had turned back up points to growth, firmin not stalling. And that was even as our forward-looking, separate forward-looking indicators on inflation were showing inflation pressures still fading.

And at the time we called it a setup for a Goldilocks space. And everybody else was still talking about a hard landing, but we just, it didn't show up in the cyclical forward looking directional data and. That's just what, we are very agnostic actually on, on, on most things except what our indicators say.

When the indicators are pointing one way or another. We trust them because of the real time performance and then we try to figure out why afterwards. Now August, by August of this year very interesting because the resilience was giving way to even firmer growth. Our cyclical signals and broader investment data started to really line up and we got into a more, what we would call a balanced brightening.

And it's an unusual situation. I think the last time was quarter, a century ago where you have a cycle. A set of cycle data, which we're tracking moving to the upside directionally at the same time that you've got some sort of structural thing happening. As you say, there was all this re-architecting happening, but there's a separate, the separate issue is the all the tangible and intangible investment drivers.

That surround the ai activity. And so with those pushing to the upside at the same time that the cycle's pushing to the upside doesn't happen like that all the time. And so that's notable, that's happening. We saw that in the summer. In September again, our update is the expansion is totally intact.

Inflation is contained. That's pretty darn unusual. And that brings us to now where it continues to be constructive. There's. There's this I think it's now a little bit more in the headlines. This K shaped stuff, we've been talking about it for, until I'm blue in the face.

But basically the, you have the, a smaller group of consumers at the upper end of the K that are responsible for the bulk of consumption. The top 10% are just spending freely. And they're helped by rising wealth and strong balance sheets. And at the same time, the median household is under a lot of strain.

They, they have slower earnings growth, a lot of credits, stress and. With the job market not adding jobs, right? It's not losing jobs, so it's not adding jobs. There's more stress. And so you get this, what we've called the kind of plutonomy pattern, a narrow consumption base that props up the overall numbers.

But there's definitely some fragility underneath. And that. Is why things I think are very confusing for people at the moment. And it also explains in a way where one aspect of why inflation can is having trouble like getting a grip of getting some traction here. I'm talking broad inflation not goods, inflation.

And that's because the bottom end of the K just can't stand it. They can't handle higher prices and so it's very difficult for it to start to to run. And our forward looking inflation indicators are saying that continues to be the case for now. So right now we're in a Goldilocks phase.

I know that's getting a little tired to say growth firming inflation contain no hard landing, no stagflation. Now eventually that's gonna, the balance will tip. And that's what the leading indicators are designed to do is to give us a heads up on that.

Erik: That's fantastic Lak because that there's so much to unpack there.

I really want to dive into it. I tend to think in macro narratives in my head and I, I really respect the data-driven work that you and others do, that's what I respect technically, but my brain thinks in narration and what I think you just said. Tell me if I got it wrong, is right now we've got an economy that's dependent on rich people being in the mood to spend money like it's going outta style 'cause some of them are new at being rich and they're still celebrating that. But all it takes is one big catalyst, like some of the people the that are in the majority who can't afford to go out to dinner watching that conspicuous consumption, getting pissed off and throwing a Molotov cocktail at just the wrong moment that hits a big news story and all of a sudden there's a mood shift and rich people don't wanna show off and go spend money like it's going outta style and everything collapses very quickly because of that one little butterfly flapping its wings at the wrong moment. Trickle down effect.

Am I reading way too much into that? Because it sounds like there's some real risk there.

Lakshman: Here. Here's where our cycle stuff would line up with that story. As I intimated the k-shaped consumption, it's not a new feature. This feature, it, I feel like I've been saying it for decades.

And maybe it's been there forever. I'm not that old. But his, I know that we're not the first ones to struggle with what's going on with the economy and what I do know. Is like relative change, right? And it feels like that gap between the upper end of the K and the lower end of the K has just taken a, good step bigger.

And that would feed into the narrative you just said, right? It's what's the straw that's gonna break the camel's back kind of thing.

Erik: What do your long-term cycles tell us about past times in history when wealth inequality was growing exponentially, which is what seems to be happening here.

Lakshman: Here's what happens, right? It's quite interesting. Imbalance is built. And they're always different, right? If you're a student of these cycles and histories, there's some debt crisis, there's some other boom like the dotcom boom, or there's the housing stuff.

There's weird little ex like imbalances that build, and that in and of itself doesn't tell you when things are going to end, right? We're looking for the inflection point in my world, right? We're looking for the inflection point. So we track the leading indicators, not the coincident ones we're trying to look a little further ahead and when they begin to turn and go down, I don't know exactly what the match is going to be.

That lights the fire, but that's when. The conditions are ripe for something to move the other way, and that's where you generate the cycle. It's the combination of the extreme. In this case, we're identifying tension between the two legs of the K or the two arms of the k and. At some point, something is gonna give, I, I don't know what it is, but I watch the long, what I'm doing every day as much as I can is watch these long leading indicators and I'm trying to see if there's any sign of a growth rate cycle, downturn and reason this is on my mind.

I can't help but remember the dotcom boom. And, roughly speaking, NASDAQ went to 5,000, then it peaked, and then it crashed and fell 50% and took, all the related things around it with it. And there was a whole narrative around tech that it was going to do all of these things.

And it, it's not that. It was untrue, but it was just overdone, right? It got overdone and perhaps that's happening here. I don't know. But what I do know is that in 2000, the year 2000, the long leading indicator index had started to turn down and it was starting to point to growth slowing, which then takes the shine off of the priced for perfection stories.

Erik: But you're saying you're not seeing that now? You're not seeing the topping

Lakshman: today? When I'm talking with you right now, I don't see it. It doesn't mean I'm not aware that it could happen. I'm aware it can happen, but I'm just reporting object is it as I'm trying to be, I'm trying to get rid of my feelings.

And say, I know that booms end in busts because I've read books, right? And I know that the long leading index is just one thing. I don't know. There may be other things that could crack the situation. But the one thing that I know something about is accelerating and decelerating growth.

And I know that decelerating growth would take the shine off of the price for perfection stories. That underpin a lot of what is being said about, you know how people have stories around why, this time is different and right. And you see everybody, I think everybody who's been around for a little while looks at the market and says, whoa, that's pretty high.

And wonders, what might. Topple the apple cart today. I'm saying in the snapshot of what the long leading indicator is saying is it's not growth yet.

Erik: It seems if you look at the market in terms of where all of the upside has been, it would be the risk of an unwind of the AI trade specifically.

And I think there are extreme parallels to the dotcom bust in the sense that they got the call right, that the internet was gonna be a really big deal. They got that exactly right. It's just that. They went and bought a whole bunch of stuff. They didn't understand what it was because it sounded like it was internet related, and that got us into a bust situation that was quickly contagious, even to the cool stuff that really was relevant.

Is there a setup for that to happen again here with AI where Yeah, AI is a really big deal, but it doesn't mean we can't have a bust because it's a big deal.

Lakshman: I, I would say it's virtually certain, right? Because the nature of it is you, as we said earlier, you're priced for perfection, but the misallocation of resources, right?

Because you don't know which one is the right one. So everybody's throwing money at everything and some of them are no good or, maybe I, what is it? I'm not gonna get this right, but I'm sure your listeners know this that in the dotcom boom, they were building certain infrastructure, including lines and capacity for data moving around that just was way beyond anything that could be used.

And it has to be repurposed at some point. It's almost like building, there, there's a whole thing where people built all the malls and stuff like that, and then you don't go to the mall anymore. You buy stuff online, so you gotta repurpose the mall. Here we're building a great deal of dataset or capacity and other things.

I don't know exactly how this works, but if there's some technology change that may not be needed, right? So that's misallocated capital. That's, you gotta be careful what you wish for. Many of us know or understand that these free market economies that we are, we like to think we're in, we're mostly in, for the most part.

Every once in a while they get a kind of crony capitalism, but in these free market oriented economies. If you don't allocate your capital properly, you get, you end up paying for it at some point, and so the boom can turn into a bust. And that's probably gonna happen here, but there's a huge fear of missing out.

If it happens in a month and you pulled out, you're a genius. If it, if you pull out now and it happens in a year, you're an idiot. And so that fear of missing out keeps everybody here. I wanna swing back 'cause you're making me think back to the regime change stuff. Also, if you'll bear with me in the early seventies Nixon the Nixon shock, right?

This is a bit of a regime change. He has a, an America first policy. And unilateral action. In the international trade stage, you get 10% PAC tariffs. You have the inability to exchange dollars for gold to taking off the gold standard. The upshot of that for everybody looking at it in the moment.

Whoa, this is a really big deal. Which it is. And maybe this is gonna bring us a lot of inflation. What's gonna go on now? There was a whole concern around that. And ultimately they were right. I think in retrospect, people look and they say, oh yeah, seventies had a lot of inflation. It must have been related to that Nixon shock.

And it probably was right. Smarter people than I have made that argument. But what's interesting from a decision making point of view, either for your business or for your portfolio is that after he did this and made the announcement the economy did great and inflation was not a problem.

It was more than a year later that the wheel started to come off. I don't think people really appreciate that. The indicators got the direction right in on both counts. We had been coming out of the 69 70 recession, so the indicators were pointing towards growth and we didn't have an inflation problem at the moment, even though these things were happening.

And it's not that it didn't show up right because they, these were big rule changes. And you have the oil embargo begin also, but the the timing of when it shows up is really critical. And, there might be some rhyming of that now.

Erik: I really want to go deeper on this one, Lak, because, and I'm gonna ask you to hold me to account here 'cause you are a historian and a cycles analyst.

I am not. And if I've got the history wrong, please set me straight. But I think about the Nixon shock and the secular inflation of the 1970s with a different narrative, which is. I think that all the signs of a secular inflation were there in the mid to late 1960s. I think that the first, from what I've read about secular inflations, and please correct this part if I have it wrong, it's very common that the market is misled because for the first few years of a secular inflation, the feedback loops that make inflation bad for the stock market haven't kicked in yet.

So what happens is in the early years of the inflation, it feels like just. Really explosive economic growth, and everything is wonderful, everybody's happy. But it turns out that it's really just the beginning of an inflation. I think that's what happened. It started in the late sixties, and by the time the Nixon shock occurred, as you said you can get to essentially what we think of in markets is a buy the rumor, sell the news event where the Nixon shock happened.

A lot of people knew that it was going to be inevitable. They were fading. It. That got unwound. It wasn't another year, just like after the bust in the dotcom market. It wasn't until another year before the trade really started to kick in that, the internet is an important thing and that the inflation was very real.

And then you had the stock market bust of the 1970s. It feels to me like we're still in the late 1960s. The Nixon shock hasn't even happened yet. Have I got that all wrong, or what do you think about that view?

Lakshman: So on the secular side I'm like you in the sense of, I, I hear the stories, I try to put them together.

And it's very difficult because the secular stuff or structural stuff very hard to forecast the inflection point extremely hard. You can see it if you're lucky and you're really good in the rear view mirror. Five years after it happened, it's hard to do the to know that stuff.

So that's why it's tricky. I think you need to be a astute, I, in one man's opinion is that history is important, right? And I like to read it. They're great stories. And you learn that, people. Did interesting things and thought, interesting things but you're also reading someone's account of something.

You don't literally know what was happening in the mood in the moment. Like I think you and I and everybody listening know the mood today outside our window. But then you start to re-remember it very quickly and as a decision maker. You're taking in all of this, you have this huge amount of data flow, and nowadays we have more than ever right, of this data flow coming over our washing over our screens and our ears or whatever, and we're trying to figure out is there a structural change? What is the structural change?

What's it doing? And quite frankly, it's very, it's almost impossible, but I think the cyclical stuff, you can start to hang your hat on that. That is reliable information. Even now with the government data, on hold for a bit we have reliable cyclical inputs. And they're saying that regardless of our understanding of history and of.

The game changes or the rule changes that we think are going on at the moment, growth is not collapsing here and inflation writ large is not running away. The caveat there, how I can reconcile that with the stories that we've been telling about Nixon or the secular changes that, that started in the sixties.

Is that the forward look on the cycle indicators is a couple of quarters, two or three quarters. So it's not saying any of those views are wrong, it's saying not yet.

Erik: Lak. I love that setup because I'll tell you the narrative that's, I think. Driving. This is energy. And if you use that analogy to the internet, they were building a whole bunch of infrastructure.

They weren't thinking about things like social media and, so forth would be the big trends that would be where the money would actually be made in the internet. I think what people are missing now about the AI trade is, yes, it is every bit as as important to the future of history as everybody thinks it might be, but.

It's not gonna happen the way everybody thinks or imagines it's gonna happen because there won't be enough energy in order to fuel it. The exponential growth of AI will require a increase in the amount of energy that we consume that simply. Isn't immediately serviceable. It could be long-term with the right nuclear energy strategy, but that takes 10 or 15 years to build out.

There's a really big energy crunch I think that will drive an inflation. So again, I'm thinking in narratives, how does that view align with your cycles work? What do you see in the cycles? That, and by all means, if you contra, if your cycles contradict, tell me

Lakshman: No. Right now the future inflation gauge is not running away.

Okay? And most of the future inflation gauges around the world are pretty benign. We cover, all the major economies, including the major, emerging economies. Actually in China, you want a little inflation, right? Because they've been flirting with deflation. I'm talking very broadly, not in a commodity or energy inflation.

There are a couple spots where there's a little, UK and Japan had a little inflation stuff, but not, but basically not an issue right here. Does that mean anything that you said was wrong? No, I agree with you. My, I we work with large industrial companies and those who are in the energy production area.

Like the traditional, Hey, I may, I need to have a generator kind of thing. They've sold things for the next five, 10 years already. Because of what you're saying with the demand. What's quite interesting, and I don't know how to fully figure this out, I is just market prices.

I, I was listening to a pitch, this is your basic straight up. Wall Street Bank pitch on how to reallocate your assets, right? And so everything's, all the assets are up year to date across the board. Bonds, equities, whatever, gold stocks except oil, right? Oil's down oh 10%. When I had this report, which is a, in September, end of September.

So that's interesting. Right now, how do I intersect all of that with inflation and cycles and it comes into our work. Now I'm going from structural to cyclical. Looking at the next couple of quarters, it comes into our work in two ways. Industrial materials, prices sensitive ones including oil.

Let's say, let's start there. At the bottom of this very closely linked to global industrial growth cycles. Global industrial growth has been in fits and starts. It was like slowing a little bit and bottomed out and yeah, now it's moving up. Okay, so there's a, there may be a disconnect there on the demand side between a relatively weak oil prices and where the global industrial cycle is headed over the next couple of quarters.

That says nothing about supply. I'm not, I don't have an insight on the supply side. So that's the other side of this equation. And then you switch to the inflation side. What's going on with inflation cycles? So I'm switching from global industrial growth cycles to a completely different cycle.

Inflation cycles in the United States in particular, and sensitive industrial materials, prices, which is much broader than oil. Okay. There's energy, there's metals, there's textiles. There's there's other kind of miscellaneous materials, building materials, these other things, and they actually are starting to move up as a group.

Some of your longtime listeners may remember the JOC index. The Journal of Commerce Industrial Materials Price Index. That it's actually an ECRI index that we started in the eighties to track sensitive industrial materials. Prices. It's very different than like the Bloomberg one or Goldman Sachs one or whatever.

'cause those tend to be energy heavy. And ours are ore tradable. Our index is specifically designed for inflection points and growth, and I have to tell you that the breadth of that is starting to move to the upside. So it would be unusual, very unusual for oil prices to not eventually participate in that.

One that that, that means that one driver of many. The inflation cycle could start to get a little traction in the coming quarters.

Erik: Lock everything that you're saying very much stands as confirmation of one of my core views, which is I think we are at the beginning of a secular inflation, and I think the bad for the stock market, part of that secular inflation is not happening yet.

It sounds like your data confirms is not likely imminent. It's probably a good year or two off before we get into the kind of inflation cycle that that really starts to affect markets. And there's a lot of good reason to think that this equity market, what everybody thinks of as a very bubbilicious maybe it's about to stall out and roll over.

Stock market probably actually has legs to run quite a bit higher before. Eventually I think there will be some serious. Headwinds, but it sounds like it's not time yet. Does that jive with what you're saying?

Lakshman: Yeah, I'd say not yet. I agree. I agree with you. Not yet. I'm, this is an off color joke, but it's, I'm an older guy.

It's the guy who jumps off the Empire State Building. He's and as he's going, passing each floor on the way down, he says, so far so good. It can be fine for a while. And and booms and busts are like that. They're fascinating times. If. You have some awareness as to what's going on and probably some humility on knowing that you're not gonna get it exactly right.

Erik: I wanna turn this conversation upside down now because I think that this secular inflation discussion we're having is gonna be really important. You see this from two sides. One is your cycle work, but you also advise a lot. Of people to the extent that you can talk generally without breaching any confidentiality agreements.

What are your clients asking you about inflation? How are they seeing it? Is any, are other people worried about this? What is your interaction with your client network telling you about this?

Lakshman: What I think the, our, our clients have spent some time thinking about cycles. And once you get into it you're a little more familiar moving between cycles and growth and cycles and inflation.

And it's the latter cycle, the cycle in inflation. I think that is. Interesting to the clients and to me, quite frankly because I think it, it's confusing to, to the general public and therefore has all kinds of risks and opportunities around it. The inflation cycle right now as we've been talking about, is not a problem.

The us cyclical outlook on inflation overall, it's not running away, and that's hard to believe. Because of the things that you see and hear around you, and when you get into it. And we talked about this a little bit at the beginning of the call there are pieces that are moving up and it's related to the headlines.

The tariffs and such are pushing core goods inflation out of deflation where they were in 24 and into inflation, where they are now, and they're running around, they're approaching 2%. And so that's a big change, right? They went from minus 2% to plus 2% on core goods. At the same time. Shelter and services less shelter are all trending down.

And so that's why the overall inflation while sticky is not running up yet. And part of that relates to the bulk of people who, when the median households and who are in the lower end of the K, who can't afford higher prices. And so discretionary. Spending items they can't get a lot of price inflation there for that large cohort of people.

All of this matters because there is this combination of inflation and growth give you interest rates. And interest rates, then price the rest of your portfolio. I'm oversimplifying, it's critical component. And where does this then relate to the interest rate, to the yield curve?

Regardless of whatever the headlines are there's not going to be a strong inflation reason for a hawkish FED. So that's one piece of information. On the other side the continued stickiness and all of the structural and secular concerns, may have the long end hanging out, also sticky.

And so that's the setup for the yield curve going forward. There, there's probably some room on the short end. Certainly not for raising rates, but for being more dovish. And then the other end's sticky for now. And you've got, as I described earlier on a cyclical basis, a Goldilocks kind of outlook, firming growth with overall inflation, not running away.

So you see how the inflation cycle informs so much, and I think the inflation cycle is the most confusing part for most people to figure out.

Erik: Lak. I can't thank you enough for a terrific interview. But before we close, I want to ask the question on a lot of our listeners' mind particularly our institutional audience, which is what if they want to sign up for your service in order not to be left out in the cold and to know when there is a change in what your cycles are telling us is coming next, or when one of those inflection points is upon us.

Lakshman: Look, if you wanna work with us, it's pretty simple. Just call just give us a call. We're old school. Just call Melinda at our office and you can find us at Businesscycle.com. We're here in New York and we do have some people who are extremely good on, on, on social media and stuff.

So we have a YouTube channel, and that's Economic Research Institute. And we have a LinkedIn where there's, there's a newsletter and things like that, and that's Economic Cycle Research Institute. Again. So if you just type in the whole name on one of those social channels, you'll get right up to date stuff on what we're doing publicly.

If you wanna work with us, give us a call or send us an email and we'll take care of you. We're nice people and we enjoy talking.

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

 

 

 

Erik: Joining me now is Michael Howell, CEO, of Global Liquidity Indices. And boy, what a perfect time to get Michael on the show. Michael prepared a slide deck to accompany, today's interview, which I strongly encourage you to download as we'll be discussing those slides throughout the interview. There are also two research notes, which are very much worth reading.

One of them is called a Giant Hissing Sound, and it's exactly about this drying up of global liquidity that's occurring in markets. Michael published that long before the market events of the last week or so. So he's definitely got some prescience in terms of what was going on in this market. The second download is called The New Currency Wars and the Gold Bitcoin Axis, America's Digital Collateral versus Chinese Gold.

Both of these papers are very much worth the read. Just for our listeners benefit, we are recording this interview. Early on Tuesday morning. So Michael and I are aware of the market carnage, which brought us to the first sell off to a closing print below the 50 day moving average on S&P E mini futures since the 21st of February in 2025.

The last time this happened, it was 1200 points down from there before it bottomed. Michael. Is that about what's gonna happen next, or is this one gonna be shallower?

Michael: Oh, hi Eric. It certainly could be. I think the concern is that we've we've been in a bit of a bubble and liquidity is basically being pulled from markets and, liquidity has been a major driver of asset prices really well, as long as I can remember, in fact.

But certainly since the the low point in. Late 2022 markets have catapulted upwards by more liquidity. And it looks as if this is coming to an end, or certainly at least for the short term, if not one into 26.

Erik: Now I wanna compare this. I agree with you completely that boy, liquidity is everything to markets.

It does seem like the technical indications are giving us a signal we haven't seen since February. That was pretty nasty in February. This could be big. The other side of that though, is our good friend Eric Peters over at One River Asset Management has a note out saying, look. President Trump has never had more at stake than he has right now.

If the Democrats take control of the Congress in the midterm elections in 2026, we're gonna go back to Lawfare, probably another impeachment. Who knows what could happen. On the other hand, if he can get through this and somehow make sure that Republicans win in 2026, then the rest of his presidency, and he can't run again, so this is the end of his presidency.

It sets him up for the legacy that he wants to have. So what Eric Peters is saying is, boy, there's never been a stronger incentive for Trump to pull out all the stops and do absolutely any policy action that it takes to turn this around. So I guess the question in my mind is, okay, are there any policy actions that can turn a drying up of global liquidity around?

And I agree with you, it's not just US, it's global. Liquidity that seems to be drying up. Is there some trick up Secretary Bessent and President Trump's sleeve that could reverse all of this?

Michael: I think there's a lot of things out there. And I'm absolutely sure that their focus very much on the midterms, so I'd be surprised if they do nothing from here.

But the question is do they really try and goose Wall Street or do they put more stimulus into Main Street? And I think everything that we're hearing out of. Treasury Secretary Bessent is that we're basically moving towards an environment where it's quite likely that Main Street is gonna get the thrust of any policy impetus.

Now, I think you can see that in some ways by listening to some of the Trump appointees on the FOMC notably Steer Miran. And what he's saying is that sort of very curious combination of. Let's cut interest rates, but also let's shrink the Fed Balance sheet. Now that's a head scratching point because it's difficult to do that, but at the end of the day, what they're really saying, I think, is that lower interest rates will likely help Main Street.

But a smaller balance sheet is gonna take some of the impetus or some of the liquidity away from Wall Street and that may be is what they're thinking of doing. And it's really in this sort of camp that I describe as, a shift from Fed QE towards treasury, QE.

And that I think is really the direction of policy. The problem is it's very difficult to. Sort of fine tune that withdrawal of liquidity from Wall Street without causing the market some tensions. And I think we're seeing the early signs of that now in the repo markets. We haven't seen these kind of tensions in repo really, since 2019, and the script is looking very similar.

So you're seeing a run of of excitement or wider spreads in repo and then suddenly as in 2019, you get an unexpected blowout and that could be happening again. So we've just gotta be really careful about monitoring some of these some of these issues.

Erik: Michael, let's tie this conversation into your slide deck. Walk us through what's going on and what we can expect next.

Michael: Okay let's let's start on slide 11, which is a little way in, but it gives you the sort of essence of what I've just been talking about, which is looking at at the global liquidity cycle.

Now, what this chart is identifying is the momentum of liquidity through the world economy. Now, I think we've gotta be, clear about. A couple of things. One is what is global liquidity? And the way that we define it is it's the flow of funds through world financial markets. Now is that money supply?

The answer is not, it's not probably an easier way to understand what we are doing is to say that this aggregate is really financial money, but it pretty much begins where conventional M2 measures of money supply end. So it's really looking at that sort of fringe. Of, of funds, which are, in repo markets flowing through shadow banks, Etc.

These kind of more esoteric areas. But it's that which tends to drive a lot of the leverage in the financial system. And it's very cyclical as the diagram says. So the black line there is the momentum. It's shown as an index, but it's basically the underlying growth rate of liquidity. And what we've overlaid on top of that is a sine wave that you can see as a red dotted line.

Now that sine wave was actually put in place 25 years ago, back in the year 2000. It was estimated for those that are mathematically inclined by fourier analysis, and it's basically been extrapolated thereafter. What is what you get. It's a 65 month cycle. Interestingly by coincidence the foundation for the Study of Cycles, which is an institute that looks very closely, as the name suggests, that cycles took the data away and did their own independent analysis much more rigorously, I'm sure, than we did. And they came back with exactly the same conclusion that it's a 65 month cycle.

So there's independence sort of corroboration here. And the other question is, why is it 65 months? And our best rationale is that this is a debt refinancing cycle. As we've noted before, capital markets are not as the textbook suggests mechanisms for raising new money for new investment projects.

They're much more systems for debt refinancing. And we've got so much debt. Something like 70 to 80% of all transactions in financial markets are about debt refi now. So this is debt refinancing cycle and the average maturity of Debt out there in the world economy is around about five and a half years, which is exactly the 65 month cycle.

So that's probably what it is. And you can see from the cycle that we last bottomed in late 22. In fact, it was October of 22. The cycle has been moving up, pretty pretty nicely in almost in a straight line ever since. But it's just beginning to inflect and it's inflecting. It's pretty much round where that ine wave is suggesting late 2025, early 2026.

And that's why we're concerned because we're seeing this downward momentum. And that's coinciding with where the cycle would norm, the rhythm would normally start to turn down. So that's our concern. And if you go to the next slide that basically just encapsulates that in by looking at the current cycle and comparing it with the average.

Cycle over the period since 1970. The average cycle is that black dotted line. The zero is showing the, of the middle of the chart is the low point, the months before and after that low point are shown at the bottom counting to the left and to the right. And the red line is the current cycle. So it looks as if we're pretty much at the end of a, what is a normal cycle.

Now there is tolerance either side of that average and the tolerance it's been on average about eight months. You've got a window there of some flexibility, but it looks as if we're getting pretty late. That's the story. And then, if you want the implications, then take a look at the following slide 13, which is just a schematic diagram that looks at the asset allocation cycle and tries to overlay the liquidity cycle, which is shown on the left. Onto the asset allocation cycle, which is shown on the right, and it basically infers that if you're in the upswing, in the phases that we describe as rebound or calm, you are likely to have strong performance from equities around the peak of the cycle.

You tend to find commodities. Picking up strongly in the downswings you wanna be moving back to cash is the asset that gives you the better absolute returns. And then around the trough of the cycle, you want longer duration government debt. And then the cycle starts again. You go from risk of back to risk on, and that's effectively how the how the cycle tends to work.

Where are we now? We're basically around the peak in the US market. We reckon Wall Street's in what we call a speculative phase in terms of liquidity. Let's be clear. Other markets are nearer the peak, maybe Europe emerging Asia, and much more in the sort of the very late calm phase.

But you got the idea. We're late in this cycle.

Erik: I wanna make sure that I'm not reading too much into this. 'cause as I go back to page 11, this looks pretty ominous. It says that basically we're probably hitting a peak or pretty darn close to it, and it's two or three years of down before up starts again.

And we're seeing that confirmed. I would say certainly the signal that we've seen in the last two days in the market is the first time since February that we've had a closing print on the S&P below the 50 day moving average. And I saw an. Note from our friend Ola Hanson over at Saxo Bank saying commodities are really starting to take off.

That jives with what you're showing on page 13, that's what happens after the equity cycle has already peaked. Really seems like there's a lot of corroborating evidence that all says equities are done here. Am I reading too much into that?

Michael: May maybe, it's never quite as binary as that, as you know right , but I mean, I think the the fact is that we're likely to see much more of a headwind for stocks if this is the correct judgment, that liquidity is turning down.

You can see this whole picture in a, maybe a, an easier way through traffic lights, which we show on slide 15. And the point about that chart is that it basically shows to the left. Asset allocation in which asset classes you should be picking in different phases of the cycle. And then the industry groups that tend to perform are on the right hand side.

Now what that traffic light system says, and by the way, that this is, not something which adapts to each cycle, it's something that we I'm not gonna say set in stone, but it more or less is we've used this for decades, but it basically shows where you would normally expect to see returns from.

Different asset classes, different industry groups. Now what it says is that if you're in the rebound stage where you know you want to be, just think about the traffic light, the orange light says proceed with caution. So that's saying that you wanna, overall in your asset location be prudent, but probably.

Moving forward green lights are clearly goes, so you want to be in equities and credits at that stage. Commodities, it's too early and bonds not really any interest. Then you go to calm and you start to see equities picking up more strongly and you're getting the first sniff of action from.

Commodities credits. You wanna be, maybe a little bit more cautious, spreads have already narrowed a lot at that stage. Speculation, equities proceed with caution commodities, full green. That's where I think we are now. By the time you get to turbulence, you wanna be out of out of equities.

You maybe wanna be sticking a toe back in the credit area because spreads may be more attractive and bond duration gets the green light. And you think about industry groups on the right hand side very straightforward. You wanna be in cyclicals in that upswing phase during rebound and calm.

You wanna be defensive otherwise, in the downswing phases. Technology always leads, so it does. Really well in rebound and calm. You tend to find financials really picking up strongly around the mid-cycle calm stage. And then typically energy commodities do well later in the cycle. Now, I would say, despite the fact that we've had virtually no business cycle to speak of since the end of COVID.

Economists have generally flatlined maybe for a host of reasons, one being the the sort of strength of fiscal spend. What you've seen is a very normal liquidity cycle and you've seen a very normal asset allocation cycle. This has been almost operating like clockwork technology.

Were clearly leaders financials have had a stellar 12, 15 months across, worldwide. Commodity markets are, have been on fire mining stocks have been basically, thrilling us this year. So it looks extremely normal from an asset allocation and liquidity cycle standpoint. The puzzling element is clearly about reading the economy because that's pointing all different ways.

Erik: And I would suggest also that the obvious other elephant in the room has been an expectation or a desire among market participants to believe that this market weakness surely must have been all about the US government shutdown. With the government reopening. We must be almost at the bottom and it's all gonna take off again.

It seems like you've got the good explanation for why. Maybe that's not true, but I think we should touch on that topic. Is there any any validity to the idea that maybe what we're seeing here is just to sell the news reaction to the government reopening and we're about to see a recovery?

Michael: It could be, I think that, one has to be realistic here. And the fact is that, within the Fed Balance sheet, there's an element that we we've termed fed liquidity which is something we wrote about when we published a book, five or six years ago, called Capital Wars, which went into dissect it a lot of Fed operations.

And we came to the conclusion that it's not the overall balance sheet. That's really the important element. It's really understanding. Parts of the balance sheet, those components that actually create liquidity for the markets. And if you look at that that particular aggregate that that calculation fed liquidity it's been under, under pressure over the last few months.

Really from a combination of reasons. One of those is being the end of the debt ceiling. Treasury general account, which had been paired down during the period when the, where the federal government couldn't issue debt. It's been rebuilt. That sucked money out of markets. And then lately the government shut down, has further sucked more money out because there hasn't been the, there's been limit limitations on spending.

So you've got the Treasury general account, which is it sounds slightly wonkish, but it's an element of the balance sheet where effectively the Treasury build up its bank account at the Fed, but that is taking money outta markets. It's not circulating liquidity, and that has been, now it's over a trillion dollars and that will clearly come down as the government restarts.

There's no question. So money will come back. The question is that the Fed has taken out. Over that, maybe the last six months since the summer about 500 billion. So half a trillion dollars out of markets it could put back with a government restart, maybe 150. So we're still gonna be sure, and that is being played out in bank reserves where bank reserves are now well below the 3 trillion threshold in the us and that's clearly causing problems in the repo markets.

I think what might be helpful is to try and understand why this is a problem and maybe what is coming down the track in terms of understanding this sort of whole debt liquidity nexus, which is really driving global financial markets as we see it. And there's a slide a little bit further on in the presentation on slide 21.

Which looks at a sort of schematic representation of the, the world financial system, if you like, post GFC. Now, what that slide identifies, it's as I say, a schematic diagram, right at the heart of that diagram is a debt. Liquidity Nexus, and what it basically says is that you've got this paradox in the world economy where, as I've maybe emphasized, we're in a refinancing world where capital markets are already focused almost entirely now on.

On refinancing existing debts. If you take out a debt, unlike an equity security, you've gotta think about rolling that debt. Spoiler alert, debt is never repaid. It's only just rolled over. You've gotta, you've gotta roll that debt on average FI in five years time. And that causes a great burden for financial markets.

So if you think of a very simple math here, if you've got $350 billion of, sorry, trillion dollars, I beg your pardon. Trillion dollars of debt in the world economy with an average term of five years, you are asking capital markets to roll over 70 trillion. Of debt every year. This is a huge amount and it's only getting bigger.

Now if you look at how this system works, you've got at the heart of the system, this debt liquidity nexus. The paradox in the system is that debt needs liquidity for a rollover, but liquidity needs debt as collateral. It needs all existing debts as collateral. Now, that's the paradox. Something like, as you can see from the chart, 77%, very precise figure, but that comes from the World Bank, 77% all lending worldwide now is collateral based.

So it doesn't mean to say your, home mortgage or real estate has got a, is collateralized. It's not just that. It's saying that a lot of financial lending. It's actually collateralized using US treasuries or German bonds. Think of the hedge fund basis trade that is underpinning the US treasury market.

A lot of that is, or the bulk of that is collateralized on treasuries. So this is really a very important element. And the point about this diagram is that what you need is an equilibrium there, and that equilibrium is a balance between the amount of debt and the amount of liquidity. If you have deficient liquidity, you're gonna get a financial crisis.

If you have too much liquidity, you get an asset bubble. Now, if you take a look at the following slide 22, that gives the history of that particular ratio. What that shows is the debt liquidity ratio over time. Now, I've often puzzled, been puzzled by the idea of why do economists look at debt to GDP, and I've never really understood the logic for that.

Maybe it's because it's an easy calculation to make. And so many things in economics what is most easily measured seems to take on the greatest importance, whether it's relevant or not. And I think that's the same with debt/ GDP, this is looking at something which is practical, which is saying, let's look at debt liquidity.

You need liquidity to roll debt. And if you look at that series, it's it's basically a stationary series that mean reverts. And it seems like there's a level of. About 200%, otherwise, two times debt to liquidity where you get an equilibrium. Now, if you stray above that equilibrium, if you go way above the two, you'll see there that you get spikes which have annotated, which happen to be global financial crises, and that's when you get refinancing tensions in the system because there's too much debt, insufficient liquidity, you can't roll the debt.

And so financial markets get into gesture. If you look at the opposite of that, if you go down the page and you look at the low periods of the debt liquidity ratio, when there's abundant liquidity in the system, you get asset bubbles. The vent of that excess liquidity is asset prices. And you can see where we've just been coming from, something called the everything bubble.

Now that is an astonishing displacement downwards of that ratio, and it's clearly been propelling markets ever higher, and you can see that it's now coming to an end as that. As that line picks up, now we can go down two rabbit holes here. One is to is to look at. The history of asset bubbles, which I think was the second slide in the deck, which is just something I snipped from Twitter which was a chart on asset prices in bubbles since 19, the mid 1970s.

And I just. As best I could overlaid on that, our global liquidity cycle, just to show that almost every bubble coincides with a prior period of excessive liquidity, pretty much as this slide 22 confirms. But the question is, why did we go down so far in that ratio? Why was there so much liquidity relative to debt?

And now why are we going up? And that's really the second rabbit hole. Now, if you think about why we went down, it was simply because we reached the situation after the GFC and after COVID where policymakers just plowed liquidity back into the system to try and write put us back on the rails and write the system after those significant crashes or collapses.

Liquidity was the solution. It's now become the problem and the other thing is that interest rates were slashed to zero. If you've got worries about debt, why do you want to incentivize people to take on even more debt by getting interest rates to zero? That seems to be a completely crazy policy doing that, but it also encourages a lot of borrowers to term out their debt later to later in the decade.

So if you. Look at the next slide and I'll stop after that. But if you look at the next slide 23, that shows the the, for the advanced economies, what's called the debt maturity wall. And this is our calculations, but it basically shows the incremental increase each year in the amount of debt that needs refinancing

You can see this is for, as I said, the advanced economies. You can see the bite out of the chart in the COVID years 21, 22, 23. And why was you, why did you see that bite? Because low interest rates encourage borrowers, governments, corporates, households to refinance their debt, term it out, in other words, push it back to the late 2020s.

And that is now coming back full steam into capital markets and it needs liquidity. To be refinanced, so that's why the ratio's going up and that looks fairly threatening for the next few years. Liquidity is desperately needed and that's not what policy makers seem to be wanting to do.

Erik: This slide 23 really speaks to me, Michael, because we've discussed this narrative for the last 10 years about, boy, we're gonna run into this problem.

Interest rates going back up, it's gonna be hard to refinance US government debt. It comes at a time when geopolitical relations are such that many countries are questioning their commitment to US treasuries as their primary reserve asset. That's a great narrative. But boy, you look at slide 23 and what it says to me is.

Was a good narrative, but we didn't really have a big problem until about 2024, and it gets worse in 2025 and wow, for the next five years, who the heck is gonna buy all of that US Treasury paper at a time when even before we had this maturity wall hitting us in the face, it was already getting difficult to continue to rationalize that sale of US Treasury paper because of geopolitical developments.

Am I reading too much into this, or is this a really scary slide here?

Michael: I think Eric, you're not rooting enough into it. I think the reality is, remember this is refinancing existing debt. This is not talking about the new debt that's coming down the track as well. So you've got on top of this for the us another 2 trillion every year of of new debt.

So I think this could, we're burying ourselves under paper here. This is the problem, and so you need more liquidity, and this is why the monetary debasement trade is so popular because the only way governments can get themselves out of this is to basically start printing money.

Now you can see the tensions, which are forcing governments into a corner. On the next slide, which is looking at the repo markets, which is very topical right now. Now the issue that we raised is that if you start to see problems between the amount of debt needing to be refinanced and liquidity, you're gonna start to see tensions in the repo markets, which are the main refinancing arena.

Certainly post the GFC. And what slide 24 shows is the spread between. Repo rates, which are a market based rate and fed funds, which is clearly the administered rate by the Federal Reserve. The targeted rate, and you can see how that spread is evolving over time over the last three or four years.

Now, it's not so much the extent of the divergence that's really important here. It's the frequency and what you're seeing is more and more evidence that the repo markets are struggling under the way to refinancing demands and the lack of liquidity. And normally you'd expect to see is that chart initially shows a negative spread because SOFR rates which is the main repo rate.

A collateralized whereas fed funds is not, so you'd expect actually SOFR to trade a tad below fed funds. And actually what you're seeing here is it's trading well above. And, paradoxically, the Fed's recent interest rate cut has been virtually wiped out now by the markets in terms of the rise in SOFR.

So it's the Fed has lost control. The interest rate setting mechanism. Now, at the moment, this is purely an inconvenience for the Fed, but it could turn into a bigger problem down the track. And one of the things to see is to look at a couple of slides on which I think is slide 27, which is looking at bank reserves in the US which is really the counterpart to liquidity in money markets.

Bank reserves are shown as the orange line in terms of their deviations from what we do. Deemed to be adequate levels of reserves or minimum levels of reserves, and the numbers of failed trades that you're getting in among primary dealers in these markets. Now, primary dealer trade fails are shown in black inverted.

So when that black line falls. Lower, it's actually indicating a big spike upwards in failed trades. And what you can see is that as bank reserves dip so you are seeing this this process of increasing trade fails. Now that's only gonna lend to volatility in. Financial markets and certainly in the bond markets.

And that's really a concern. And if you wanna understand how we got there, just take a look at the two prior slides, 25 and 26 25 is looking at the aggregate we described as fed liquidity, which is basically the liquidity components of the Fed Balance sheet. And this, comprises both their QE policies.

The QT policies and what we've slightly tongue in cheek labeled not QE, which is this ULA tabla or backdoor liquidity injections that can come, through running down the reverse repo account through the bank term funding program, whatever. You look at slide 25, which is the fed liquidity growth, and you can see basically where we are right now, which is this big draw

In in the growth in liquidity. So actually fed liquidity is falling in absolute terms, and that's because of these factors such as the end of the debt of the debt ceiling, the government shutdown, Etc. There's some recovery for sure, but it looks like a fairly recovery. And even to get there, we've assumed that we go back to a QE.

I've used the, heretic. I've used the word QE, the dreaded word. We go back to a QE of maybe 250 billion next year. But there's still not enough to already lift, fed liquidity growth. And you can see the impact of that if you go to the next slide, 26, which is the counterpart. So think about fed liquidity, initiates the liquidity impulse.

It goes into money markets and it ultimately appears as bank reserves excess or whatever levels of bank reserves. And you can see here are Estimates of bank reserves. So we've taken, we've calculated estimate or we've estimated bank reserves by looking at when you get tensions in repo markets. And that gives us a plot for minimum levels of reserves and we show actual reserves against that.

And the. Prior chart or I looked, we looked at earlier. Slide 27 is the one that shows that displacement relative to failed trades. So you can see where we are now. The Fed has basically let us bank reserves fall below what we think is the critical measure of about 3.3 trillion, and that is why you're getting the tensions in markets right now.

And I'll end this bit on just looking at one further slide, which is slide 29, which is comparing fed liquidity in absolute terms with the S&P. And the S&P has been lagged by six months to show it has it follows on, not directly one for one, but, I've always looking at that chart and, spotting the fact the federal liquidity was dipping as sharply as it is.

I'd be fairly worried about the health of Wall Street. If you get my point.

Erik: Michael, let's move on to page 30.

Michael: Yeah, let's let's focus on that, Eric. What it's looking at is a slide that basically disaggregates the various sources of stimulus that are coming into US financial markets in liquidity terms and what the chart is looking at.

There are three divisions there two, which concern the Fed which is the orange and red areas. The red is conventional QE, balance sheet expansion by simply buying treasuries. The orange bid is what we've as I said, called slightly Italian sheet, not QE, which is really the backdoor liquidity stimulus, which comes from things like the bank term funding program, the rundown of the of the reverse repo account, Etc.

Other sources of liquidity, and that's really what you would call fed QE. And that's been something that clearly has lifted Wall Street. It's benefited wealth owners in the US. But it's something that treasury, secretary Bessent, roiled against, and more particularly recently new FOMC appointee Stephen Miran.

And what they're talking about is actually focusing much more on what I've labeled treasury, QE, which is the black area now that basically is concern something that Miran wrote about we've also focused on, which is looking at changing the issuance calendar in the US towards. Bill finance or very short term debt finance of the government.

And because that changes the structure of debt in the system, although this sounds wonkish, it actually is equivalent to a liquidity injection. In other words, if you're, if you are issuing a lot of treasury bills, the question to ask is who buys those bills? And it tends to be banks and banks by government debt.

Technically it is monetization of the deficit now. The little window in that chart is basically overlaying on the liquidity stimulus the the growth rate or the cycle of the US economy. And you can see that the two line up pretty well with a lead time of about nine months. So it should be that the real economy gets traction in 26.

Contrary to what a lot of people are talking now about recession, I think it's gonna be the opposite. You get stronger growth. Now, this is not just a US phenomenon of this monetization of debt, it's also a global phenomenon. And if you look at slide 32, this is looking at the scale of monetization of fiscal deficits and government debt by banking systems worldwide.

And the point is that this shift from longer dated debt issuance towards shorter debt issuance is. A subtle way of governments getting banks to finance them through printing money because banks love the short-term paper and that's exactly what they're doing. So if you look at that slide 32, that's worrying for Monetarists because what it's likely to be telling us is that more traditional M2 money supply growth.

Could be actually accelerating into next year and you Yeah, I'll back up. The envelope calculations would suggest that us M2 conventional money supply could be growing at something like, seven 8% in 2026, which is clearly incompatible with a Fed. 2% inflation target. So this is the longer term problem that the system faces.

Now, that's one reason why you want real assets as a protection against this debasement, but there's another reason, which is basically China. And if we look at what China is doing, take a look at slide 38, which is. Jump forward, but it basically looks at the debt to liquidity ratio of China and it compares that with Japan, which is the black line on that chart.

Now, as I tried to argue, debt liquidity ratios are the equilibrium in the system, and what you need to do is to get out of a away from a high debt liquidity ratio and to pair that down to more average levels. And you can see Japan has successfully done that. And despite the fact that Japan's debt to GDP is sky high, its debt to liquidity has been brought down significantly because of Abenomics and because of the bank of Japan buying lots of JGBs Japanese government bonds monetizing debt causing the Yen to weaken significantly. And by the way, it's still weakening despite the a lot of brave words about how the yen is so undervalued. It's responding to this monetary inflation by devaluing. China is good doing the same thing now it is being forced into a devaluation of its currency.

It wants to print money. This has been, I think, accelerated by the stable coin phenomenon in the us It's threatened. Monetary system is threatened greatly by this, and you can see on the following slide. 39. The scale of the impulse that the PBOC has just added to markets in 2025. They've been sitting on their hands of quite a long time.

They're running a tighter policy to try and protect the Yuan against the US dollar. And my view is that's doing two things. One is. But that big liquidity impulse is driving the gold market up, which is what Slide 40 says. And I think we've gotta start thinking about how China is controlling gold now.

And that is another sort of ultimate segue into the future monetary system. And then finally, on slide 41, what you see there is the is a track of Chinese liquidity, which is taking a longer term view. Using our indexes of the Chinese liquidity impulse against commodity prices. And you can see there that in the black lines are the with or without energy, the impact of Chinese liquidity on commodity prices.

And the fact is that China has a big economic footprint globally and in the Asian region. And if the Chinese economic engine gets going again. It's gonna suck in commodities and that's gonna drive prices up. So I think we're absolutely at the stage where commodity markets do well.

Erik: Okay. You've said that a couple of times now that commodity markets should do well, and we're maybe getting to the point where equity markets have, are reaching a peak.

What does that mean for the commodity stocks, the mining stocks? Are they likely to continue to do well along with the com underlying commodities, or are they going to be affected by the pressure on equities?

Michael: Argue this in a number of ways, Eric. One is that if you look at these many of these mining stocks on traditional valuation grounds, or, even compared with their history, they look cheap.

So I think there's no question about that there, there's compelling value in them. But the thing is that a mining stock has two moving parts. The E and the P and the E is gonna move up strongly as commodity prices rise. Assuming, let's say that oil remains. Or lags because one of the things that tends to affect mining stocks is the cost of extraction, and that tends to be energy related.

Looking at the commodity price to oil ratio is clearly a decent heads up for that, for the, for those profit margins. But assuming that is going upwards, then you're gonna get further. Earnings expansion for these stocks. But the question is the PE and the PE, sadly is also a sort of a function of general levels of Wall Street.

So if markets sell off, it's gonna be very difficult for mining stocks to gain dramatically. They may well outperform because they've got stronger earnings, but it's it's a difficult judgment. So I think that you are on safer ground looking at the underlying commodities. In this at this time.

But, I'm, personally, I'm still favoring mining stock because I think that they've got decent value behind them.

Erik: I want to just assimilate this entire slide deck before we move on to go a little bit deeper into this question of stable coins and re-architecting the monetary order, which you've got an excellent paper again, linked in the research roundup email for our listeners to download and read.

Let's just take this all into to perspective, Michael. If you had showed me this slide deck three weeks ago when the S&P was testing all new, all time highs at 69 50 or whatever it got up to, I would've said, boy, this is a really compelling argument that says we're nearing the end of a cycle. The big question now is, okay, when's it gonna crack?

Gosh, Michael, just in the last 24 hours as we're recording early on Tuesday morning before the European open, we've seen the S&P break down to its first close below the 50 day moving average for since February. And the last time it happened, it was 1200 points down from there. Did it just crack?

And if so, it seems like maybe this is a pretty big deal and a pretty big signal.

Michael: Yeah, it could be. I think the thing is that if you look at investor sentiment measures so this is what retail investors are doing. There doesn't seem to be a huge overextension in markets.

So this is not about, let's say excessive valuation concerns. This is much more about the flow of liquidity, and you can see the breakdown on the flow of liquidity. But looking at the repo market in the US that's a. Fairly decent heads up. It's only a US metric, but it's certainly important.

And the repo markets certainly are are not behaving very well, and they're not behaving very well simply because the Federal Reserve has pulled the rug away to some extent. And what I would go back to again, is the, is the comments that Stephen Miran has made recently about saying, okay, what we want is the balance sheet down and we want interest rates down.

And that says to me that they wanna direct the hose away from the Fed. And soaking asset markets with actually directing the hose more precisely into the real economy and trying to get Main Street driven forward. And that means, defense procurement. It means critical minerals, it means taking strategic stakes, Etc.

And it comes back to this general idea that we've been talking about for some years. This is a capital war, not a trade war. A trade war is a veneer on top. It's really a capital war. This is a struggle for. If you like, dominance of the world economy in terms of currency and capital and America wants to win.

Erik: From page 23, we know we're facing this massive refinancing wall that comes at a time when the relationship between the US and China is under extreme pressure. All indications are that China is buying gold hand over fist apparently, to replace their prior dependence on US treasury paper as their primary reserve asset.

You wrote an excellent paper, which is linked in the research roundup email. It's called The New Currency Wars and the Gold Bitcoin Axis, America's Digital Collateral versus Chinese Gold. In the time we have remaining, give us a quick rundown of what this paper is about.

Michael: Let me also flag Brent Johnson because he's done very similar work.

He probably makes the case more eloquent than me, but he's been a great advocate over the years of the MILKSHAKE theory, which you're familiar with, and I think a very good way of understanding the milkshake, theories to look at. Slide 35, which basically showing the big inflows into the US dollar, and this is something which has clearly occurred almost uniquely since the GFC.

There has been a redirection of money flows into us assets in the US dollar for a whole host of reasons, but clearly it's been a fact and that has prop higher over the years and Brent has very clearly called the milkshake theory. I think what we've got now is a milkshake theory with two straws, and not just this sort of dollar straw, but we've also got a stable coin straw. And I think that explains an awful lot about the reaction of what of China in recent weeks to to the, to these developments and why it's putting a lot of liquidity into its markets right now.

It wants to repair its financial system quickly, and it also explains why China is buying a lot of gold. Now what I think you are getting is you are getting a financial system worldwide that is cleaving. Its two parts, one part which is being backed by gold, which is China. And China is clearly accumulating gold.

It's a big gold producer of now the world's biggest, but it's also buying on the open market. And, some market experts, as you'd be familiar with, are actually suggesting that China has actually managed to accumulate something like 5,000 tons of gold officially. Way above what the slated amount is.

The data shows. So they're doing this surreptitiously, but they're doing it by stealth, but they're still doing it, and that gives 'em the ability to back their currency by gold. Now, it's important to say that this is not a return to a gold standard. Fundamentally no, it's not. Because they still need fiat, because they need fiat money to basically fund the government in the same way that America does.

But America is not backing its system with gold. It's using a stable coin, and it's basically wrapping treasuries within a stable coin wrapper. So what you're getting is essentially digital collateral in the US versus gold. Or tangible collateral in China. And what America is implicitly saying is trust our technology.

And what China is saying is trust our gold. And that's how the two systems are basically working out now. Stablecoin is a big threat to China. And just to understand that, just think of the squeals that are coming out of Europe now about the unfairness of US stablecoin and, a a prominent member of the ECB.

Said only yesterday. Look, this is unfair competition because if the US starts issuing stable coin to European residents, we are gonna lose. Europe is gonna lose control of the monetary system. Let's just reap that for China too. 'cause China's got a much, much bigger problem.

And the way that I envision it is to say, look, if you are a Chinese exporter you are facing sort of the choice between the devil and the deep blue sea at the moment. You can put your money, your dollar earnings. Into a Western banking system and you can risk sequestration rather like the Russians faced after the invasion of Ukraine, or you can put it back in the domestic banking system and risk sequestration by the Chinese authorities, by the PRC if you do a Jack Ma full foul of the authorities.

So it's very, it's a straightforward decision I would suggest to start putting your money into stable coin. It's easy to open a stable coin account easier than opening a bank account. And what's more, there's some degree of anonymity in holding them. So the Chinese must be really scared by this, and that's why I think they've been triggered into stabilizing their financial system, trying to buy a lot of gold, issuing lots of liquidity to the debt problems because we're facing this capital wall.

So it's really a question of trust. Gold versus trust our technology, it's in America's interest. I would suggest maybe controversially to say, actually we want to destabilize the gold price because a much higher gold price will benefit China. And it's in China's interest to attack US technology through cyber warfare and maybe quantum computing to say we wanna un undermine the fabric of of US society, which is very technology dependent.

So you've got these two. Entities at war using very different weaponry.

Erik: In the interest of time, I'm going to have to refer our listeners to your excellent paper for more context on this. But I have one final question before we close, which is, how do I make sense of what this means for the gold market from here?

Because on one hand I could see the argument that, hey, China is gonna continue buying gold hand over fist. It's gonna drive the price higher. You gotta stay long gold. We're maybe at a, a. Bit of a low point here. It seems like a good buying opportunity. Go baby, go on gold. But then I could see the other side of this, which is President Trump is very much engaged aggressively in negotiations with China.

He has, as far as I can see, a very strong incentive. And there's no doubt in my mind that Scott Bessent understands all this stuff and is coaching him on what it all means. To say, look, China, we gotta cut a deal here somehow, where you guys back off on the gold buying and go back to US treasuries and we'll make it good for you by wrapping them in stable coins and we'll make a promise to you that we're not gonna do to you what we did to Russia.

How do I balance those two ideas? What do you think the outlook is for gold here?

Michael: I think you've gotta play the trends, Eric. I think that's for sure. Both commodities gold and Bitcoin are volatile. We know that. If you take the longer term view, my view, my.

Perspective is, it's not a question of gold or Bitcoin, it's a question of gold and Bitcoin. You need both of those assets for the reasons I've just explained. And I think if you look at the longer term perspective, just consider the growth in federal debt US federal debt since year 2000. Compared with now is up 10 times.

That's an eye watering figure. The S&P has managed to gain less than five times over that same time period, but goal is up 12 times. So goal is more than outpaced the increase in federal debt. So if you start to extrapolate into the future you are looking, even taking. Congressional budget office data that the debt GDP ratio of public debt to GDP for the US is gonna test 250%.

So more than doubling from where we are now by 2050. That would suggest that if you just use that same timeline and assume that the real value, the gold value of federal debt stays where we are now, not an outperformance by goal. The gold price should be 10,000 by the mid 10,000 an ounce by the middle 20.

Thirties and it should be $25,000 an ounce by 2050. Now that'd be higher. We live to see that, I'm sure. The fact is the trend is there and you've gotta play the trends and people need essentially hedges against this monetary inflation. And my point has been that we're in a monetary inflation world, not a financial repression world.

There's a subtle but a really important difference.

Erik: Michael, I can't thank you enough for a terrific interview. I really want to encourage our listeners to download all three of the attachments in the research roundup email. That's the slide deck, which we didn't have a chance to get to every page in.

I recommend that everyone peruse the pages we missed 'cause there's a lot of great content there, but particularly the two papers that you shared with us, both are excellent and I highly recommend them for people who want to go further than that and find out more about what services are on offer at Global Liquidity Indices, how do they follow your work? How do they contact you and what services are on offer there?

Michael: Okay, Eric. The easiest way is to look at Substack. We have a substack called Capital Wars, where we provide both data and narrative, and we publish about three.

Three times a week on average. For that we've we've transitioned from a company called Cross-Border Capital, which I founded. We've now focused a lot on global liquidity indexes, but the old website, crossbordercapital.com still exists and works, and that's where our institutional research offering is still provided.

Those are the two main conduits I would suggest. And there's a Twitter account @crossbordercap. For the occasional tweet,

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

Erik Townsend 

Joining me now is Mike Green, simplify asset management's chief strategist, Mike, it's great to get you back on the show. Let's just dive right into this market. Last week, the sky was falling, the world was ending. Everybody was sure that the market was going to crash. This week, government shutdown seems to have been averted. Everybody's saying it's new. All time highs around the corner. I kind of have a feeling that you're going to say that the story is a little deeper than that. What's really going on here? What should we expect? How should we interpret this market?

Mike 

Well, I think the thing that you know I'm going to talk about is ultimately the most important factor that exists in the market. It's just the mindless bid that continues to come from 401, K contributions, IRA contributions, money flowing into ETFs, mutual funds, etc. You know that money largely flows into the broad indices, the total market index, or the s and p5 100, is really the single biggest beneficiary of this, and powers equities higher in a framework that is driven largely by momentum, but actually has some interesting characteristics, slightly different than pure momentum. It's what I'm calling the passive factor, and my math suggests, unfortunately, that that is now adding about 1300 base 12 to 1300 basis points a year in excess performance versus what you would expect under a mean reversion or a valuation dominated market. And so, you know, a lot of what we are seeing is, unfortunately, just a statement of how we invest, which is passively through broad indices into retirement accounts. We don't take that money out. That how we're investing is a big deal. And then the fact that so many people are investing under a government sponsored enterprise is driving the price of financial assets higher regardless of what the Federal Reserve does, regardless of the money printer goes, Burr, et cetera. Those can have real market impacts, but they're not the primary feature that's behind all of this.

Erik Townsend 

Okay, I definitely agree with your characterization, but you know, it begs the question, as much as there's plenty of reason for concern longer term, is there any reason to think that this phenomenon of momentum that you're describing is ending or has ended, or that we should expect anything other than a continued melt

Mike 

up? There have been a couple of things that have been concerning, right? So one of the ways that you can tell a game is about to change, or is changing is when quote, unquote, everybody figures out the rules to the game and starts playing to what they think is happening, right? And so we saw a huge amount of retail surge into very speculative stocks. We saw chasing after short, covering, etc. In this last move, there are components of that that that will exhaust itself, right? There's been some really interesting analysis on the returns of funds that are invested in Robin Hood type accounts, etc. The losses just appear to be rising. Unfortunately, it appears that, in aggregate, many of the investment choices that people are making will eventually exhaust their capital. And so some of that discretionary is very much certain, you know, has very much elements of a short term sentiment driven bubble that was created by and large from the taco type phenomenon. And, oh, this isn't that big of a deal. And blah, blah, blah, all that has a risk of running out the other effects. And this is really one of these things that, you know, I just I probably am the most annoying person on earth in this respect, because every time we hear this narrative of, oh, this is now going to change the setting, right? Whether it was interest rates going higher in 2022 or the loss of American exceptionalism in March of 2023 we heal. Keep building these narratives that occasionally drive discretionary flows, or we're going to buy Europe, we're going to buy small caps, we're going to buy Japan, etc. At the end of the day, the structural features in the United States and increasingly around the world are largely about directing flows of retirement assets, which are copious, into the s, p5, 100. And you know, seeing that stop is going to be really hard. And then the second component of it is the mechanics of how we invest this passive factor has a concentrating factor built into it that creates a feedback loop that causes the market to get narrower and narrower. Many people are reporting this as an anomalous outperformance by the size factor. That's not what my research suggests. My research suggests that these are really the stocks that are most positively affected by the passive bid. There is a strong overlap with the size factor, meaning the largest stocks outperform. But it's not quite right. It's not quite what is actually driving this. And you know, until we change policy, or until there is a significant enough macroeconomic change to change the direction of flows, it's just really hard to see where this stops.

Erik Townsend 

Mike, the volatility that we're seeing in the stock market, frankly, doesn't surprise me, because we've got a very politically contentious environment. There's lots of headlines in different directions. It makes. Sense. But when I see bond volatility spiking up, that kind of alarms me more, because I know that bonds are not really traded by retail investors, at least not actively. What's going on with bond volatility recently, and is it a signal that we need to be concerned about?

Mike 

Well, I think you have to separate bond volatility. So there's a traditional bond volatility, the move index, which actually is created by my partner, Harley Bassman, which is similar to the VIX, it measures interest rate volatility as priced in options markets one month out, that actually is quite depressed, right? So a lot of the speculation or fears of interest rates losing control, that there is going to be a surge above 6% then 7% 8% there's really no evidence that that is currently priced into the markets. The narrative that the US was going to encounter fiscal dominance, and, you know, an immediate loss of credibility in the treasury market really disappeared fairly quickly on the flip side of that equation, when you talk about bond volatility, I also include the corporate bond sector, and there we're actually starting to see a little bit of concern pop up the credit default spreads and the spreads in investment grade have begun to deteriorate, largely because of the weakening balance sheets and operating outlook for many of the large technology companies, companies like meta, for example, have gone from a $70 billion net positive cash balance to my rough estimate is today, they're about 30 to $40 billion in net debt. So that's a remarkable deterioration in the strength in their balance sheet over the past couple of years, with very little evidence that the investments that they've made along that path have secured them any unique source of incremental revenues or profits. And so the bond markets and investment grade and high yield are showing a little bit more concern than the risk free markets are.

Erik Townsend 

Mike, can you expand that description to include high yield bonds. Because frankly, this is a market that I thought should have crashed a long time ago, but it hasn't. So obviously I don't understand

Mike 

it well. I'm not sure that you don't understand it, because my models would certainly suggest credit spreads should be a lot wider than they are right now, I build models on macroeconomic factors that exclude things like corporate bankruptcies, but even there, in the corporate bankruptcy space, we're starting to see much higher levels of corporate bankruptcy than we've seen historically, and it does suggest that credit distress does exist. Now the challenge in high yield, particularly in public market, high yield, is as a fund, right? I run a high yield fund, I typically will receive between 20 and 25% of the cash of the assets of that fund back in cash in any given year. That's a combination of maturities which run on average at about five years. So at 20% of my cash is coming back from maturing bonds, and somewhere between seven and 8% is typically coming from the coupons associated with those bonds themselves. There's a little bit that will be lost to default in that process. I have to reinvest that into high yield. And when you have a high interest rate environment, like you currently have, the incremental production, or incremental sourcing of new high yield paper is depressed, so I have more paper that's maturing and coupons than I have paper to invest in. That forces me to buy secondary market bonds, that, in turn, drives their prices to higher levels and yields and spreads to relatively low levels. We know what's happening in the high yield space, right? It's priced at historically very, very tight spreads. That's particularly true if we compare it to areas like private credit, where we're starting to see loan spreads widen significantly. It's remarkably true if we consider it against things like business development corporations, which historically have very closely tracked high yield because they're effectively a private credit metric, those have diverged to a level that we've really never seen before. So I don't think it's that you don't understand high yield. I think it's just that there are mechanical market structure components that are currently driving high yield spreads to very tight levels, albeit wider than they have been recently. There's increased concern, as I mentioned, in the investment grade space of what's called fallen angels, which is a way of introducing supply into the high yield space without issuing new paper. That's simply investment grade companies that are downgraded and pushed into the high yield index. That requires me to sell other paper in order to buy that new paper in proportion to the index. If I'm an index investor, and can cause credit spreads to widen quite significantly. We saw this in 2005 for example, when Ford, or in general, motors were downgraded in the auto industry. Those concerns are growing. We're not yet there. But you know some leading indicators, or leading candidates for that would include firms like Oracle, for example. Ali, which could very much find itself in a distressed credit environment, and that very much belies the idea that they're going to be spending astronomical sums building out data centers to meet the objectives of some of their partners, but that high yield space is wider, but nowhere near as wide as I think it should be, primarily because of the lack of secondary supply right now.

Erik Townsend 

Let me spin the question a different way, because at least in my own trading, you know, I've got a certain amount of risk capital that's deployed in risk assets, then I've got a bunch of T bills. And frankly, you know, T bills don't really resonate for me as a private investor. I don't need the liquidity of being able to, you know, cash in a billion dollars and not move the needle. It would make much more sense to get the higher yield of AAA corporates, except AAA corporates don't really yield much higher. Okay, what do I do to get more yield out of fixed income? You know, cash equivalent, safety money in my in my portfolio? Well, I go to fill in the blank. Help me out here because I don't know what to do other than T bills, because nothing that is short of high yield, which I'm very concerned for the reasons we just discussed, is carries a lot of embedded risk. I don't see where the moderate increase in risk or small increase in risk gets me any better than T bill yields anywhere in the fixed income market, and that doesn't make sense to me.

Mike 

Well, I don't entirely disagree with you, right? Part of what you're describing is the relative flatness of the curve, so you're being paid well in T bills, there is reinvestment risk associated with the T bills. If interest rates, if you know, concerns about economic growth, turn out to be larger than the Fed, will cut interest rates, and you will be reinvesting the proceeds of those T bills into less attractive T bill yields, whereas if you bought a fixed income bond a longer duration, for example, theoretically, you've locked in that reinvestment for an extended period of time, you could see price appreciation as a result of that. I don't entirely disagree with you that high yield, given spreads is relatively, relatively unattractive if the economic conditions that we're concerned about lead to default performance, and I think there is key risk associated with that. Now, the way I address that is by running a proprietary hedging process designed to isolate the impact of credit spreads. We've been very fortunate that it's worked really well and has allowed us to insulate against credit spread widenings, like happened in February March, for example. But without that, I would not be particularly interested in high yield. To answer your question, what other people are doing, though, and this is again, part of the story that's playing out in high yield and investment grade and in other areas is that searching for yield has led people to engage in strategies like covered call writing. There's a explosive growth of ETFs that are involved in various forms of covered call writing. Some are more speculative and riskier than others. Oftentimes, they will carry optically very attractive yields. What's happening there is, is that you are doing the same thing, ironically, that we did prior to the global financial crisis. You're creating synthetic forms of corporate debt. And the important thing to remember about this is that you always wanted to find an instrument not by the title that it carries, right, not covered call equity funds or high yield bond funds, but instead of it, think about their payout profile, and so a high yield bond has an incremental upside return associated with either lower interest rates. That means that I get some capital appreciation or the coupon associated with providing capital to riskier credits. All right, so the quality of the company that I'm underwriting is lower than the highest quality companies. I'm taking that increased risk in exchange for a higher premium or interest rate associated with it, but the most I can make is kind of, you know, slightly better than par and that coupon in a high yield space, if things go badly, right, I start losing principle fairly quickly, and can end up getting wiped out in that high yield bond. Blackrock just saw this with private credit that they had on their books at par 100 just a month ago, and today it's valued at zero. That's the same structure as a covered call. In a covered call, you own the equity you have sold a call option against superior performance in exchange for a fixed income comportion portion to it. You know exactly what you're going to get. The premium that you sold it at. You are also exposed to all the downside, right? So really, what a covered call strategy is is just synthetically written corporate debt. Optically, many of those strategies offer really high returns right now, particularly if they're done against single speculative securities, because you're embedding that value of the call option that you're selling. And these have become very, very popular. Or products that people are using to enhance their yield. It's, you know, the knock I would give on high yield is that you are writing credits on slightly dodgy companies, but you're tend to do so at prices and at Capital attachment points. That means that they're reasonably well underwritten when you enter into a high yield contract, you typically will have covenants that enforce your rights as an investor. When you go to a covered call strategy, you've mimicked that payout. You're investing, typically in higher quality companies, because you'll often do it against the s, p or against the mega cap, but you have absolutely no rights, and your attachment point is much, much closer, right? So a 10% decline in equity, for example, can cause a meaningful drawdown in a covered call strategy that really shouldn't affect, particularly investment grade or, to a certain extent, high yield performance, because those strikes are typically written much lower in the capital structure. So I like the way people are dealing with it right now is they're taking a lot more risk. Unfortunately, I think much of it is is misrepresented to people.

Erik Townsend 

Mike, let's talk about energy next. Oil and gas prices were something that I think your very first sub stack we talked about, refresh us what your prediction was there? Why you had that perspective, and what your current outlook is for the oil and gas market?

Mike 

I wrote a piece in which I was highlighting that the price of oil had actually risen in the aftermath of Russia's invasion of Ukraine to remarkably high levels, certainly relative to other commodity assets, in particular monetary commodity assets like gold. I called into question the thought process that people were employing, which that we which was that economic growth, if China were to reopen, would lead to extraordinarily high prices in oil. My view is we already had extraordinarily high prices in oil, and if anything, we were likely to see demand destruction that ultimately would cause the production to exceed the demand that forecast ended up being right now we're at a point where the price of many of those monetary commodity assets, like gold and silver have risen to extraordinary levels relative to other industrial and consumed commodities. I think this more accurately reflects both the eventual move away from fossil fuels, particularly in transportation, but it probably more than reflects that at this point. So we've moved from being very, very expensive to being very, very cheap. Sentiment has deteriorated. I'm actually pretty constructive on areas like oil and in particular, natural gas, which is probably the single most levered exposure to the data center build out and AI story that I can find.

Erik Townsend 

Well, I definitely agree with you on natural gas and the AI connection. I also think a lot of people are missing that one. We've talked about it here on macro voices before. I want to go back to your comments. Though, you said oil and gas are particularly, you know, under priced compared to the monetary metals, gold and silver. Let's talk about what's actually driving the gold and silver rally. Because, you know, some people say it's all about central banks and not wanting to to have their treasuries canceled. This happened to Russia. Other people say, No, it has nothing to do with that. It's all about China buying for completely different reasons. Then there's other people that say it's all geopolitical risk. What really is driving this unprecedented rise in the monetary metal prices? Well, I

Mike 

guess I would lean into the camp that says it's more of B than A or C. Ultimately, what trans I think I got that order right. Ultimately, I think the math is very clear in terms of what happened to gold in the aftermath of the US taking Russia's reserves, it became very clear that treasuries were not a safe asset to hold your accumulated dollar reserves in and China began to diversify aggressively. With its extraordinary trade surplus, it began to buy significant quantities of gold, both domestically and on the international market. What was really interesting about this is, in the face of that, you saw continuous liquidation of the financial gold assets like GLD and to a lesser extent, GDX, the gold equity, ETFs, GDX, J etc, we actually saw a really interesting phenomenon where the buying for from China was largely offset by selling That was coming from the US domestic public retail investor. That stopped somewhere around 2024, and at that point you reversed it. As Americans began, American retail began buying gold. Exposure again. Now it was pitched as a devaluation, as a debasement trade that they were just going to print money. It's. Etc. We really don't have any evidence of that, you know, I wish, I wish it was that simple, but it really is just a function of the American retail investor stopped selling, while China and others continued buying. That, in turn, has caused prices to move in a very aggressive fashion. And now it becomes a question of you know, do the higher prices beget yet higher prices? Does it become a self fulfilling narrative in George Soros frame of reflexivity, or do we have we pushed this far enough that now Americans, through a combination of price appreciation and reallocation of portfolios, have as much gold exposure as they want? There's some indications that that's the case. There's also some indications that China's trade surplus is starting to deteriorate in a fairly meaningful way, which reduces the amount of funds that they have for buying gold. And so it looks like gold has at least hit a near term peak. You know, the one of the reasons I think that the selling was actually occurring was because people were diversifying away from gold into things like Bitcoin. I have a very strong negative view towards Bitcoin. I think ultimately much of that will be reversed. But again, I wrote in my substack about this that if you X out that buying of Bitcoin, my calculation suggests that gold could be as high as 10,000 right now. So this has very much been financial buying, first by central banks that recognize they couldn't hold treasuries. Secondly, by retail chasing it, and we're still not really seeing the anti Bitcoin trade. There remain positive flows into the Bitcoin ETFs, which is a competitive asset to gold.

Erik Townsend 

Let's talk a little bit more about China and where their relationship with the US and China is headed.

Mike 

Well, I mean, this is a tricky one, because candidly, first we need to know what we're actually trying to accomplish in the United States. I think it's become very, very clear that the United States relationship with China is curated. We've moved to a position in which the two ostensible trading partners have increasingly become geopolitical rivals. My general sense is that China, that this should have been apparent to people as early as 2015 really, the emergence of xi as a compromise candidate between the two primary parties in China, and his subsequent purging of those parties to gain control really set the stage for a meaningful change in China's tone with the rest of the world, this century of humiliation and overcoming it became really operative. And in my opinion, they candidly played their hand a little bit too hard and too fast, making the United States increasingly aware of it, and putting us in a position to start making some of the hard choices about separating away from China. There's an arrogance on both parties. The United States, thinks it's going to be relatively easy to do this, or at least that's that's the way it's presented. I think in part, because it has to be China, I think views itself as having competitive advantages that are going to be largely insurmountable, and I don't think that's true, right? There was really interesting piece. The suit that was filed against the Trump tariffs was by a company called learning solutions, which highlighted that they sourced roughly 2500 products from China. Replacing each one and moving it to a different location would cost them somewhere in the neighborhood of $6,000 per product. That works out to about 15,000 $15 million of expenses. They had budgeted $5 million for tariffs, and when the elevated tariffs, which are no longer in place, went through, you know, they did the calculation that they could owe up to $100 million in tariffs. So in classic American fashion, rather than getting busy and dealing with the $15 million worth of expenses that would be required for diversifying away from China, they chose to file a lawsuit against the government trying to claim that they were being forced to spend $100 million that I think defines almost the relationship between the two, right? It is, it is going to be hard and it is going to be painful, but at the end of the day, it's a heck of a lot less than the tariffs. And so the real risk that you run in the United States right now is the tariff policy, which I would never choose in a perfect world, right? If we had true free trade, if there was not subsidy and monetary currency manipulation coming from China, which should have allowed its currency to appreciate to the point that its consumers became large global consumers. Instead, they chose to focus on enhancing the power of the CCP, repressing wages domestically by keeping their currency from appreciating and now they've crossed the point where the supply of workers is beginning to fall. That's caused them to become increasingly automated, and now they're stuck with extraordinary surplus production that they basically have to dump onto the rest of the world. The rest of the world doesn't want it, right? We love getting the little trinkets. We love getting. Little toys, etc. We love getting, you know, flat panel TVs, but we love jobs more. And at the end of the day, the Americans are way too munificent about the idea of free trade or unfettered access to the US markets. Europeans are much less open to it. Japanese are much less open to it. Koreans are much less open to it. Africa and South America, in many ways, are much less open to it. And so by forcing the Chinese to send product that would have historically come to the United States into those markets, the world is rapidly imposing trade barriers of its own on China, and that suggests to me that China is in a very precarious position. I

Erik Townsend 

want to go back to your comments on Bitcoin. I agree with many of the sentiments that you expressed, but at a place I'm going to start that over again, guys, Mike, I want to go back to what you said about Bitcoin, because although I do share some of your, I guess skeptical concerns about Bitcoin itself, I find that the the recently promoted view that US dollar stable coins are going to be used, really, as a way of propping up the the dollar dominant global monetary system seems very credible to me. It seems like that's a way to essentially get the US dollar into the digital age without having to create a digital dollar that's actually, you know, a tokenized currency. What do you think about that genius act? Stable coin view that it potentially kind of replaces the petrodollar system and allows a continued preference, or a continued artificial demand for US Treasury paper.

Mike 

I mean, ultimately, every dollar that is released is, to a certain extent, backed by that already, right? So in order to get the dollars out, the US government is issuing paper that's going to be held by someone, all you're identifying is, let's actually make this a continuing requirement in which stable coin funds will offer people the electronic or digital equivalent of a US dollar. It can be spent, it can be used. It does not earn interest, which I think is actually a critical flaw in this system. Nor does it treat domestic versus International in any meaningfully different way. And so, like, I kind of buy into it a little bit. I do think that it's important and that it will ultimately drive further adoption of the US dollar in regions of the world that do not have stable currencies. I'm just not sure how that's positive for Bitcoin, right? The whole argument behind bitcoin as a, you know, a social good was that it provided access to a currency that could be used in foreign countries that didn't have stable systems. If, if we replace that with a stable coin, you know, not that it ever really amounted to much in Bitcoin, but that seems to undermine one of the key features that was lauded for

Erik Townsend 

Bitcoin, Mike, I can't thank you enough for another terrific interview. But before we close, I want to talk a little bit about what you do at simplify Asset Management as I understand it, there were basically some regulatory changes that allow you guys to have what are effectively ETF or mutual fund like instruments that do fancy tricks that used to be only hedge funds were allowed to do. Tell us a little bit more about what the regulatory change was, and what are the products that you guys are offering as a result of that change.

Mike 

Well, there are two critical regulatory changes that caused me to transition from the world of hedge funds into the world of ETFs 2019, there was what was called the ETF rule. These are all very creatively named. The ETF rule facilitated and made easier the process of applying for a traditional ETF, particularly an active ETF, historically, that was a very long process. There was a lot of concerns about transparency, and it was very difficult to launch an ETF, which is part of the reason that you saw only the large sponsors releasing ETFs, and typically only in the form of like an S p5 100, for example. That rule opened up the floodgates to active and smaller ETFs, like many of the products we offer at simplify, the second key change came in September of 2020, it's what's called the derivative rule. And unsurprisingly, the derivative rule allows you to include derivatives inside mutual funds and ETFs in particular. What it does is establish effectively, risk metrics around it, so you declare a benchmark that you're held against, you are then allowed flexibility using derivatives to have up to two times the volatility of that index. This has contributed, on one side, to the proliferation of things like 2x levered funds, or even 3x levered funds, which can then turn around and point to a 2x levered fund as their benchmark. It has also facilitated the inclusion. Version of derivative strategies like I use in my high yield product, for example, that are designed to take advantage of certain features in market structure. A really simple example of that is many high yield mutual funds and credit funds broadly, will short the hyg ETF to reduce their market exposure and allow them to amplify their single security picks that, in turn, actually places pressure on the balance sheets of dealers, firms like Goldman, Sachs, Morgan, Stanley et cetera, who have taken that high yield exposure onto their balance sheet and in a post Volker world, have to carry much higher capital against that they're willing to pay me a portion of that excess return that they get in the form of securities lending for taking that risk back off of their balance sheet and what's called a total return swap. So that allows me, at the base of my product, to effectively receive hyg Plus, typically, between 50 and 200 basis points. The nice part is that additional return almost inevitably flows during periods of market stress, and so it allows me to partially outperform in down periods, because I'm earning a higher return on assets. The second thing that it allows me to do is include things like my proprietary hedging frameworks, where I use an equity Long, short overlay that is designed to mimic credit spreads, but to do so with a positive carry associated with it that allows me to mitigate the impact of a significant credit spread widening that couldn't have been done prior to 2020, and so we've been very fortunate. The rules have changed, but I just want to emphasize like I'm using it for a little bit of return enhancement and a lot of risk reduction. Most of the strategies that are out there have actually chosen just to embrace the the increased risk and pursuit of higher return.

Erik Townsend 

And for investors who want to learn more about the various products that you're managing, what's the website or who do they call?

Mike 

So the best place to go to find out more about simplify is www.simplify.us. I emphasize the.us there we have the full list of products. We have deep dive explainers on the various exposures that we have, and they're tuned to deliver everything, ranging from fixed income exposures to more speculative equity exposures, if that's really what you're looking for, as well as ways to thoughtfully create income from equity type assets. I would encourage people to check out, in particular the product CDX that I was describing. We've recently launched a product in the private credit space. PCR is the ticker there that employs similar tools to what we're doing within CDX. We have five star CTA managed futures fund run by our partners at Altus, Charlie Magara, who I believe you've had on the show. These are all tools that are really excellent in building a portfolio, as compared to simply deciding that you want to knock the cover off the ball with one particular investment. And I encourage people to check that out. If you're interested in my thoughts, you can follow me on Twitter. I'm at prof Plum 90 9p. R, O, F, P, l, u, M. 99 never anticipated having a presence in social media. It's a confusing account, but a lot of people find value in it, and then, as we've talked about repeatedly, I write on my sub stack. It is, yes, I give a fig.com. Very reasonably priced. The objective is not to make money off of it as much as to make sure that the people that are reading it value what they're reading. So if you are interested in it and you do not want to pay but you do want to read, feel free to reach out over a sub stack, and I'm happy to comp you exposure.

Erik Townsend 

Patrick Ceresna and I will be back as macro voices continues right here at macrovoices.com.

Erik Townsend 

Joining me now is Michael, every global strategist in economics and markets for Rabobank, or Rabobank if you prefer, Michael, I'm so keen to get you back on the show. I loved something that you wrote recently when you said, Does anybody remember PMIs remember when, when that was what everyone was focused on? It seems to me like the combination of political, military and economic, statecraft and posturing and positioning and so forth has hit fever pitch over the last month. I'm certain that it's really important to markets, and frankly, it's above my pay grade. I'm so glad to have you back on give us the the overall assessment of what's going on in terms of statecraft, politics and so forth that's going to affect markets. And how should we interpret all these interesting news events of the last month?

Michael 

Okay, well, thank you very much for the opportunity. We've obviously got the whole world to cover there within that introduction, we can bullet point it that the primary driver is still the US trying to reinvent itself and changing the world around it by doing so. The reason for it doing that is still above all China in the simplest possible terms, but we have a panoply of really, you know, eyebrow raising developments over the past couple of weeks, which I want to just run through briefly before we get to the main event, which is, of course, the Trump Xi Jinping meeting that we had recently, and the outcome from that. So let's just consider that a month ago, I was speaking to clients and writing an editorial about it. And I said, economic weapons are things that you need to be looking for, or new forms of weapons. And immediately afterwards, China announced export controls on its rare earths, or further export controls, and said that no one was allowed to use them anywhere if they went into military supply chains. And given that you have to have them in order to build that equipment, effectively, China was saying no one anywhere except it or its allies would be able to build any military equipment going forward. That's rather a game changer, if you consider it. We had the Dutch government seizing a Chinese owned chip maker, an Xperia, which was about to be asset stripped by its parent company, and which then cut off chip supplies to the EU in response, we've had three EU oil refineries, which take Russian fuel, suffering mysterious explosions. The US dangled more military aid for Ukraine, and then pivoted at the last minute and sanctioned Rosneft and Luke oil. Although physical enforcement there is key. Russia brandished a new nuclear weapon, just going straight to real weapons. The US has restarted nuclear tests. The US is talking about regime changing Venezuela very clearly, Trump has suggested he could move on Nigeria and now potentially move into Mexico too. So that's that's just a smattering of what we've seen. And on top of all that, in Europe, we've had the former head of the ECB and the current head of the ECB talk about how Europe should run its political system, saying that it should be majority voting, rather than everybody having to agree to everything. Where's that? In a central bank mandate, we've had the European European Commission, President von der Leyen, laying out green tech policies that very strongly implied we're going to have non tariff barriers, so basically made in Europe for all public tenders, which is 14% of GDP, capital controls to screen FDI. So it's in the European Union's interests, and I presume that's coming in and going out, in which case you can stop people investing in other countries you don't want them to, and tariffs and subsidies to support key sectors. And on top of that, they threatened to put their anti coercion instrument into play against China, which is a trade bazooka, although it's never been used, and the rumor is that they're going to completely remove or change all their legislation for financial markets regulation. And the number of acronyms I could run through there is almost endless, and basically lift everything up to the EU level rather than the national so that is just a gobsmacking backdrop, and that was before Trump swept through Asia and did a series of trade and FDI into the US, by the way, and defense deals, and of course, centered around rare earths, gathering a cluster of economies to his side, versus China, and Getting Japan in South Korea to say they would help with shipbuilding in particular. And then he sat down for that meeting with Xi Jinping beforehand, tweeting, the g2 will be convening shortly. The g2 well, there's 193 countries in the world left out. So let's then turn that Trump Xi meeting, did we get a g2 and in very, very short form? No, I don't think we got a g2 I think what we have here is a cease fire to re arm, if you will, quite literally, and it's not any kind of peace deal in the longer term. In the longer term. I think we're still heading for a 2g which is not the g2 working together, but the world with two different groups, the US centric group and the Chinese centric group. But we are going to have, at best, a year's interregnum where we basically Okay, wait and see who can have the better cards a year from now, so that we get a relatively easier ride in markets for the next six to 12 months.

Erik Townsend 

Michael, if you've been sitting enjoying the Caribbean sun for months and months and all of a sudden there's a monsoon, and then it doesn't stop, you have to consider, okay, there must be some seasonality to this. Oh, it's monsoon season. You eventually figure it out. You've been a master of interpreting economic statecraft. It seems to me, economic statecraft is something that was subtle and seldom used until fairly recently, and from what you've just described, we've got so many things going on at once. How do you interpret that big picture? Does it mean an economic war has begun. Does it mean that we're just going through a phase here that gets resolved once we get to a certain set of Trump and Besant policy goals, then it's all going to settle down. How do we interpret the big picture? What's the big thing that's just begun, and how long is it going

Michael 

to last? Well, that's a great question. And to be honest, it's really up to the listener to decide for themselves, because many people will view what we're seeing right now as an aberration, and the long run trend is that everybody just wants to trade and get along. I think that's pretty much the normal view in markets and in most, most economic circles. I disagree. I think everything is always about power. At the end of the day, while everyone's got a stable power balance globally, everyone will focus on markets. But when the hegemon starts wobbling, while everyone starts putting in their bets to see who's going to be the next leader, that's still the game, I believe is playing out. That's going to play out probably for the rest of our lives. It's a very, very slow burning process, because neither China nor the US is going anywhere, and both of them clearly have a very strong hand. Both of them have an enormous number of tricks which they can use to try and give themselves the advantage. So, you know, short of an actual shooting match, which some people worry about, I think directly between the US and China is relatively unlikely. This is going to be the new normal going forwards, but it is happening across geography, across asset and across disciplines, in a way that most people are having difficulty drawing together. Some parts of it are more obvious than others, but there's almost nothing going on that matters, that isn't in some way tied into this. And so if you see it the way I do, kind of everything points back to it. And if you refuse to accept that fundamental precept, which many people do, you know, I'm pointing to things that aren't there. And in reality, we just have a lot of random shocks. But if that is the case, you know, why are very easy to predict things like Trump talking about regime change in Venezuela, you know, which not many people had on the cards 12 months ago, but I did now headline news. Why have we seen, just in the past few days, rumors that the US wants to openly dollarize other economies, which, of course, would include Argentina, I would think, I mean, that's been floated before, but I don't think it's a coincidence that all of this is coming back right now, as in the background, you know, China is trying to do currency deals with other people, and both sides, or both blocks, are trying to feel out who's on whose team and with in what new set of rules.

Erik Townsend 

Going back to the Soviet era, there were really two axes of power in the world. There was the West and there was, you know, the whole Russia controlled the eastern Europe and so forth. They basically didn't trade with the West, and they couldn't trade with the West. In many cases. Are you saying that we're going back to that kind of bifurcated global economy where there's the America centric West and the China centric east, or whatever you want to call the China centric pole, and we get toward a global economy where there's just not as much cooperation, and everything's living in two sides of a wall.

Michael 

Well, that's your worst case scenario. And I think that absolute worst case is unlikely, in that there are going to be different categories of goods, some of which people have no problem trading. For example, you know, if China is going to make novelty toilet roll holders, I just don't see that the US is going to have an issue buying them. You know, there are advantages to making many different things, and manufacturing in general is an advantage, full stop. But I would think, if you're specifically talking about that product category, very few people in the West would say we're going to fight tooth and nail and use economic statecraft to get that back. You know, chuchkas, we don't care about them, but all the big strategic sectors which have direct national security, key industrial energy, tele. Coms or military implications, all of those. Over time, we are already seeing a bifurcation happen between different technology sets and production supply chains. And the logic is that this doesn't only point to downstream products, it's everything all the way upstream. That's what we're seeing now, where the US during this one year pause in escalation with China is desperately running around the world trying to find new rare earth supplies and refiners so it doesn't have to go back to China a year from now. And China, for its part, is desperately trying to make sure that everywhere that the US currently has the whip hand, for example, the highest end chips, or in software or in aircraft parts that it can catch up, and a year from now, it can say to the US, look, we just don't need any of your stuff anymore. So it's a dynamic process, and there will be things, yeah, where you can carry on pretty much as normal. But I think everything that matters is going to shift over time, even if it isn't done in a synchronized fashion.

Erik Townsend 

What I don't understand about your explanation is just how it's possible that the US would be leading this charge from such a weak opening position. I mean, it seems to me, there's been, you know, economic bloggers that have been complaining for decades now, or certainly for the last many years, about the number of things that we are sole source dependent on China for, from our medications to rare earth elements to a zillion other things. This is very widely known, if you know all those things, and you want to get into a competitive, hot and heavy negotiation. I would think the first step would be to quietly shore up all of those vulnerabilities, figure out, you know, play nice smile and be happy with China and shore up all those vulnerabilities to put yourself in a very strong negotiating position. Then start talking tough, it seems to me, Michael, like Donald Art of the Deal, Trump is doing it backwards, and I think he knows better. So I don't, I don't get

Michael 

it. Well, I don't think that Trump was in the position to be able to do what you're suggesting. If he were, then he would have done exactly that we have lived through decades. I mean, not just years, decades in which not just the US, but Europe and every major Western economy has done everything it can to get rid of all its productive potential and to shovel it offshore. It was absolutely the norm. That's how you made your money on Wall Street. That's how you, you know, got a nice slush fund if you're a politician, just ensure that you offshored absolutely everything. Sliced up the value chain into a million different pieces, and very, very few of them were still within the US, and everyone was happy. Now, you know, you can say that that was a utopian view, that if we did that, we'd have no more war, because everyone's integrated together. And I won't rule out the fact that some people are idealists doing it. I think far more people just simply didn't care because they were getting paid. And, you know, I'm not trying to offend people saying that. I just think it's an objective truth. And there are still a lot of people who are either useful idiots, who can't see the way the world is now, or are still getting paid to do the wrong thing. You know, you can see headlines around you every day of people still not understanding the importance of the geopolitical moment and the geo economic moment and repeating past errors. So Trump would love to have gone in there, you know, guns blazing, because he had all the guns and all the ammunition. That was never going to be possible. Now, the US still has a lot of weapons, a lot of very good cards, absolutely, let's not forget just how significant they can be, but it doesn't have those things like rare earths, where China absolutely still has the whip hand. So we're now in this strange Mexican standoff where different kinds of weapons are being brandished against each other. So China has those rare earths. It also has pharma, as you correctly pointed to, and frankly, has the supply of almost every physical product, but the US has control of the financial economy, which does still matter for now, even if I think physical production outranks it, you know, in any kind of military conflict, it certainly does. And as I also said, it has high end software. It has top end chips, and it has, you know, aircraft. It has various different things which do still count, and the US consumer China must keep exporting to keep its economy moving forward, given how weak domestic demand is. So the US is kind of agreeing to continue to keep buying from China while it tries to decouple from China. It's a very, very difficult process for anyone, whether it's Trump or anyone else, to deal with, and he has to basically remake the US economy, the Chinese economy, the world economy, everything, all at once in multiple dimensions. It's a staggeringly difficult ask whether you're into the art of the deal or not.

Erik Townsend 

Well, let's unpack this in terms of your take on where it stands and who. Really has the strength. Because, you know, frankly, I want to hear that the country I was born in the United States, is going to come out on top of this thing. But what I think you just told me is China is in a position to say, look, we're going to withhold all of your prescription medications. You're not going to have any medications, you're not going to have any rare earths to make your weapons with. We're going to hold, withhold a whole bunch of other products we've got you by the short hairs, United States, don't mess with us. And the answer is, oh yeah, we could withhold iOS version 26.1 and not let you have it for your iPads.

Look, there was an element of that. That's

Erik Townsend 

what it sounds like to me. Michael, we're tell me more about our strength here and how we're going to say, China, you better not play any games withholding our medication, because we've got a stronger hand than you do. Help me understand that stronger hand.

Michael 

Okay, well, let's get to the good stuff. First of all, let me repeat what I just said, because I was saying a lot of stuff fast, because I got so much to get through, and I don't want to leave key things hanging. So one of the first ones, as I said, is that the Chinese economy, because domestic demand there, is relatively weak, and that's part of this. That's part of the structure of the system. It just invests too much that has to be exported, and if it can't be exported, you do get problems. For example, you know, China's, you know, banking debt to GDP, or bank liabilities to GDP, is vastly, vastly worse than in the US. So Chinese government debt is also pretty high, trust me, it's not that. It's not that much better than the US when you really deep ground and the long grass, but their private sector debt is far worse than in the US. So from a debt to GDP perspective, if they don't get the inflow of capital coming from abroad, from exports, you know, all kinds of bad things can happen, even if they have capital controls and a largely state dominated economy. There's only so far you can push that paradigm. So that's one weapon, as you said, you know, in one level, okay, you could. You can mock some of the software, but some of it's very important. Very, very high end chips are important. You know, aircraft are still important. But here's where I want to segue into. One other thing at the beginning, you've very correctly said, political statecraft, economic statecraft, military statecraft. And the political side of it is, can we make a deal? And that was, you know, can we get a g2 and the answer is no, no, we can't. So if we can't do that, we can try and use the economic statecraft and the US currently is it's trying to change itself. It's trying to change China, which is very hard to do. It's trying to change its allies, because if it's the US plus Europe plus Canada plus Mexico plus Japan plus South Korea plus Australia and New Zealand plus the UK, you start putting those economies together, and all the oil in the Middle East, or most of the oil in the Middle East, and that's a very, very different ball game. But where that links into my next point is that I think the US is going to have to over time, and maybe sooner than people think. If it isn't happening already, really start thinking, Well, what about military statecraft? Because China may have this magnificent production machine, and it may be re arming or arming at the fastest pace anyone has done, you know, since World War Two, and very soon, we'll have a much more powerful navy than the US, if it continues on the current trajectory. But for the moment, it doesn't have global projection of any of that, not seriously, not in the way that the US does now. And it's deeply reliant on resource imports from all around the world, from Africa, from Latin America, from the rest of Asia, from Russia, from Europe, etc, etc, you name it. The US is in a position to block those flows. Now that takes us to the realm of economic warfare, or, as I said, actual military warfare. But when you start looking at Trump, talking about regime change in Venezuela, for example, dollarizing Argentina, which, of course, sells stuff to China, what we saw versus Iran in the Middle East a few months ago. This is exactly what you would expect to see as part of a grand macro strategy from the US perspective, which is to say, if we've lost the game on this front in the time it will take us to try and build up our resources again, to try and go at warp speed to get rare earths and industrial production and onshoring and factories via tariffs back, we have to make sure China doesn't have an easy time of it either. So, you know, we will do all that we can to physically disrupt some of those commodity flows in areas where China can't do a lot about it, like Nigeria, for example. Okay, so Nigeria's oil. What happens if Nigeria can't export oil? You start going down the list of places that export things to China, and thinking, how could you disrupt them? And that's that's what I suspect we will start to see emerging next. And we're already seeing that happen vis a vis Russia. I already mentioned the three oil. Refineries in the EU which deal with Russian oil flows, all mysteriously exploded within a week that happened a couple of weeks ago. Don't tell me that's coincidence and market forces,

Erik Townsend 

okay, but let's talk a little bit more about these military risks, because from the things that you just described, and some of the weaknesses or limitations that you describe China as having at this time, it sounds to me like a close alliance between China and Russia would overcome most of those things, because Russia has a lot of those needed natural resources. And from what I understand, the US is really kind of in last place on hypersonic weapons, so these super fast missiles that can hit the target faster than any intercept or defensive system could possibly stop them from what I understand. Russia has enough of them already that, you know, if it really came to blows, they could potentially do a simultaneous, you know, take out all 10 of the US is aircraft carriers in a single attack and neutralize that force projection capability completely. That obviously would start a nuclear exchange and pre Ali and humanity. So I really hope that it doesn't happen. But it seems to me that China and Russia, together, both economically and militarily, are a force that I'm not sure could be reckoned with, and it seems to me that we've done a lot to encourage, rather than discourage that kind of alliance between China and Russia.

Michael 

Well, let's take that piece by piece, because there's a lot to unpack there. We're talking about the end of the world as we know it, right? Well, that's I'm hoping we're avoiding it. Yes, it's not, not a topic I brought up, you did. But you know, once you play the nuclear war card, it is a bit difficult to know where to go next. But I honestly don't place a particularly high probability on that, because I think both sides are rational and much as we saw during most of the Cold War, except for a few flash points, that's, I'm sure, something both sides want to avoid. Okay, so let's, let's compartmentalize that.

Erik Townsend 

But isn't it true, though, that China and Russia jointly to assume that they don't have as much military might together, between them as the US has by itself, I think is not only optimistic, but just dead wrong. I think they've got much more military force, and we need to recognize that reality.

Michael 

Well, let's be blunt. This is macro voices, not military voices, right? We can get people on here who can give a much more nuanced view, who wear uniform. All I will say is that China is completely untested, spending a lot on lovely new equipment. We don't know how it works. And, for example, they don't really have a blue water Navy yet. They can't project power anywhere. You know, on sea, they're starting to look at it, but they can't do it yet. And Russia, well, bluntly, Russia can't even beat Ukraine, with the West only half heartedly helping it, because the West is not all in on Ukraine in any way, shape or form. You know, Europe talks a good fight and does almost nothing. You know, in terms of physical flows of goods, and the US has been helping, but, you know, Russia has struggled to even take pokrovsk After a year. And, you know, 10s of 1000s of men dying just for, you know, a few, a few square kilometers. So I think it's easy to over hype how strong in one dimension they are together. But if you are talking about a nexus of resources and production. Yes, absolutely. And was it a geo street strategic mistake at whatever time period, and blaming whoever you want to to have accelerated the drift of those two countries together? Yeah, absolutely. And you can point fingers at lots of different people for it, but where I think the US response will now have to come, and again, it ties into what I was just saying is not just the very, very aggressive statecraft measures that we're seeing in the economy, which they really are quite remarkable, some of the shifts that we're seeing, and we haven't even got time to list through them all, and I expect many more radical ones to be coming over the next couple of weeks and months that will make people's hair Stand on End. It's going to be building a block within, you know, under a US umbrella, with Europe, with the UK, with Australia, with New Zealand, with Canada, with whether Canada likes it or not, with Mexico, with Japan, with South Korea, with a few others, with the Philippines, maybe with Vietnam. And we'll see who else gets included on that list. And you put everything there together in the West, and it's a very different equation. It's not the US alone. You know, America first doesn't have to be America alone, even if that's currently, I believe, quite a, you know, a tendentious issue on the right of the Republican

Erik Townsend 

Party. Let's break this down, then into the macro trades and where it's all headed based on everything that you see. What, first of all, you mentioned some things coming that you expect. Are those specific things that you can tell us about? Are you just saying that there's more turbulence coming? And based on what you think is coming, where do you think the trends aren't going to be in

Michael 

markets? Well, okay, first of all, in terms of. I think is coming when I published a piece nearly a year ago. Now, actually it was, I think, pretty much, yeah, just almost a year ago to the day, or a couple of days when Donald Trump was re elected, and I said that we were going to move towards statecraft. I explained very specifically how the taxonomy works. For example, you're going to put up tariffs, and afterwards you'll find you'll have to put up subsidies as well to match. And then you'll have to have price controls in place. We've already seen all of those happening, specifically in rare earths. We will see that expanded. You are going to see subsidies on energy. You are going to see change after change after change being introduced in order to make sure everything gets to where it needs to go. And market forces will play less and less of a role within that that's inevitable. We've seen the Pentagon turn basically into a hedge fund where it can leverage itself up 20 times to be able to spend more. That's already happened. Where we're going to move next, I think, are capital controls. That's going to start seeing where money can and can't go. We're going to drag the fed into this absolutely when we get new management at the Fed, we will be a very different fed playing a very, very very different game, with huge implications for markets. And the currency will be dragged into it too, because dollar stable coins, the legislative framework is there for them now, sure they actually aren't out there in the marketplace doing much yet when they are that can absolutely reshape the entire geopolitical and geo economic architecture again, so the really big stuff hasn't been done yet. All we've had is the first foundations of this new building, in terms of the tariffs and when China, we've got, like, a blueprint of what it might look like, but we'll come back in a year. So that's going to be a huge shock for markets when they start to hear and people realize what they do and

Erik Townsend 

don't do. Let's hear more about capital controls. Capital controls on whom and impose town

Michael 

Well, look, we already have emerging capital controls into the US. CFIUS is now screening things much, much more vociferously. Is this an entity we want investing in the US? Here alongside that, with the deals Trump Just Did on his road show through Asia. He's forcing allies like South Korea and Japan and Europe will be next, and Australia, by the way, too, with their with their pension funds, to invest in the US, forcing them to and specifying where he wants them to, in areas that maybe they wouldn't want to, maybe they would traditionally just want to buy the latest hot stock, you know, or a REIT. No, now you're going to open a factory here. Now you're going to open a shipyard here. Now you are going to do what we need to be done as a team, to re industrialize and get the military industrial supply chains going. The next phase of that, logically, which they've flirted with, is to control where capital can go when it's going out. So we don't want you investing in this country or in that sector. We're nearly there. I can see that happening very easily. And the more radical one which feeds into, I think the next part of the discussion on currencies and the Fed is okay. Do we just want foreign capital coming in and buying US assets like US Treasuries and US debt? Do we want the same global reserve status for the dollar and US Treasuries that we have now, whereby, when people want to buy US assets, that forces the US to run a trade deficit, forces the US to run a fiscal deficit, forces the US to de industrialize, and all of that is done to keep the dollar the way it operates now. And logically, the answer to that will be no.

Erik Townsend 

So are you anticipating capital controls? And a lot of our listeners are institutional investors in Europe and elsewhere in the world who invest either significantly, if not predominantly, in US markets. One of the reasons for that is because US markets are so inviting. There are no taxes on capital gains for foreign investors, foreign investment capital is generally welcome in the US you're saying that's potentially going to change.

Michael 

Yes, absolutely. I want to make that abundantly clear, because while the current system operates the way it does, that financial relationship is an absolute corollary to us. Deindustrialization, demilitarization and gradual decline in terms of its global status. Vis a vis China, they are absolutely wedded at the hip. Oh, sorry, joined at the hip, even if people can't generally see that relationship. Geo strategists can see it and describe it regularly. What I think you will see instead, there's a spectrum of possible outcomes you can get, and I don't want to specify exactly what part of it will apply, where and when, but I think you are going to get a lot, lot more of what we just saw, which is the US saying to key allies, this is how we want you to invest. You are not going to have a free choice. You're still going to make money. There's going to be a return. We're not stealing your money, but you are going to put it here and here and here to ensure that we have capital in the right areas so that five years from now, we are resilient as a group, in order to do X, Y, Z. Right now, it's rare earths. After that, it will be many, many other things, many, many, many other industries, because we're no longer in a phase. Fees, where you can just say, because markets, which is a phrase I use flippantly at work all the time. I mean, frankly, who gives a damn about because markets, individual investors? Sure, I get that. But there are games being played at a much higher pay grade than any of us on this, on this chat or listening to it, you know are involved in and they have particular outcomes they want to see, and unfortunately or fortunately, depending on your point of view, I think markets will be moving from a world where they can do whatever they want, let's call it a jungle, where they can go wherever they want, to a safari park. So you know, you're free to roam around in certain areas, but you're now in a safari park rather than in the wild, and just count yourself lucky you're not in a cage in the zoo, because that's the alternative, and it's far worse.

Erik Townsend 

What does that mean for the major stock indices? Because I don't know what percentage of the s and p5 100 is, you know, domestically owned by Americans and American institutions, but a lot of it isn't. And if there was suddenly, you know, tomorrow morning, everybody who who's not in a certain category, has to divest their their index holdings. That would be hugely disruptive. So we can't have that. I hope. How would you impose this transition if you're not going to annihilate markets in the process?

Michael 

Well, I'm talking flows, not stocks. To be abundantly clear, no one is going to put a gun to people's heads and say, We want you to sell off all your assets in the US. Quite the opposite. They don't want to see a massive capital outflow, which was rumored, by the way, earlier in the year when the Trump plan started to be rolled out. You had lots of gnashing of teeth and wailing and hair pulling and people saying, I'm selling everything us. If you look actually, capital is flowing back into the us big time. Now, okay, it's aI centric, but even treasuries aren't doing too badly again. So you know, everyone who was panicking has had to reverse over a few months. But you don't see many mea culpa headlines in the financial press saying we called it completely wrong. And actually, statecraft can drag in capital. But from the flow perspective, you know, I don't want to keep repeating myself. You can't have a US versus China existential. And you know, the US itself calls it existential, geo strategic rivalry, and then just say, Yeah, okay, let's put all our money into an app that makes cats look like dogs. I think I've used that analogy on this on this show before. What an absolute waste of time. You need to be seeing capital flow to areas, as it does in China under their system, where you're going to get the maximum bang for the buck. And it's literally bangs for bucks that we're talking about in some cases here. Now there will still be money made doing that, absolutely but you may have to rejig the system to make it work. For example, as I said, tariffs and subsidies, together with price controls in some areas, and either deregulation or more regulation to ensure that you get an outcome that works, quote, unquote, for everybody. And I think we'll get more and more of that, and the US allies will be copying and pasting that, because they're not going to be able to have free markets in the same way they did. Whatever controls the US puts in place there's like an umbrella or a shield against a kind of a China system or a China block. Everyone with the US will have to mirror it, and we already see that happening on trade. The US is gradually moving towards everyone who it trades with having a common external tariff against China, or doing that via a trans shipment. So, for example, Country X, yeah, they can buy as much as they want from China. Not one carton or crate of that is going to go into the US from them. So if they want to swamp their own economy with it, good luck to them. And that's basically an incentive to tell them, No, no, we want you to match our external tariff. The same thing will have to happen with these capital controls. But another way that will, you know, Evolve is through the use of the currency, which brings us back to dollar stable coins, which I think can be a very, very efficient way to build this new safari park that we're talking about, where you think they're free. You know, you can go and sit in that tree or that tree, and you can chew your, you know, your fresh meat and raw whatever, as much as you like, but you're not in the jungle anymore,

Erik Townsend 

Michael, let's get your take, because we already heard from Brent on how he sees this. Why are stable coins so important, and do they have the potential to really reinvigorate the dollar's hegemony over the global financial system so that we no longer feel that the dollar is at risk of losing its reserve currency status.

Michael 

Yes. Full disclosure, Brent and I are friends and have a very, very similar view on this particular topic. You know, I know that he's just published a really, really great people what piece of work on it, which I thoroughly recommend people looking at. I got my own fast, slimmer piece of work out a little bit earlier, and was making, I think, one key point the same way, which is, when people were talking about these dollar stable coins initially, the because markets crowd, and I am saying that with a sardonic smile on my face, we're just talking about, is this a new asset, like an NFT, that. I should be buying, if I have a buy all the things policy, you know, how much money will I make doing this? And I fully understand why individual investors would be thinking like that, but they are missing the point. These dollar stable coins are, as Brent quite correctly, says, entirely, entirely geopolitical. They are about creating a new financial architecture which will enable the US to re industrialize and where, instead of the offshore currently, Fiat Euro, dollar being the tail that wags the US dog, the US dog wagging the tail, again, no matter how large that tail has got, because that tail is enormous, it's like a kangaroos tail now, rather than a dog's tail, but these dollar stable coins will allow the US to wag it again.

Erik Townsend 

Michael, let's tie all of this conversation together. Run it through your mental blender, and let's spit it out in terms of market opportunities, what does this mean for investors? And also, how do all of these things affect major macro trends, like, I think we're in the beginning of a secular inflation. How does this play into that?

Michael 

Well, okay, there are several different ways that you can look at it. You can you can slice the cake in different ways. So one of them, broadest is, are you Team China or team us? And if you're on X or on social media discussing this, there are really passionate views either way. And very clearly, if you've got a strong view, one is going to win and one is going to lose. Go short, one along the other, and you choose, and that's on the FX, that's on the assets, that's on every single related element of that team and what it has to offer. I think that's a very simplistic way to do it, but I know some people who do do that in the interim, while we are getting along that path, bit by bit, step by step, I agree with you that part of what we're seeing, for example, in this AI surge, which is absolutely related to it, it's who's going to win the race for aI don't, don't ask me Why. But that's where we are. That's clearly inflationary. You know, you're seeing power costs surge. You're seeing, you know, resource demand absolutely surge, and that will absolutely feed through into inflation in some areas, and at the same time, ironically, the AI we already have is highly deflationary, and it's deflationary on two fronts. First of all, if companies aren't going to hire anymore, and we're already seeing companies actually start firing and replacing people with AI, we have the potential prospect of massive corporate profits and no one working. I mean, if you push that to its logical extreme, it's a ludicrous scenario. But that doesn't mean we couldn't get there. You know, everyone loses their job and one person in the corner owns everything. In fact, even the Financial Times in the UK recently ran an editorial, or, sorry, an OP head. It wasn't written by the FT, but they published it in their, you know, in their own paper, which shows how important they thought. The argument was that, rather than universal basic income, we need Universal Basic capital, where everyone will need some kind of share in AI to compensate for the fact they don't have a job. Now that sounds very much like universal basic income to me, but it's interesting that was, as I said, being discussed equally if AI doesn't make any money whatsoever, and it can't make any money, and it's all just about the military. And once the military gets that golden egg laid, it takes it, runs away and says to all the companies who did it, thank you. You can all go bust Now that's pretty damn deflationary in terms of asset prices, you know, that's that's going to wipe ahead of a lot of people out if that were the case, and if, basically, the US has outsourced the Manhattan Project to a lot of people who are in a race to make a nuclear bomb, per se, and then they'll just take it away and say there's no money in them, you know. So that could be another, another deflationary aspect to it. But above and beyond that, we have real disruption baked into the cake right the way down supply chains from upstream to downstream. I was mentioning that very early on at the beginning, that that's what I thought would happen. What we're already seeing in terms of, you know, for example, the oil refineries in Europe that got blown up. What we're seeing with Europe and Ukraine, sorry, Russia and Ukraine doing to each other's energy infrastructure and what, logically, China, what is already doing to the West in terms of these rare earths, which, by the way, is seeing the price soar in the west and remain low in China. That's the that's the paradigm they want to see. Well, the US and or the West needs to see that reversed, low commodity prices for what they have in the West, high in the Chinese block, because, well, whatever it takes to achieve that, and there are lots of ways to do it, so in its extreme. And this is an important thing to conclude with here. I think we may be looking at a world where we don't have one price for commodity X, Y or Z. We've already got a bifurcating technology environment. We've got bifurcating supply chains for certain goods. Why, for example, would we have one or, you know, one very close set of benchmarks for oil. We don't have one for germanium right now. We don't have one for. Other rare earths. We have a Western and an Eastern, and I think we will have that for lots of different commodities, and you can make serious money playing that the right way, and you can lose serious money not playing it the right

Erik Townsend 

way. Doesn't that arbitrage opportunity potentially create or extend a global network of crime that that seeks to arbitrage those prices by pirating things into countries that they're not supposed to be imported into.

Michael 

Let me ask a slightly sarcastic question in a very British way, your first time in markets? Yeah, absolutely. Of course it will, and there'll be money made doing that, but it will be highly illegal, and you'll risk getting blown up quite, quite literally. I mean, during the Cold War, we certainly had some gray market activity, and I'm sure we all have some here. But if individual investors at home are listening and thinking, yep, I'm going to be a profiteer, you know, the kind of guy who in London in World War Two was selling, you know, knock nylons for the GIS had brought over with them to, you know, to ladies around the back of the pub. I wouldn't say that's your best pension option, right? I think there are going to be far more crystal clear ones that you will be encouraged to do at home. But yeah, at the margin, there will certainly be people doing that too, because human beings are human

Erik Townsend 

beings. No, I'm not thinking about opportunities for individual investors. I'm thinking about a massive increase in gray market transactions that criminals like, oh, I don't know mafia or Goldman Sachs or, I'm sorry, what was I saying other others might get involved with in ways that are not obvious to to the public. So I'm just suggesting that markets could become more complex and grayer than they are black and white. Now, if the predictions that that you're making are come to fruition.

Michael 

Well, look, that's already been the case historically. If you do a deep dive, you know, lift the stone, have a look at how some European economies have operated during the Cold War, you know, when there wasn't much official trade flow between East and West, and how certain countries which had organized crime networks operated within that and who they collaborated with and who they didn't, and how, I think you'll find it very entertaining reading, and it's certainly a lot better than the plot of the last couple of James Bond films. I'll tell you that for

Erik Townsend 

nothing, Michael, before we close, let's talk about where some of the opportunities that are on the upside for both our institutional and retail audience are, where are opportunities and markets? How should we be thinking about all this dire news in terms of upsides?

Michael 

Look, there's a lot of upsides to it. So I warned, as I said when Trump won re election, that we were going to enter the world that we're in now. And I spelled it out really pretty concretely. I even mentioned things like the Panama Canal, okay? At the same time, I didn't say, sell everything a runaway screening from the US. And when people started to do that, started to do that, I was mocking them and saying, You don't understand what's going to happen. It's part of the interests of this particular new paradigm to make sure that people do Okay, maybe not the same trades you used to make before. Maybe you're being corralled in a certain direction, but there are still directions in which it will be worth going. And one clear example of that, of course, is AI where, if you look at the market cap of Nvidia, now it's more than the GDP of Germany, and you look at the market cap of Microsoft, and it's more than the GDP of France. So I'm not telling anyone what to do specifically, and certainly not in terms of those two stocks. What I'm saying is, if you understand how economic statecraft works. You understand how grand macro strategy works, factoring in also the military and the political statecraft alongside that, you can start to see what will need to happen in certain areas and where money will be made and where money will be lost. And that is the one critical set of lenses that I've spent all year trying to share with people, put them on, and you'll see for yourself what you need to do. Don't put them on, and you're just guessing,

Erik Townsend 

and you've done quite a lot of writing about these things. So for people who want to follow your work before we close, tell us what you do at Rabobank, and how to pronounce Rabo bank, and where we can follow your work?

Michael 

Sure. Well, for us, it's Rabobank. If you're Dutch, it's rainbow bank. And I always get confused between the two. So I'm a global strategist, or you could pronounce it global strategist if you want to try and make it Swedish. And I do what we've just done on this discussion. I'm cross asset, cross geography, cross disciplinary, and I'm trying to look at the biggest of big pictures in order to understand what's going on at the local level, tying together the micro, the macro and the meta. So that's what I do. And if you've enjoyed hearing this, or this is your first time hearing me in particular, obviously, go to Rabobank knowledge. Now, you do have to be a Rabobank client to get the best of that, but some of the stuff is available there. Look me up on LinkedIn. Some of my recent research, which is most appropriate to these discussions, is available there. And I'm also on X at the Michael every or one word, T, H, E, M, I, C, H, A, E, L, E, V, E, R, Y,

Erik Townsend 

Patrick sobrezna, and I will be back as macro voices continues right here at macro voices.com

 

Erik

Joining me now is Santiago capital founder, Brent Johnson. Brent prepared a slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you haven't registered This email address is being protected from spambots. You need JavaScript enabled to view it. Just go to our homepage macrovoices.com click the red button above Brent's picture that says, looking for the downloads, Brent, it's great to get you back on the show. You know, I've noticed a trend in the finance podcasting industry. Here's what you do. You're a podcaster. You go in the air, you make shit up in your head about what you think Brent Johnson and Luke Roman each said about the US dollar. You set the context that way. Then you bring one of those guys on and ask them questions that don't make sense because you didn't get the story right. I'm going to resist that temptation. Dollar milkshake theory is your explanation for why you think, even though the dollar system might be in big trouble, it's more likely to be upside risk to the dollar relative to other currencies than other people think. You call that the dollar milkshake theory. Give us an update on that, because, boy, it's starting to look I certainly think you already were proven right on that. We saw that unexpected rally up to 116 on the Dixie, holy cow. But wait a minute now it's looking a little bit shaky for the dollar. Let's get an update from the slide deck on the dollar milkshake theory, sure.

Brent

Well, first thing I'll say is thanks for having me back again, Eric. You were one of the first persons to interview me when I first started talking about this, and you were actually your conference in Vancouver, was the first time I ever spoke about it live. So you've been a great supporter of me over the years, and I appreciate you having me back, or having me originally, and having me back so many times since then, you know. So as the dollar milkshake theory goes, what it really is is it was a framework for me to understand what I thought would happen, should we get into a sovereign debt crisis as a result of all this crazy debt that the world has taken out. And I called it the dollar milkshake theory, because the dollar underlies the entire global economy. You can't really understand what's going on in the world if you don't understand what's going on with the dollar. And I thought that the if we got into a crisis and the system came into some kind of an event that would force it to change, it would be as a result of the dollar going higher. But the idea was never to just sit in dollars and wait for this big implosion. My point was that the dollar was going to rise. And I thought that would have a knock on effect for several different things. And I'm not going to spend too much time going through the whole theory again, but, you know, people can look at the slide decks, and the first, you know, 10 or 12 pages kind of summarize it. But if you look at page four, what I really said was, I thought six things would happen. I thought, you know, because of all the debt in the world, interest rates would finally start to rise after a 40 years of going down. I thought that would cause bonds to break. I thought the higher interest rates would pull capital into the dollar and make it rise versus foreign currencies. That pulling of capital into the dollar and into the United States, I thought would also cause US equities to rise. I thought gold would rise as well, both because Fiat loses value over time, but also the uncertainty surrounding the monetary system itself. And I said I thought the United States would continue to outperform the rest of the world on kind of an asset appreciation basis. And we did not get the sovereign debt crisis that I thought that we would, but all of the six things that I thought would happen as a result of that sovereign debt crisis have kind of played out. You know, the dollar has kind of from the time I first said it, it's, it's up about 10% but from from covid, which is when things really kind of got interesting. It's basically flat. But I would point out it's flat despite all the bailouts, despite all the money printing, despite the money printer go bird, despite the, you know, expansion of the Fed balance sheet, and so, you know, we've just kind of kicked the can down the road. But, you know, the framework has helped me understand what's going on in the world and why it's happening the way it has been happening. And so where I think we're at now today, Eric, is we're kind of at the same place we were five years ago. There's a lot of people out there who thinks the dollar's days are numbered. There's a lot of people calling for its imminent demise. There's a lot of people who think that American Exceptionalism is now over and it's the rest of the world's going to outperform the United States. I just don't think that's the case. I think, if anything, over the last five years, the United States dollar has become more entrenched in the world, despite the great desire to get away from it. I just don't think it's that easy to do. And I think, you know, with with the ratcheting up of the trade tensions between the United States and China, and the geopolitical tensions between the United States and Europe against Russia, you know, I don't, I don't think the next four or five years are going to be smooth and calm, and I think when things get crazy, I think the dollar will still rise versus foreign currencies. And I think the dollar will become. More entrenched than it ever has been. So that's kind of a little bit of an alternative theory than most people have. But you know, I have, I haven't changed my story in seven years, and I'm not changing it now.

Erik

Okay, that's perfect context, because I'm changing my story. Brett, what I would have said until maybe six months ago is, look, first of all, you've already been proven right on this. As far as I'm concerned, yeah, we haven't had a full on sovereign debt crisis, but we really are, in my opinion, having at least a an awareness, finally, of how bad the sovereign debt situation is, and I think it's driving these, these rises in the dollar and the bonds, breaking the interest rates, everything you said, the gold. I think it is all happening for those reasons. But what I would have said until about six months ago is, look, Brent, there's so many people around the world that agree that the dollar is the world's reserve currency because there's no viable alternative, and they're working hard to build that viable alternative, and once they do, I think it's toast for The dollar, because I couldn't see any smoking gun that could possibly preserve or salvage that that US dollar reserve currency status long term. Until recently, and I've been looking for somebody to talk about this. You just wrote a 30 page paper about it. So what is the smoking gun that might extend the dollar's hegemony over the global financial system longer than a lot of us thought possible, at least, certainly longer than I thought possible.

Brent

Well, you know, it's really, really interesting, because when this first came out a couple years ago, I didn't think it was that big a deal, but I've changed my mind on that, having done a bunch of research on it. And that is the rise of US dollar stable coins. And I think perhaps it's been missed by most for the same reasons I missed it is that it was, you know, it kind of came up in the world of crypto and these digital assets. And, you know, for many people, perhaps they understood the monetary side of it, but they didn't understand the technological side of it. And for many people, when you don't understand something, you just kind of stay away from it and don't really dig into it and and as a result, and I think there were some shady companies that were involved in the stable coin market, and that kind of, you know, probably kept me and perhaps some other people from from embracing it too much. But what really got

Erik  

me hang on a second, Brent, let's just do a definition before we go on of for that audience. And it's definitely part of our audience. For the people, okay, stable coins, that's one of those crypto, whatever the heck things, for people who are not interested in crypto. Why the hell should you care about a stable coin? Why should I even care what it is?

Brent

Sure, well, what a stable coin is essentially a digital token that is then tied to something else that's tangible, so as an example, or something that exists in another form. So rather than a new meme coin, you know, like Doge or something coming out that that really gets its value from either some perceived use or speculation it. The stable coins derive their value from the underlying assets that it's tied to. So you could the, you know, you could have a US dollar stable coin, in which case it's tied in a price manner to the US dollar. You could have a gold stable coin, in which, you know, you have this digital asset that is tied to the value of gold. And there's kind of different kinds, you know, some of them.

Erik  

Let's define that word tied Brent. What do we mean by tide? Do we mean backed by like, for every stable coin, there is a US dollar behind it someplace in a bank that hopefully is not in the Bahamas. That's

Brent

that's the idea. And I think for a long time, people were very skeptical of whether there actually was enough backing those stable coins, and if there was enough assets backing it to where, if you wanted to return your stable coin for the dollar itself, or the piece of gold or whatever, whatever it was tied to, that the backing was not there. And I think, I think what really kind of changed this for me was when they passed the genius Act. Now I started hearing about the genius act a couple years ago, but it was still kind of in, you know, legislative creation form. It wasn't really an official thing, and it was still kind of on the fringe, but then they literally passed it earlier this year, and Scott Besant has spoken about stable coins quite a bit. And so it's kind of getting official sanctioning or backing from the US government that it is going to be a thing. And that's what really got me thinking about it in a bigger way. And as I started thinking about it in a bigger way, I think the government is going to mandate in some way or another, that these stable coins are backed, and I think transparency is going to need to be more forthcoming than it has been, and I think audits are going to be more stringent than they have been. But the idea, as you suggest, is that, you know, these are backed, and. You know, in the past, there have been some stable coins whose backing fell apart, and then the price of those stable coins fell apart. I think that's going to be much more stringent oversight going forward, and that oversight is again, part of the reason why I think this could be a much bigger deal than than people perhaps have realized so far.

Erik

Okay, now let's talk about the stable coins role here. Because what I said years ago when I wrote my book in 2018 is, look the US government. Once they figure out what all this crypto stuff really is, and they realize that it really is a threat to the US Dollars role as global reserve currency, they're going to outlaw it. They're going to do whatever they can. Of it. They're going to make it difficult for crypto people. What I never saw coming is that actually there's a way for some crypto assets to kind of be the salvation that saves the dollar from being displaced as the reserve currency. How does that work? And how does stable coins play into that?

Brent

Well, I think you've just hit the nail on the head. And that's, that's kind of the realization I came to. And that is what I would say, is that what is emerging here as a result of the genius act. And listen, I have to say that this is, I say this somewhat tongue in cheek, but I'm also serious, is that usually when I see the name of a law come out, I laugh, because the name is usually the exact opposite of what's going to happen in this case. I actually think it's appropriate. I think this is a rather ingenious idea by the US government, perhaps saying Machiavellian is a better way of describing it. But essentially, what's emerging is not a decentralized alternative to the global financial order, but rather a deeper centralization, which may be disguised as efficiency and freedom, but is actually, you know, it quietly reinforces the US Dollar as the global reserve currency, and it reinforces the United States government's control over the global monetary system.

Erik

So the essence of it is, if you wanted to go digital, and you were kind of thinking about ditching the dollar and going with Bitcoin, okay, there's a lot of volatility in that. But if you go not with Bitcoin, but with a stable coin that might be cleared on the Bitcoin Blockchain, but it's a stable coin tied to the US dollar. Now, all of that demand for US dollars is still there, and you don't have the competition from other Euro stable coins and New Zealand dollar stable coins, because all the stable coins are dollar based, for the most part,

Brent

that's correct. 99% of stable coins in existence are already tied to the US dollar. Now, I have no doubt at all that other countries are going to launch their own stable coins as a way to kind of compete against the US dollar. But I would say countries around the world that are worried about the US dollar stable coin should be worried about the US dollar stable coin. And the reason is, and I'm going to take a step back here, and because I think it's important to understand the argument that we're making, and I think the mistake that a lot of people make is that they think that stable coins are competing with perfection, but they're not. They're not competing with perfection, they're competing with other fiat, right? This is a Fiat versus Fiat argument. This has nothing to do with Bitcoin. This has nothing to do with gold. It's nothing to do with diamonds or other tangible assets that increase in value over time as Fiat loses value. This is a Fiat versus Fiat battle, and for most countries around the world and most individuals and even kind of small and medium sized institutions, the US dollar is a much more stable currency than the local currencies in which they transact. And typically in an emerging country or a newly developing country, the government of that jurisdiction has a way to control the monetary flow. The capital controls what kind of a bank account you can open, what you can hold in the bank account, and so they can protect against an outside monetary influence coming in and disrupting them. But in this case, the technology is allowing citizens, individuals, and you know, again, small and medium sized institutions, to skip those capital controls or those banking laws or those regulations, because anybody that has a phone, a smartphone and a connection to the internet can download a wallet, and now all of a sudden, hold a US dollar balance. Previously, you had to have a bank, and then that bank, you had to have a bank account, and then that bank where you had your bank account had to allow you to own to hold us dollar balances. And then, not only that, that bank had to allow you to withdraw US dollar balances in perhaps physical form. And if that didn't work, then you had to go to some local merchant or some bazaar or some money changer, and, you know, pay a big spread in order to get out of your local currency and get into dollars. Dollars. And this has a way to, kind of, you know, immediately bypass that entire infrastructure, both regulatory and financial, to to allow, you know, the people in these jurisdictions, to immediately circumvent those controls and hold the US dollar. And what this ultimately gets to, what it ultimately gets to is the sovereignty of a country. And this is where, you know, understanding the definition of terms, I think, is pretty important here, because sovereignty basically means ultimate power. And every government wants to have ultimate power over their jurisdiction. But if you are beholden to a country or to another country, or if you are beholden to another currency which you cannot control, then you are no longer truly sovereign. And as I think these other countries start to become more quote, unquote, dollarized, it starts to eat away at the sovereignty of those local jurisdictions. And it's not an accident. If you look back through history, whenever there's been a currency crisis or a currency has failed, it's not very long after that that the government of that jurisdiction typically fails. And again, the reason is a loss of sovereignty. Once you lose control. Once you lose power, you're out and, you know, a new form takes its place. And I really think this, this, this is the genius of the genius Act, is it? It's a way for the US and the US dollar to kind of infiltrate foreign countries, foreign economies, and use the US Dollar as a weapon to a greater extent than they already have. And not only that, they don't even have to do it themselves. The market will do 99% of the work for them. And again, it's because the US dollar is a better currency than 99% of the other fiat currencies out there. And so I think a lot of people have focused on the fact that these new stable coins will be a source of demand for the Treasury, and that's true, it will be a source of demand, but I think that is a secondary benefit. I think the primary benefit is a more of a geopolitical and strategic currency as a weapon, that I think will will, quite honestly, change monetary architecture of the entire world. Let's

Erik

talk more about that currency as a weapon aspect. Because it seems to me that, you know, the genius Act is a mechanism or an invention of the US government. But wait a minute, one of the US government's favorite sanctions is to withhold access to the SWIFT system to prevent people from being able to transact international transactions in US dollars, basically kind of cutting people off from the global or cutting entire countries off in in the context of sanctions from the global monetary system. But wait a minute, don't US dollar stable coins kind of create a better way to completely bypass and obviate the need for the SWIFT system? And doesn't that undermine the US ability to use that as a sanction tool?

Brent

Well, I think it actually enhances it, and I'll tell you why. Is because the SWIFT system is not a US institution. The SWIFT system is actually a European institution. Now, after 911, 25 years ago, the US government went to Swift the US Treasury, more specifically, went to the went to the SWIFT system, and by using the political pressure of the United States government, was able to, quote, unquote, sort of infiltrate swift and get more information from Swift. But they still don't have perfect control over it. They have more control than perhaps any other group, but they don't have perfect control. And again, when you go back to sovereignty, every sovereign wants to have total control. They don't like a little bit of control, and they have some visibility, and they have better visibility than anybody else, but they still don't have perfect visibility. These stable coins are basically a new digital architecture that would give them perfect visibility, because it's all on the blockchain, or a blockchain, you know, I'm not sure which blockchain they would use. Perhaps they could use a couple different ones. But the point is, is it's it's not only gives them more visibility, it gives them more control, and it allows them to even better a sanction or remove somebody or cut them off. And so what I think happens over time is they're building this parallel system of you can call it plumbing or rails, however you want to describe this. And it will I think this new system will cannibalize the traditional Euro, dollar rails and create this. New us, dollar stable coin, Euro, dollar rail, which gives them more visibility, more control and more more a greater ability to use it as a weapon. Should they decide to do so? And I don't think this will happen right away. I don't think they're just going to flip a switch and happen. But the example I've used of how this could possibly go is the LIBOR so you brought up the Euro dollar system for those are not familiar, there's an entire system of dollar based transactions that exists outside the United States, and that system is called the Euro dollar system, and that Euro dollar system is orders of magnitude larger than the US dollar system within the United States. And for many, many years, the interest rate, which was kind of the standard interest rate that was used for the Euro dollar market, was called LIBOR that was set in London. It's called The London Interbank Offered Rate, and it was basically set by a committee of bankers in London. And again, the United States had a little bit of control over that, because it was essentially $1 based loaning system, but they didn't have perfect control, and they didn't like that. And over time, they got LIBOR shut down, and they got it transferred over to what's now called sofr, which is now a US based rate and one that they have control over. Now, that process took 567, years, but they eventually got it done. And so now LIBOR no longer exists, and now it's sofr, and you know, the US has more control over it. I could see the same thing happening with these Euro dollar rails and these new, you know, US dollar stable coin rails. I don't think it's just going to happen by a flip of a switch, but I think it will happen over time. And if you think about it, all the US would have to do, would say, Hey, this is our new preferred way of doing business. So any vendors they do business with, any any payments that they have to receive from other other partners or or companies or governments, you know, they could say, we want to now use this new system. And you know, it wouldn't take that long for the traditional rails to be cannibalized into the new rails. Imagine if the United States were to be able to get a partner like Saudi Arabia to say, we are still pricing our oil in dollars, but now, rather than sending us a Fed wire over the SWIFT system, we would like you to use this new, more efficient, quicker, cheaper system that the US Treasury has blessed, and then all of a sudden that gives it legitimacy. And for anybody saying, Well, no, Saudi Arabia is not going to do that. They want to sell their oil in yuan or rubles, or they're going to join the BRICs. I would just say, you know, keep an open mind. A lot of people didn't think that, you know, in 1972 that Saudi Arabia was going to price all their oil in dollars, but it happened. And so, you know, I think the US has a lot more tricks that it can still play, and more power and influence that it can use to make this happen, and especially if the market starts to adopt it on its own, it will make it even easier to do something

Erik

like this. Okay, let's go back to the theme of weaponization of currency systems, the goal or one of the principal benefits of the genius act stable coin, as I understand it, is you're describing it is basically it gives the us a way to, very quickly, almost immediately, bypass all the engineering that would have gone into a so called fed coin, a digital dollar, and just say, look, we'll keep us dollars as US dollars. We'll provide the the crypto rails, if you will, the digital currency rails on the US dollar by using stable coins. And that allows you to transact stable coins that are backed by dollars. Very efficient internationally. Don't need the SWIFT system. It's got all these great features, and it does have, I think, a weapon like aspect to it, which is that it potentially perpetuates the life of the US Dollar as the world's global reserve currency. Okay, well, generally, when somebody's got a weapon, whoever their enemy is, observes that carefully and copies it, or does something and tries to come up with a better weapon. So if I put myself in the shoes of Sergei glazyev, the Russian scholar who was the architect of the de dollarization campaign, imagine he's going and meeting with his counterpart in China. I don't know the name of that individual, but whoever the guy is in China, who's, you know, the weaponization of currency guy and the Chinese government. There's probably lots of those. Probably lots of those guys. And they sit down and they say, okay, what are we going to do? We got to design something. It seems to me, we've got the whole world is going to like this digital currency idea. They're going to start using stable coins that are tied to the US dollar for everything. That's going to potentially perpetuate our. Enemy's currency system. How can we design an even more attractive stable coin than a US, dollar backed stable coin that everybody's gonna say, Oh, well, since we're already on stable coins, it's easy to switch to a different stable coin, and we're gonna go use this other one instead. What would they do? And is there a risk that they come up with something better.

Brent

Well, they will no doubt do something, because if they don't do anything again, they are going to get their economy is going to get hollowed out and dollarized. So the countries that have the ability to fight back will no doubt fight back. And I think the countries that you mentioned, China and Russia, are probably best positioned to fight back. So it, but there's a number of countries out there who won't have that ability and don't have the power or perhaps even the technology or the know how to do it. And so I think what happens is even countries like Russia and China, you know, will still probably use the dollar stable coin to a certain extent, but I fully expect there to be a ruble stable coin, probably a yuan stable coin. If you look back over the last couple years, or last several years, our last 20 years, how many times have we heard about the EU on or the new digital this, or the new Libra system? There's been innumerable attempts to come up with a system that is anti dollar, that has been launched by a competitor, that is going to be the new standard of currency issuance and usage, et cetera, et cetera, et cetera. And it just never, ever comes to anything. And it's not to say that there's not great desire there, but again, you're fighting against the biggest network that has ever existed in the history of the world, and that's the US dollar network. Now it's not to say that nothing can happen. It's not to say that the US dollar can never be replaced. You always have to keep an open mind to that possibility. But I think my point is, is that with the network that already exists, the need for dollars that already exists, the desire for dollars that already exists in many of these countries. If now all you're doing is handing them the ability that with a with a with a smartphone, they can, they can now not only hold dollars, but transact in them. It's kind of like, you know, taking candy from a baby, I would argue. And so, you know, none the parents of those babies may not want, may not want the, you know, the US dollar, to be in there. And so they will put controls in place and stuff to try to prevent it, but I think it's going to be an uphill battle for them.

Erik Townsend 

Let's go back to the question of the blockchain and how this all works. Because what you said earlier is I was questioning, wait a minute, could this undermine the us's ability to withhold access to Swift as a sanction? And you said, Oh, but they'll have even better abilities. Well, hang on, if we're talking about surveillance abilities, definitely the fact that it's all on a blockchain gives visibility to all the transactions. There's an audit trail there that has to be followed. But if we were talking about a cryptocurrency style of blockchain where there is no owner, you know, the US government would not have any ability to prevent a transaction. So are you imagining that this is a different style of blockchain that the US does have control over, and is there a risk that maybe somebody else says, Well, wait a minute, you know, you don't want to use this thing for that exact reason, and instead we've got, you know, that's the competitive advantage of something new.

Brent

I'm the first to admit that I am not an expert on all this technology, to say exactly how this would work. And the other thing I would say is, even if I was an expert on the technology, I still wouldn't know exactly how this was all going to get rolled out. But I do know that there is ways that bond these different crypto assets, or these cryptocurrencies or these different blockchains to basically make it programmable money, right? And one of the things I've been debating myself with and talking to a bunch of other smart people is, is this going to be a system where the US Treasury rolls out their own stable coin or on their own system? Or will it be something where they just let everybody you know do it? Or will it be something where they, perhaps they grant a license, and they, perhaps they grant 20 licenses to a handful of different multinational banks and, you know, financial entities who then issue them. And I don't have a perfect answer that I don't know, but what I do know is that part of the reason for doing this is to have more control. Right? Governments are not in the business of giving up control, whatever you think of the genius act, I promise you that is not so that they are losing control of the money. It is, it is an attempt to get more control of the money. Now, how exactly they do that, I don't know. But to your point, could somebody else come along? Long and say, this is a way to get out from underneath the state's evil intentions. And I have no doubt that that will continue to proliferate, right? That's one reason to own gold. That's one reason to own Bitcoin. It's perhaps a reason to own some of these other crypto assets that gains, that provides an exit from the system. What I think is rather ironic about this, though, is that this new technology and this new innovations that was developed by the private market as a way to exit state control is now, at least from the way I see it, is being co opted by the state and perhaps implemented on a bigger scale by the state than the free market would would prefer to see happening. And so this is where, this is where I don't have it worked out perfectly, but I can see the where it's headed. And it's, it's, again, I go back to the very beginning. It's whether you want to call it genius or Machiavellian. It is, it is rather clever, Brent.

Erik  

Let's come back to what's going on with reserve assets, because central banks around the world watched what happened when the US sanctioned Russia by basically saying, hey, all those treasury bonds that you guys all own, we had the serial numbers and we just canceled them. See you later. Other central banks said, Wait a minute, we don't want that to happen to us. They started buying gold. So I guess my question will be in two parts, seems like there's already a trend going on with central banks. Is there any reason to think that it's going to change? Which is, they're starting to favor gold over US Treasuries as a central bank reserve asset, but maybe more importantly, is there an angle for some clever maybe Russia and China to come in and say, look, we've got a better stable coin that's not just backed by US dollars, but it's backed by gold, and it's audited gold, and they're really, you know, it's basically a gold coin. So you can use the digital currency convenience of instantaneous transactions, but it's all based it's all backed by gold, and it's in a vault in Switzerland. Seems to me like if you were a central banker and you wanted to get some of these digital assets, and you had a choice between US dollar genius act, stable coins, versus some other kind of stable coin that's on a completely ownerless blockchain that's backed by gold in a neutral country's vault. It's starting to look kind of challenging for that us, dollar stable coin, isn't

Brent

it? Well, I don't think so, and I'll tell you why, because I think we get back to the Dollar versus perfection, or the dollar stable coin versus perfection, rather than dollar versus other fiat. Now, I think there's a place for gold backed stable coins, and perhaps some of these other countries will try to do something with gold. But again, you have to remember, most people in the world do not want to hold gold. If they did, they would already hold gold. There's nothing to keep them from already doing it. And the other thing is, if they do want to hold gold as an asset, that's different than holding gold for liquidity, for business reasons, or for, you know, your daily operational needs. And so I don't think this is a gold versus dollar or a gold versus Bitcoin argument. One is a longer term store of value and one is a day to day liquidity needs. And I think we still live in a Fiat world. And I think that is going to continue. The other thing I would say is that to the extent that the rest of the world does try to do something with gold, the United States has a lot of gold. So if the dollar gets or if gold gets repriced higher, and therefore that makes China and Russia, who own gold, in a better position. Well, then how does that not also make the United States in a better position? Because they have more gold than anybody. Now I know some people will come back and say, well, the US gold hasn't been audited in 70 years, to which I would say, well, when's the last time you saw China's gold audit? And when's the last time you saw Russia's gold audit? And did you actually get confirmation of it, or did they just tell you they had it? And so the other thing I would say is I can't imagine Russia storing their gold in Switzerland. I can't imagine the PBOC shipping their gold back to the west after spending so much money to buy gold and ship it east. And so the last thing I would say is you have to remember the whole way that a gold backed stable coin would be given value is the gold that backs it. And the idea is that you could then turn in that stable coin for the gold. Now, do you think that China is going to give you the gold if you turn into stable coin. I don't think they're going to do that, but it does. It doesn't mean that it can't happen. I just, I think it's a lab, or rather lower probability event. But, you know, as it gets but, but I think as it gets back to the US dollar stable coin argument, you just have to remember that there are absolutely 100% Be countries that fight against it, and some countries will be more successful than other countries, but there's a lot of countries out there, and there's a lot of people out there, and a lot of small and medium sized institutions out there who already hold dollar balances or want to hold dollar balances, and the easier that that is made available to them. I think the more they will do it, and it is a way as, again, a Fiat versus Fiat battle. It's a totally different battle than the Fiat versus hard assets. The other thing, I would say, the last The other thing is, you mentioned central banks looking to hold more gold as reserves and treasuries. And listen, I think that is the case again. If we go back to the original the origins of the milkshake, one of my thoughts was that interest rates were going to rise, bond prices were going to fall, and we'd get into a sovereign debt crisis where sovereign bonds, including us, treasuries, are repudiated. And that was one of the reasons why I thought gold would rise, because I said the gold's rise would be, you know, driven primarily by foreign buyers, which I think is what has happened. The other thing I would say, though, is, if you look, if you look at a lot of these charts, there's a chart I have in here. I can't remember which slide it is off the top of my head, but I think it's slide 13. It's a fairly popular slide that's been going around, and it shows treasuries as a as a percent of reserves falling, and gold as a percent of reserves rising. Now that's not to say that nobody has sold US Treasuries, and it's not to say that nobody has bought gold, but this chart is largely explained by price. Treasury bonds have come down 20 or 30% and gold has more than doubled. That is partly why, as a percent of reserves, gold has risen and bonds have fallen. That said, I do expect that probably continues in the years ahead. Again. I think we're still going to get into one of these sovereign debt crisis where sovereign bonds will be repudiated, and I think in exchange, people will want to own hard assets, whether that's gold, whether it's Bitcoin, whether it's us, companies that have property, plant and equipment. I think we're going to continue to see Fiat lose purchasing power. But I don't necessarily think this is going to be necessarily just bad for the dollar and not bad for the rest of the world currencies.

Erik

Brent, I want to skip ahead here in the interest of time to let's see. It's page 21 in your slide deck. You've got the Table of Contents here, and I guess just the executive summary page for a 30 page paper, which I quite enjoyed reading myself. It is behind your paywall, understandably. How about hooking macro voices listeners up with the verbal executive summary of what's in this paper and what it's about? Sure.

 

Brent

So you know, the paper is titled Empire by code, and we titled it that because, again, I was actually surprised myself when I started doing the research on this. I enjoyed doing the research. I enjoyed learning about it, and I enjoyed writing the paper, because I think it is a rather big deal. And you know, I started the paper off with a quote by von Clausewitz, who was a military general, and he said something to the effect that in war, you know, you have to think of all parts of a whole. You can't just think of the individual parts alone. And the point we made, that's the same thing with money, you know, I'm going to tell you a story, and I'm going to tell you about a number of different pieces, but you have to think about it as a whole. And that's what we tried to do with the paper. And so, you know, the different things that we talked about in the papers, what are stable coins? What is money? How sovereignty plays a role in money, how the Euro dollar market developed, and how that plays a role in global monetary architecture, as well as sovereignty. We then went in to explain the SWIFT system and how that has traditionally been used to kind of regulate and and use the Euro dollar system, and how and the not only that, but the ways the US has tried to gain a little bit of control on it. We actually did a special section on the US dollar stable coin as a weapon. And the point I would make here. I don't know if many people realize it, saying money is going to be used as a weapon this, it may sound like a controversial statement, but it should not be. Money has been used as a weapon for centuries. Perhaps all of history, and the United States has actually used this as a as used money as a weapon in several wars, battles and different military theaters over the years. So this is not, this is not some new idea that I've come up with of a way they could do it. This is, this is already doctrine in which they have used it. We then go into the genius act, and how that how we think the United States is using the genius act. Ali to then use all the things we previously wrote about to embed US dollar hegemony to an even greater extent than it, than they, than many people realize. And then we just kind of go through why it all matters, and why we think this is important. And you know, we and we come to our conclusions. And so, you know, from a very big perspective, we think that this is a very big deal, and perhaps as big a deal as when the United States, you know, severed the dollar from gold and left the Bretton Woods system. The point I would make with the paper is we tried to break it up into easily understandable different sections, and the details matter, but the overall structure matters more, because what we think is emerging is not just a currency system, but a new form of global control. And the one, one thing I would I'll just, I'll just read you this one paragraph from the executive summary, I won't read the entire thing, but we say, make no mistake, something profound is shifting in the geometry of global money. Quiet code and public ledgers are no longer just symbols of rebellion against the state. They are becoming extensions of it, and the very tools once imagined to escape central authority are now being absorbed by the most powerful monetary authority the world has over known through digital tokens that settle in real time and travel across borders without friction, the United States may be transforming the architecture of control itself. And so, you know, like I said this, I don't want to come across as hyperbolic, but we just think this is a very, very big deal. We've actually this is so we've got on our research service. We've got two levels of service. We've got a premium service, which costs 399 a year, and we've got a pro level service that costs 2399 a year. We thought that this report was important enough that we're making it available to both levels of subscribers. If you subscribe to the 399 level between now and next Wednesday, which is November 5, even though this is a pro level report, you will get a copy of this pro level report that can be found at research dot Santiago, capital.com, I think this is a pretty big deal. I wouldn't be out talking about it if I didn't, and if nothing else, if nothing else, it's just an incredibly interesting time to be analyzing what's going on in the world, because if you think about it, this US dollar stable coin is or as an idea, it kind of sits at the center of both capital markets, global geopolitics and the madness of crowds. And if that isn't interesting to you, I don't know why you're looking listening to macro voices.

Erik Townsend 

Brent, I couldn't possibly agree with you more, and I definitely want to eat some crow on this one myself. My prediction going back to my book in 2018 as I said, Look, at some point the US government is going to figure out how much of a threat the whole crypto asset, digital asset infrastructure that's being built, how much it poses a threat to dollar hegemony. And once they figure that out, they're going to do everything they can to stop it. What I didn't see coming is, no, actually, they're going to figure out how to use it to their advantage, and stable coins are the mechanism to do that. And I agree with you, it's a game changer. Patrick, sureshna and I will be back as macro voices continues right here at macro voices.com