Brent Johnson (03:09):
I think there’s a lot of uncertainties in there. And over the last couple years, my biggest beef with a lot of other people is the certainty with which they expressed their opinion, for lack of a better word. I’ve always kind of said I could be wrong. I don’t think I am. I’m a pretty stubborn person, but I fully admit that I could be wrong on this stuff. And I think everybody should admit that they could be wrong on this stuff because it’s a very, very uncertain time and global markets are anything but certain.

Trey Lockerbie (03:35):
And their opinion being hyper inflation in the US dollar, or what exactly position are you referring to there?

Brent Johnson (03:42):
Well, there’s a bunch of them that are somewhat related. They’re different, but a lot of them kind of go hand in hand with the decline of the American empire, for lack of a better theme. I think there’s almost this… The only word I can figure out is romantic, romantic notion that the US is going to get what’s coming to it. It’s been these propagate spenders for decades and the global bully who’s gone around and pushed and shoved our opinion on the rest of the world. And the rest of the world’s tired of it and they’re going to rise up and throw off the yoke of the dollar. And the US is going to end up this in this pile of ashes and the rest of the world’s going to be sunshine and roses. And I just think that’s completely, completely wrong. And so whenever I see kind of a narrative that kind of very easily describes that scenario, I feel like it’s my job to push back on that.

Brent Johnson (04:27):
Because I don’t feel like there’s a lot of people that push back on that. I think it’s almost like this is given that America has met its zenith and it’s now on the decline and it’s only a matter of time. And the reality is that I’m somewhat sympathetic to that viewpoint, but I just think it happens much differently and overlooked much longer time period than some of these other narratives or themes would suggest. And so I feel like one of the errors that I have experienced individual investors making is, they will invest in what they would like to see happen rather than what’s actually going to happen. And they will take a low probability event and turn it into a high probability event, and way overweight their portfolio to that event. So I feel like the way I can provide values to kind of put the breaks on things a little bit and say, “Hold on a second,” let’s take a real kind of hard real world look at this. And I think some people appreciate that and some people don’t, but that’s what I do.

Trey Lockerbie (05:21):
Well, you’ve become pretty well known as the Milkshake man, because in 2018 or so you put out this theory about the Dollar Milkshake. And we walked through this a little bit on episode 397 back in November, but it’s predicated on this idea, maybe crazy idea that someday debt will matter again.

Brent Johnson (05:39):
Yeah. Right.

Trey Lockerbie (05:39):
And I’m curious to know, in your opinion, what will make debt matter again and is that what’s happening now?

Brent Johnson (05:47):
Well, I think ultimately everything in economics comes down to two things, supply and demand and kind of a subset of supply and demand is a cash flow. A business needs to receive cash flows in one form or another either needs to receive cash flow from current customers who are sending cash into it and exchange for product, or they need to be out there raising money and getting cash flow from new investors. But if you’re not attracting cash flow and you’re not getting any incoming revenue stream, then that company is going to fail, eventually. And the same things for an individual or for a country or kind of any organization. And one of the things that governments have been absolutely, and governments and monetary authorities have been absolutely great at. And I took my captain and is kicking the can down the road and extending the game.

Brent Johnson (06:37):
And typically the way that they’ve done that is when cash flows from customers stop flowing in, they’ve provided cash flow from government stimulus or bailouts or whatever you want to call it. Right? And for that reason, debt hasn’t mattered. We just kicked the can down the road in a weird way. So let me take a step back, as you said, I kind of started talking about this in 2018 and I am the first one to say that I was early. On Wall Street, you’re typically if you’re early, you’re wrong and so from that perspective, I was wrong. Now, I don’t think I’m going to continue being wrong, but I there’s no question I was early. I kind of saw this playing out 2019, 2020 timeframe. And when COVID hit, I thought that was the trigger. In hindsight, it was not the trigger and again, I’m not blaming being wrong on COVID.

Brent Johnson (07:20):
It kind of drives me crazy when people blame all their problems on COVID. But what I think happened was COVID was such a, for lack of a better word globally systemic event. It sort of forced the whole world to work together to combat it. And so we kind of saw the whole world do the same thing from a monetary policy perspective, from a government spending perspective, from a trade perspective, perhaps Trump and China kind of took it a little bit easier on each other than they otherwise would’ve if they didn’t have to deal with that. But now we fast forward and now we’re in 2022. Maybe COVID isn’t totally behind us, but it isn’t kind of the front and center that it was two years ago or even a year ago. But now what we have is rather than the world working together, we have the bifurcation of the world.

Brent Johnson (08:04):
I don’t think it’s too much of a stretch to say, we’ve kind of gone back to this cold war mentality where we’ve got Russia and China on one side and the US and the West on the other. And sides are being drawn and partners are being picked and red lines are being put down. And I think it’s the opposite of coordination. Then, not only that, but within those two sides there’s fractions. And now we have not only monetary policy divergence between the two sides East versus West, but we’ve got monetary policy divergence within the West and within the East. On some countries are tightening monetary policy and some countries are loosening monetary policy. That is the environment, especially when the US is tightening monetary policy where really volatile things happen. And it’s primarily a reason because the whole world trades in dollars because it’s a global reserve currency.

Brent Johnson (08:56):
And because there’s so much dollar debt out there and it’s the primary funding currency of most countries. When the US raises rates or tightens monetary policy, they’re not just tightening it on the United States, they’re tightening it on the whole world. When Japan does monetary policy or Europe does monetary policy or Brazil or Australia, when they do monetary policy, it’s typically for their own region. It’s typically not a global event. But when the US does, it’s a global event. And so I think because of that happening, going back to what will cause debt to matter is I think flow of cash is going to start leaving certain places, and I think it’s going to come mostly to the United States. If it moves at all, I think it’s going to come to the United States. Again, if it doesn’t move, capital’s not moving, you’re not going to get that cash flow, you’re going to have a problem.

Brent Johnson (09:35):
And I think if it does move, I think it’s mostly going to come to the West, into the United States in particular. And I think that’s going to deprive the rest of the world of capital. And so I think that is what’s going to cause debt to matter, the lack of coordination and the lack of liquidity. Now we’ll see, if that doesn’t happen, I’ll be wrong again. But that’s kind of how I see it playing out or that’s what I think causing debt to matter.

Trey Lockerbie (09:55):
Let’s walk the dog on that a little bit more. So you’re saying essentially now that we’re raising rates, we’re tightening, it’s tightening the entire world. And I’ve heard you talk about how in the Dollar Milkshake theory, US assets would benefit. So is that where you’re talking about when dollars are coming back to yes, they’re chasing yield, they’re chasing US denominated assets.? And how exactly does that affect the level of debt?

Brent Johnson (10:17):
I always point out, the very first time that I ever mentioned the Milkshake theory by name. I was very clear that this is a story that ends badly for everybody, even for the United States. But then I thought on a relative basis to the rest of the world, the US would outperform. And I actually think at some point we will get into a point where the US equity market is actually rising, not just versus the… For the last couple years, it’s dramatically risen versus the rest of the world, now over the last month or so you’ve seen it coming down. I don’t think that that’s over. I think it’s going to continue to come down. But in the years ahead, I actually think we will see US equity prices rise, not just versus the rest of the world, but on an absolute basis. And I think that will be because of this sovereign debt and this just general debt prices that we have.

Brent Johnson (11:04):
I think money will leave bonds. We’re already seeing that. We’re already seeing money, a lot of money has left bonds. And I think to a certain extent to US large cap equities will replace global sovereign debt as a place to safely “on a relative basis part capital.” So the way it affects the debt is that it affects the debt in two different ways, and it depends on where the debt is located. If it affects US dollar debt outside the United States, it deprives those markets who owe dollars of liquidity and it deprives of capital. So the Milkshake theory is the US is sucking up that capital, when it sucks that capital into the United States, it’s sucking that capital away from the rest of the world. And if the rest of the world either cannot get dollars to finance their trade or cannot get dollars to service their debt or cannot get dollars to do whatever that US dollar funding for. That’s a problem.

Brent Johnson (11:57):
And that’s when defaults start to occur. And again, this is very complicated. I try to make it simple, but it’s actually very complicated because in a debt based monetary system, where money is loaned into existence, the system has to grow. The debt has to get rolled. It’s not designed to have a reverse gear. It can go backwards for a couple months, maybe a year or two with government support. But it can’t just be allowed to go and reverse on its own because if that happens, the entire system crashes. And so that’s what I think in many ways, the rest of the world’s going to be faced with is once you start to get a default, it leads to another default. And then when another default happens, then it leads to somebody getting laid off, and then when they get laid off, then they can’t pay their bills. And then the people that they owed money to then they can’t pay their bills.

Brent Johnson (12:42):
And it kind of becomes this vicious cycle where the lack of liquidity gets more lack of liquidity. And once that starts, it’s really hard to turn around. It’s not impossible. We’ve seen this several times, we saw it in 2001 .com crisis. We saw it in 2008 financial crisis. We saw it in 2020. But a lot of pain happens before they can turn it around and it takes typically a Herculean effort to turn it around. And each time it typically takes a bigger effort than it did previously. And we all know how crazy it got in 2020 and the measures they had to take to kind of turn it around. And maybe they can turn it around again or maybe they can’t. But I guess my point is that every time they’ve kicked the can down the road, they’ve made the problem bigger. When kicking the can down the road does not decrease the problem, it makes it bigger. It makes it come along later, but it makes the problem bigger. So I think it will eventually get away from them, and we will have kind of a global contagion.

Trey Lockerbie (13:38):
So on that last point about kicking the can, rolling things over. The US has 6.5 trillion coming due in the next 12 months, and they’ve got to roll that over. And now, if they’re rolling it over at a higher interest rate, it would seem. So what kind of effect, I mean, how can we interpolate that? I mean, what is going to be the effect moving all that to a higher interest rate?

Brent Johnson (13:58):
Yeah, well, so the first thing is it’s a problem. The first one to hold up my hand and say, “Listen, the US is not in good shaker. This is not a good situation to be in.” But the second thing I’ll say is that rates are not just rising in the United States. They’re rising all over the world. And not only are they rising in US dollar terms, but they’re rising in other currency terms. Because the US dollar is rising versus almost every other currency. So if the US dollar is rising versus every other currency and rates are going up in US dollars, then that means it’s going up even more for all these other countries that have US dollar funding, or you need US dollars to trade.

Brent Johnson (14:34):
And we get back to this relative argument. One distinction I should probably make is, again, when individuals listen to this, they may make the comment, “Well, just sell everything and go sit in cash, button down the hatches.” That is possible for you as an individual, that is not possible for a large pension fund, but that is not possible for a large endowment. That’s not possible for hedge funds and central banks, and they have to place capital. Their investment policy statements probably says something that they can have a maximum size cash position of like 3% or 5%. A 5% cash position in a pension fund would probably be fairly large. So that means 95% of their capital it has to go somewhere.

Brent Johnson (15:13):
And by the same thing, they might have an allocation that allows them to go 5% to gold. I think that would actually be even a high percentage, so that would allow them to go to gold. And most of them don’t believe in gold. You as an individual might believe in gold, but most of these big pension funds and asset gatherers and asset allocators are not huge allocators to gold. Now, maybe they will be someday, but that’s a process. So 90 to 95% of this money has to go somewhere. And so it’s not a matter of going the same cash. So even if you hate everything, you have to pick one of them and to place your capital there. And I think when that happens, that capital will choose a US treasury that now yields dramatically more than just about any other treasury.

Brent Johnson (15:51):
You can actually get some yield in bonds now. For years, we’ve said bonds are a return free risk because you buy this thing, you know interest rates are eventually going to go up. You’re taking all the risk, but you’re not getting any interest in return. Well, again, it’s not bad. It certainly hasn’t normalized, but it’s much closer to normal today than it was even just a year ago. So the fact that you can get, I think the 10 year hit 3% earlier today. So you can get 3% by buying a 10 year treasury. But if you buy a 10 year Japanese bond, you get .25%. Now, if you have to put your money somewhere and you know you have liabilities in dollars, and you know you have to trade in dollars and you have to choose between buying a Japanese treasury that yields you 0.25% and a 10 year treasury that yields you three. You buy the 10 year treasury, you offset your liabilities perfectly. You don’t have to do any currency hedging.

Brent Johnson (16:37):
And you get a yield that’s almost 10 times as much as the other one. It’s not that hard of a decision to make. And so from that perspective, even though it will be harder for the US to fund itself now that interest rates are much higher than they were a year ago. I think that we will be a more attractive option for global capital than the rest of the world. And so while it is a problem and it will eventually cause us to probably maybe default in some form or another, I think it will happen to the rest of the world first. And when it starts happening to the rest of the world first, I think that makes the dollar even more attractive. So again, it’s not that I’m ignoring the problems in the US. It’s just, I think there’s a sequence of events. And I think that sequence of events comes home to roof last in the US.

Brent Johnson (17:17):
And so you kind of have to look at things on an absolute basis just to understand the absolute game, but you cannot ignore the flow of funds that will exist based on the relative game, if that makes sense. Again, everything comes down to flow, right? And if the US is getting the flows, even if the flows are smaller than they are today, but they’re bigger going into the US than they are everywhere else. On a relative basis, the US is still better off than the rest of the world.

Trey Lockerbie (17:43):
That’s so interesting. And when I asked earlier about when debt is going to matter again, I almost expected you to say, “When inflation matters again, now we have to increase interest rates to quell inflation.” And you have everyone in the US at least scratching their heads like, “Why on earth are we raising into weakness into a lot of things that are happening in the market right now?” And to your point, what I’m hearing from you just now is that the fed is thinking more globally, right? And they’re saying, “Well, we got to raise rates because we’re going to have to print more money. We’re going to have to create more bonds to fund that money printing. And who’s going to buy it?” Ideally not the fed, ideally it would be the rest of the world. And maybe they will, if we are able to provide some real yield. Is that correct?

Brent Johnson (18:22):
I mean, that’s part of it. I think them raising rates is kind of threefold. One, you make it more attractive and then you get more capital. Number two, if you raise, then you have more room to cut later if you want to. Number three is the inflation point that you just brought up. And I’m going to go off on a tangent here, but I promise I’m going to come back to this point. If you think back a year ago, it was an absolute given that interest rates were never going to be raised and the government was never going to stop sending checks. The playbook was financial repression. We’re going to hold real rates negative. We’re going to keep rates low. We’re going to keep spending fiscal stimulus and we are going to inflate our way out of this problem. If we can get 5% inflation for the next 10 years, that decreases the debt burden by 50%.

Brent Johnson (19:04):
And the point is that works really, really well on a spreadsheet. It doesn’t work that well in real life because there’s political ramifications of having 5% inflation. The other thing is it’s very hard to get 5% inflation without it splurging out of the toothpaste tube and becoming 10% inflation or 15% inflation. And once that starts to happen, politicians start to feel it. And politicians are nothing but short-term thinkers. I mean, that’s how they get reelected is taking care of short-term problems. They don’t get reelected by taking care of long-term problems. And so my point is the certainty with which financial regression was going to take hold a year ago has just a year later, we’re having rate hikes, and they’re going to raise rates again tomorrow or Wednesday. They may raise rates again in June, they’re going to start doing QT.

Brent Johnson (19:50):
And if you don’t believe that they’re going to do this, then I think you’re not paying attention. Now, at some point they’re going to have to reverse, but I think they’re going to keep tightening until something breaks. And I think that they know that if something breaks, it’s in a break overseas before it breaks here. And if it breaks overseas before it breaks here, that gives the US political leverage, which is again, that’s what they want. As the global hegemon, that’s what the US wants, leverage on the rest of the world. So that’s why this inflation, your point about inflation it’s an important one. And to your point, inflation is causing the rate rises. The rate rises is pulling the dollar higher because you get more bang for your buck if you put it into dollars and put it into treasuries. And then putting the dollar going higher squeezes the rest of the world.

Brent Johnson (20:33):
So now the rest of the world, we’re in a global slowdown from a growth perspective. So the rest of the world, their top line is slowing down, but because the dollar is going higher and rates are going higher, their bottom line financing costs are going up. So they’re getting squeezed and their currencies are starting to fall, because many countries are trying to combat this squeeze with more fiscal stimulus and spending more money and doing more QE in easy money policy. And again, so it becomes this vicious circle, which actually perpetuates the problem rather than solving the problem. So to your point, what causes the debt to matter is inflation is one of the answers and maybe the best answer.

Trey Lockerbie (21:10):
Well, you talked about something breaking, especially globally. Aren’t we seeing that? I mean, the yen has now broken through a 40 year trend line, and it is like falling off of a cliff. The yuan is following closely behind it. What are we going to have to see breaking for the fed to reverse course here?

Brent Johnson (21:27):
Well, so again, there’s a couple things here. First of all, they’re not going to reverse force without pain. They are a reactionary agency, but they’re not a proactive agency. They’re going to stay on their path and tell something, forces them to change their path. And right now, it’s not bad enough that it’s changing. Right now, the pain that the average person in the United States is feeling right now is inflation. And so politically what the biggest knock against the Biden administration right now is inflation. And if the Democrats want to get reelected the majority in the House or whatever, they need inflation to come down between now and November, because the Republicans will blame it all on them. Now, whether that’s accurate or not, I mean, we could probably debate that for a century. But I’m just saying the perception is that this is Biden’s problem.

Brent Johnson (22:13):
And Biden is a Democrat and the Democrats are in control of the House. So why can’t they do something to fix it? And so this is a real problem. This is the real politic of inflation. Again, they’ve wanted inflation for years, now they’ve got it. But unfortunately, instead of getting three to 5% inflation, they’ve got 8% inflation or 10% or 20, whatever number you want to subscribe to inflation is much higher than was expected. And so that is the problem that they’re currently dealing with. So going back to your point, what is going to make for the fed change their mind? It’s going to take more pain than we currently have, because if they were to go back to QE as an example, that’s going to likely increase the inflationary effects, at least in the short term. I don’t really have the time to get into the whole monetary reserves and what’s a reserve and what it isn’t, and is QE inflationary, deflationary.

Brent Johnson (23:01):
But I would argue that it pushes prices higher in the short term, but maybe for not, for the reasons that many people think it does. But again, without going too much into that debate right now that would exacerbate the inflation problem, at least in the short term. And so they’re not going to do that, I don’t think before the election, unless something forces them to. And what could force them to is kind of a global EM meltdown. If the rest of the world starts to melt down and then that comes back and starts to melt down in the US, then they will react. But again, if that happens, the US on a relative basis is still going to be better off. Again, we are not going to have a situation where the US markets are down 30 or 40%, and the EM is up 5% or 20%.

Brent Johnson (23:42):
It just doesn’t work that way. I’m sorry for anybody who thinks that’s going to happen, but it’s just not going to happen. So it’s possible that the whole world kind of goes down together, in which case the US has to bail out the rest of the world and the US. But if the US is bailing out the rest of the world, the US is in the driver’s seat. The person doing the bailing out has more leverage than the other guy. Now, I know some people will say, “Well, if you owe the bank a $100 million, then you have the leverage.” Well, but when you also have aircraft carriers and hypersonic missiles, that changes a little bit. And that’s another part of my argument is that the US is the global hegemon. There is not too many countries that can even consider taking on the United States.

Brent Johnson (24:19):
And I would argue that there’s nobody that can beat the United States in a global military conflict right now. Now, that doesn’t mean that the US would not get hurt in a war. It doesn’t mean that I think that we could easily roll over just anybody in the world. I just mean that if you really go to the mattresses, so to speak, I think the US comes out ahead, and that’s how a global hegemon works. I think part of raising rates and making the dollar stronger is part of the US kind of getting the rest of the world back in line. To me, it’s a geopolitical tool as much as it is a domestic monetary tool. And I think that’s kind of what you’re seeing right now.

Trey Lockerbie (24:51):
Let’s keep talking about, what’ll drive something to break. We’ve described the US dollar in previous conversations as a wrecking ball, especially when it gets to higher levels. And we are now seeing the US, well, the DXY at least at 103 and change as of today. Last time we spoke, I asked you, “What would be a number that would get you be a red flag or an alarm going off for you?” And you said around 97. So we’re well past that and we’re definitely gone above and beyond. But you’ve also said that, what’s more important than the nominal number is the rate in which it has changed. And it’s been climbing fairly slowly over the last six months or so. Why do you think that is? And are you less concerned that it’s at 103 because the rate of change has been lower?

Brent Johnson (25:32):
Well, I’m not less concerned. I’m very concerned. I think your point is perfect in that the reason that we haven’t seen chaos, for lack of a better word, is because it’s taken six months to go from 94 to 102 or 103. Whereas in 2012, we went from 94 to 102 in 10 days. So that’s when the wrecking ball just comes out of nowhere and nobody’s ready for it, and just kind of knocks you over. The most recent one has been kind of, for lack of a better word, kind of the slow boiling of the frog, so to speak. The ratchet’s gotten slowly tighter and slowly, now it’s still tight. Don’t get it wrong. That ratchet is still tight, but it hasn’t been the knee jerk tightening. It’s just been the slow tightening. And so I think that’s why the world for the most part has weathered it a little better than it did in 2020.

Brent Johnson (26:19):
But at this level it’s starting to cause real problems. And you mentioned a little bit ago, the yen, and I said, I’d come back to it. To me, the yen, and I said this at a conference a couple weeks ago. And I’ve actually seen it being talked about much more over the last two or three weeks, but a month ago, nobody was talking about the yen. But to me, the yen is the most important thing that nobody was talking about. And it’s the most important thing that people are starting to talk about now, because the yen is now at 130 versus the dollar. Now, a year or so ago, it was at 105. But the beginning of the year, it was like at 115, 110, 115. And so for a major currency, that’s a big move for an emerging market currency. But for a major currency, probably the third biggest or most used currency in the world to move that much over a two month period, that’s a huge move.

Brent Johnson (27:04):
I hate being that, I told you so guy, but this is the milkshake to hopefully this will help explain it. And this is why I said this will happen to the US last is that Japan, despite all the problems the US has, Japan has the same problems. They have huge amount of debt. They have very low interest rates. The bank of Japan has had to buy so many of the JGBs to keep interest rates low. People say the fed buys all the bonds here. Well, the bank of Japan’s balance sheet and the percent of bonds that they buy makes us look like very conservative investors. And so what’s happened is all of their banks, all of their insurance companies, all their pension funds own these huge amounts of Japanese bonds on their balance sheets. But they bought them with either zero or negative, even yields or extremely low yield.

Brent Johnson (27:49):
So if yields, if interest rates even go up a half a percent or 1% in Japan, these pension funds in banks, they get wiped out. They have a banking crisis. And so what’s happening this year is again the interest rates going up in the US. It’s not just a US problem. It’s a global problem. They’re going up all over the world. And so they’re actually starting to go up in Japan, and the Japanese tenure has gone up 25 basis points. And just that small move has caused so much problem for the Japanese banking system is that the bank of Japan has had to come out on several occasions now and institute yield curve control, which is basically saying we will buy as many bonds as we have to in order to keep rates down. And if you think about that, every time they buy bonds, they’re making yen available, right?

Brent Johnson (28:34):
They’re exchanging yen for bonds. And so then those banks can take those yen and loan them out, or use them as reserves to make loans and extend the game. And they increases the yen available, and so the yen is starting to fall in value. And they’ve basically said, well, this is the point with yield curve control. A lot of people will make this point with a dollar. The US is going to have to choose, do they save the bond market or did they save the dollar? And I agree, the US is going to have to make this choice someday. Unfortunately, for Japan, that someday is already today. They have to choose between saving their bond market and saving the yen. And because they can’t afford a banking crisis, they’ve decided to sacrifice the yen. They’re going to save their banks and sacrifice their citizens purchasing power. That’s what they’re doing.

Brent Johnson (29:16):
And so you see the yen just continuing to fall. And I think that’s going to continue to happen. I think the yen’s going to go to one 140 before it turns around, and then maybe it’ll have a little bit of a rally. And then it’s going to go to 150, 175, and I think it’s going to go to 200 because I don’t think there’s anything that the Bank of Japan can do to stop it. And so if that happens, then that’s going to contribute greatly to the DXY going higher. And again, as the dollar shows to go higher, then it starts to cause other people problems. What’s interesting about the yen is that, we’ve talked about the problems that it will cause for Japan, but it’s already starting to cause problems for China, because China’s a regional competitor to Japan. And as the yen continues to lose a value, Japanese goods become more competitive with Chinese goods.

Brent Johnson (29:57):
So China is already dealing with stagflation because they have deflation in their real estate market and their economy. They’ve got rising inflationary problems because they have to import a lot of their food and energy. And so they’re getting squeezed in the middle, but the yuan is pegged to a band. Now, it floats a little bit, but it’s pegged to a band. And because the yield on the yuan was higher than the dollar for the last couple years, they got a lot of inflows. And it’s those inflows of capital that allows them to peg their currency. But now, because the US interest rates have risen so much, they’re no longer getting those inflows. And because of the fear of sanctions on China, money’s coming out of China. So we’ve seen the biggest outflows out of China since the 2020, and they’re picking up speed. So that’s making it harder for China to compete with Japan, because Japan’s currency is lower and they’re not getting the dollar flows that they used to get.

Brent Johnson (30:49):
So it’s very possible that the weakening yen will put pressure on the China to depreciate that yuan. And if you look back in history of 2013, when the yen lost value, it eventually led to the yuan losing value. And in 2015, a weak yen is what ultimately led to the yuan doing their mini deval. And so if the yuan has another mini deval, that’s going to send a deflationary wave to the rest of the world. Now, whether that wave lasts for a couple days or a couple months, I don’t know, but I know that it’s not a pleasant economic event should that happen. So to your point, even though we’ve had this slowly boiling frog of the DXY going from 94 to 103 over six, eight, nine months, it is a problem at these levels.

Brent Johnson (31:30):
And if something breaks, when something unexpectedly breaks, that’s when the DXY gaps higher, that’s when you get the real move, and then that causes other things to break. So it’s kind of like the perfect storm right now, to be honest. Stagflation is kind of the worst of all worlds, because you’re getting squeezed from both sides and you try to solve one problem and you exacerbate the other. And I just don’t think that the monetary authorities are going to be able to manage their way out of this one without significant volatility. Now, it doesn’t mean the world’s going to end and we’re all going to be in a pile of ashes. But I think it’s going to be very painful.

Trey Lockerbie (32:03):
Where you’re seeing a lot of volatility right now is in oil and energy, that’s been climbing higher and to your point with the yen, I mean, collapsing, for lack of a better word. That just makes energy more expensive, right? And they used to be able to export their inflation by when they were printing money, doing yield control activities. But if we move into this de-globalization where we’re all kind of going back to our own native mindset and nationalist mindset. How does that affect energy prices in your mind? I mean, the price of oil, do you see that going higher and higher from here?

Brent Johnson (32:34):
Yeah. I mean, I think in the very short term, I think it’s possible. We could have a demand shock to a certain extent. Maybe oil comes back down into the 80s, that would not surprise me. It wouldn’t surprise me at all to see it oil in the 80s. But I do think over the next year or two, we’re going to go much higher in oil. I would be a buyer of oil if we get a pullback. I mean, we already own some energy names and stuff, but in general, I think energy prices are going higher. Again, geopolitical conflict is typically inflationary because it causes less cooperation. It causes more supply chain disruptions. And again, one of the big debates over the last couple years was, are the inflationary effects the result of all the bailouts and the helicopter money? Or is it the result of COVID shutdowns and supply chain problems?

Brent Johnson (33:14):
And the answer is it’s probably a little of both, but for everybody who was saying it’s just a matter of what the central banks are doing. I hope that has been put to rest, because now we’ve got some tightening going on and we’ve still got supply chain problems and we’ve still got prices rising. I mean, a lot of people didn’t think it was possible to have inflationary pressures while the dollar is rising. And I kept saying, “You can absolutely have inflation with a rising DXY.” And again, a lot of times this comes from individuals is that I will get pushback and they’ll say, “Brent, it doesn’t matter if the dollar rises if it’s only rising versus other fiat. It only matters if it’s rising against real things.” And that is the worst because the entire system runs on dollars.

Brent Johnson (33:53):
And if you get a deflationary wave in dollars and people have to get margin calls and they have to liquidate things in their accounts, everything will get sold just like it did in 2020. Now, it may be lasts for only a few days or a few weeks, but it will happen, or it can happen. In a debt based monetary system you can never rule out deflationary shocks or deflationary waves. But the worst of all worlds is when the dollar is going up versus other currencies. But it’s also going down versus things you need, that’s stagflation. And that is what leads to hyperinflation in other currencies, not the US dollar, but in other currencies. I hate that I even said that word because I think hyper inflation is the most overused word and FinTwit and global finance. And I think it gets bandied about way too often because to a certain extent it’s lost its effect.

Brent Johnson (34:43):
What we’re experiencing now while painful from an inflation perspective is nowhere near hyperinflation. Hyperinflation has about as much in common with regular inflation as a Ferrari has with a horse. I mean, they both move but completely different. But this is the environment in which hyperinflation of peripheral in currencies would happen, because there’s no global demand for their peripheral currencies. So when they print, it has to stay in their own country. And so it loses all its purchasing power in its own country and it loses dramatically versus the dollar. But as the dollar continues to rise, their costs continue to go up. So if anybody thinks that the relative currencies don’t matter, especially when the DXY is rising. I would just urge you to rethink that because it’s actually even worse.

Trey Lockerbie (35:28):
They say that the road to ruin is paved with good intentions. And then last time we spoke, we were talking about how these politicians and even people in the fed, they’re kind of like magicians because they can continue to kick this can down the road and come up with all these creative ways. And just lately you’re seeing, well for one, we’re talking about student debt forgiveness here in the US. We’re talking about 10 grand for about 13% of our population here, which equates to roughly half a trillion dollars of stimulus, really which is what it is, right? Because that’s debt they don’t have to service, they can go spend it in other ways.

Trey Lockerbie (35:59):
And then in Australia, you’re seeing them, their government come out saying they’re going to buy or offer a 40% of home purchases just to keep that bolstered. And so where I’m kind of confused is quantitative easing didn’t seem to create any inflation. And it seems like we’re now in this place where we’re really hesitant to go back to quantitative easing for right now. And we’re more prone to go direct with direct stimulus, which in my mind just kind of creates more problems with inflation and everything else. So why do you think we’re seeing this and just because they’re trying to get reelected?

Brent Johnson (36:33):
The thing you mentioned with Australia is a perfect example because this is the opposition party. There’s an election coming up in Australia. This is the opposition party. They’re already starting to see downward pressure on home prices in Australia, which is a huge problem for Australia and they haven’t even raised interest rates. They’re probably going to raise interest rates tomorrow but they haven’t yet. And so this is a perfect example of the opposition party trying to get elected, making campaign promises. And again, they’re not coming out and making a promise to cure inflation. Or they’re not coming out and making a promise to take money away from somebody. They’re coming out and making a promise to give more money to them or help them in some forms. They’re not coming out and saying, “We’re going to help you with inflation. We’re going to come out and help you buy that home in order to keep home prices coming up.”

Brent Johnson (37:10):
And they’re dangling that shiny object to get elect. And that’s again, whether you’re a current politician or you’re somebody who’s trying to get elected, that is how you get elected. And that’s how these problems get kicked down the road and that’s why they just become bigger and bigger. Again, there’s no easy solution now because whichever way they go, they cause one of the other problems. If they continue to raise rates, they’re going to cause a credit contraction because people will start defaulting at some point with higher rates. But if they cut rates and go back to easy monetary policies, it’s going to extenuate the inflationary pressures that are being felt. So again, it’s kind of a damned if you do, damned if you don’t moment. And this is like I said, this is why it’s the worst of all worlds because there is no easy solution. There is no easy way to get out of this.

Brent Johnson (37:49):
And typically, typically if you just stood back and let the free markets do its work, it would be really painful, but it’d probably be over in six to nine months, right? But governments don’t stay in power by just standing back and let the free market work. And new people don’t get elected to positions of power by saying, “I’m not going to do anything. Please elect me. I’m not going to do anything to help you,” right? Now, that’s not a very good campaign platform and so these problems just get bigger. Eventually, eventually debt will matter. Eventually the markets will overpower the monetary mandarins, for lack of a better word, and the central bank on missions. But again, central banks are very powerful and that’s why one of my other pet peeves is when people say, “Oh, the central bank, they’re out of bullets. There’s nothing they can do.”

Brent Johnson (38:32):
Well, trust me, there’s a lot more things they can do. Now, ultimately I think they’re going to lose control and I’m not a fan of central bankers at all. But to say that they don’t have any power, that they’re out of bullets and they could no longer do anything. I would be very careful if I was making that bet.

Trey Lockerbie (38:46):
Well, it said another way, I think what people are referring to is, to your point earlier, it’s they could do quantitative easing and increase the asset prices, which basically decreases the public’s purchasing power in a way. Or they can create stimulus, thus creating real inflation in everyday goods, which thus decreases purchasing power. So it just seems like no matter which way they go, our purchasing power is going to be collapsing more and more over time. And to your point, I think it’s like, we’ll be the last ones in the race or the last to be affected, which is I think a really interesting nuance to the discussion that’s not often, I think, appreciated.

Trey Lockerbie (39:21):
And I guess my question then would be, so if our purchasing power is going down, there’s usually you would think to flock to a store of value, a store of wealth. And gold comes to mind to your point with endowments, may or may not be going to gold. I mean, we did see gold shoot up recently win over $2,000. It’s come back down. I’m a little surprised gold hasn’t done more given the environment we’re in. I mean, obviously there’s the other store of values out there as well we could talk about. But that one in particular with everything going on today, why is that not much higher than it is today within your opinion?

Brent Johnson (39:56):
It’s a very good question. And you’re not alone, a lot of people are trying to figure that out. I tend to think that it’s a combination of a couple things. One is that rates have gotten high enough now to where real rates are positive when real rates were negative, because inflationary pressures are starting to come down a little bit. Again, they’re high, I’m not pretending that they’re not high, but the price of oil has stopped skyrocket higher. Copper started to come down a little bit. Some of the other inflationary effects are either not rising as fast or they’re expected to not rise as fast. And so forward looking rates, real rates are positive now, and when there were negative, gold was screaming. So I think that’s part of it. The other thing is I think there’s also this understanding that there is uncertainty out there.

Brent Johnson (40:40):
Again, a year ago, everybody was absolutely certain the government was never going to stop sending checks since they were just going to do QE forever but now they’re not. And every time we’ve had a financial crisis, again, people always say buy gold for a financial crisis. And listen, I agree with that, but you have to understand that in a financial crisis, the reason you have an insurance policy is so that you can use it in a financial crisis, right? And the thing is with gold is always liquidated. No matter what the environment is, you’ll always be able to sell gold. So when a financial crisis starts to hit, people start to cash in their insurance policy. So if we have another financial crisis, when everything gets liquidated, I think gold gets liquidated with it. Now, I think it will come back faster than just about anything else, just like it did in 2020. But in 2020, the market for gold, I think went from, was it 1,600 to 1,400? It went down like $200. The miners went down 40 or 50%.

Brent Johnson (41:29):
And so it wasn’t immune from this market selloff. Now, I think that you can buy gold and as long as you’re understand why you own in a portfolio, I don’t really think it matters whether it goes higher or lower, you own it as insurance. But if you’re buying gold as a speculative way to get rich, then I think there’s a lot of risk in that. If you have a long time horizon, maybe you don’t, but if you need to use that part of your portfolio to live or to pay bills or to fund some other project, there’s nothing to say that we couldn’t have a pullback in gold. In which case you become a distressed seller rather than a distressed buyer. But I think it’s really, really hard to find stores of value right now. I mean, gold is about as good a store value as there is, but even that’s not a guarantee. But there is unfortunately no guarantees, right? This is a really, really hard time for people who are trying to protect their portfolios.

Trey Lockerbie (42:13):
Now, you tweeted today, “Has there ever been an asset that’s broken more hearts than silver?” And I got to say, I’m one of those brokenhearted people because I’ve been hanging onto silver admittedly for years now. And I saw it as a very asymmetric bet. The thesis wasn’t terribly strong. I just saw it as incredibly cheap.

Brent Johnson (42:30):
Yeah.

Trey Lockerbie (42:31):
And it has just done really nothing for years. So I’m right in that camp and I’m just kind of curious, why do you think that is? Is it similar to the gold argument and what’s your prospect for silver?

Brent Johnson (42:41):
I think it’s similar to a gold argument. I think it’s also that silver is more of an industrial metal than gold, right? And so with some questions of what’s going on in the economy now, we see other risk assets selling off. To me it’s not shocking to see silver selling off with it. I think part of it is it’s a smaller market and it can be pushed around a lot easier. So when people do sell in size, it affects it more. But listen, I think that gold and silver are both going to do phenomenally well, let’s say over the next five years. But it doesn’t mean it’s going to happen over the next five months. And I’m not one of these people who thinks every day that I come in and gold is down that it’s because of manipulation.

Brent Johnson (43:17):
I think people who rely on that rely on that too much. And the second thing I’d say is if you think it’s that easy to manipulate the market, then you really want a market that can be manipulated that easy as the bedrock of your portfolio. Again, I think any of these speculative assets, which I consider silver a speculative asset, now that doesn’t mean that the speculative asset won’t go up 10 times in the next five years, but it’s much more of a speculative asset. And I think as uncertainty creeps back into the market and inflationary pressures start to wane a little bit and real interest rates rise, silver starts to become a little less desirable. And again, I think one thing that would help people, especially people who are investors in silver or even gold, is when you think about stuff like this, don’t think about how you think about it.

Brent Johnson (44:01):
Put yourself in somebody else’s shoes. Think about the person who you spoke to last week, who had no idea what the price of silver even was. What would they do? And if they don’t even know what the price of silver is, they’re probably not going to go buy silver. So if they’re not going to go buy silver, then who is? So you can’t think of what you, or what people who are like-minded like you are going to do. You kind of have to think about what’s the rest of the market going to do. And if you think the rest of the market’s going to go to silver, then go buy it. And if it doesn’t go up, then it just means you were wrong. But just under, I think the idea that you can just put your money in gold and silver and there’s no risk involved. I think that’s wrong.

Trey Lockerbie (44:38):
Well, speaking of what the rest of the world’s going to do. There’s been a lot of speculation around Russia, now that they’re cut off from the Swift system, they have been stockpiling gold for quite a while. And there was a lot of speculation as to whether they would back the ruble by gold or maybe even oil or some kind of energy asset, given that’s their leverage at the moment. What is your perspective future for something like the ruble? And how does it tie in with China? Because China is saying that this could be a “new model,” but the Russia, China relationship could be a new model for the rest of the world. What do you think they mean by that?

Brent Johnson (45:11):
So I think what’s going on is extremely interesting. And it’s kind of funny because of my dollar views, a lot of people will say to me, “Brent, how can you not see these things that are happening?” And the red is I do see them. I see that are happening. I admit that these are kind of historical events in the historical times and that the world is changing. But I don’t necessarily see it the same way that some of the others who think that these are like genius moves by the East that the US never thought could happen. Now, there’s been books been written about exactly these events happen. So it’s not like these were unknown possibilities. But I think what I would say with regard to Russia and China, if you had to choose between the two places, I would choose, if I was an alien coming down to Earth and I was observing all that was going on and I could choose between being in the United States and Europe, or maybe just the United States, leave Europe out of it.

Brent Johnson (46:01):
And Russia and China, I’m going to take the United States. Not because I grew up here and not because I think it’s the greatest place in the world. But despite all the problems, if you look at all the problems and all the advantages for both North America and then Russia, China, I think that the US has more advantages and less disadvantages than the ones over there. Now, that doesn’t mean that Russian, China are not formidable adversaries. They are. They’re very smart and they have resources. The fact that Russia is one of the biggest natural resource producing countries in the world gives them tremendous leverage. Now, I don’t think it gives them the enough leverage to go rule the world. And I don’t think that the ruble is going to overtake the dollars, the global reserve currency. But I do think the fact that they have these assets that the rest of the world needs does give them leverage.

Brent Johnson (46:49):
I think to a large extent, they have played their hand pretty well because they had these sanctions put on them. I’m talking about Russia now, they had the sanctions put on them and they used their resources and their central bank in order to prop up the value of the ruble, because the ruble fell dramatically. And I think some of the capital controls, the raising of interest rates. And I think the job owning that they’ve done with the gold has helped the ruble obviously come back. Now, you have to understand this is an extremely manipulated currency at this point. This is not the free market bringing the ruble back to where it was prior to the war. But that said, Russia did it, they played their card and it’s helped them increase the value of the ruble so at least they’re not going through super, super high levels of currency debasement right now.

Brent Johnson (47:33):
I still think that’s very possible what happens but as of right now, they’re not. And their biggest customer is China, and China said, “We’re going to buy a lot of your energy.” So I do see, this kind of goes back to the point where we were making earlier on where we’ve got these two blocks, right? We’ve got the Eastern block and the Western block, and there’s a lot of partnership going on in inside those blocks but there’s not a cooperation outside of them. And so I think that you’re going to see more of this. I think the world is going to continue to try to de-dollarize. I think the world is going to continue to try to use the assets they have to their advantage. To try to get out from underneath the oppression of the dollar or the US global reserve currency or the hegemon, however you want to describe that.

Brent Johnson (48:12):
I think that those efforts are going to be much less successful than they are written on paper. I would almost equate it to, we were talking about the financial repression earlier about how, all you got to do is keep rates low and then print money and you inflate away the debt over 10 years and it works beautiful. And that is one of those things that it works beautiful on a spreadsheet, but it doesn’t work so well in the real world. And I would kind of point that out here with the kind of the trading and the currency manipulations that are being done between China and Russia. I’m not saying they’re not trying, I’m not saying they will have zero success, but I think it’s going to be much harder to pull all this off in the real world than it is on a spreadsheet.

Trey Lockerbie (48:52):
Is it also that this time is just different? For example, when we did that financial repression, we are basically coming out of World War II. So you’re talking about like the 1950s timeframe we’ve basically inflated that debt away. That wasn’t nearly the global economy we have today, right? Is the fact that we have this global economy part of the reason why we can’t just inflate away the debt?

Brent Johnson (49:12):
Yeah. It’s a big part of it. Number one, debts are much bigger and the growth potential is much smaller. Now, I never say never. Crazy things happen. Perhaps there will be some new technology that is discovered or invented and will allow us to wean ourself off a $100 oil or $200 oil or whatever it is. And maybe something will be discovered that we can increase crop yields by 500% by sprinkling some fairy dust on the fields. And it will solve these inflationary problems and these supply chain problems. And it will lead to global growth and we’ll grow out of this. I think it’s highly unlikely, again, very small probability event. I wouldn’t put it at zero, but I wouldn’t put it much higher than one or 2% either. So to your point, it’s going to be very, very hard to get out of what we’re seeing right now. And the other thing I would say is that for the Russia and China and some of the other countries who are trying to break away from the US dominance and the global reserve currency, however you want to define that whole movement.

Brent Johnson (50:07):
That is unfortunately not going to happen without a military conflict. It’s just not. They can try and maybe they will have some successes, and maybe something that will happen to the US and we will stumble. But global reserve currencies do not transfer from one place to another without significant amount of pain and typically without military conflict. Again, it’s not impossible. It’s just really, really, really low probability. So I hate saying that and I hope to God that it doesn’t come to that. I have a son who’s 13 and in the next few years he’ll be at the age where he would, God forbid have to participate in something like that. And I hate even thinking about that and I don’t want anybody else’s sons or daughters to be involved in that either. But when I look at history, that’s what it tells me.

Trey Lockerbie (50:49):
So you mentioned things might get worse before they get better. So just as a mile marker here as a Friday, at least. About half of the NASDAQ was down 50%, 22% of the NASDAQ was down 75% and about one and 20 of them are down 90%. So I would speculate that of all the things, of all the assets in the world, high flying tech companies are probably the thing that fed cares about the least. But if that starts to spill over into other, like even value based companies and we start to see a bigger decline happening. Where do you think we’re going from here before things maybe turn around?

Brent Johnson (51:21):
Well, I think we’re going lower in equities. So again, I don’t know, maybe we get another… We had a sell off in March. We had a really strong bounce the last two weeks of March, and then it just rolled over hard in April. I don’t think the fed wants chaos. I don’t think the fed minds lower asset prices, because I think they want to get inflation down. And I think bringing asset prices down is part of getting inflation under control. But they don’t want to collapse and I don’t think they want to collapse. So it wouldn’t surprise me at all if after the fed meeting they jawbone in some way that gives equities a little bit of a lift. Now again, I’m totally speculating here. I’ll have to wait and see what they actually say.

Brent Johnson (51:54):
This doesn’t mean that I’m positioned one way or another, but it wouldn’t surprise me if we get a little bounce somewhere over the next couple weeks. But I think between now and the end of June, we’re going lower. I think it’s most likely that probably below, I don’t like making predictions like that. But I think it wouldn’t be at all surprise me to see equity prices five or 10% lower from here.

Trey Lockerbie (52:14):
Well, one prediction you have made is that the dollar is going to strengthen over time, and so far you’ve been right. I mean, since 2018, maybe there’s been some meandering along the way, but what we’re seeing right now sure sounds like the Dollar Milkshake theory in play. So I have to give you credit for that. And it’s always a pleasure speaking with you, Brent. Thank you for coming back on the show and updating us. I hope we can continue to do this because this is a movie that’s unfolding and it’s not going to be boring no matter which way.

Brent Johnson (52:40):
That’s a good way to say it. That’s funny I always say that too. I don’t know how the next couple years are going to play out. I obviously have opinions and I’m happy to share them. But I don’t know for sure, but the one thing I am kind of certain about is not going to be boring. So I think the way you just said it’s perfect.

Trey Lockerbie (52:52):
Well, before I let you go, Brent, I want to make sure I give you the handoff for where people can find you and fall along with your updates.

Brent Johnson (52:58):
Sure. So I’ve got a website that basically just has my very basic contact information on it. So if you go to santiagocapital.com, it has contact information there, you can send me a message and if you want more information. I’m pretty active on Twitter. You can search it under either Santiago Capital, my handle is SantiagoAuFund. You can also go to either Google or YouTube and type in Santiago Capital or Milkshake theory or Brent Johnson, and hard to believe that there’s many links at this point. If I have time, I’m always happy to answer emails. It gets kind of hard to do it sometimes, but feel free to try.

Trey Lockerbie (53:35):
Well, Brent, again, always a pleasure. Thanks for coming back.

Brent Johnson (53:38):
Thanks for having me.

Trey Lockerbie (53:40):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. And if you’d be so kind to leave us a review, we really appreciate it. You can also reach me on Twitter @TreyLockerbie. And next time you’re at your computer, go ahead and Google TIP Finance and check out all the resources we have for you there. And with that, we’ll see you again next time.

Outro (54:00):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.