Brent Johnson of Santiago Capital joins the Gold Exchange Podcast to talk about the Dollar Milkshake Theory, how and why everyone should own gold, and what the perversity of the dollar system means for all the other world currencies.
To connect with Brent, check out his website: https://santiagocapital.com
Connect with Brent on Twitter: @SantiagoAuFund
The Dollar Milkshake Theory Explained (courtesy of RealVision)
Connect with Keith Weiner and Monetary Metals on Twitter:
00:00:51 Goldbugs on the Strength of the Dollar
00:05:13 Financial Justice Warriors
00:10:25 A Funny Thing Happened Along The Way…
00:17:50 Emotional Investing
00:21:38 A Question For Keith??
00:32:19 Explaining the Dollar Milkshake Theory
00:40:00 Perversity of the System and the Network Effect
00:48:22 If You Are Trying To Make Money…
00:51:51 Gold Martyrs and Systematic Instability
00:53:55 Gold, Leverage, and the Risk-Return Spectrum
00:56:47 Debasement of Fiat and The Dollar Index
01:01:53 Discussion of Part II
Dickson: Hello, everyone, and welcome to the Gold Exchange Podcast. I’m your host, Dickson Buchanan. And I’m joined, as always, by the founder and CEO of Monetary Metals, Keith Weiner. Today we’re very pleased to have on the show Brent Johnson. Brent is the CEO of Santiago Capital, a private wealth management firm based in Puerto Rico. Brent is also the CEO of the Dollar Milkshake Theory. I’m just kidding.
He’s not really the CEO of the Dollar Milkshake Theory, but as far as synonyms go, I would say Brent Johnson and the Dollar Milkshake Theory are pretty much synonyms at this point. You may know him.
Brent Johnson: For better or worse. I think for better or worse, we’ll see how it all works out, right?
Dickson: So we plan to get into everything dollar milkshake in this episode. But I want to just before we get started, I want to just note briefly that it’s a pretty rare phenomenon to have two gold proponents pro gold bulls, if you will, who are at the same time dollar bulls, or at the very least, think the dollar is going to get a whole lot stronger before it gives up the go. So I’d love for both of you to kind of unpack your positions there and the reasons why you kind of maintain that thesis. But yeah, let’s start with let me just say first, Brent, welcome to the show. We’re very glad to have you.
Brent Johnson: Yeah, thanks for having me. I’m happy to be here and I always enjoy speaking with you guys. I think Keith is one of the smarter, if not the smartest guy I know in the gold world. So I always appreciate his work and I like it that he kind of keeps an open mind and understands how the monetary system works. So it’s always fun to have these conversations.
Keith: Thanks, Brent. The one thing I just want to say is preface, and I’ll let Brent do most of the answering of the question is that a big theme in my work is perverse incentives and also perverse designs. And to say I’m bullish on the dollar, I could quibble with that accuracy of that slightly, but to say that the dollar is going to get stronger, which I’ve been saying for one long time, relative as measured in euros and pounds and other currencies like that, isn’t to say, yeah, America, which is an easy assumption for people to make. Rather it’s to say the system is designed the way it is. It’s not designed the way it isn’t, the way everybody imagines it to be. It’s very perverse. Like all the mechanics that we’re going to talk about, it’s not good. But you have to recognize reality. It is what it is. It works the way it works, doesn’t work the way it doesn’t work. And I think that’s a really important preface. I’m not going to speak for Brent, but I’m going to guess that he’s not an advocate for it being designed this way. But it’s designed this way for whatever reasons, which we can talk about historically, and because it’s designed this way, then it behaves this way.
And because it behaves this way, you either get it or you don’t get it. And I think Brent, more than almost any other single human being, has been out there trying to reach out to people and help them understand this is how it is.
I’m sure I’ve got the T shirt. I’ve been there, done that. Got the T shirt for pissing off a lot of people in the gold community by trying to say, look, this market works by arbitrage, not by naked shorting and manipulation. I’m sure you could say, been there, down there, got that the T shirt for pissing off a lot of people saying milkshake and dollar bull for the same reason, which is sometimes people have their comforting illusions. If you take that away, take that away at your own peril, they lash out you, they get furious. And there’s nothing good about that. But anyways, let me let Brent answer and take it where you will.
Brent Johnson: Yeah. I think the most important point that you just touched on and that I will second here, and I hope everybody takes us to heart, is that recognition is not the same thing as advocacy. Right?
Keith: Here here!
Brent Johnson: Just because you recognize something being the way it is, does not mean that you’re a fan of it, does not mean that you would do it the same way, does not mean that you think it should be that way. It’s just recognizing that it is. Right. And I feel like many people in the gold world, and perhaps it’s fine, I don’t have a problem with them doing this, but just recognize what you’re doing. And I think that many people in the gold world are, for lack of a better word, financial justice warriors. And a friend of mine coined that term, I don’t know, four or five years ago, and I thought it fit perfectly. A lot of them are out there advocating for a better system, maybe a more moral system, maybe a perhaps more fair system. However you want to describe it, that’s fine. I don’t have any problem with anybody advocating for what they believe is right. But when you then start telling people to invest or place their money or allocate capital or make decisions of their life based on what you think should happen rather than what is actually going to happen based on the design of the system in the real world, that’s where I start to have a little bit of a problem with it.
And so when I kind of really first dug into the monetary system was 15 years ago, 2006, 2007 timeframe. Luckily, I started doing it prior to the global financial crisis, and that led me to be a big advocate for gold because I recognize that the system is inherently unstable. And then as I got further into it, let’s call it five, six, seven years later, kind of middle maybe 2015/16 timeframe, I thought that gold should have gone up. I was a financial justice warrior from let’s call it 2009 to 2015, I would put myself in that camp, but I was a financial justice warrior, and I couldn’t figure out why gold wasn’t going up. And all my other friends in the gold world saying, oh, just give it time. It it will will. And I kept saying, but why hasn’t it? And nobody wanted to address the answer, and nobody else wanted to say, we got it wrong. And I was like, we have to say we got it wrong because we did right. I finally just got tired of asking all my friends in the gold world to help me figure it out, and I kind of just decided to figure it out on my own.
And listen, there’s a question of whether or not I figured it out or not, but what I discovered in my own search for why the gold didn’t work is I really kind of dug into the monetary system again. And that’s when I kind of perhaps I should have known this all along, but I didn’t. I kind of figured out that the game is, to a certain extent, rigged in favor of the dollar. And based on the design of the system, the dollar is not going to get inflated away, at least not before all the other currencies get inflated away. Well, it didn’t happen in one day. This was a very long process. But I remember the day that I finally came to the realization again, realization versus advocacy. I knew I was right, or I had a very high conviction I was right because I hated the answer. I hated it. I did not want to come to this conclusion, but there it was, right? So then I was like, holy cow, I need to do even… So then I did even more work on it. Again, I didn’t want to be right. I wanted to find a flaw in this, and I couldn’t.
I really couldn’t. And so that’s when I tried as best possible, and that’s what I continue to do. I don’t necessarily want everybody to go out and buy a bunch of dollars and sell their gold. I just want to educate people. There’s really no big upside for me going on Twitter or going to conferences and going to interviews and pounding the table saying the dollar is going higher. Other than the fact that my clients money is already allocated, I don’t really need more clients. If I get more clients, that’s great, but I don’t need more clients. But I feel like there’s a lot of people out there who just either don’t have the full picture or the picture that they do have is not completely correct. And the simple reality is, if I do my job really well, rich people stay rich. I don’t know that there’s a lot of that. I’m really helping the world by just doing my job. But if I can educate some people along the way and I can help them think through what’s going on, and I can maybe help one or two people kind of survive the chaos that I think is coming, then maybe that’s worth doing right, and maybe that is changing the world a little bit or helping the world a little bit.
Keith: If I can just respond to one thing, they love the term financial justice warrior. For some years, I’ve had a different term for something. I think it’s very similar, and I think of it as a funny thing happened along the way… And that is everybody starts out assuming that the dollar is money and money means a dollar. Because whether they call it education or whether we call it propaganda. It begins from the time you’re getting your mother’s milk and you go to Google Images and you search for money and you get endless pages of rectangular pieces of paper with green ink on them. People holding fistfuls of it and a crisp one. And then she’s coming off the printing presses. But you don’t see gold coins anywhere. And so everyone just kind of assumes that. And then one day, those of us that come to gold have this realization, oh shit, this thing is unsound and it’s unstable, and the debt is growing exponentially in the printing more of it or whatever it is. That first realization and the impulses, go buy some gold. Okay, so we do that, and then that’s where the funny thing happens along the way.
Now it’s cheering for gold to go up rather than any kind of monetary advocacy. Instead of thinking about how is the system broken, how do we fix it? What comes next? What’s the right monetary system and what’s the next monetary system? Instead it’s gold go up. And it’s very perverse because it go up in terms of the thing that you’ve now defined as not money. Money is going to go up. In terms of not money, how do you measure money? Well, in terms of not money, obviously, and what’s the purpose of it going up? So you can sell it and make more of the not money that you just said was going to be hyperinflated by tomorrow morning. And if you go deep into the conspiracy, the bowels of the gold conspiracy movement, these people will publish a date. Or in one case I’m trying to remember, this guy published a number, it Gold be like 173 on his website. That’s the only thing it said. And then like five days later it would be 168. And then everybody would start to notice he has some sort of countdown and all the rumors that his peeps in Beijing or DC or whatever they know about the coming, whether it’s going to be reset or signal failure.
There was nothing in the audio that said the date. They just reset. There’s something on the page that said and now it was reset to December 31. So they push it off by six months. And I was like, this is an interesting game. I came back in January. Oh, yeah, look, they reset it again. It’s a funny thing happens along the way. People go from advocacy of the next monetary system to rolling the dice at the craps table, crying out, baby needs a new pair of shoes while they roll them bones. I think it’s the same thing and very blinding, obviously. I love your point about you kind of knew what’s right because you hated it and you were only concluded reluctantly. I think there’s a temptation to fall for the convenient theory, the one that just makes everything so nice and neat and you don’t have to challenge any of your premises. It’s just right there. It’s just so nice and neat and wrapped with a bow that the more tempting it is, the more that you should be skeptical. And if you’re drawn to it reluctantly, kicking and screaming, it doesn’t mean that you shouldn’t still drive for intellectual rigor. But it’s an interesting litmus test. I don’t want to believe this. I hate it.
Brent Johnson: I read this great book several years ago now, and I just presented part of it at a conference a month ago. But it’s basically about it’s more about psychology and stuff. And there’s these studies that have been done that has shown that the feeling of certainty, when you’re absolutely certain about something, it’s actually an emotional response, like love or hate. Like you don’t really choose who you fall in love with. You don’t really necessarily choose who you hate. It’s a natural response, but it doesn’t necessarily have anything to do with logic or the facts of the matter. It actually has nothing to do with that. It’s literally an emotion so whenever I’m certain about something, or whenever I’m really sure of something, that’s when it scares me the most. And again, it didn’t used to because I thought, oh, I’m really right. And so now whenever I hear people make black and white statements and absolute certainty and even myself, I catch myself doing it too. And I have to pump the brakes a little bit because I always say in investing and in capital markets, there is no certainty. The minute you’re certain, you’re dead. You may have a high conviction and you may be right, but there are no guarantees in this business.
Keith: Yeah, absolutely. I think there could be certainty about economic law, but that doesn’t translate into certainty about what the price of a certain instrument is.
Brent Johnson: That’s a good way of putting it. That’s a better way of putting it.
Keith: People accused the Austrian school all the time of, oh, well, if your economics is so great, why aren’t you all multi billionaires trading? And it’s like we can tell you that marginal utility diminishes. That doesn’t mean that the price of coffee is going to go up 20% by next week. Maybe. But there’s a lot of variables in the real world, and margin utility is only one of them, and supply shortages and they’ll just change. Also other factors. And at the end of the day, things are very messy in markets. But anyways, this is fascinating. This idea of financial justice is going to get vindicated by betting on the right asset.
Brent Johnson: Well, and I think that’s part of it, too. Again, I think this is where especially in the gold world, but it happens in all markets. So I’m not singling out the gold world here. It’s just that I see it there. I saw it a lot in crypto, still see it a lot in crypto is the emotional attachments that people get to their investments. And I think a large part of it is the fact that they believe and perhaps they’re right. Maybe they are, maybe they’re not, but they believe that they’re doing this for the greater good, right? Or they’ve convinced themselves that it’s for the greater good and they deserve to get rich along the way since they are doing it for the greater good. In other words, I don’t think that these proponents would be doing it if they would not be out there fighting for justice as much if there wasn’t a plot of gold, right? If they were doing it strictly for the moral reasons or for the social good I don’t think they would do it with such rigor but because they believe, because they’ve discovered this truth and that they now want to share this truth with the rest of the world, that they will be rewarded at the end of the road. And again, maybe that’s right, maybe it’s not. But I think that’s why it gets very cloudy and why it gets very emotional.
Keith: The psychology of the state reminds me of people who confuse revenge and justice.
Brent Johnson: Yeah, exactly.
Keith: They got a job at a shitty company and things don’t really work out that well and then when they quit, they have to try to go delete the entire database and they have to go badmouth the company on every website and they’re like cruising for what they and in their mind they tell themselves it’s justice.
Brent Johnson: Yeah.
Keith: But in fact it’s just revenge. Yeah.
Brent Johnson: Well, there’s another part of it too. There’s another part of it too and I fully acknowledge this side of it as well is that for the people who have recognized that the system is unstable and for the people who have bought gold and silver or whatever it is and if and when they are still around when the day comes that the system comes down and they make a lot of money. However you define that as a result. They will deserve that as well. Right? I mean, that’s capitalism. If you allocate capital in a way that others don’t recognize and then what you think is going to happen eventually happens, that’s capital, you get rewarded for that. You get rewarded for taking that risk. So I’m not saying that the gold and silver people won’t be right. I actually think that they will be right. I think it’s the journey along the way that I have the biggest problem with as opposed to the end game.
Keith: That’s a really good point. That you could be right in the end. But there’s a lot of twists and turns and drawdowns in the bull market if you want to think of it that way. That can be distracting and then to be early if you’re too early. That’s almost again in a financial market sense. Not in an economic sense. But in a financial market sense to be too early. It’s indistinguishable from being wrong.
Brent Johnson: That’s right. In my business, that’s just being wrong. Now, if you’re writing research or if you’re a newsletter, or if you have, you’re just an individual, and every month you take a percent of your check and you put it into the gold coins and you stick it away, that’s fine, but that’s much different than what I do as someone who manages money for other people.
Keith: That’s right. That’s a very key distinction.
Brent Johnson: I actually have a question for you, Keith!
Keith: That’s a first! Come on our podcast and….
Brent Johnson: No, I’m really curious. Is Monetary Metals about ten years old?
Keith: Yes. 2012.
Brent Johnson: Okay. That’s what I thought. I remember coming across you right around that time, and I had never kind of come across you before that. And I remember even from the beginning, you were a little different than a lot of the other people that I came across in the gold world. And I always thought that this guy is pretty measured. He kind of comes at it a different way, doesn’t seem as emotional about it. And then, to be honest, I was probably more emotional about it at the time. And so I was probably wondering, why is this guy not quite so emotional about it? How did you get exposed to the gold world and what made you ultimately come into it? Because I feel like you’ve kind of been the same for the full ten or twelve years that I’ve been following. I don’t feel like you made some big transformation, but maybe your transformation took place before or after. Maybe it never did. I’m just curious, like, what drove you to the gold world to begin with?
Keith: So a little bit about, I guess, my personal backstory. So I was your classic computer nerd in high school and went off to after a brief misadventure with healthcare, went off to computer science school, which was my love and my passion. Dropped out of computer science school because I felt that there was nothing left to offer me at the undergraduate level. I was already doing graduate level projects. Very briefly got a job developing video games, and then started my own company, which was called DiamondWare in 1994. Spent 14 years building that up. I guess the first five or six were really just learning about business, developing a business model, and then settling on the business model of 3D Audio for Voice Communications. Sold that company, to North Carolina Networks. The transaction closed August 19, 2008. As historical footnote. We were the last acquisition North I ever did. Spiraled into bankruptcy by January 9. Filed bankruptcy.
Brent: Did you get cash or stock?
Keith: It was cash. There was no stock.
Brent: Oh good.
Keith: I got a little bit caught up in the earn outs and other things that made it more complicated, but I have no complaints about the deal, financially. Intellectually, it was very frustrating because I built all this technology that ended up getting dropped on the floor where it still sits today, being totally unused. 3D Voice should have been in the pantheon with color TV and microwave ovens. Garage Door Opens it should have been one of those things that once you experience it, it should become ubiquitous and you never want to. My personal hell is I have to do meetings all day that lack the technology and the solutions that I built and patented and had a team building 20 years ago. That’s my personal hell. Anyways, financially was pretty good. And as you can imagine, I sat there and said, okay, I don’t want to make any major financial moves, investment purchases, whatever for 90 days. I just want to let this settle because it was a life changing sum of money. And that happens to be the 90 days that everything blew up. I mean, the overlap with the financial crisis was almost perfect. Almost like there was state or something like that.
My investment banker, who by the way, was diagnosed with late stage cancer in July and went to the hospital and said, gentlemen, here’s the things you need to worry about. And now you should assume you’ll never talk to me again on this earth because I have to focus on my health. It was one weekend where the doctors gave him 50 whether he would live. He called me up in October of 2008 and said, Keith, you’re the luckiest beep man in the world. The guy who just survived cancer! And he lived after that another six or seven years and went on to do all the things bucket list that he wants to do and everything else. He called me up to say that because of the timing of how everything and the timing of the deal like that, it’s up to lawyer, summer vacations and just all kinds of things that are outside your control. And that’s how it worked out. Anyway, so that fall, I started to obsessively. I used the term like a moth to a flame. I was just drawn into this morass of what is wrong with the system. Nothing that said on TV made any sense.
I got all the famous people’s books in the space and it’s like nobody’s really getting to the root of this. And like you I was going to say earlier when you said something about your conviction and I forgot how you put it, you’re not sure whether you’re right, but you’re asking the question. I felt nobody was asking even the right questions. And I came across this old Hungarian professor named Fekete. And at the time I said, well, I don’t know if he’s right or not, but he’s the only one even asking the question, let alone trying to offer an answer to it. And so then I saw he was given a course in Hungary. I was like, okay, I have basically unlimited vacation time coming to me because of the way the deal worked out. So I flew to Hungary and I took this course and with no intention of going back to school or anything else, just because I just found it interesting. I saw a picture of him. I said, okay, he’s clearly elderly. I don’t know how long he’s for this earth, and I want to meet somebody like this while I’ve got the opportunity.
And I took another course, another course. And I started to write essays. And then, of course, I shared my essays with my professor. And there was a point he said, Powell, I think you open up material for a PhD here, dissertation. Which was kind of a joke because that was a six page paper. My dissertation ended up being like, 126 pages or something by the time it was done. But anyways, I came to it from a study of monetary science, which is what he called it, and really thinking about how a gold system works in a free market. And then second, so that was first, not trading markets at all. The second was putting my entrepreneurial hat on. I consider myself to be an entrepreneur, not an academic, saying, okay, how do you roll out the red carpet? How do you pay the pass? There’s been a lot of economists and he’s obviously Hayek a lot of others who said, we need to get to the gold standard, guys, this is going to be a real big disaster. But nobody figured out how to roll out that red carpet and get there. And I had one insight, which was it’s the interest rates that regulates flow circulation of gold.
And if the interest rates zero, I used to use a picture of like a plumbing system with a jack valve. If the interest rate, even if you had a working gold coin system, it would seize up and stop working if the interest rates ever went to zero. So then two and two click together, and I was like, you have to pay a return on gold and gold, and if you can do that, that’s a value proposition that people will respond to. Although the whole gold world told me that I was an idiot for trying to do that. And of course the mainstream people also told me I was an idiot. But that’s obviously a value proposition that makes sense. And if you can do that, if you can scale it, you create the gold standard and a bottom up sort of way. So in 2012, we weren’t ready to pay interest on gold as such, but we started a little hedge fund to trade the gold silver ratio. But the innovation there was to keep the books in gold. And then management success fee was paid based on increasing the value of the holding in gold ounce terms rather than in dollar terms, recognizing what the dollar price may go up and everything.
But if all I do for my client is buy gold, the dollar price goes up. I haven’t added any. Value. Yeah, that was what we did there ultimately started to wind that down because that wasn’t where the business was as the fixed income line is really where it worked at. So that was how I came to the space, was from a monetary economics perspective. And like everybody, I mean I bought gold back in those days but I always kept thinking of it in terms of you have to measure the dollar in terms of gold. Gold is the lighthouse. The dollar is the ship which is both leaking and tossing around in the volatile seas. You can’t stand there on the deck of the ship and say why is the lighthouse going up and down and mostly up, but it’s an incorrect vantage point, although it’s the one we’re all trained obviously to view. So that was my history, how I came to all this.
Brent Johnson: Got it. Cool. Well I knew that you had studied under Fekete but I wasn’t quite sure anyway, maybe you’ve gold me that in the past and I just forgot it. But I appreciate you sharing that because I was always curious how that happened.
Keith: It was kind of an unusual set of circumstances that all came together. Serendipitously he was giving that course, it wasn’t that long after that he basically retired of 2012. So I had enough time to go through coursework, enough time to write the dissertation, enough time for him. And he invited Professor Wan Ramon Rago from University Juan Carlos in Madrid to be the other examiner of my dissertation. And then Professor Federate as far as I know, only ever granted two PhDs to myself and one other guy and then he retired. By this point he was in his mid eighty s and slowing down and not able to do it anymore. So I’m grateful for that. Why don’t you we talked about this term milkshake. I’m sure most of the people who obviously everyone who follows you on Twitter would know what that term is. Probably most of the people who follow me on Twitter would know what it is, but maybe a lot of people listening to this podcast don’t necessarily know. So why don’t you take a couple of minutes and just say what is the theory and how does it work?
Brent Johnson: So I’m going to start off by explaining that the reason I came up with this analogy in the first place is I manage money for individuals, so I’m not managing money for big pension funds or endowment. Most of the people that are sitting on the other side of the desk for me that are my clients are very smart, extremely successful, and if they wanted to be focused on finance they would probably do very well. But for whatever reason that’s not what they do. So they’re not versed in the same type of language and acronyms that I am and they don’t know the difference between a credit default swap and T bill to be honest, that’s why they hired me. And so whenever I’m explaining what I think is going to happen, I’ve always got to come up with a kind of a layman’s way of saying what I think is going to happen. Because if I go in there and start talking about interest rates and monetary policy, their eyes are going to glaze over and they’re going to fire me. So I don’t want that to happen. So I’ve always got to kind of just come up with a simple way of explaining what I think is going to happen and why we should do what we’re going to do.
And so kind of around the same time that I was talking earlier, I came to this awareness of the way the system is rather than the way I wanted it to be. I had to start explaining why we should continue to own gold because I do think we should continue to own gold as part of the overall portfolio. But I also had to explain why I couldn’t predicate my entire gold thesis on gold or my gold thesis on the dollar going to zero. Which anybody who’s ever gone any new gold investor. Whoever goes to a gold conference. The entire conference is pretty much built around the fact that the dollar is going to get inflated away because of the fiscal profligacy of the United States government. Right?
That is the base case. Now there are other reasons as well, but that is the bedrock on which the whole old thesis is built. And that’s fine, I think that is appropriate, but it doesn’t mean it’s going to happen right away. Right. And so I had to explain why we needed to keep gold in the portfolio as insurance or as part of diversification. But also I had to explain why the primary reason that most people see to own gold is not my primary view and in fact I think it’s the opposite. And so that’s where the milkshake theory came up with and ultimately what the milkshake theory is. It’s a framework for the way I see a global sovereign debt and sovereign currency crisis playing out. Now perhaps that will play out over a number of months. I think it will play out over a number of years and I think there will be starts and stops, I think probably in the late 2020s before this all gets settled and it might not even be settled by then. But the reason I say that is not something I think that the dollar has a big move up over the next six weeks and then it’s over.
I don’t think it’s going to be that way. But essentially we could probably go back 100 years. But to keep it simple, if we just go back 15 years to the global financial crisis 20 08 20 09 time Period ever since then, global central banks around the world have had to provide an enormous amount of liquidity stimulus incentives, however you want to describe what’s going on since then. The QE, the money printing, the example I used was that’s the milkshake, the world governments and the monetary authorities provided this big financial milkshake to the global economy. But due to a number of reasons, which primarily traced back to the design of the system itself, is the US. And the US dollar has the straw. So we meaning the US. When I say we the US. I believe is going to drink up that milkshake regardless of where it’s at. Doesn’t matter if that milkshake was milked in Perth, Australia or in Durbin, South Africa. I think that liquidity is ultimately going to flow into the dollar and into the United States markets. And as it flows into the United States markets. And that allows us to extend the game longer than everybody else.
And as that liquidity leaves those other areas, it puts those other areas into crisis. Because at the end of the cash flow in investing, everything comes down to cash flow. You either need to have a stock of cash, and if you don’t have a stock of cash, then you need a flow of cash coming through. And so as that liquidity leaves those other areas, I think that they are going to come under extreme pressure. And we’re already starting to see this in places like Turkey and Peru and Ecuador and El Salvador. You’re seeing it in Sri Lanka. You’re even starting to see it in Europe and Japan in some cases. Anyway. The thesis is that the dollar will get strong as global capital flows into it as a safe haven. And again, you may think that it doesn’t deserve the safe haven status, but I argue that whether it deserves it or not is irrelevant. It is based on the design of the system. And so as that plays out, I think the dollar gets stronger, which attracts even more capital to it, and it becomes this vicious circle. And I think the dollar goes a lot higher.
And on a relative basis, I think the United States, despite all its flaws, despite all its mistakes, despite all the bad policies, I think will weather the storm better than most other places. And then kind of at the end of the theory is that the dollar will get so strong, I believe they will have to reset the system in some way, whether they come up with a new design or whether they have another Plaza Accord which devalue use the strength of the dollar, I think something will have to be done to relieve that pressure. And then at that point, you’re not going to want to own dollars anymore. You’re probably not going to want to be invested in the United States. You’re probably wanting to go and allocate your capital to those places that have been beat up and deprived of liquidity, because then I think the tide will flow back. The other way, the name came from a movie where there’s a movie called There Will Be Blood, where this oil baron, for lack of a better way of saying it, was negotiating a piece of land with the guy that owned the land next to him.
And the guy wanted him to buy the land. And he said, I don’t need to buy your land. All I got to do is stick a straw down to the ground and I can drink your oil. He said, I can drink your milkshake. And I think that’s essentially what’s going to happen. I think that the US is going to drink the rest of the world’s milkshake. Japan is still mixing the milkshake. Europe is still mixing the milkshake. A lot of places, China still mixing, a lot of places are still mixing the milkshake, but we’re the ones drinking it. So I think that that is going to play out. So that is the explanation of what the term milkshake means.
Keith: There’s a real perversity. You can see the perversity and the design in the system absolutely. That everybody around the world because they owe dollars, where people say, why is the dollar have value? Oh, it’s just a matter of everybody waking up one day and realizing it’s shit and then repudiating it. I’m like, don’t think in terms of the small trader who says, should I own dollars? Should I own this, should I own that? Most of the bigger players in the system have no choice. They owe lots and lots of dollars. And the problem is their revenue is in Turkish lira, their revenue is in South African rand or whatever. And they’re making a very firm bid on the dollar as they’re desperately trying to generate as much revenue as they can in their local currency to then trade it for dollar so they can service their debt. And of course, the people in those countries, as they see their own currency going down, start to think, powell, I should open up a USD account. And every response to this only just further adds perversity on top of diversity.
Brent Johnson: I think the key for me, and maybe this will help again, people that have not heard this before and that are kind of new to this, that are listening to this, the key for me was getting an understanding of the Euro dollar market. So again, for people that are new, there’s two dollar markets. There’s a domestic US dollar market, but then there’s a market for dollars outside the United States that’s bigger than the market of dollars inside the United States. So dollars that exist outside the United States are Euro dollars, dollars that exist inside the United dollars. But the market for dollars outside the United States is orders of magnitude bigger than the one inside the United States. And so when I say there’s all this debt out there that is denominated in dollars, a lot of times the argument I will get back will be, well, what if the rest of the world just defaults on those dollars? Then the US. Won’t get their money back. And the point I always point out to them is the US. Did not lend these dollars to them. This is France. Loaning dollars to Turkey. This is Japan loaning dollars to Australia or whoever it is.
Brent Johnson: But the point is that financial institutions, shadow banks, even commercial businesses that do vendor financing, they will extend credit in dollars. And both the lender and the borrower are located outside the United States. So if the rest of the world suddenly decides not to pay back their US dollar debt or the credit that’s been extended to them in US. Dollars, they’re not defaulting on the United States, they’re defaulting on themselves. In other words, the rest of the world is defaulting on the rest of the world. And so it’s not that it can’t happen. It’s just that that doesn’t necessarily hurt the United States, or at least it doesn’t hurt them as bad as it hurts the people that have lent that money outside the United States. And then people say, well, what if they just don’t want if they move to another system and they don’t use dollars, then that would hurt the dollar. Okay? There’s truth in that. But they would all have to figure out what other system they were going to go to. The system would have to be designed and implemented. Everybody would have to trust it, and they would have to do it while they were fighting a war with the United States. Right?
And I just don’t think that that’s viable without a lot of volatility along the way. I’m not saying it can’t happen, but I think it would be an extremely volatile event if that happened. And I think in the short term, the dollar would go a lot higher. And again, for all the reasons that I’ve discussed before. So the Euro dollar market is really key to it and for those who are saying, yeah, well, I wouldn’t want the dollars anyway because they’re going to be worthless. And the analogy I would use here is if you’re living in the United States and you get a job in Germany. And now you fly over to Berlin and you get an apartment and you get a car and you get a post office box and all that kind of stuff. If you had $100,000 and you’re safe back in the United States. You’re not just going to burn that $100,000. You still want that money. Even though you’re not going to be using dollars anymore, you still want it. You still want that asset. So the idea that it doesn’t matter that you’re just going to leave those reserves behind and that you don’t care that they go to zero, it’s just not reality.
It works great in a presentation of why the dollar is bad, but it doesn’t work well in reality. So again, the idea that the whole world is just going to leave dollars behind and move on to some new system and they’re all going to do great and the US is going to go up in smoke is just to me it’s fiction, I was going to say.
Keith: So if you look at the balance sheets of most of the major players in the rest of the world, they owe dollars. If they default on those dollar debts, their assets are seized because the counterparty isn’t Uncle Sam. Arguably, maybe the rest of the world could agree, let’s all screw Uncle Sam. But the counterparty is the bank of France or whatever, or BMP Pariba. So if they default on that side, then their assets are seized and out of business. And on the asset side, it’s an asset that’s performing well relative to their local currency or any other currency that could conceive of. And so they may hate it, but go green and bear it. Because of that reason, I was going to make a point about just reset and just change the system. And a lot of people may be aware that there was an attempt to do that through language that a bunch of smart people got together and defined an artificial language that nobody spoke, by the way, but we’re all going to speak it because it’s a better language. And that’s esperanto. It didn’t work, obviously. And the reason is the network effect. Do not underestimate the network effect. That’s right.
Brent Johnson: The dollar is the biggest network in the world, right?
Keith: By far.
Brent Johnson: It’s not even remotely close.
Keith: So the network effect is a term coined by Metcalf. Yeah. And he was selling network cards for PCs. This is Ethernet and he came up with this graph they put on a slide. To this day, I’m not sure anybody really knows whether this is exactly true or not, but he said the value of the network is proportional to was it the square of the number of notes? I don’t remember.
Brent Johnson: It said something like that.
Keith: And everybody just sort of accepted it. The companies would say, okay, we’ll buy one Ethernet card. No, you got to buy more than one. You have to hook everybody up anyway. If you had something there, obviously, whether it’s the square, the cube factorial, whatever, there’s some real value there. And for good or for ill, all economic calculation is performed in dollars. If somebody from Germany is buying something from somebody in Turkey, they want to know the dollar value of the transactions. I’ve met pension funds in Malaysia. You might think, okay, it’s a Malaysian thing, right? The pension fund would have a balance sheet. Denominated in Ringett is the Malaysian currency. No, it’s a nominated dollar. Pooch oil in rubles or yuan or whatever, rupees. But everyone knows that the barrel of oil is worth X amount and discount for euro, obviously, but it’s all dollar calculations. How do you just reset that? How do you just say, if we could only get 7 billion people on this planet, all fly to New York at the same moment and then one, two, three, jump, we could knock the planet out of its orbit or something crazy like that, right?
Well, how do you do that? It’s completely intractable, completely beyond comprehension. What it would take to really do that. When you get into the logistics of it, you get into everybody’s self interest, why? That network is bigger.
Brent Johnson: Yeah, and it’s part of that network effect. And this is what I would say again, people that are out there, they’re listening to this, that are investors, that are allocating money, they’re trying to make more money. Again, there’s probably some people on here who are financial justice warriors. They’re trying to advocate for gold. Totally fine. But if you are trying to increase the value of your 401 or increase the value of your investment account or whatever, if you were trying to make money, however you define that to be, then the second part of this is not when you’re investing in markets, is to understand that in many ways there’s what will play out fundamentally over a very long time period. But then there’s also the common knowledge gain where you are basically betting of what everybody else is going to do instead of what they should do. What is everybody else going to do? And what I mean by that is you may think the dollar is trash and you may think that everybody should go buy gold, but does everybody else think that? Because until they think that gold is not going higher, right?
And so in the same way that we think about all the things that happened over the last couple of years as a result of COVID, whether it was the lockdowns, whether it was the mask mandates, a number of different mandates came down from above that said you have to do this. And how many people hated it? How many people pushed back, right? A lot of people just complied, but a lot of people pushed back. Now let’s pretend that we went to a gold conference and everybody in the room was a gold advocate. And then Janet Yellen comes up on stage and says, we are moving tomorrow to a seashell standard. Would everybody in that room just accept it and go on the seashell standard? No. Well now think about all the people in the world that are not at that gold conference and have never even heard of gold, and not only have never even heard of gold, have no desire to change to a gold standard. Well, when Janet Yellen comes out and says, okay, we are going to a gold standard tomorrow, you don’t think anybody is going to push back. You think the whole world is just going to say, okay, no problem, and there’s not going to be any volatility now, I would actually argue that gold would be one of the most accepted things that people would agree to.
But the idea that there’s not going to be any pushback and everybody is just going to automatically accept this return to the gold standard, there is not going to be volatility is to me just the height of hypocrisy because you’re not going to do it yourself. You’re not going to accept the mandate from heaven or yelling however you want to describe that coming down from the top. But you want everybody else to accept the mandate from the top if it complies with what you think should happen again until the rest of the world decides on their own that we need to get into gold because the euro. The end. Or the dollar or whatever else is just no longer worth it. Gold is not, in my opinion, is not going to do what a lot of people think it’s going to. I do think that day will come. I do think gold will go much, much higher. But that is why it might not happen right away and that’s why it might not be this eminent event like you were talking earlier, the countdown, 60 days, 54 days, 43 days, I’ll get off my soapbox.
Keith: Yeah, a lot of good points there and the bitcoiners are even bigger sinners in that particular regard.
Brent Johnson: I always feel like I need to say this, I say this as a huge advocate for gold. I don’t want people to rush out and sell all the gold and if you don’t own any gold, I think you should go buy some.
Brent Johnson: But just recognize that just because you understand that the system is unstable and it will eventually fall does not mean that’s going to happen tomorrow. Just keep a level head, I guess, is what I’m trying to say.
Dickson: Well, too, there’s probably been a lot of martyrs and you talk about financial justice where there’s been a lot of gold martyrs along the road, right, that have sacrificed their wealth waiting for that day to happen.
Brent Johnson: Well, part of the reason that I probably pound the table as hard as I do, and part of the reason that I continue to go to conferences and speak and continue to do podcasts and do interviews is because I’ve met so many people. I would go to these conferences and there would be people that were either in their retirement already or very close to retirement and in their retirement accounts they would have 60 or 70% gold miners, right. And these people have just been destroyed. And the very thing that those advocating to put gold miners in your portfolio were trying to protect them against, they gold say don’t put your money in the stock market, you could lose 60, 70, 80% of your money. Well, you know what, they did lose 60, 70. They did it in gold miners instead, as they did instead of IBM or Netflix or whatever it was. So again, everybody should own goals. And I think having goldminers is perfectly acceptable, but keep it within reason. Don’t go nuts. I got tired of talking to people who were just praying. They were like, Powell, when do you think it will come back?
Brent Johnson: And the reason they were just upset because they were down 60, 70%, and they needed it to come back to survive.
Keith: The problem with that is they took a thesis that turned out not to be right, which is gold to the moon, and then leveraged it. The presumption is that gold miners are gold with gearing, which is also an error, right? They’re gold with gearing and a whole bunch of other risks, most of which are not at all obvious to casual people. And this is something we talk about. We just have a minute to dwell on this. We talk about this a lot with our investors, which is, in the dollar world, you have a complete risk return spectrum. On one side, you have holding paper, dollar, cash, let’s say, in a safe under the floorboards, and then the opposite extreme and there’s no return and no risk. And then the opposite extreme, I guess, would be near term expiring at the money call options on a three X leveraged ETF. That if you put $100,000 into that and you’re right, you can create an intergenerational portion, right? And every step at every grain along the way, highly granular at every step along the way between one extreme and the other, there’s an investment for you in the dollar world.
In the gold world, you have gold and metal itself, which in gold terms have no return and no risk. Warren Buffett famously said, you buy a lump of gold, you stick it in your desk drawer, 20 years later, it’s still the same one. Gold GLD, gold futures, they’re all basically gold. And maybe you add a little bit of leverage to it, but it’s still basically gold. There’s no return in gold terms anyway. And then on the opposite extreme, you have the miners, and then you have the major miners GDX, and then you have the GDXJ, and then that’s the opposite extreme. Not quite all the way out to triple calls on three X Leverty, yes, but pretty far out on the risk return spectrum, you have that. And so people are attracted to the gold miners. Not because they know anything about the gold mining sector or gold mining as a business or geology. Or mine engineering. All these things. Not because I don’t mean any offense by this. But they have no real business trying to make that bet because the disk are numerous and they don’t understand it. And they’re not equipped to do the due diligence properly.
And they’re doing it because they see it as gold with a return versus gold medal, which doesn’t. And then the problem is, these are businesses have all sorts of risks, including how they get impacted by the business cycle and then you end up with a 70% loss of somebody who’s retired and can’t make it back. And it’s tragic.
Brent Johnson: The other part of this that we should probably touch on at least a little bit is what has happened over the last year. Most people probably don’t realize this, but the dollar index is up close to 20% in the last year or 15 months or whatever it is. And so a year ago everybody was telling me the dollar index is never going to go higher. Okay?
So now a year later they’ll say, well the dollar index went higher, but the dollar is not going higher because the price of food has gone up and the price of gas has gone up. So they moved the goal post a little bit, but that’s fine because to a certain extent they’re right there, okay? And I’ll acknowledge that. So then I’ll get the answer. So they’ll say it doesn’t really matter that the dollar index is going up, if all fiat is being debased, we should just get out of all of fiat and it doesn’t really matter. The dollar index is irrelevant. And that is just for anybody listening who has an open mind that is completely wrong, okay? It doesn’t mean you shouldn’t recognize that all fiat is getting debates, but the idea that it doesn’t matter and it will have no impact on your portfolio is 100% wrong. And the reason is because what we were talking about earlier is all the US dollar debt in the world, when the denominator of a ratio goes up, the value of that ratio goes down. And so if somebody has borrowed businesses or people have borrowed in dollars and the price of that dollar goes up, now all of a sudden they’re going to be insolvent.
And when they’re insolvent, then defaults happen. And when default happens, money disappears. And that’s how a depression happens, right? And so if you have any doubts about this, pull up whatever asset you want and go back to March 2020 and look and see what the price of that asset did from March 9 to March 19, everything in the world went down or started the beginning of end of February to the beginning of March 20. Gold went down. Gold miners went down, silver went down, bonds went down, stocks went down, wheat went down, everything went down. And it’s because there was a global margin fall on the dollar, because everything was going down in dollar terms. Now that doesn’t mean that they didn’t recover very quickly. Gold recovered very quickly and shot up really. But in that moment, in that month, or that two or three week period, everything gets liquidated. So the idea that the dollar going up versus other fiat does not impact the portfolio because they’re all getting debased is completely wrong. It doesn’t mean you shouldn’t be aware of it. It doesn’t mean you shouldn’t have your portfolio allocated in a way that will do okay as fiat gets debased.
But you just can’t say that the dollar index doesn’t matter to the point we made earlier. It is the biggest network in the world. If you think that the biggest network in the world and the one thing that underlies the entire financial system doesn’t matter, well, you probably shouldn’t be managing.
Keith: Money just on a very simple basic level. Most of the companies in S&P 500 have revenues globally, and those revenues are denominated in the local currencies. If you’re Coca Cola, you’re selling Coke to people in France. It’s in Europe. You’re selling coke to people in South Africa? It’s in Rand. The value of that euro and the value of that rand in dollars, which is how Coke state its earnings share prices in dollars. And you can measure the ratio of its share price divided by its earnings earnings. I don’t know what percentage it is for Coke, but a lot of these companies global revenues are either majority of their earnings or at least 40 50%. And now suddenly 40 50, 60% of their total earnings are going down. Not because the business is doing any differently than the US. Business, but it’s denominated in currencies that are doing worse than those. Companies are going to have huge downside earnings surprises. And if you think that’s going to be good for their share price, you got another thing coming, right. And there’s a lot more to it than just that. You also refer to how your company globally or short the dollar because they borrowed it.
You’re short something that’s going up. How’s that going to work out? I saw Russell Napier talk in London one time several years back. I love this quote from I don’t know if you’ve ever used it before since, but I saw it live when he said, equity is the thin line of hope between the liability and the asset.
Brent Johnson: That’s interesting.
Keith: If the liability is going up, what’s that going to be worth?
Brent Johnson: That’s a gold line. I have heard that line before.
Keith: That’s not going to be repaid in full. The equities were zero. And of course, there could be a thin line of hope, as there are certainly in some stocks even now. So there’s a lot of diversity here. I feel like we could do a part two of this. Yeah, we should probably do that and talk about the world needs a theory of speculation. That okay. Dollar to go to zero. Great. Wonderful thesis, long term, whatever you’d have asked me back in 2012, I would have said five to seven years. Did say, in fact, at that time, five to seven years. And obviously here we are more than seven years after that, and not only hasn’t the dollar down to zero is getting stronger, but how does speculation set? Price is a very interesting thing that I certainly haven’t written a lot about that, and I know I need to write, but it might be interesting to have a real time chat with you because I’m sure you’ve thought about that as well. Why hasn’t gold gone to $5,000 in this environment? If it’s obvious, that’s where it has to go at the end of the day, why is today not moving towards where it is today? Be very interesting, but I think we’ve more than used up our time slot.
Brent Johnson: Yeah, I’m happy to do part two anytime. I appreciate you having me on. It’s always fun talking to you.
Keith: Yeah, absolutely. Thanks for coming on. This has been a blast. I’m sure we’ll talk again soon.
Brent Johnson: Sounds good. Thanks for the invite, guys.
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