If you want to know where asset prices are going, if you want to know where bitcoin and crypto goes, gold, real estate, and any other stocks or commodities, then you have to understand one single thing, and this is global liquidity. And so I am having the master of global liquidity on. I'm talking about doctor Michael J. Howell. He's worked in finance for over thirty years. He was the former research director at Solomon Brothers, and during that time he developed
the concept of global liquidity. This is a lot more than just m two. He's focused on analyzing liquidity trends and capital flow data, which I believe is the most important thing to watch in financial markets. He's also the author of multiple books about this, including Investing in Emerging Markets and more recently Capital Wars. Again, like I said, if you want to know where asset prices are going, bitcoin, crypto, real estate, it doesn't matter. You have to understand this
one thing, global liquity. So let's go ahead and jump right in, all right. Michael Howe the author of the book The Capital Wars and someone who has been studying liquidity global equity for a long time. Something that I've been talking about for the last year. I'm super excited join have you joined me today? So thank you for
taking the time. You know, I've been subscribed here to your substack, been reading your articles obviously your book as well, but just for the audience, just quite and give us a little bit of a background. And why have you been studying liquidity cycles for so long? And and how long has that been? Well?
Hi, Mark, Yeah, it's a great privilege to be here. Thank you for the invertation. It kind of goes back. I mean, my studies of liquidity and why it's an interesting subject go back to probably well at least twenty five years, probably a tad more. Actually, when I worked for the US investment bank Salomon Brothers. Salomon Brothers was the world's biggest trader in terms of world fixed income
markets for X markets, et cetera. And to understand trading, you had to understand where the money was flowing, and that was really the critical thing. If you can understand these capital flows and where they were shifting, you had a pretty good insight. It was actually insight their information. In many ways, you had great insight into understanding the
direction of macro markets. And so what I did was while I was there to basically put in a framework that allowed us to monitor flows of money around the world, understand what central banks were doing, etc. And the whole concept of global liquidity really grew out of that. And global liquidity is very simply flows of money through international financial markets. It's as straightforward as that. That's what moves the world.
Yeah, I read I read about Stanley Druckenmiller and how he when he first started his career, you know, his the person that he was working under, said or he brought all his research to him and you know, here's here's what's going on in the economy, and here's whats going on with the company, and here's their price to earnings and all these different things. And they said, no, no, no, no, no, take take all that and come back when you know what moves markets. And he said, or moves asset prices.
And he says, what do you mean? This is this is what I learned. And he said no, no, no, that's it. And so Stanley Drucker Miller came back and said, no, what moves markets isquidity, which is exactly what you're saying. So you said, simply, it's the flows of money through the financial system, But it's a little bit more complex than that. I think most people, well at least in my sort of sphere, are very US centric, and so they think of just like US M two and I
think that's a little bit oversimplified for liquidity. So is it just like excess bank reserves? Is it money on the sideline that's ready to trade these assets or how would you define global liquidity?
Well, I think you as you rightly say, one has to be more granular, and look at some of the components, and some of the things you cite are important someone less. So you talk about M two, which is sort of a traditional measure of the supply of money. Now we're looking at money in a general sensor, generic sense, obviously, but we're not looking at an M two aggregate. And the reason being is that M two measures effectively retail
deposits in high street banks. Now, if you believe that that's the only important thing in the world, then I'll come uly and you drop the global liquidity idea. But actually banks, high street banks have been eclipsed a long time ago. What you've got now, you've got international markets, you've got wholesale markets, you've got repo markets. You've got
what the Federal Reserve is doing through QE. You've got extraneous things like I mean, just think the Swiss National Bank is a major investor directly in the US equity market. It's a big holder of techtocs. I mean, all these things are sort of, you know, unusual factors, but they're liquidity driven factors that come in and move asset prices. And one's got to have a pretty broader, eclectic view of what matters. And what we're looking at is to give you a sort of stricter definition, we look at
the interventions and central banks around the world. We would say, as a caveat this is not just about looking at the size of balance sheet.
You've got to look at the active components within the balance sheet.
Not all the elements on the balance sheet create liquidity markets, for example, and the Federal Reserve is a great example of that. We also look at what the banks are doing in terms of bank credit. We look at shadow bank credit. Shadow banks have been an important element in the whole equation about global liquidity, particularly in the last twenty years. That's a key factor. And then we look at repo markets, wholesale market activity, we also look across
border flows. They're also a critical element I mentioned in the Swiss National Bank in the US. But looking at the other side, look at US investors and emerging markets. They often control the pace of many of these markets with their capital outflows.
Yeah, so it's pretty complex. There's a lot of things that go on. And being in a debt based monetary system and money is created through debt issuance, then a lot of what you have to look at, I would imagine, is sort of the bank's willingness to lend, like how tight are there lending markets? Maybe the SLUZE reports things like that, Yeah, exactly, I.
Mean I think the thing is is that I mean, the SLUS report, as you mentioned, is a pretty good heads up. I mean, unfortunately, it tends to be a bit of a lagging indicator. So we're looking earlier in the pipeline as to what is actually going on to actually see the sources of that liquidity coming into the banks. So the banks are operating that banks will sort of change their view when they've got more opportunity to actually
raise capital in markets themselves. So it may be that very short term money markets become liquid and the banks will respond to through the SLEWS or the Senior Loan Office. That's survey for example. In terms of you know, what is sort of critical to understand in terms of what the things that the main things that we look at. We look at what the Federal Reserve is doing. I mean that clearly goes without saying it's the most important
central bank worldwide. We've got to understand the Federal Reserve. We also look at the People's Bank of China. The People's Bank of China is bigger in some ways than the Fair It has more more reach, if you like, through the Chinese financial system. It tries to keep the Chinese Chinese financial system and relatively tight rain for example, It's very important for understanding the temper of the world economy because China has such a big economic footprint, particularly in the Asian region.
And then we also look at the pool of collateral.
And the reason for emphasizing collateral is that ever since the global financial crisis in two thousand and eight, most lending in the world, particularly wholesale lending, is backed by collateral. It's like, you know, taking the analogy of the whole mortgage and saying, well, okay, let's just extend that idea.
Everyone who borrows now has some collateral, not necessarily a real estate residential real estate, but it could be a treasury bond, or it could be an equity, something which is actually put up against the loan for security and collapse with the collateral base of the system is increasingly important. So these are the factors that we mainly watch. Federal Reserve, People's Bank of China, and the pool of collateral. Those
are key things. But I would go on to say is that one of the things we've got to recognize now is the whole nature of the financial system has changed. We characterize it really by saying that, you know, if you go back and pick up an economics or a finance textbook, it will tell you that interest rates are all important.
I mean, of course, you know.
Every you know, almost every day in the journal or in the financial time, you find people dancing on the head of a pin about what the Fed is going to do in terms of setting FED funds next next month or next FOBC meeting.
Generally, in argue, that doesn't really matter very much.
We're not in a world now where interest rates are really ruining the tempo of the business cycle. We're much more rather than being in a new financing world, we're in a refinancing world. When your point about debt is extremely important because in a world of debt, you've got
to refinance that debt. With something like three hundred and fifty trillion dollars of debt worldwide, with an average maturity of that debt of about five years, the system is basically refinancing or needs to refinance about seventy trillion dollars every year. That's an eyewatering amount and actually quite demanding on the financial system.
This not interest rates.
The matter in that case is actually the capacity of the financial system to roll the debt, and that really is a liquidity feature.
So that's why global aqudity is all important. And I go on to.
Say, as a sort of as an end NOE, all this is that if you look back, every financial crisis that I can think of in the last twenty or thirty years has fundamentally been a refinancing crisis. It's been a time when debt gets out of step with liquidity.
Now you talked about the interventions of the central banks around the world has changed, and it looks like it really changed around two thousand and eight with the introduction of Q at least in the United States, and then the sort of ever increasing willingness to intervene in markets, as we saw obviously through twenty nineteen, twenty twenty and so forth. Even you know the bank collapse bear Stearns went bankrupt in two thousand and seven, it took seven
months to get a fed bell out. In twenty twenty three when the bank's collass we got one in six days. So we see like the willingness to intervene has changed. But if we go back to these refinancing cycles that you talk about, it's almost like I've seen like a YouTube video where you put all these metronomes for keeping time and they're all on different beats, but after a period of time, they all get on the same beat.
I don't know if you've ever seen that before, And it's almost like this refinancing cycle has been syncd up maybe since two thousand and eight when the whole world went to zero, interest rates got refinanced, and now we're sort of in this like four year refinancing cycle, which also seems to align with the presidential cycle. And also you talk about bitcoin as well, and it also coincides
with the bitcoin having cycle. And so I guess my question to you is, does it seem like we're now in this rhythm of refinancing that seems to be about every four years? First? And then do you think it's because of those interventions that happened in two thousand and eight.
Yeah, I think you've absolutely nailed it. I mean, I think the key point here is that if you go back historically, the business cycle was typically eight to nine years in length, and that was really driven.
By the Kapex cycle, and all was how.
Businesses will actually invest in new capital, plant, on equipment, et cetera. And that tends to be an eighteen nine years sign what's happened in the intervening in the intervening years in the last maybe the last twenty years, is that business cycle length the sort of concerting and smaller. So it's sort of shrunk into a period of nearer sort of four to five years, and that basically reflects this debt refinancing cycle. And as you correctly spot, what
you're getting is everything is moving in that harmony. Now you've got bitcoin, you've got central bank interventions, you've got the presidential cycle, all these things seem to be in a sort of four year window. Interestingly enough, now it's
kind of difficult to cause and effect over that. But I think debt is a critical factor, and I think that if you look at the interventions of the central banks, they're increasingly coming in with alacrity, of course, to try and smooth the system if there are any hiccups in depth refinancing, and they move much faster as we've identified. So in two thousand and seven, it took a long
time before the FED really showed its hand. But if you look at what happened in the COVID crisis, or look at what happened in the REPO crisis in twenty nineteen, the FED was moving very quickly. And I think that you can even see in the shorter term instances where you get wobbles in markets such as SVB that crisis,
the FED is there almost immediately. And I think what this is really telling us is that the primary goal of the monetary authority in the US and maybe in every country now is to preserve the integrity of the sovereign debt markets. This is absolutely critical with so much debt and so much public DEBTA run they need functioning markets and a very good heads up.
To that, if people can remember.
The instance is to go back to Britain and the so called lizt Trust moment, when an incoming British Prime minister sort of screwed the markets badly by outrage of statements. It ruffled the market's feathers significantly, and what you got was a huge seller in the British sovereign debt market. And that was a wake up call to central banks and finance ministers everywhere to say, look, we simply cannot
allow us to happen. Had this happened in the US treasury market, the core, you know, it will be in penury now, the system would have collapsed, threatened to collapse.
So I want to talk about their capacity to intervene. But just sticking with this four year cycle, so you do see it sort of on this four year cycle. As you said, the business cycle has sort of gone from about an eight year cycle down to about a four year cycle. And it seems like the metronomes on time and it does seem to coincide with these things. And so then if we're in as you said, we're sort of in this basically what would you say, a refinancing cycle.
So now all this debt gets kicked down the road, and in order to refinance the debt, we need more debt to refinance it. And it's almost like every four years we sort of see maybe this I think maybe you framed it up as liquidity air pocket where maybe there's not quite enough debt to like roll it over until then the central banks sort of intervene and inject this new liquidity to kick that can back over, which sort of resets it like another four years.
I think that's absolutely right. I mean, what you're getting is exactly that kicking the can down the road. I mean, it's it's almost impossible for any administration, whatever the stripe, to actually change the outlays that the Treasury is undertaking because most of those outlays are sort of their non
discretionary spending. They're things which are mandatory like Social Security, medicare, ultimately defense, these bills have to be paid, come whatever, and it's very difficult to actually offer any cutbacks in spending. And they can tweak around with discretionary spending, but it's such a small item of the budget now it's pretty much irrelevant. And then you've got on the other side, taxes.
Taxes are clearly an unpopular area. But will any administration, particularly marginal administration where you've got, you know, you're scrambling for votes, put their hand up and say, look we're going to raise taxes.
I mean, nobody's going to do that.
So what you've got is this funding dilemma, which really comes back to the fact that the real strength of economies comes back to whether they've got, you know, a reserve asset. So the US dollar is in a prime situation because the US is a pristine borower internationally at least until it's normal, and that makes funding the US deficit a lot easier than if you had to fund maybe the British deficit, or a deficity in an African country or a smaller Asian country.
These are a lot more problematic.
And so what you need is that integrity of the markets, and that's why the Treasury and the Federal Reserve, in my view, are so putting such a high priority and maintaining the stability of US debp markets.
You mentioned like the PBOC, if you watch other central banks like the PBOC, but if sort of in two thousand and eight, all these interest rates got it reset down. Then even though we have different countries, different central banks with different priorities, they all sort of got SYNCD onto that cycle. And then furthermore, with PBOC, for example, they're currently printing or injecting hundreds of billions of dollars into the real estate markets to prop that up currently right now.
And so that's just global liquidity. And then a lot of global equity can go into global assets like commodities or bitcoin, or even potentially back into the United States. Is that sort of the way that you look at this global equity exactly?
I mean a lot of this is fungible.
I mean, it would already depend I mean in China, they've made announcements that they're going to basically issue debt for refer real estate, I mean the real estate support. I mean, the question is who buys the debt. That's really the critical thing with every financial system, you know, whatever the nationality, what really matters is whether the debt is brought by a credit provider or whether it's.
Brought by private saver.
If it is brought by a private saver, it's just basically switching money from one pot to another.
So there's no net effect.
If you're giving or if it's the credit provider like a bank, who is buying the debt, then what you're doing is monetizing the debt. In other words, that's what textbooks will tell you was a bad thing, because you're creating a lot of excess liquidity. And my view is that that's what the gold market and that's what bitcoin and currently telling right now is there is concern about monetization.
Now if you look at what Janet's been doing in a treasure executor, Janet Yellen's been doing basically, I think she's been very astute in managing the.
Supply of coupon debt in the US.
And what she's done is created given the fact that we know that there's got to be a lot of demands on the coupon market, given the fact the deficit is two trillion a year or running at that sort of clip, there's got to be a lot of coupon issuance. And otherwise, anything which is of a maturity of more than about a year, So anything any Treasury security that plays a coupon is deemed to be coupon debt, and the Treasury normally has a preference for sort of issuing
debt around about seven years or there or thereabouts. But what she's done is very carefully avoided the longer end of the market for issuance, focused on the shorter end, and in particular use bill finance as a plug for any swings in the deficit. Now, that's actually pretty astute management,
at least in the short term. I mean, she'll be caught out in the long term almost unquestionably, But in the short term it's helped the treasury market, and it's probably meant that yields are actually lower at the longer end now than they should really be by rights, so the yield curve is flatter than it would be it should be steeper right now. But generally speaking, there's been quite quite a you know, quite a clever move by the Treasury and actually how they've how they run things.
In the US.
But the problem's sorry ahead, go ahead, tell me what the problem.
The problem is, quite simply is that what's happening is that if you're assuing so much short dating coupon debt, you know words at the front end of the market one two year dead and you're assuming a lot of bills, it's the banks who tend to light that error of the market. They buy those treasury securities and that is pure monetization. So you're actually feeding, you know, the wolf who is creating the monetization or if that anamitude works, but effectively, that's.
What's going on. So America now is is, you know.
Doing what Milton Friedman has been counseling against for decades and decades and decades.
It's effectively printing.
Money right by issuing the short term bills. I mean it's basically injecting money directly into the economy. I mean we consider in the US, if I had one hundred dollars note, it's one hundred dollars bill. I mean she's basically issuing so that's a that's a that's a bill, that's a note with the zero day you know, coupon if you will, right, and she's basically issuing the same thing into the market, which is just short term cash. Now,
you said that it's brilliant for her to do that. Now, I guess in an MMT lens, maybe not from an Austrian lens, but it's keeping the system alive, if you will. But you said that she'll probably be caught out a called out in the long term. So what does that mean?
Well, I'm thinking, I mean, there's a rule thumb, there's no hard and fast rule here that the Treasury tends to fund the deficit about eighty percent with coupon and about twenty percent with bills. Now, that's, as I say, not a not set in stone, but that's really been the benchmark many people have looked at. And what Gianik did about where we now nine twelve months ago is actually flipped that round. So it was almost eighty percent bills and twenty percent coupon. So there was a very
significant shift. There was a huge amount of bill finance going through the system, and that's actually ebbed down a bit. But generally speaking, looks as if the trending bills is going to be higher than we saw before, and that might be a concern, but there's a lot of there's a lot of opportunistic moves going on. But the fact that she starved the market temporarily of coupons supply was something that I think, in my view, has actually kept
yields lower than they would otherwise be. I mean, I think the US ten years should be over five percent now, given everything else that's going on, the inflation backdrop, the economy, et cetera, et cetera. But you know, they're moving in that direction, but they're not there yet. They're being held back.
Now. You had talked about earlier about basically we have this pool of collateral which is the base of the system, and how important that is. And so in this debt based monetary system, it seems like because money is created through debt issuance, if I go to if I go get credit, then the dollars are created into existence, which means the dollars of the liability against the debt, which then the debt becomes the asset itself. And then that debt is the asset or the collateral the base of
the system, which then collateralizes other debt. So that's sort of this Ponzi scheme, if you will, right, So then debt is collateralizing more debt, collateralizing more debt, which is part of the reason why they can't allow any of this collateral to sort of lose value, because then it will unwind the entire base of the system. Is that the way? Is that a good way to say that?
Correct? Yeah?
I think it was actually if my history is correct, it was Alexander Hamilton who first made that observation that the stability of the US financial system depending on a solid government bond market, and that's what has transpired pretty much ever since. So if you get that system being challenged, then there is an issue.
Now.
I think the challenge that well, we all face, not just America, because the dollar is the global financial asset. But what we all face is the fact that at the moment, something like eighty percent of the world savings surplus savings go into US financial assets. I mean, and I'm watering a large amount, but if you look up to counter that, US government outlayers are up forty percent.
Since the COVID crisis.
Now, the second number, the forty percent, is telling us that the fiscal situation, the budget is running out of control, and that is likely to undermine the integrity of the treasury market in the longer term. That's the concern. Now, that, in my mind, is why you've got these jumps going on in the gold price and in bitcoin. And I just think of bitcoin because it acts very much like this.
It's moving rather like exponential gold. It's moving at a much faster place than gold, but it's moving in the same direction.
Now.
Bitcoin is one of my main topics. I'll be speaking at the Bitcoin conference here in Nashville coming up in two months, So if anybody in the audiences listening wants to come see me in Nashville, use codemark Moss to save ten percent on your tickets and come join me there. So I want to definitely about bitcoin with you, Michael, but kind of going back to this sort of cycle that we're in. So we're printing money to continue to
kick the can down the road. We have to continue to issue more debt to refinance the existing debt, and basically this is debasement, right, So they're debasing the currency. So acts at prices are going up because the value the purchasing power of those dollars are going down. So if you think about it in those lens, then trying
to understand the financial market. So if you think about the financial market looking at the stock index s and P five hundred, or let's use the NASDAC, then it almost seems like the price of those assets is moving up, not because as I started out talking about Stanley Drugammeller, not because of what's happening in the economy, not because of their earnings or their profitability or any of those things, but really it's moving up as a function or an
inversion of the debasement. That's the way that it looks like to me. So fundamentals are out and we just look at the debasement or the liquidity moving the asset prices up. And so one tell me if that's correct. And then then observation number two, which I want to get into, when it looks like different assets move at different rates. So in your research, you know, on your substack, which we'll link in the notes down below for everybody,
they should definitely check it out. You can show that gold moves on liquidity, but bitcoin moves many times more on liquidity. So I guess question number one do we do we look at fundamentals out and now looking at the basement or liquidity moving asset prices up like that? And then two, why are different assets moving at different prices like that?
Well, I think that your observation is correct.
Basically there is an underlying force, and the underlying forces is the flow of liquidity and markets. My view is that it's it's global, it's a global liquidity dimension. It's not just a US centric one. You've got to look into it. You've got to check whateverything is everything is going on globally.
Yeah, and just just to interject, I mean you already said, like the Switzer Switz Bank is already interjecting money into the US markets, and so is the PBOC, and so is every other market in the world. It's like George soros imperial circle, So like all that money just sort of comes into these global assets, right exactly.
Yeah, I mean you can actually go back.
I mean, George Soros's imperial circle is a very interesting thesis. It's almost exactly the same as the as maybe the more popular and probably maybe more transparent milkshakee theory that Bread articulated many times, which I think is a very neat way of looking at it. And basically that we're in that frame. So you've got to look at a global money and you've you've got to accept the fact
that liquidity is fungible worldwide. But there are these dominant trends, and it's very clear that you've got certain trends which are stronger than others. You've got to you've got to you've got a gold and a bitcoin trend. Those look pretty well established. You've also got a US tech trend. That's another one that looks pretty well established. But what's going what's going on behind that is that liquidity is
a major feature driving them now. It so happens that these falling with the catchup without being too wonkish of being long duration assets. And basically, if you've got a long duration asset, it tends to be very sensitive to liquidity, and a long duration asset is something that has a long term payback if you think about it.
Now, you've got.
Other assets which fall somewhat beneath that. You've got things which are more cyclical, maybe things that are more connected with the business cycle. I would maybe counter what I've just said by saying that liquidity is not the only factor. You've got to also take into account of the business cycle itself, because that will actually change sentiment or investors feeling feeling towards the markets. If you get a recession there, they're less likely to invest in even in these trends.
They'll be disrupted. They want to go for safer assets in that environment. But generally speaking, you've got the underlying trend which is being driven by liquidity, and maybe the cycle a cycle of investment sentiment, which is more akin to maybe the swings in a traditional business cycle. So i'd look at that in terms of the sensitivity of assets. Again,
you were correct. We did an analysis and this was you know, I drew up immediately what you might say as a health warning or a wealth warning here, because this is based on historic analysis.
But if you look at.
Data, what the data shows is that every ten percent increase in liquidity, you tend to get a fifteen percent increase in the gold bullion price. Now that's over the medium term, and that's what seems to have transpired. If you look at bitcoin. The answer, and this is what I say is a caveat, it's really in the period of the last ten years, bitcoin has actually had a multiplier about five times. In other words, it goes up fifty percent for every ten percent increase in liquidity.
Now that will not be.
What it's what's going to happen going forward, but it still may be a high number. And that's the thing I think you've got to remember.
Why will that not be what it Why would that not be moving forward?
Well, because I think what you've got is you've got an adoption effect. So in other words, in the very early stages, bitcoin was a comparably in liquid asset. Now it's a more liquid asset, and I'm talking about liquid being here at market depth. And the fact is that you've had a lot of investors who are already there.
You may have others who will come in. But I think that this sensitivity, once the market becomes more institutionalized, the sensitivity of the market to short moves in global liquidity, in short term moves will be less or I would imagine it would be less.
I mean, never say never.
Of course, it may be that that's actually a robust figure, the fifty percent, but I would counselor that it probably isn't.
And that's because as the as the market cap of bitcoin gets bigger than the asset itself becomes more liquid as far as the daily trading volume, I mean, I can get more in and more out, and so as it becomes a more heavily traded asset, then it's a lot harder to move. That's why the sensitivity goes down.
Yeah, yeah, exactly right, exactly right. So that's correct. But then you see, if you go back, I mean, you keep drawing the or dry.
The example of Stan Drockamiller, I mean Stan Drockermiller learned a lot of what he was doing in global investing by looking at Japan in the nineteen eighties, and that's what I remember him, and he was he was then, you know, very clued in to what was happening to liquidity in the Japanese market, and liquidity was a key, key factor driving the nicky higher and higher and hire.
It wasn't about valuation.
A lot of the traditional value investors piled out of Japan in nineteen eighty four, but the market kept rising for another six years or seven years.
Well couldn't you say the same about Turkey's stock market or Zimbabwe's stock market as well? All those asset prices in the stock market are making new all time highs in normal.
Attack exactly exactly. And I draw the analogy.
And I'm not suggesting this is maybe a fair analogy, but it's a point to ponder. This is an example I give with people to say that, you know, don't invest in bitcoin or all coins or whatever, because they're basically you know, the their empty assets or whatever, or their fictition's assets. My example is to go back to
Germany in nineteen twenty three with a hyperinflation. Now in nineteen twenty three, just before Germany saw this massive inflation as the government the game was printing loads of money. And I'm stressed the fact we're not going to get hyper inflation in the US. But the direction is important. I think in that case, many older generations invested their wealth in government bonds because that was the world they knew, They depended on the government, They thought the government was reliable.
They kept their money in bonds. That's what they'd always done, that's what their parents and grandparents had done, and they got wiped out. The younger generations instead did.
Not invest in bonds.
They they've invested in the stock market and they basically kept their wealth. And what you saw in Germany in the nineteen thirty I say, in nineteen twenties, well, obviously you know unfortunate consequences is there was a massive wealth distribution shift from the older generations to the younger generations.
And I've got no evidence for this, but I would imagine, I would strongly believe that through that period the older generations were schooling their children, say you're absolutely mad to invest in stocks. Here you know, why don't you fall back on the reliability of government bonds because.
They've always worked.
You know, what are these pieces of paper you're trading for company securities? I mean, they're completely worthless, but actually we know that they weren't. And isn't that exactly the same argument that the older generations are saying to the younger generations now about bitcoin and all coins. You know, the younger generations basically gravitating these instruments because they're probably very good monetary inflation, the hedges, and they understand them.
Yeah, I mean, there's certainly that we can dig into that. There's also that in times of high inflation, hyperinflation, however, you wanted to find that what happens is it turns into a culture of gambling, right. John Mayner Kean said that that Vladimir Lennan told them that the best way to destroy capitalism was to debouch the currency through inflation.
They could arbitrary steel wealth until all relation is lost, and the best way to get rich was gambling and theft and so of what we see when societies start breaking down. And so was it just two weeks ago, Game Stop was back back in the news. Everybody's you know, Yolo into game Stop, and so not that there's really any valuation there. I think in hyper in Germany maybe they were buying notes of equities of maybe productive companies.
So it's a little bit different, I think than buying game Stop or you know, some some all coins, meme stocks or whatever. But certainly to the point that you're making. I mean Bitcoin, obviously, I'm a big believer in Bitcoin is a new alternative asset. Do you think so? Bitcoin is the first time we've seen an asset that has true scarcity, so fixed supply of twenty one million, and do you think that has something to do with it?
I mean, if you look at whether it's real estate or art, it's always the scarce assets that move many multiples higher than the existing assets, right, And so in this type of environment where we're seeing unlimited money printing against the face of an asset that has a fixed supply, I mean, how does that interact?
Well, I think you're absolutely right. I mean, this is it? What is it? I mean, you'd know better than me. What is the living twenty one million bitcoin? I think is it? Yeah?
Twenty one million bitcoin is the is the max supply? It's the first time that we've seen an asset that has true scarcity, a digital asset with true scarcity. Obviously, like a Mona Lisa. There's one Mona Lisa, so it's true scarcity as well. But the first time we've seen a digital asset with true scarcity, and so it's hard to imagine where that goes. But I think we're seeing that.
Yeah, I think that's right.
I mean, the only question one's got a raise. I mean, you know, there have been other examples of scarce assets primary real estate, mona lisas or whatever, but their price goes up. I mean, that's what we know they hold their value. Bitcoin is an example that certainly should do.
I think the question that you know I've posed many times in the last few years is, I mean, is there a chance that you get some of the equivalent to the Gold Act in the US and ninety thirty four where the Gold Act basically made it illegal for private individuals to hold gold. The penalty of I think it was a seventy year jail center. Its a really hefty US dollar normal fine at the time, So that focused the attention.
Now, could the administration do something similar?
I would doubt that now I think the I think that you know, the horse has bolted. So I think it's very very difficult. Big coins a global asset, it's not under the control of the US administration, and how much they made late like that, and I believe I'm correct in saying that Trump, you know, over the weekend, actually endorsed the whole idea would never be any constraints on nacrypto.
Yeah, so just to catch you up on that, I mean that has been the number one uh sort of people who don't believe in bit when that's of their number one attack vector is like, but the governments will make it illegal and obviously there's good reason for that with Acts sixty one h two where they made called illegal. To your point, but yes, not only did Trump endorse it, but we had other leading candidates Vivi Gramaswami, he was out endorsing it. RFK Junior has been out endorsing it
and receiving a campaign cont in that. But more importantly, last week the House passed a bill that basically, so we have a couple things going on. We have multiple states that are breaking apart from federal government. And so now Montana, Oklahoma was the latest one that basically passed a law. The state passed a law to protect people's right to own bitcoin, custody bitcoin. And so the states
are now moving in advance of the federal government. But then the federal government, the House passed a bill that also guarantees citizens' rights to own bitcoin self custody bitcoin. And so to your point, I mean, could that be overturned and you know whatever, Sure, I mean, everything's a possibility, but as it looks right now, they have gone above and beyond and actually put sort of what the Constitution does is guarantee those rights. And so that's a pretty
big deal. And to the point that you made, yes, I mean, even if the US said, hey, we'll kill you on site if you have it doesn't stop the rest of the world from moving in advance of that. So I think to your point, the house the horse has bolted the horses out of the bar, and it's too late to close those doors. So kind of if we look at this lens then and we have this tech trend as you called it, So there's certainly AI's that's sort of driving markets like Nvidia, you know, it's
catching that. I think copper is even this old metal that's starting to sort of move on this tech trend, if you will. Maybe that's the energy transition, you know, as well as the AI right, massive data centers, things like that. I've mapped out about every fifty years, we have these condroit and waves, these K waves, and every fifty years there's like this technological revolution that happens, and
each one of those seems to drive financial markets. So with had the industrial revolution, we had steam engines, railways, we had steel electricity heavy equipment, we had oil automobiles mass production ninety seventy one. We had microprocessors which brought telecommunications, personal computers, Internet, and now we have this like next tech boom, and each one of those dry drove financial markets.
So back to that trend. So we have this tech trend, which is why I referenced the NASDAK not the S and P five hundred, so sort of got this Nasdaq and obviously bitcoin crypto overall is sort of driving that. And then if we look at we have these global liquidity cycles that seem to be happening globally every four years, and these these tech So we have the tech trend, we have the NASDAK represented sort of moving off of debasement and based off of sort of the way you
framed it up. And I want to get deep into this. This the pool of collateral, the base of the system is so important we can't let it collapse. So we're going to have to keep kicking the can down the road. So we're going to have to keep debasing, and it's going to keep pushing prices up higher. And then that's
in the backdrop of this tech crypto AI boom. Do you think it makes sense to sort of be a warm buffet and be more concentrated in your bets, put your eggs in one basket and watch the hell out of that basket, as I think he said, instead of this diversified thing. It's like, no, Like, we can pretty clearly see that these are trends that are going to happen. They have to continue happening, at least the base cases
that they'll continue to happen. And we can see what's happening with with the tech stocks and bitcoin, and so maybe it's time to sort of focus more on that or no.
Well, I think it comes down to I think it's a very interesting debate. I think it comes down basically to what. So, first of all, your time horizon, so you know, if you've if you've got if you're a young a young guy who can you know is going to be saving or working for the next forty years, then you can take a long term view and maybe short term volatility doesn't matter too much in that regard. You're right also to say that the most successful investors did not diversify or do not diversify.
They concentrate.
However, what they face is en route is significant volatility. Caines, who you cited earlier, was actually also somebody who didn't believe in diversification. He believed, in his phrase, was I put to all my eggs in one basket, and I watched the basket very closely. And you know that's and that's you know something I think one's got to think about. If you believe that these are the these are the safe assets of the future, then I would definitely got to go along with that. And you know, I happen
to believe strongly that these these are important. I'm not going to say I've got all of my investments in bitcoin or in associated vehicles, but I think you know, I've got substantial amounts because I think that the real thread out there is monetary inflation, and where we are today, which is very different to where we've been at any time in my investment career over the last you know, thirty forty years, is that governments are really in a
situation where they can't really do very much. All they can do is, we keep saying, is to kick the can down the road. Now you think of the alternatives to that. The alternatives would require a revolution in demographics, which we're clearly not going to get. It would require the ability of the government to hike interest it significantly
to discipline the markets. But they can't really do that because if they do that, the debt interest builds skyrockets, and then you get it, you get an even worse situation with debt growing exponentially. And they probably don't want to cut interest rates too much either on the other side, because the incentivize people to take up too much debt,
so they're really stuck. And you know, there's an old saying in Ireland that if you want to travel to Dublin, don't start from here, and that's where we are, unfortunately.
So I think the fact is that what you what you're going to see over the next few years is government's increasingly kicking the can down the road, and it's those that have got maybe the bigger boots on, like the US, which is going to succeed rather more than some of these smaller countries who haven't got the same resources or haven't got an international currency at the dollar.
Yeah, so you said that the US is a pristine borrow and tell it's not. So, I think to the point that you're making, I mean, that's obviously I agree, and I'm also trying to make that same point. And if we look at ancient history as well as current history, that's what it tells us. So it's going back to Turkey and Zimbabwe I referenced earlier, or Venezuela, Argentina, name your country. What we see is they're all going to
print until the printer doesn't work anymore. None of them just say, well, fold up shop, just shut it down. Like they all just go and tell it doesn't work. And so it's like the law of diminishing returns, and so that sort of seems to be the way it's going to continue to go. They're just going to keep kicking the can until the can doesn't kick anymore. But you said the US is a pristine bar until it's not.
What we're seeing is, obviously with the rise of the bricks, sort of the decentralization or maybe deglobalization of the world, if you call it that. You know, China and Russia have both been openly claiming to be de dollarizing since what twenty fourteen, about a decade now, And what we're seeing is even now, like in Saudi Arabia with the oil, is like the surpluses are not being recycled back into
dollars or treasuries now, they're being recycled into gold. And maybe that's part of the reason Golled is also catching such a bid right now. And I'm just curious what you think about that dynamic. And if that's the US as a Christine Biro until it's not, does that sort of shorten the runway that they might have as countries starts sort of recycling into other assets.
Yeah, I think this is a this is a key area, and I'm not sure I've got the answers, but I think I can, you know, I can pose post some questions here. I think the you know, the interesting point and the interesting maybe opposite correlation that one sees is that whenever the Chinese current account, SERPENTUS or trade surplus rises, the dollar goes up. And we shouldn't be seeing that
should be the other way around. So what's happening is there's yet another price in the international financial system that's not working properly. It's working perversely. Now why is that the case? And I think there's you know, a number of reasons why you may be seeing that. One could be that, in actual fact, China is a dollar rised economy. So it's a little bit like saying, I don't want to push this an energy too far. Is it a little bit like the state of California? Okay, So what
you've got is a dollar rised economy. If California was hugely successful, what would that mean for the value of the dollar? Well, difficult to say, is the short answer. And I think that's the case with China. China is pricing everything in dollars. Then, you know what, it's not necessarily telling us anything about the demand for you are Chinese?
You are because it's basically sitting on dollars. Now, you could argue against me and say, well, of course China is now pricing on a lot of its goods or oil in particular from Saudi Arabia in Chinese you are, and therefore it's getting paid in Chinese you are. But the or sorry, Saudi Arabia is getting paid in Chinese you aren't. But the key thing is that Saudi Arabia is not keeping money in Chinese you are. It's shifting into gold or it's probably plying it back into dollars.
And the critical day is when the sound is decided they want to save in you are. That day has not come yet, and I think it's going to be an awful long way off. And I would venture that simply because if you look at what's happening in the Chinese markets, and this is the.
Big problem that China is God is.
Of course they've got capital controls, and what you're looking at is a situation where the U are looks to me to be a fundamentally recurrency, even despite the fact that there's a swapping great trade surplus.
Capital wants to leave. Now.
I would venture that if capital controls disappeared in China, you would see a wave of money leaving the Chinese you are and going into international diversification in international assets. It may well go into things like gold in much bigger size if it could. It may well go into things like bitcoin if it could. So these are interesting things to speculate upon. Chinese savers have got a lot of money, and the bottom line to this is I didn't think they can get off the dollar hook very
easily at all. And one of the reasons I think the dollar goes up when the Chinese surplus expands is simply because increasingly the Chinese are not depositing their money in US banks. They're depositing it in fringe banks in other words, in the Middle East or in Asia, and the recycling abilities of these banks to actually push it back into the system, is actually more challenged than a
conventional US bank. So you've actually lost the elasticity of supply in terms of the recycling of dollars, which explains what the dollar is a lot furtherer than people think.
Now.
I think that could go on, but that doesn't detract from the fact that I think the goal outperforms the dollar, and I think that bitcoin outperforms the dollar. But I still would maintain that the paper dollar is still, you know, significantly better than maybe the euro or the British pound or the Japanese end.
Yeah, so that's the you know, back to all these examples, but like the dollar milkshake theory, where it sort of becomes the last, the strongest lasting currency, as a lot of people say, it's the cleanest shirt in the dirty laundry, so to speak. But it's totally possible. And what I see is that the dollar gains strength against other currencies,
but it loses against herd assets, so it's losing against commodities. Yeah, so in that example that you gave there, so basically China is still working in dollars, but because some of these banks that they're putting their dollars into, it's not as easy to get them back into the global system,
so thereby it's lowering the amount of circulating dollars. The big problem is that most of the debt around the world is denominated in dollars, So if the amount of circuiting dollars go down, it makes it harder to repay that debt, which makes the value of those go up. I guess, and this is now this is going way outside, but maybe there's something to think about in light of where we're at with Russia, Ukraine and so forth. And now China and Russia have now sort of stepped up
their military cooperation. But I think maybe the Biden administration is what we'd say in the US, has jumped the shark, so to speak, by seizing Russia's assets and now saying they have to pay for war damages. And now Russia is like, tip for tat, well we'll just take back US assets. And so it wouldn't be that far of a stretch of imagination to think that some of these nations might just say, well, we're just not going to pay that debt back.
Yeah, I think that's I mean, you know, people do strange things when they have their wealth threatened. You know, we saw that in nineteen what was it, nineteen forty one with Japan, when the US froze Japanese bank accounts in the US to stop Japan buying oil in dollars, and that was something that actually led to, you know, obviously the beginnings of World War two or American American parts aspecially in World War Two.
So a lot of these things can actually have very very very big consequences.
Okay, so we'll kind of wrap this thing up It's been a great conversation. I appreciate you taking the time. But let's just kind of if we recap this. The world got put into these Well, one, we've seen central banks of the world sort of change the way they intervene in markets and being much more willing to intervene. The time tables of how they intervened markets has been stepped up, and now I mean they don't even intervene. They already have icon credit cards, but swap lines set
up and things like that. We see these four year cycles or these liquidity cycles sort of moving and sync. Potentially, we have this massive base of collateral that's super important, so they can't let that dip. So that's one reason why that that wheel has to continue turning that the basement is moving, asset price is higher, and we have
the tech trend on top of that. Some assets are more sensitive than others, tech assets, bitcoin, ethereum, as you've pointed out in your research, and there doesn't seem to be any way to stop this train from just continuing down this path until something happens and we don't know what that is. Does that kind of frame this up?
I think I think that's correct, But I think that, you know, one of the things I think to think about here is to say that you know, if you if you go back to listen to what a lot of economists would argue, They say that these levels of debt to GDP or public debt to GDP that we're looking at perspectively whatever it may be, one hundred and fifty GDP are unsustainable. That's wrong. History shows its sustainable. That's the worry.
How does history? How does how does history show? Everyone says the report from Hereschman Capital that every nation that's ever gone over one hundred andy percent failed. The only one that's ever survived was Japan or Japan?
Has Britain?
Did Britain survived through the nineteen forties and fifties, Well, I think public debt to GDP hitting two hundred and fifty percent, so way way above where US levels are now. Now, did that mean that the British economy was a roaring success. No, Rather, the country what you saw was basically decades of stagflation. And I would argue that British economy has never recovered
from that from that episode. So one of the costs of taking on large amounts of unproductive public debt and paying for it with funny money is you actually destroy your economic system. You get very slow growth, and that may be a cost of that. But it doesn't mean to say that it's unsustainable. It's fully sustainable because basically the government is that is the debtor, and the government can always print money itself, and that's pretty much what
it's doing. So the problem comes if you've got a foreign if you're borrowing in foreign currency, and you don't have the ability to do that. So I think what you're looking at, and this is one of the things that I think you've you know, you've you've articulated very well in terms of your observations, is that what you're looking at is a lot of debt machines around the world now where these governments, be at the Eurozone or be at the US, which are just creating debt and
they're basically funding it themselves. And that's the that's the world we're in, and therefore that is what I call monetary inflation. And you want a protection against monetary inflation. The obvious one is gold equities are not bad, prime
real estate is not bad. But what has come through to shine, you know, excues the pun is basically bitcoin in the last five years, and that shows that it's performing my exponential gold and why shouldn't it continue because, as we rightly point out here, it's got it's the only asset we can think of there's got a limited supply.
Why do you this is this is going out on a kind of stretching this question here. Why do you think an analyst like Peter Schiff, who seemingly knows so much about you know, ostering economics and understands this so well, just cannot see any value in bitcoin?
Well, I don't know, really, I find that I find that hard to believe. I mean, the question is is what is intrinsic value anyway? And that it's always a philosophical point, but you know, something is worth, something has a value if somebody else thinks it does. And if people believe that bitcoin is a store of value, then it is a store of value by definition because people will accept it. So that's one of the criterion of money.
So I think that's true. I mean, you know, we can debate long and hard about whether you know, is a paper dollar got.
Any value in it?
Because there's there's no intrinsic value in that there's a promise to pay, and I suppose with bitcoin there is an implicit promise to play.
In there or redeemedly the token.
So I find it's very typical at all while the people, you know, while the people are saying what they're.
Saying, Yeah, I agree, I mean it all value is subjective, and but but then you have to recognize that then to the point of intrinsic value, then that means there's some utility in that value. And I think maybe that's the argument he makes. But it's like, how else can you send money peer to peer digitally censorship resistant? Right, And so there's a lot of utility there that's not there. But well, Michael, we've we've kind of run the course on the on the time here. I really appreciate you
taking the time. I subscribe to your substack. It's great information. I'm going to link to that down below for everybody that's listening. The Capital War's book If you really understand global liquidity, which I think you should, is what I've been paying attention to. Check out that book. We'll link to that down below. Anything else you want to point out while we're here, Michael, I didn't think so.
I think that you know what, what you've got to watch is the three things that I've probably mentioned. You've got to watch what the FED is doing. You can look at that every Thursday, four thirty pm some time with the H four point one release. That's worth looking at.
Look at the People's Bank of China what it does in the markets, and also check out what's happening to the value of collateral, of which the best heads up, in my view, is to look at something like the move index, the index of volatility in bond markets, which is a pretty good guide to the size of haircuts that credit providers will give on collateral. So we'll give you some sense as to how you know what the
collateral multiple could be. And those three together are very good insightful factors for understanding global aquidity.
Yeah, all right, we're going to wrap it up with that. Thank you so much, Thanks so much.
Man, pleasure. Thank you.