The US continues to defy all rational valuation metrics as it continues to make new highs. I contend this is the result of the huge amount of liquidity being provided to the markets by the FED. This bubble now appears to be entering its blow off phase. As I have said before, just because a market is overvalued does not earn it cannot become more overvalued.
Nevertheless, at some point the music will stop and a massive decline in the stock market will occur.
Will the reduced economic activity caused by the coronavirus be the needle that pricks this bubble. So far the markets, with the exception of commodity markets, are shrugging off the news that China is basically on lockdown.
The German energy transition continues to fail as the country considers building more coal generation as energy rates soar and CO2 emission targets are not being met. A lesson for policy makers in the US to take into consideration.
Transcript00:00hey guys John Paula me here actionable00:03intelligence00:04today is Sunday February 16 2020 this is00:09the weekly market update00:11so before right before I get into the00:14charts I just want to make some comments00:16on the continuing coronavirus situation00:20as it relates to what we’re doing when00:23it relates to in the markets and I’m a00:28little bit I don’t know00:31shocked not shocked but what’s the right00:34word confused we’re seeing all-time00:38highs last week and in many stocks in00:42the stock market and so you know it00:49makes you wonder what’s going on is the00:51market so efficient that its pricing and00:54the fact that this isn’t going to be a00:56big deal or is it more that I what I01:00think it is which is a liquidity bubble01:03plus all kinds of money coming into the01:06US for various reasons safe haven flows01:10if you will I think that’s probably an01:14explanation for why stocks are going up01:15there’s some stocks that are01:17inexplicably not going down which should01:20I’ll give some examples as we go and get01:23into the discussion what I want to say01:25though is is that I’m getting very very01:27concerned about the bubblicious01:29conditions we are at some of the highest01:31bubble levels that I’ve ever seen01:34now we’ve been talking about that for a01:36while and we’ve said that liquidity01:39flows matter you know the stock market01:42isn’t necessarily correlated with the01:44economy in the longer term it seems to01:47be but you know it’s liquidity matters01:50and with the QE for that that the Fed is01:55doing that the QE for non QE for01:58whatever they want to call it the repos02:00that’s high-powered money that’s t-bills02:03they’re buying this is the first time02:04they’ve done that in many years and that02:06money is going directly into the markets02:09couple that with the fact that you02:11already had dollar flows into the u.s.02:13prior to the coronavirus and now the02:16u.s. still being a safe haven that’s02:19where the money’s going so I would02:22caution you it what’s what’s fascinating02:25is is the the only thing that’s really02:27bad are commodities so the commodities02:30are showing us that you know demand is02:34obviously gonna have a knock-on effect02:36from this you know when you shut down02:39the Chinese economy basically you’re02:41gonna in some largest consumer of things02:43like oil largest importer of oil copper02:46aluminum cement things like this you’re02:51going to have a knock-on effect as China02:54basically everybody’s in quarantine and02:56Industry slows down we’ve also seen that02:58in the supply chains we’ve seen more03:01announcement this week we saw one03:03announcement where the company went back03:06to work and there was like a thousand or03:092,000 employees and what the employees03:11had coronavirus now everybody’s03:13quarantined to the factory they can’t03:14even go home so I don’t know I’m back to03:18what I’ve said before I don’t really03:20know what’s going on here do you trust03:23the data in China no if you look at the03:24John Hopkins tracker coronavirus tracker03:28they take in they don’t just take in one03:30bit of information they gather03:32information from several sources it03:33seems like things may be starting to03:36peak in China if you believe the data03:38which I want I don’t believe the data I03:41would say though that I think the rest03:46of the world cases are still going up03:48slightly they’re still under a thousand03:49cases it’s like 750 outside of China03:54most of them concentrated in the areas03:56directly around China so there’s 1504:00cases in the US for example so we’re not04:03seeing this big epidemic now there are04:06many commentators or people that I’ve04:08listened to that said that the next wave04:10is coming and this thing is going to04:11explode outwards I don’t really know04:13what I’m I’m not a you know happened04:15epithelium ologist04:17I don’t have not an expert on academics04:20epidemics outside my circle of04:22confidence we still have to look at04:23those it’s affecting the markets that04:25were involved with which is resource04:27markets04:27for in a large part so I would be very04:34cautious if I was basically one of the04:38things I’m recommending is you know I04:39mean I think we’re going to see some04:42interest rate cuts from the Federal04:43Reserve as the economic numbers have to04:47be affected by this they have to be I04:50mean you’re just not going to have this04:52kind of slowdown in China and not have04:54it have a have an effect on the rest of04:55the world so I expect that that means05:00higher bond prices probably especially05:02in the Treasury market that’s a good05:03place play to put money in a short term05:06cash is always good I have a lot of cash05:09I like gold still Gold’s in a bull05:12market I think with the accelerating05:14monetary malfeasance that continues05:16around the world especially in the US05:18and I think you know what’s gonna happen05:20in China I think gold is poised to go a05:23lot higher especially with the debt05:26levels in the US we’re gonna be hitting05:28trillion dollar deficits I wrote an05:30article this week that kind of pointed05:33out the fact that I believe this is the05:35first year when the Social Security05:37trust fund now goes into the red and is05:40now going to become an on budget item so05:42you’re gonna have to pay out of the05:46federal budget there’s the two hundred05:48billion dollars that you don’t have in05:50the Social Security trust fund and I’ve05:52written articles about that people can05:54go my my site and look at that so there05:57is no lockbox there is no thing nothing06:00to dip into it’s just a bunch of IOU use06:01that now come do so things are not06:05getting better they’re getting worse but06:08yet the markets move higher and higher06:10and higher because it’s all about06:11liquidity so you know if you look at the06:16Venezuelan and Zimbabwe stock markets06:19when they went into hyperinflations06:21that’s not what I’m suggesting is gonna06:22happen in the US I’m not suggesting the06:24hyperinflation but if you look at their06:25stock markets they crashed upwards06:27there’s people piled in the stocks who06:30tried to hold some type of value so like06:35I said all these bubbles and we’ve06:37talked about bubbles even since I’ve had06:38this channel we’ve went through two06:40bubbles the Bitcoin06:41bubble that was one of the first videos06:42I did was about Bitcoin being a bubble06:44it was it crashed people a lot of people06:47lost a lot of money06:48same thing with cannabis stocks we06:50talked about that that’s now crashed06:52people have lost a lot of money so you06:56know we’ve seen bubbles before here’s a07:02chart shows various bubbles what happens07:04they crash they don’t usually come back07:07for a while you see the this particular07:10person chose excuse us what as07:11disruptors it’s just the post great07:14financial crisis that induced bubble but07:17this is the greatest one of all and it’s07:19now gonna go it’s I now believe it’s07:21accelerating too far it’s blow off top07:22and this is something we suggested in07:24previous videos what happened I’ve07:25talked about this I’ve got a Cassandra07:29but I suggested that even though the07:33stock market was overvalued and it’s07:34been overvalued from a long time it can07:37get way more it can get way overvalued07:39you can get much more overvalued and it07:42probably will another chart here you can07:47see going back to 1991 this is the07:51build-up to y2k that was going to be the07:53you know computers were gonna lock up07:55the world was gonna end the Greenspan07:58Fed printed a bunch of money it led to08:01the tech bubble it blew off but what08:04happened this is the Nasdaq he crashed08:0690% then you had your great financial08:09crisis in here we’ve had nothing but08:11money printing since and now QE 4 if you08:14will and we are now accelerating to what08:16I think is the blow-off top in this US08:19stock market so you need to be you need08:24to be concerned you need to be08:26understand what’s happening now I don’tknow what’s gonna prick the bubble someI’m looking at my my indicators as Ilook at the high-yield debt market whichI think will be the first thing thatrolls over and it’s not there’s no feverthere there’s no issues there right now08:42that can change you know as we start you08:45know one of the things like forecasts08:47are thought what could happen was that08:50if we did go into a recession there’s a08:52lot of zombie companies about 25 to 3008:55percent08:55the companies out there that have junk08:57debt are zombie companies and they08:59cannot afford to have rates go up rates09:05won’t go up unless we have some huge09:07breakout inflation so what could happen09:10though is that the economy slows09:11massively because of this China thing09:13cash flows can be constricted and that09:16could force companies into a situation09:18where they do not have sufficient cash09:21flow to service their debt and then you09:23begin a cascading flow of waterfall09:27effect if you will of debt explosions09:32and and you know reorganizations so I09:35think that’s a possibility but my09:39original thesis was that this thing was09:41gonna rip and roar we were gonna have an09:43energy was going to drag the inflation09:45rate up I we were on that track and then09:48the coronavirus had you remember we had09:50WT I was over it was sixty two dollars a09:52barrel at the beginning of January and I09:56was forecasting higher oil prices09:58because of the lack of investment and10:00the slowdown in shale and I thought that10:02that might be what kicks inflation into10:05gear and forces the Fed to raise rates10:08but now with the coronavirus and the10:11collapse and commodity prices that’s10:14happened that particular pin has been10:17put back into the into the drawer so10:21this is really amazing though because if10:23you look here at what’s happening in our10:25stock market I mean you could this just10:27correlates perfectly with what happened10:29with that we whole repo QE for non QE10:33for is what I call it so liquidity10:36really does drive these markets whether10:39people can then me you know you10:40supercharge this what the fund flows10:42into the US as because of it being a10:45safe haven or considered a safe haven or10:47the least dirty shirt in the HAMP or10:50however you want to characterize it but10:52this is what we are seen and this is not10:55healthy this is not going to end well10:57folks this is not good we’re gonna see10:59this blow off and then we’re gonna see11:01and I don’t know what’s gonna happen on11:03the downside so let’s go back talk about11:07some China stuff11:08for a while here her the resource11:10markets you know so the Baltic Dry Index11:12you know 415 it’s been a decline since11:18mid-2009 teen as the world economy was11:20slowing down but then we’ve got this you11:23know really what’s happened since the11:25beginning of the year and this11:26coronavirus took off and this things11:28crashed by you know three quarters or11:33two-thirds this is that lows we haven’t11:36seen in a decade so or almost of the11:41lows of 2016 so anyway this is not good11:44this is an indication that you know iron11:47or various ore concentrates they’re not11:52flowing you know because China is11:55basically shut down you know we’ve11:57already seen China declare a force11:58majeure on some energy deliveries like12:00LNG deliveries not good but what I’m12:08showing you this for is because I’m not12:09seeing the knock-on effect the market so12:11really don’t seem to be pricing any of12:12this in and it’s kind of it’s very weird12:15the signal is not good there’s China12:19travel collapse this was the passenger12:21transport volumes in China during the12:23Lunar New Year you see that we are12:25downed on rail roadway and air travel12:30anywhere from sixty to eighty percent12:33almost it’s a complete collapse the12:35whole country’s in lockdown basically12:39what I want to talk about why is this12:41relevant I just picked this one company12:43because I’ve heard other people talking12:45about it and kind of piqued my interest12:46this is wind resorts that’s a casino12:48operator they have properties in Las12:52Vegas but they also have two casinos I12:54believe in Macau which is a another12:56small island off the coast of China12:59where they allow gambling a lot of13:01Chinese well ninety five percent I’m13:04sure 99 percent of the traffic there is13:06is to these casinos is from China13:13mainland China what I find fascinating13:16here is is that the two casinos I look13:19at some of the financials real quickly13:20for Wynn Resorts13:22and the casinos the two casinos in Macau13:29are shut down now they’re still making13:30payroll basically they’re not to just13:34keep the casinos in the current state13:37they are paying payroll the 12,00013:39employees is about 2.5 million a day13:41they have no revenue coming in I believe13:43these two casinos if I read it correctly13:45contribute 300 million dollars of EBIT13:48da to the two Wynn Resorts bottom line13:52last year I think a billion dollars in13:54sales if I’m not mistaken regardless13:58when you shut down a large portion I13:59mean you had a bit of a drop off14:00obviously I mean actually if you look at14:05the beginning of 2020 when this virus14:06took off this thing made all new time14:07highs and then it it kind of did pull14:09back but not like you would think I mean14:12it pulled back about you know 20 percent14:15and now it’s rallying again why is this14:17thing rallying when there’s you know two14:20of their major properties and their14:21major revenue generators I mean are not14:24you know in business they’re just14:27sitting there we have no idea when14:28they’re gonna reopen so well I like I14:31said there’s two things going on here14:33either the market is efficient and its14:35pricing and the information and the14:36coronavirus is gonna blow over in the14:38next you know a few weeks or month or14:41two and then we’re gonna be back to14:42business as usual that’s one option of14:45another option as the market is just not14:47getting this I mean the same thing14:48you’re seeing like some of these cruise14:49ship companies these things should be14:51crashing who is taking a cruise with you14:54know to cruise ships go around like you14:56know Typhoid ships that can’t even get14:58into various ports I know I’m15:00overdramatizing that one of the ships15:02can’t but one of the one of the ships I15:04think that’s in Japan they’re finally15:05taking off British and American15:07passengers the governments of the UK and15:10the United States are dealing with this15:12but you know this news is not good this15:16thing’s supposed supposedly is so very15:17early and yet people are still taking15:21cruises and the you know it’s not really15:24being reflected you think any stock15:25prices only stock prices it’s reading15:27reflected as the resource markets you15:30know gold and copper down you know15:33anywhere from 15 or that gold but what15:36copper or down anywhere from 15 to 2015:38percent the stocks are down 30% which is15:42what you would expect get priced in15:45because of the you know like I showed15:47you earlier China’s basically shut down15:48so I don’t know this is not making a lot15:51of sense this thing is either gonna blow15:53over or it’s just going to we don’t know15:55what’s gonna happen and I just think15:57that some of the reactions in this15:58market are just ridiculous and they16:01don’t make any sense it’s just I think16:04like I said liquidity driven and no16:08fundamentals are even being considered16:09so you got to be careful out there guys16:11this is not this is really not textbook16:15what’s going on here well like I said16:17I’m still I still like gold I think you16:20can’t go wrong at gold sir we already16:22knows was in a bull market if we’re16:24gonna see increased money or increased16:27currency units being put into16:29circulation then I think that that’s16:33going to manifest itself in a higher16:34gold price at some point continued16:37higher gold price we’re starting to see16:38earnings come out excuse me16:41cup sum up some of the gold companies16:43ones that I follow I’ll just give you16:47one that I like that I follow I don’t16:48have it in the portfolio but I like it16:50it’s a company called Caledonia mining16:52they have a mine a very very profitable16:55mine in Zimbabwe and yeah I know people16:59kind of scoff at that but the company17:00really is a performer and they really up17:02their guidance for this year next year17:06because just of the gold price and how17:10that leverage is translating with their17:12low costs and their increase in17:13production so you really you know with17:17lower fuel costs with the oil price down17:19that’s a major component of a lot of the17:20miners and that’s going to have a17:23knock-on effect also so it also depends17:26where you’re operate if you’re operating17:27in a country like Zimbabwe and your17:29costs are in Zimbabwe dollars which are17:31being depreciated by the government and17:33yet you’re selling your commodity for US17:35dollars that also helps quite a bit I17:40want to give some other things here17:42quickly us to create a uranium reserve17:46we saw the news it was all over the17:47tortoise Twittersphere you17:49twit it looks like that starting next17:55year the Trump administration put into17:58the budget to create a uranium reserve18:04if you will 150 million dollars a year18:06for the next ten years do I think that’s18:09a major market mover no but I think it’s18:13it’s part of the commitment the Trump18:14administration is making to uranium and18:17to nuclear power in the US I mean we are18:19totally behind everyone else I mean it’s18:22just ridiculous18:22I mean somewhere close to 20 percent of18:28our our power in the United States is18:32from nuclear power and we don’t even18:34mind 1% of our fuel and process it here18:37I mean that’s just a national security18:38issue not only that just based on our18:40nuclear Navy fleet so I think that if18:44the if Trump gets reelected he is18:48pro-nuclear I’m Pro nuclear I think this18:50is good for the country18:52we shouldn’t be relying on Russia and18:56causality z’ and for our uranium it’s19:02just not in our interest to do that we19:05also need to get you know I’ve always19:06been an advocate for this I’m gonna say19:08it again19:08you know if you really are into stem19:10which is science technology engineering19:11and math and you really want high wages19:14and you really want to deal with climate19:16change if you if you think that co2 is19:19the control knob for climate then why19:22not do something like build 100 nuclear19:25power plants in the next 10 years or 2019:27in 10 years or something like that19:28because these are high paying jobs and19:30long life construction projects very19:32technical even for the operations19:34personnel that work there you have to19:36have be very highly educated19:38these are high-paying jobs it would19:41create a infrastructure manufacturing19:45infrastructure based here in the US that19:46we could export and we’ve just left this19:49to the Chinese and Russians and that’s19:51just stupid because the Chinese and19:53Russians use their nuclear industry to19:58gain political footholds and countries20:00and to cozy up with him and they20:02run the thing fullcycle they’ll come in20:04engineering procure and construct then20:06operate then deal with the fuel supply20:09and the waste you just sit there and you20:11know charge for the electricity while20:13they run everything so that helps their20:16home industries that are involved in20:18this it helps them politically as they20:21go around the world and try to woo20:24various countries to their block so the20:31u.s. from any perspective you look at if20:34you are look at it from wages climate20:36change energy supply energy diversity20:40national security it just makes sense20:42and I think that you know a lot of20:46people make fun of Trump but I think he20:48does he spot-on on this so this isn’t a20:52game changer but it’s more you know more20:54wind in the sails and it certainly isn’t20:56going to hurt things now I want to bring20:59up some things this is gonna get me some21:01bad mail people don’t like this wanted21:04to talk about read some good articles21:06this week about the energy transition in21:09Germany’s fleet joke it’s it’s it’s big21:13problems I’ll put an article up had it21:17really pretty good vignettes in there I21:19mean basically you know here’s that21:20here’s a slide from the article this is21:22green Germany’s proposed coal plant21:25expansions you know you’ve got your yeah21:28just in the yellow that you’ve got for21:30these late-night mines21:31that’s that surface mining with that21:33cheap dirty coal of course you got the21:35other plant sees that these are plants21:37that are going to be built because solar21:41and wind are not getting that the energy21:43transitions not happening and the Merkel21:46regime there which is not going to be in21:48power much longer I don’t think well is21:52you know did a snap judgment on shutting21:56down or phasing out and shutting down21:59the German nuclear fleet which is in22:02progress so you have to get power from22:04somewhere so now you have a situation22:06where Germany is now suffering power22:08rates are some of the highest in the in22:10Europe German industry is suffering22:14people are suffering because they don’t22:16have there’s poor people there that22:17don’t have enough money to pay there’s a22:20link to an article in the article that22:23I’m going to link to where people are22:24shifting to wood stoves and they’re22:26sneaking out into the woods and chopping22:28down wood illegally I mean it’s it’s not22:32working it’s not gonna work and I think22:34that you know just in the article the22:36one article there’s linked to and22:38they’re you know it gave it vignette of22:40you know Merkel just as just does things22:43on a snap judgment she’s a consummate22:45grubby politician and with her finger in22:49the wind so you know with the Greens22:51party making inroads in Germany she’s22:55counting to it but the problem is is22:57that you know it’s hurting business and22:59industry and jobs and most people23:02there’s a lot of people that don’t care23:04about that that green a lot of people in23:07the green movement could care less they23:09want deindustrialization they want you23:12know they tie everything into socialism23:14and equality and to you know however23:17they define it rights of different23:20indigenous peoples all this thing is23:22just tied into one big goulash that they23:24create and they’re in their philosophy23:26and they could care less23:27but the majority of people do care the23:30majority of people do not want to see23:33their standard of living go down the23:34majority of people want a better you23:39know standard of living and I believe23:41that you’re going to see a big upheaval23:43in German politics culminating with a23:45reversal I think of the nuclear band and23:50I think Germany may even start building23:52nuclear plants23:53I mean I’ve put up article after article23:55you can’t even build a new wind farms in23:57Germany the opposition out in the23:59hinterlands and farms and rural areas is24:03just too high they will not allow it and24:05especially the East Germans East Germans24:07have had enough of this they they see24:10right through it and that’s why you’re24:13seeing AF D alternative for Deutschland24:16make inroads in some of the recent24:18elections and you’ve also seen you know24:21this this has led to the Christian24:24Democratic Union Merkel’s24:27Hera parents she actually resigned24:29because of something that just happened24:31in one of the states German states in24:34East Germany one of the CDU person that24:38was elected got elected with the support24:40of the AFD in a coalition and that was24:44determined to be racist and all that24:45stuff to say FD supposedly is right-wing24:47and so this governor resigned and that24:51reflected back on the Hera parents so24:53there’s a lot of upheaval coming in24:55Europe that’s a whole nother video just24:59about you know the EU is on its way out25:02this is not sustainable25:04there’s too many competing agendas and25:07it’s just not going to last and breaks25:11it is the beginning the populist revolt25:13whether it’s populism coming from the25:14left or the right25:15it will continue around the world the25:20other thing to point out and the article25:22which I thought was interesting or I got25:24this from somebody else I can’t remember25:26here are the emissions of co2 in Germany25:29I believe 2009 was the year they started25:32the energy transition and I somewhere25:35around here I can’t remember I have to25:36look it up the energy and I can’t25:40pronounce it so they long german word25:41that means energy transition basically25:43the solar and wind but you see there’s25:46really not been no decline and that25:48emissions of co2 in germany you know if25:51you wanted to get this down you get your25:54nuclear fleet back and you get rid of25:56all those coal plants and why are you25:58going to build more coal plants that26:02does say in the article though that26:03because these are supercritical boilers26:06supercritical blowers are boilers that26:07run at like 3000 psi coal-fired they26:11actually have 30% reduced emissions of26:14co2 but you’re still going to be pumping26:16out a lot of co2 and this number is not26:19gonna get better so something to watch26:23you know like I said I’ve said this26:25before you know Germany is a real-life26:26Laboratory of a major industrial country26:29that has attempted and we can argue in26:33state if actually that is still trying26:36to attempt to do an energy transition26:38from fossil fuels to26:40it’s simply you see what happens it’s26:43not working it cost a lot of money power26:46rates go up and you know what your net26:48co2 doesn’t go down26:49that’s like I’ve said before there’s a26:51reason why we use Coal Fired there’s a26:53reason why we use nuclear power because26:55large base load generation is cheap and26:58reliable that’s why we use it you’re not27:01going to play solar panels into Baltic a27:04lot of the Baltic Sea where you know and27:06it does the Sun doesn’t shine that often27:08that’s just I mean the certain areas27:10it’s not Arizona or Texas where the Sun27:14shines all the time or Florida or27:15Southern California this is Germany for27:17heaven’s sakes northern Europe but you27:20can’t explain to some people I want to27:23point out another thing saw an article27:26shale pioneer John Hass heading off27:28Shores Hess production Hess oil from the27:35article production of the Eagle Ford27:37Shale in South Texas is starting to27:39plateau while the bat Bakken field North27:41Dakota where Hess as a major producer27:43will hit its peak production levels27:45within the next two years this is a27:47speech that our presentation has gave at27:50a recent oil conference the Permian27:53Basin the top US shale field in Texas27:55and New Mexico will plateau plateau in27:58mid decade and is already facing well28:00interference issues has said so has John28:05Hess plans to use cash flow their Hess28:07company it’s a big very big oil company28:10plans to use cash flow from the Bakken28:11to invest in longer-term offshore28:13investments the company is relied on28:15offshore Guiana one of the world’s most28:18important oil and gas discoveries in the28:19last decade so just another piece of28:23information piece of the puzzle you know28:27I really about shale peaking and shale28:32accounted for 98 percent of the oil that28:37met the demand increases over the last28:39you know five six years in the world you28:43know oil demand goes up a million28:45barrels to a million point one point28:47five million barrels a day every year28:49increases by one to 11.5% every year28:53and that increase has been met by the28:55increases in shale production it’s been28:58huge28:58so non-opec conventional oil has not29:03been invested in it’s not been a29:05contributor and OPEC is just sitting29:08there we don’t you know it’s it’s the29:10call on OPEC has not been to increased29:12production so I think what’s going to29:15happen if things stay correct and we see29:18this decline in growth and shale which29:23is happening if it stays consistent if29:27in fact we are at the top and this29:29thing’s rolling over which I believe it29:31is that being shale the cup there’s not29:38that enough investment main offshore29:39that’s been my thesis and that’s where29:41people that’s where the money’s gonna go29:42now the problem is is with this29:44coronavirus it kind of short-circuited29:46the recovery in oil prices we don’t29:49really know we have to watch inventory29:51levels things are very chaotic right now29:53we don’t have enough information we29:55don’t know where this is going to end29:57but you know looking out three to five30:00years I hate to say that because you30:02know it’s like you just keep saying that30:04every year another three years and30:05people just aren’t going to wait that30:07long I get it but you know if you look30:10at the Reserve life indexes of major oil30:12companies if you look at the investment30:15dollars that have went into oil30:17exploration it’s not been enough to30:19sustain production and the penetration30:22of electric vehicles is not going to be30:24sufficient in the timeframe that’s30:25necessary to create demand destruction30:30and oil I mean in fact electric vehicle30:33sales were down last year they weren’t30:35up so that should tell people something30:39I think oils gonna be around for a lot30:41longer and once we get to this30:43coronavirus which has really been a30:45septic shock to the oil and commodity30:49markets we’ll have to see what happens30:50as we come out of this but I think as30:54this thing gets back on plane and we can30:55see real data it’s gonna become more and30:57more obvious what’s happening that the31:00call on non-opec a conventional supplies31:04will not be able to be met because the31:06lack of investment31:07and then we’ll see if OPEC has the31:09weather with all or has the ability to31:11increase production regardless these are31:15extractive industries and if you don’t31:17invest enough money in replacing your31:20reserves you eventually go out of31:21business I mean I’ve said that over and31:23over and over and that’s really where31:24we’re at so a lot of information there31:28guys that’s it for this week31:31appreciate the support appreciate the31:32viewership you guys are the inspiration31:36to why I do this more people keep31:38subscribing I thank you a lot it means a31:42lot to me and keep on sharing keep on31:46liking the videos it really helps out31:48enjoy the comments switching to a less31:52stressful career so I probably should31:54have more time and I’m hoping to make31:57some changes get some more interviews31:58but we’ll see how things happen over the32:00next coming months that’s it for this32:02week guys thanks a lot and we’ll talk to32:04you next week
Watch Brent Johnson’s follow up to The Dollar Milkshake Theory: https://rvtv.io/2tdRouM and The Great Dollar Debate with Brent Johnson and Luke Gromen: https://rvtv.io/2TGSnza only on Real Vision. — Santiago Capital CEO Brent Johnson rejoins Real Vision with a plethora of predictions that revolve around a strengthening dollar. Johnson believes that a global currency crisis looms, but that there is a bull case to be made for the greenback, gold and U.S. equities. Filmed on May 29, 2018 in San Francisco. Published on June 6th, 2018.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
The strength of the dollar is going to cause such chaos in the global monetary system that
the safe haven that gold has always provided, I think, is going to become into higher demand.
And there will be a point where they rise together.
This isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying, go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different than what the typical person thinks.
I’m really happy to be able to come onto Real Vision today, because I haven’t been this
excited about markets in a very long time– not because I think everything is going to
be easy, and things are fine, but really, because I think everything is bad, and it’s
going to be very hard.
But I think that it’s also going to present a lot of amazing opportunities for those who
can kind of see through the fog of what the markets are going to do over the next year
to two years.
Now, I’m sure over the next 30 or 40 minutes, there’s going to be a few of you out there
who agree with what I say.
But I know for a fact that there’s going to be a lot of people who disagree or who maybe
agree with part of what I say, but who are going to disagree with a lot of what I say.
And there’s also going to be some people out there who absolutely disagree with everything
And that’s fine.
What I’m asking you to do now is, at least for now, let’s put aside challenging me, and
just actually listen to what I say and think about how I might be right.
And if it turns out after you’ve actually thought about it and more than for a minute
or two, and you still want to have a conversation to discuss it, I’m more than happy to do that.
We’ve seen a nice bounce in the dollar after losing 10% to 12% on the dollar over the last
12 to 18 months.
So I think it’s a good time to discuss this.
I really think the dollar move higher is really just getting started.
Now, that doesn’t mean that there’s not going to be starts and stops, and in the short term,
it’s probably due for somewhat of a pause or even a short pullback.
But one thing I want to get across to people is this move is only just getting started.
The dollar, in my opinion, is going to go much, much higher over the next year to two
And so as I get into what the actual dollar milkshake theory is, it really comes down
to the fact that I think the whole world is really one trade right now.
And it’s the trade on the dollar.
Everything wraps around the dollar.
I’m going to talk about gold after a while, but I think even gold– all roads go through
So even though I’m very bullish gold long-term, that road also goes through the dollar.
And so at the end of the day, why I think the dollar is so important is because whether
you’re talking about a company, whether you’re talking about a family, or whether you’re
talking about a country, everything comes down to cash flow.
Everything investing ultimately comes down to cash flow.
And if you don’t have enough supply of cash, then you need flow of cash coming through
to keep operations going.
And I really think that’s where the whole monetary system is right now.
And that’s really the heart of the dollar milkshake theory.
And so I’m going to get into that as we go further into the conversation.
Now, one thing I want to make clear is this is not a story that ends well.
This is a story that ends very, very badly.
But I think the road to badly is much different than a lot of my peers think it is.
To get really into the theory, we all know that the central banks of the world injected
$20 trillion of new money into the global economy over the last 10 years.
And I kind of title this as this is the milkshake that all the different countries created.
They pushed down on their syringes, and they injected this tons of liquidity into the market–
euros, yen, pounds, yuan, dollars.
And they created this soup or this milkshake of all this liquidity out there.
But now, while the rest of the world is still pushing down on their syringes, the United
States has– we’ve gotten this monetary policy divergence, where we’re not using a syringe
We’re no longer injecting liquidity.
In fact, we’ve swapped out our syringe for a straw.
And so as we lift up on our interest rates, that sucks that liquidity to the US domestic
It sucks that liquidity up into our domestic markets.
And I think it’s going to push asset prices higher.
In other words, we’re going to drink the milkshake that the rest of the world is still mixing.
So the implications of this milkshake theory are several, and I’m going to try to walk
through them step by step.
But they really kind of all happen at the same time, and they all kind of go on at the
So while I’m going to try to walk through this linearly, I don’t want you to think of
it as necessarily a progression.
One might happen before the other.
They might happen at the same time.
But it’s really this soup.
It’s this milkshake that we’re dealing with.
So there’s three main implications of the theory, and the first part of the theory is
that the US dollar is going to strengthen.
And when I say the US dollar is going to strengthen, I don’t mean that it’s going to
strengthen a little bit.
I mean it’s going to strengthen a lot, and I hesitate to use the
word “supernova,” but it has the opportunity to really break out to incredible highs.
The second implication is that this dollar strength is going to lead to all kinds of
trouble in the global marketplace, specifically in the international markets and the
And finally, the third implication of this is it will ultimately react into
a currency crisis.
And we’re already starting to see the beginnings of that.
The monetary system is just not designed for a
So the implications of a strong dollar are really profound.
It really comes down to the flow that I was talking about earlier, but it’s the monetary
policy divergence as interest rates differentials eventually pull flow into the dollar.
Now, that hasn’t happened for a while.
The first part of the year, it didn’t look like
interest rate differentials mattered.
But you’re starting to see with a two or three-month lag that it actually does matter.
We’re also in a period where there’s not only this
increasing demand for US dollars due to the flow into the higher interest rates, but
we’re also– it’s compounded by the fact that we now have a situation where supply is
So you have increased demand with contracting supply.
That’s through the quantitative tightening that the Fed is
The other thing is that demand for dollars– there’s a lot of talk about a lack of
demand for dollars.
There is an incredible amount of demand for dollars just to pay
the interest on dollar-based debt in the world.
Now, a lot of people will focus on the $20 trillion that the United States government
And that is a problem.
I’m not going to deny it.
But the fact is that there’s another $20 trillion outside the United
States, either through direct dollar loans or the shadow dollar market, that
international entities own.
Oh, and those are dollar-based demand that they need as
And so if you add up all the dollar-based debt in the world, and if you just assume
that all that debt has the same rate as the US Treasury, which is 2.3%, which is
There’s no way that that’s what all these different loans are actually made
at, but if they did, there’s over a trillion dollars a year in demand for dollars just
to pay the interest on the dollar-based debt.
And that stays the same, whether– even if people totally move away from the dollar and
never borrow another dollar going forward, there’s still a trillion dollars
in demand to service the existing dollar-based debt.
And the reality is it’s probably twice that high.
It’s probably $2 trillion.
Now, another reason is that– we’re getting into a period where the dollar is going to
go higher– is that the US debt ceiling is now gone.
And we’re at a place where the government is providing fiscal stimulus.
And this provides increased demand.
And what I mean by that is a year ago, we bumped
up against the debt ceiling, and we could not issue new bonds.
And so the checking account that the US government, that
the Treasury has at the Federal Reserve, had about $500 billion in it.
And they drew that down to less than $100 billion.
So they pushed $400 billion out into the system.
That created supply of dollars, and that’s part of the reason why the dollar dropped.
That’s completely flipped now.
Not only is the government not pushing that $500
billion or $400 billion out into the market, but they’re actually entering the
dollar market to get funding.
They’re selling bonds in exchange for dollars.
So you have a situation where the supply of dollars is
no longer increasing, and now you have the biggest buyer in the world– the US
government– entering the dollar market, buying dollars, competing with everybody
That’s a recipe for price to rise.
Another part of the cash flow back to the United States theory is the US repatriation
after the new tax bill.
A lot of people didn’t think that even if they passed it,
governments– or I mean corporations– wouldn’t repatriate.
But we are seeing a repatriation.
And I think one thing a lot of people forget is it’s not just US corporates
repatriating cash back to the United States.
Foreign banks, foreign entities can also send cash back to United States, and they
can get that higher interest rate on doing it.
Now, if you don’t think that’s possible, just go look at the breakdown of the reserves
of the Fed.
Over half of the reserves, bank reserves at the US Fed, are from
So not only are they going to do it, but they’re already doing it in
a big way.
Now a fifth reason that the dollar will gain some of this flow coming from around the
world is that as the dollar does get stronger, it creates chaos everywhere else.
And so the dollar will start to get flow just from
a safe haven demand.
And we’re actually starting to see this already.
We’ve got problems in Turkey.
We’ve got problems in Italy.
China has just recently come out and said they’re probably going to have to
lower their reserve ratio requirements and provide stimulus at some point over the
So we’re already seeing that the strong dollar is impacting other markets.
And I don’t really have time to get into the whole euro
situation, other than to say that the euro is
just– I mean it’s really a disaster.
I really don’t know how else to say it.
It’s just not a currency that is going to be able to function
They have all the same problems that we do.
Their balance sheet is bigger than ours.
They’re still providing stimulus.
They don’t really have a way to draw down the stimulus.
And they’ve also got the political problems on top of it.
So as people real– and they’re overregulated.
The number of regulations that have gone on in the EU in the last two years are
dramatic, and we’re already starting to see the impact that that has on corporations.
So I think all of these five combined are really going to push the flows back to the
So one of the arguments that I often hear is that, what if people just leave?
What if they default on the dollars that they owe
and just go off to a new agreement that they’ve created?
Would that cause chaos?
It would absolutely cause a lot of chaos.
But is it possible?
Yes, it’s absolutely possible.
And that’s one of the reasons, by the way, you should own gold, because you
never know what could happen.
That said, one thing you have to realize is if these people default on their dollar
loans, and they leave, and they go somewhere else, in a debt-based monetary
system, it’s not just the debt that leaves.
It’s not just the obligations that leave.
Money disappears as well, because in a debt-based
monetary system, when debt gets defaulted on, money evaporates.
And if money disappears, that means supply falls.
So if you think about this like a musical chairs example, and we’ve got a number of
digital or paper participants swirling around the limited number of monetary base
dollars that actually exist, if some of these players decide they don’t want to play
anymore, and they leave, and they default on that debt, that’s fine.
But when they leave, money disappears as well.
So the chairs disappear as well.
And if the chairs start to disappear at the same
rate that the obligations disappear, if you get supply falling even faster than demand,
price still rises.
So I don’t buy that argument that they can just walk away and
that there won’t be any chaos and any implications involved with that.
Another thing I would say is even if they do raise rates, and it does cause a recession,
well, then, that means the US is now in recession, and the rest of the world’s biggest
customer now have a cold and cannot buy all the goods from those other countries
that they were selling before.
So that has a knock-on effect to EM, and I actually think
it hurts EM and international more than it hurts the US.
So even if that does turn out to be correct, I don’t think that that’s necessarily
Now, the big one that I always hear is that the Fed is going to have to– again, they’ll
have to– they can’t keep raising rates, so they’ll have to reverse course, and they’ll
actually have to implement QE again.
And that’s not going to happen either, in my
And the reason that I don’t think that that’s going to happen is because the
whole point of QE is to provide artificial flow from somewhere outside the current
That’s the whole point of buying the bonds to get that injection.
When the Fed would buy bonds, they would inject currency
into the system.
So if you can get that injection of currency into the system from somewhere other than
the Fed, then the Fed doesn’t need to provide it.
And this is the heart of the dollar milkshake theory.
The rest of the world is still providing an incredible amount of
stimulus into the market.
But we’re the only ones with a straw.
Everybody else is pushing the liquidity out into the market.
The Fed has a straw, and they’re sucking up that liquidity.
And as they suck up that liquidity, that is an injection from outside the
domestic market into the market that allows the flow to keep happening.
And that is no different than QE if we were doing it ourself.
Just because they’re operating QE out of Tokyo or out of Frankfurt doesn’t mean that
those dollars or that liquidity– the euros, the yen, whatever– stays in those domestic
In a global marketplace, all those assets can flow to the US, and I think that’s
what’s going to happen.
And that is literally the heart of the dollar milkshake theory.
It doesn’t really matter who provides the QE.
What really matters is who captures the QE.
And with our higher rates and relatively better economy than the rest of the
world, we’re going to capture that QE.
One of the other arguments that often gets made is the fact that if the Fed continues
to raise rates, then it’s going to invert the
Now, I can’t argue with that.
If you look back at history, whenever the yield
curve inverts, it almost always does lead to a recession.
But what many forget to put forth when they put forth this argument is
that the length of time from when it inverts until when it goes into recession is typically
18 to 24 months, and that goes back on several occasions as well.
Not only that, but what happens during that 18 to 24 months is typically a speculative
And that leads to the blow-off top.
And if you think about it– and I can’t prove this– but if you think about the typical
yield curve that a bank would want, they want a very steep curve.
They want short-term interest rates and high long-term interest
They want to lend long, and they want to pay short, and they make that
Well, if that’s great for the banks, that’s probably not great for the speculators.
But if you reverse it, and you get into an inverted
yield curve, that’s not good for the banks, because they’re having to pay short and lend
long, and they’re upside down.
But if it’s bad for the banks, who takes the other
side of the banks’ trade?
Well, that’s the speculators.
And if the speculators can borrow long and invest short and make that
spread and lever it up, that’s like Disneyland for them.
And that leads to the speculative mania, and that’s what leads to
the crazy excesses, and that’s what leads to the blow-off tops that nobody think can
And that’s why I don’t think that an inverted yield curve– I don’t think it’s
negative for the dollar, and in the short term, I
don’t think it’s negative for the markets.
OK, so where does all this lead?
What does this dollar milkshake mean to us in the
Well, I think what it means is that we haven’t seen the blow-off top yet.
I still think it’s coming.
I think equities are going a lot higher.
And again, this isn’t a Pollyanna view.
I’m not saying to go out and buy equities, because things are good.
I’m saying go out and buy equities, because things are bad.
Things are really bad.
It’s just that the road to bad looks much different
than what the typical person thinks.
And I think that as we get into this inverted yield curve, as we get into problems
around the world, as we have currency crises, the United States is going to be seen
as a safe haven.
And all roads go through the dollar.
And when that money flows into the dollar, it eventually goes into US
And I think it’s going to push equities to all-time highs.
I also think that it’s going to have a big impact on bonds.
Now, I’m of the opinion that interest rates are headed higher.
I don’t necessarily think that bonds are going to
crash, but I think they are going to break.
And I think that that is going to have a big impact on assets as well.
Now, there’s no doubt that there’s going to be some
moments of pure panic and terror along the way.
I’m not sitting here saying that bonds are going to fall, equities are going
to go up, and it’s all going to be smooth.
I don’t think that at all.
I think it’s going to be really frightening at points.
But I think rates are headed higher.
And when you think back to the fact that there’s been a 40-year bull market in bonds, that
means somebody could have invested their whole life for 40 years and been a fixed income
investor and made money quarter after quarter, year after year, decade after
They have never really lost money on bonds as long as they were buy and
Sure, along the way, maybe they did some trading of bonds where they
lost money, but essentially, nobody has lost money in bonds in 40 years.
Well, now we have interest rates heading higher.
We seem to have broke out of the chart of truth.
Will we retest?
Will there be some moments where bonds rally?
But I think interest rates are headed higher, and when people actually start
losing money in bonds, I think that’s going to be a real wake-up call not just for finance, but from an emotional perspective.
If you have made money on something for 40 years in a row, and then all of a sudden,
you wake up, and you’ve lost money, it’s kind of like the turkey at Thanksgiving.
They have 364 great days, but that 365th day is kind of a nightmare.
I think that can happen in bonds.
And as funds flow out of bonds, I think a lot of that’s
going to flow into equities.
And so all of this– again, I’ve kind of walked through this
linearly, but this is really all going on at the same time.
And as we’ve got a period where interest rates are headed higher, I
think around the world, as bonds start to break– not crash, but as they break– and
funds start to flow out of it, as dollars flow–
as funds flow into the dollar and push asset prices up, I really think we get into this
George Soros talked about it in his book, The Alchemy of Finance.
You get into a place where dollar strength begets more dollar
strength, because as the dollar strengthens, it causes all kinds of problems
And as the yen gets into problems, people seek out safe haven back
into the dollar.
Now, gold will, obviously, I think, be a beneficiary of this.
But I don’t think people around the world are going to sell everything
they own and put all their money into gold.
In fact, we don’t need them to put everything into gold.
They can just put a little bit into gold, and gold does really well.
But I think the dollar is going to be the big
beneficiary, and I think, again, as I’ve said many times, all roads go through the
So of course, as always, I have a lot to say about gold.
I think the first thing I want to get across is that my thesis on gold has not
Everybody should own gold.
It should be part of everybody’s portfolio.
And I’ve said for a long time that gold is going to go to at least $5,000.
That hasn’t changed.
Gold is going to go to $5,000, and the reality is it’s probably going to
go a lot higher than that.
But you know, for anybody that’s trying to put me– peg me down
as far as time and price, I’ll say $5,000.
Now, I don’t know if I’m going to necessarily tell you exactly when, but I still
think gold goes to at least $5,000.
The only question is when.
But part of the other thing is that– part of the reason that gold will go that high
is because it will be at least part of the solution
when this horrible system that the central banks have created eventually comes down.
This dollar milkshake theory is not one in which the dollar remains the world reserve
I think we’re going to get to a place where the dollar gets so strong, they’re
going to have to come to some new kind of Plaza Accord or some kind of a system
where they dramatically reduce the dollar.
But it’s not going to be that we reduce the dollar, and people are mad at us.
I think the world’s going to beg us to reduce the
value of the dollar, because the strong dollar, quite honestly, it just breaks the
entire monetary system.
It breaks international markets.
It breaks the emerging markets.
And it actually is, in the long term, not great
for the US market either.
But it doesn’t mean it’s going to happen right now.
So I think over the next couple of years, the dollar goes much, much stronger.
I think initially, that breakout is going to
surprise a lot of people.
I think it’s going to create a lot of chaos, and it will ultimately
be that chaos that makes gold go a lot higher.
I tell people all the time that a lot of the typical gold theory is that dollar gets
inflated away, and gold goes through the world, goes through the roof.
And there is that view.
But there is nothing that is more long-term bullish for gold than a strong dollar.
Before we get into that, let’s talk about a little bit why gold, quote, unquote, hasn’t
worked for the last several years.
Well, the reality is I think gold has worked for the
last several years.
Many of us in the gold world got it wrong as far as timing when it
would work in US dollar terms.
But if you’re not a US dollar investor, and you lived in
Cyprus or Russia or Argentina or Venezuela, gold works just fine.
Gold did what it has always done for 5,000 years.
It’s provided a safe haven when things got bad.
And the reality is that things did not get worse here in the United States over the last
five or six years.
And as a result, gold has not performed as it has in those other
But it doesn’t mean that gold isn’t working.
I think a lot of the pain and a lot of the frustration with those in the gold world that
are feeling the frustration from gold not having done anything are those who bought
gold as a speculation, not as insurance, or it’s those who told themselves they bought
it as insurance, but really bought it as a speculation or a get rich quick scheme.
If you bought gold as a hedge against the rest
of your portfolio and the rest of the world blowing up or all the spinning plates that
the central bankers have going crashing, then gold is still working, because the reality
is the plates have not crashed yet.
There’s no doubt that they will, but they haven’t yet.
And so gold hasn’t needed to do anything.
But gold’s been around for 5,000 years.
It’s always been, at least from a market perspective, a currency and the last currency
of resort, and that’s not going to change over the next 5,000 years either.
So if you’re a gold investor, and you have it in your
portfolio, and you didn’t put all your money in gold, you’re probably just fine.
So now there’s also many people in the gold world who will say that the only reason
gold hasn’t worked for the last five years is manipulation, that the decades long gold
manipulation scheme between the central banks, the governments, and the
commercial banks have worked together to keep the price of gold low.
Now, even if you take that view, the fact is you are still
wrong, because if you– this is not a new theory.
This manipulation theory has been out there for decades.
Anybody who’s spent more than five minutes in the gold world
knows about this theory.
So if you bought gold five or six years ago, four years ago, whatever it is, and you
were wanting it to pay off much quicker, and it didn’t, because you think it’s been
manipulated over that time period, well, the only reason you would have bought it
four or five years ago is not because it wasn’t manipulated.
You knew it was manipulated.
The only reason you bought it then was because you thought that the
manipulation was going to fail.
And the reality is the manipulation hasn’t failed.
If you subscribe to the view that gold has been manipulated
lower, then the manipulation is still working.
And so I think it would help a lot of people in the gold world if we would just admit
that we’ve been wrong for the last five years.
I didn’t think that the monetary authorities could keep the plates spinning
for another five or six years.
I thought it would come down much sooner than that.
I was wrong.
The plates are still spinning, but it doesn’t mean that gold has failed.
It just means we got timing wrong, and I think the fact that if you say the words, “I was
wrong,” it’s very freeing.
It actually takes a lot of pressure off you, and you can actually
then move on to the next step and say, well, why was I wrong?
Why did the gold not go up?
Why are the plates still spinning?
And I think that will help prepare you for the next five or six years.
So now let’s talk a little bit about the dollar milkshake theory and how it applies to
Well, I think it largely depends on where you’re sitting and in what currency
You know, if you’re an international person or entity, and you
are not denominated in dollars– I don’t know if you’re in euros, or you’re yen, or
you’re yuan, or bolivar, or whatever you are– I think you can probably pretty much
back up the truck and buy over the next couple of months.
I think the dollar is going to get a lot, lot stronger.
But if the dollar gets a lot, lot stronger, that means a lot of
these other currencies are getting a lot, lot weaker.
That means gold, in those terms, is probably going to go a lot, lot higher.
It would not surprise me at all if these other currencies of gold rises 15% to 30% over the
next 12 to 18 months.
I think that could easily happen.
So I think determine where you’re at and which currency you’re denominated before
you just say, gold is going up or down.
I think that’s a very important point to make.
Now, I think it gets a little bit more complicated if you’re a dollar investor.
I have said for over two years now that I think eventually,
we’re going to get into a situation where dollars and gold rise together, and
I still firmly believe that.
The strength of the dollar is going to cause such chaos in the
global monetary system that the safe haven that gold has always provided, I think, is
going to become into higher demand.
And there will be a point where they rise together.
Now that said, for those of you that heard me say gold’s going to $5,000 earlier, I
want you to keep those positive feelings that you had when I said that, because I
don’t know that it’s going to happen over the next five or six months.
In fact, I think there’s a good chance that gold goes lower
in the short term.
It might not, and if it goes higher, I will embrace the break-out,
and we’ll be on to probably another five or 10-year bull market in gold.
But I’m just not sure that it’s going to break out yet.
We had another great opportunity this spring to break out, and it didn’t happen.
And I think with the move that the dollar is going to make over the next six to 12 months,
I think it will be very challenging for gold to break out initially with that.
And so I think if you are a US investor or a dollarbased
investor, I’m not saying that you should sell your gold.
The gold theory is still very much intact, but I’m just not convinced
it’s going to break out right now.
So as far as gold and the dollar rising together, I know that seems kind of
But at the end of the day, I really don’t think it is.
They’re both currencies, and they’re both measured against
all the other currencies in the world.
And so I think in the same way that the yen and the euro could rise together, dollars
and gold could rise together against a number of different fiat currencies.
Again, I don’t think that– I’m not even sure that
the dollar bulls have a proper appreciation for
how much damage that the dollar bull market is going to cause.
Again, the design of the monetary system was just not built for
a strong dollar.
And when it gets going and rocking and rolling, it is going to cause all kinds of
And that should be very good for gold.
When markets start melting down, and when chaos starts to happen, and confidence
starts to get lost, and you can feel the panic in the streets, that’s typically
great for gold.
And so whether or not things panic and break down in the United States,
if they panic in Europe, or if they panic in
Africa, or they panic in Asia, that’s a good opportunity to provide a chaos trade, so
to speak, or a safe haven trade.
And I think dollars will benefit from that, but gold
will benefit too.
And again, we don’t need everybody to sell everything they own and go buy gold.
The gold market’s very small on a per capita basis.
We just need the rest of the world to put 1% or 2% of their assets in gold, and
So we don’t need a mass exit out of fiat currency into gold for gold
to do very well.
The other reason that gold and the dollar can rise together is that we talked about
gold being a small market.
Well, if the dollar is rising a lot– and I mentioned other
currencies would be going down a lot– if those investors do start seeking out gold,
if Europeans start buying gold en masse, or the
Asian continent starts buying gold en masse, that can have dramatic implications
for supply of gold.
And so again, we don’t need it to be really big for it to impact.
And that’s another reason why, even though the dollar may be getting a safe haven
trade, that gold can get a safe haven trade as well.
And once we get to a place where the dollar and gold is rising together, I mean then
it’s just really rock and roll time.
I mean that’s just where the gold really starts to go
And then I think in a couple of years from now, whether it’s 2020 or 2021, after
the dollar has caused all this damage, the global authorities will have to get together,
and they will either have to, at that point, weaken the dollar either through QE or
some type of Plaza Accord, or maybe they introduce a whole new monetary system,
whether it’s an SDR or whether it’s a combination of a basket of assets.
I don’t know what it is, but what I know is that the monetary system, as it’s currently
designed, has a dramatic flaw.
And that dramatic flaw is about to be thrown a real
curve ball with the dollar getting stronger.
And that should be good for the US dollar.
It should be good for gold, and it should be good for those who are prepared.
A lot of people say that nobody sees the fact that the dollar has this problem, that
they have all these liabilities, all these unfunded liabilities, that our trading partners
are wanting to move away from the dollar.
I just don’t think that’s the case.
I think a lot of people see that this is a problem.
I think a lot of people want to leave the dollar.
I think there’s a big mistake in saying that this is a small problem that a few
people have discovered and that they’re going to profit wildly when the dollar gets
thrown by the wayside.
I go to meetings all the time.
I talk with investors all around the world all the time.
I can’t remember a meeting in the last couple
of years, where it either wasn’t brought up already or that I didn’t bring it up about
the dollar and its status in the world, that everybody around the table wasn’t familiar
with the issue.
Never once has anybody said, well, what are you talking about, “leaving
Everybody starts nodding their head, and everybody starts putting their
two cents in.
I think a lot of people have talked– or I think a lot of people have thought about this.
I don’t think this is some small issue.
I don’t think anybody’s come up with a real answer, but I don’t think it’s an issue that
nobody knows about and nobody discusses.
Now, even though I don’t think gold has got it wrong over the last five or six years,
and while I don’t think gold has stopped working, per se, I think gold is doing exactly
what it has always done.
Again, I think, as I alluded to earlier, I think we’re the ones that got it wrong.
Now, why did we get it wrong?
Well, I think part of it is that a lot of us, me included,
thought that quantitative easing was going to be dramatically inflationary.
I didn’t think that the world could inject $20 trillion
into the global economy and not inflate fixed assets, gold being one of them.
But you know what?
We got that wrong.
It was inflationary to asset prices.
Real estate went higher.
Equities went higher.
Some commodities went higher, but some commodities
In my opinion, all the low rates and the QE ended up being deflationary
to some assets, just as much as it was inflationary to other assets.
And I think keeping rates at the zero bound is overall
And so the fact that $20 trillion pumped into the economy was going to
create hyperinflation– it didn’t happen.
We got that wrong.
And I think it’s important– I really do think it’s important that we admit that we got that
wrong, because if you just say, “buy gold,” all the time, and you never say that it
could possibly go down, well, then we’re no different than those who say buy equities
all the time, and never buy gold.
I think we’ve got to be very careful that we don’t fall
into the same hypocritical arguments that the traditional Wall Street does.
I have a lot of friends in the gold world.
I have a tremendous amount of respect for them.
Most of them are my friends.
If you’re in the gold world, and you’re not my
friend, I think it’s probably because we didn’t spend too much time together.
But I do think that we can do ourself a lot of good
by kind of taking a step back and really trying to understand why gold didn’t do well
over the last five years.
Just admit that we got the timing wrong.
There’s nothing wrong with that, because just because we
got the last five years wrong, it doesn’t mean that we’re going to get the next five
I mean, in fact, I’m pretty sure we’re going to get the next five years right.
But I think in order– for credibility’s sake or to be
able to take a step back and be objective and
try to really understand why gold didn’t break out in dollar terms over the last five
years, I think it’s important to just acknowledge that we missed something along the
Now, somewhere else where I think you can see it is in equities.
Now, at the beginning of the year, I said I thought that
equities were going to go higher.
I thought they might very well have a 5% or 10% correction
before that happened.
I said I thought it would be nice if we had it.
It would be helpful.
Well, we got it.
So kind of be careful what you wish for.
But if you look at equities, both the S&P and the NASDAQ are both in a wedge
And I think they’re kind of near the bottom of that wedge pattern.
I’m not saying it’s going to be a straight line, and
it’s going to be easy, but I think we’re going to move higher to the top of that wedge pattern,
and I think we’re going to break out of that wedge pattern.
I think equities are going higher.
I think the Fed’s going to continue to raise rates, and I think this
dollar milkshake theory is really going to get
So again, I’m really excited about where markets are headed, not because I think
things are going to be easy.
I actually think they’re going to be hard.
I think they’re going to be scary.
But I think they’re going to be fun, to be honest.
I think they’re going to present a lot of great opportunities.
And I think if you have a plan for how to get through it, I think the opportunities
are actually pretty incredible.
I think one thing to remember is never be closed off to any ideas.
I always consider everybody’s arguments that they send back
I’m happy to think about them.
It doesn’t mean that I’m giving up on my own opinions, but I think one of the
most important things to do over the next couple of years is keep an open mind.
I think we’re going to see things happen that
many people just don’t think can happen.
And I think that for those who kind of stay nimble and have a plan, there’s going to
be an opportunity to make some good profits in the years ahead.
A company’s credit rating is a lot like a person’s credit score. The better the score, the more easily—and cheaply—you can borrow money through the debt markets. The highest score a company can get is AAA. The lowest is D. And for many years, companies strove to get that AAA rating. It wasn’t just the key to low borrowing rates, it was also a sign of solidity and reliability. And it came with serious bragging rights.
Back in the 80s, there were dozens of AAA-rated companies. Today, though, there are just two. Microsoft and Johnson & Johnson. That’s it. Most other companies appear to have given up aiming for that AAA gold standard. They don’t see the point. In fact, many companies seem quite happy to get a BBB-, which is the lowest rating that many investment companies will tolerate, and just one notch above a ‘high-yield’ or ‘junk’ rating.
How can this be? How is it that corporations have gotten okay with letting themselves go like this? We talk with Moody’s Analytics Chief Capital Markets Economist John Lonski and Bloomberg Credit Reporter Claire Boston about what’s changed in the bond market and why companies are content to get a passing grade.
An old line about war says that amateurs talk about tactics, but professionals study logistics. A similar line about the economy would be that amateurs talk about stocks, but professionals study the bond market. And lately the bond market is telling a tale of profound pessimism.
Why does the bond market reflect economic expectations? If investors expect a boom, they also expect the Fed to try to rein in the boom by raising short-term interest rates (which it more or less directly controls), to head off potential inflation. The prospect of higher short-term rates then leads to higher long-term rates, because nobody wants to lock money in at a low yield if returns are going up. Conversely, if investors expect a slump, they expect the Fed to cut rates, and pile into long-term bonds to lock in returns while they can.
So the slump in long-term yields since last fall, from a peak of 3.2 percent to just 1.63 percent this morning, says that investors have grown drastically less sanguine about the economy. Long-term rates are now notably lower than short-term rates — and this kind of “yield curve inversion” has in the past consistently been the precursor to recession:
Ominous yieldsFederal Reserve of St. Louis
Bond investors could, of course, be wrong — there are some people out there claiming that we’re in a bond bubble. And so far the real economy, as measured by G.D.P., job growth, and all that, is still chugging along. But as I said, there’s clearly a wave of pessimism sweeping the market. What’s it about?
One answer is that last fall many investors were looking at a couple of quarters of high growth, and thinking that this might be the start of an extended boom. Serious economists warned that this growth was a temporary lift — a “sugar high” — driven by the shift from fiscal austerity to what-me-worry deficit finance. But at least some people bought into the Trumpist line that tax cuts were going to produce an enduring rise in the growth rate.
At the same time, Trump’s trade war may be starting to take a toll. In particular, the uncertainty may be deterring business spending. Whether new tariffs would hurt or help your business, it now makes sense to hold off on plans to expand, until you see what he actually does.
Finally, economic troubles in the rest of the world — several major European economies are quite possibly in recession — are filtering back to the U.S.
Now, most economists aren’t predicting a recession here, for good reason. The truth is that nobody is very good at calling turning points in the economy, and calling a recession before it’s really obvious in the data is much more likely to get you declared a Chicken Little than hailed as a prophet. (Believe me, I know all about it.) But the bond market, which doesn’t worry about such things, is looking remarkably grim. I leave the possible political implications as an exercise for all of you.