Ep-60 Doomberg: The Rules Don’t Matter Anymore
Doomberg joins the Gold Exchange Podcast to discuss the green energy pivot, whether a nuclear renaissance is possible, why the rules don’t matter anymore, and what it means for the future.
Follow Doomberg on Twitter (@DoombergT) and on Substack
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
Why Today is NOT like the 1970’s
Danielle DiMartino Booth Episode
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
03:33 Bank Failure
09:11 Banks Financing Deficits
11:46 This is NOT the 1970’s
14:53 The Rules Do NOT Apply
18:44 History Rhymes
22:10 Falling Rates and Energy
26:08 The Widowmaker Trade
36:13 Nuclear and Decarbonization
41:38 Stopping Magical Thinking
44:59 The Green Energy Pivot
46:19 Nuclear War and Gold
51:35 Gold Mine Financing
53:00 Doomberg’s Question
55:38 Find Doomberg
57:25 Monetary Metlas
Transcript:
Benjamin Nadelstein:
Welcome back to The Gold Exchange podcast. My name is Benjamin Naderlstein. I’m joined today by founder and CEO of Monetary Metals, Keith Wiener, and we are joined for the first time by a chicken. Doomberg, welcome to the Gold Exchange podcast.
Doomberg:
Benjamin, Keith, great to be here. Looking forward to a really great discussion today. Thanks.
Benjamin Nadelstein:
If you guys don’t know Doomberg, you’ve been living under a rock somehow. You have to go to Twitter, follow him right now. And obviously the incredible substack where you can get all their great pieces, incredible titles. Doomberg let’s jump right in today. Jerome Powell has been pretty serious so far when it comes to following through on the rate hikes. He comes out, he says, We’re going to do a rate hike, and then they do a rate hike. Do you think that the rate hikes continue? And if so, what will actually make the Fed pivot and go back towards the zero bound?
Doomberg:
It’s obviously the question de joure on Twitter and in the macro commentary landscape. Jim Bianca put a pretty amazing chart out which I wish I could reference here, but it shows what the market is pricing for future interest rates versus what Jerome Powell is expressing to the market with respect to where he thinks rates will go. I think the big question now is not whether the Fed goes much higher from here, but how long they could keep rates at these levels before something breaks in the economy and it forces some a pivot. But it must be said most of Fintw it and the content creator universe around the finance world has been expecting a pivot for the better part of the last year. And we are seeing things break in the economy. We’ve seen pretty substantial banks fail. We’ve seen what happened with the guilt market in the UK. We’ve seen obviously, Blackstone and the real estate trust that they have and the trust of the bank that’s ongoing there. We’re starting to see the signs. And yet, Jerome Powell, the market just doesn’t believe what he says. He gets up to the mic, he says what he is going to do, then he does it and then the market is surprised.
That surprise dissipates rather quickly and then we get back into risk-on Reddit meme stonks, rallying 20 %, 30 %, 40 % over the period of weeks, and then Jerome Powell comes back out and says what he said the last time, only this time he really means it. It’s a very strange cycle. And I think looking back at this time period, two, three, four, five years from now is going to be very fascinating. I don’t think we’re going to see much in the way of increased rate hikes from here for the only reason that the US federal government can’t exist at these rate levels for very long. And so ultimately, push will come to shove. What that shove will be is the great question, of course, and starting to see cracks in the shadow banking system and so on. Japan, there’s a lot going on right now. It’s very difficult to model the supposed move away from the US dollar and BRICS. It really is just a lot of flows right now. And as a content creator, of course, it’s a great time to be in business because you have a huge amount of things to write about.
But at the same time, it’s also really impossible to model, in our view.
Keith Weiner:
If I could just jump in, what do you make of the… What do they call it? Is it the term bank? Where they basically said to the banks, Okay, we will take your treasury bonds at par value and lend. They’re not calling it repo. They called it some term bank loan facility or something like that. But they’re basically giving the banks 100 % of the cash value at the price the banks paid for those bonds back in 2020. And so we had Daniel DiMartino Booth on recently. And she says not QE. And my take is, okay, I may not call it QE, but in the sense, Powell is taking a thing with one hand saying we’re still hiking rates. But on the other hand, we’re essentially buying, although they’re calling it Repo, bonds back at the low interest rates and high bond prices? How do you read that?
Doomberg:
We also had Daniel DiMartino on for a Zoom Pro webinar that we have for our pro tier. And she made a 30 slide presentation, which was fascinating. She’s one of, obviously, there’s many great thinkers out there. She’s one that is a must Listen to, a Must Read, Must Watch, Must Listen to whenever she’s on a podcast. Our view is, obviously, we’re not banking experts. We consume a lot of content and we have our own personal experience with banking. But the view there is that program is about drawing a line in the sand. We had this mini run on large regional banks, and that caused many people in the economy who have deposits in excess of FDIC insurance coverage limits to ponder whether they shouldn’t just up and move all of their funds to the too-big-to-fail banks. The Janet Yellen testimony in front of Congress was a real watershed moment and a potentially really dangerous one. Now, this program that’s made available to the banks is all about ensuring that we don’t see a contention of bank failure. Now, why is First Republic still trading and not yet been seized, even though there’s been a massive flight of deposits over that bank?
I do believe that they’ve drawn a line in the sand. The crypto related banks were allowed to fail and they do not want to see a run on regional and community banks. And so as we’ve said, oftentimes when staring into the abyss and the choice is between launching into that abyss and or breaking the law or bending the law, the Fed will always bend or break the law. And there’s something very strange about First Republic. It’s this bank that has seen a run but was not allowed to fail. And I think they’re playing a bit of a confidence game to try and stop contingent. And so this specific program they are asking about does come with pretty punitive interest rates for the banks that pledge those securities, which, by the way, they were encouraged to invest in. A regulatory failure here in the sense that it’s not like these people just decided to go and reach for yield. They were highly encouraged. And in fact, the financing of the federal deficit requires some buyer of these notes. Obviously, there is a full range of talent and prudence, and most imprudent banks have failed. And that is a message to other banks to be more prudent about how you manage your duration risk relative to the flightiness of your deposits.
But I do think for the stability of the financial system, the Fed is very hesitant to let any more banks fail, even if they should. And it’s the classic conundrum of, are we teaching these bank executives all the wrong lessons? If they yolo their excess deposits into higher yields and it works in their favor, they get rich by selling their stock and exercising their options. And if they fail, ultimately, the public takes the brunt of it on the chin.
Keith Weiner:
Yeah, the ultimate heads we win…
Doomberg:
Well, private profits, socialized losses. And so there’s a danger in that. Now, having said that, nobody wants to be Signature Bank. I have friends who are executives at banks and nobody wants to wake up one day and find out that their bank is seized and they’re out of a job and their stock and their options are zeroed out and they’re probably going to be hauled in front of Congress to testify and their careers have this taint for the rest of their lives. So there is moral hazard, but it’s very clear in our view that there has been a proactive decision to stop the Contagion, which is probably good. Who wants to go into the abyss? Now, having said that, we seem to be caroling from narrowly avoiding the abyss to narrowly avoiding the abyss. Ultimately, there’s a deeper structural root cause here, which is too much dead in the system. The entire system integrated over the system is insolvent, but it’s in everybody’s interest to keep the can down the road in perpetuity. As Japan has shown, in perpetuity can be measured in decades. But it’s a dangerous trade to assume that the abyss is coming, in our view.
Keith Weiner:
Right, it’s coming, but not necessarily tomorrow morning. So something I’ve written about and you just touched on is the banks were strongly encouraged to buy these long-duration treasury bonds back in August of 2020. Do you have any specific knowledge of where the banking supervisors actually ordering the banks to buy that stuff, or was it a nudge? Because I’m not privy to any of those conversations.
Doomberg:
No, I don’t think it was that overt. And the fact that we have a wide dispersion of banks that have either really managed their duration of risk well and look great right now in some Silicon Valley bank that we’re just outliers and ultimately failed tells you that it wasn’t forced. If you take Australia, for example, there it was a little more overt in the sense that the Central Bank of Australia all but told the public that interest rates won’t rise for a certain period of time. And then everybody dove in and refinanced with floating rates. And then they were forced to break the peg and everybody got screwed. And the Central Bank of Australia literally apologized to people for their previous statements. But that’s not what happened here in the US, I don’t think. But the whole what’s acceptable capital and how much you have to hold and so on, there’s ways that the banking sector could be coaxed into essentially financing the deficit of the federal government. And when you’re with the reserve currency, you have all kinds of privilege and you could get away with that for much longer and so on. But if you look at what happened in Argentina before the latest of their collapses, the banks were forced to finance the deficit because they just altered the capital rules around what various holdings meant and what flexibility that gave the banks.
We’re not quite there yet. The forcing of this is not yet there. I do think that’s why you see such a wide dispersion of how these regional banks are handling the rapid increase in interest rates. Now, all of this goes away if interest rates collapse, of course, all these market to market losses suddenly become not losses or gains even if interest rates drop far enough. And so that’s why I think the market is pricing lower interest rates than the Fed is managing, trying to manage the message around, but that we shall see. Again, this tug of war has been going on for the better part of a year, Keith, as I’m sure you’ve seen. The market has been waiting for a pivot forever, and he just keeps going up to the microphone and saying, I’m not going to pivot. And at what point does the market actually believe him? It’s really fascinating and totally just unprecedented. It’s a truly amazing situation.
Keith Weiner:
I think one of the issues is there’s only really robust demand for credit, at least in the private sector, on a downteck in the interest rates. So interest rates run up because Powell is forcing them. But unlike in the 1970s, in order to get a durable, rising cycle of prices and interest, every time prices go up, you have to have people bidding all the more aggressively. And every time interest goes up, you have to have corporate borrowers bidding it up all the more aggressively. But here, where’s the corporate demand for fresh new credit? Who’s opening up new warehouses or new factories or new restaurants? With doing more of it, the more the interest rates rise.
Doomberg:
Well, worse than that, because the banks aren’t following those rise in available interest rates, what they pay on their deposits, we’re seeing a flight out of banks. And when most of the lending in the US that matters at the small business level is done at regional and community bank level. And when their deposits shrink, they stop lending. And when those banks stop lending, the economy contracts. And that’s the real… Back to DiMartino Booth, that was the case he was making, that we’re seeing the beginnings of a credit crunch. That’s not really priced in in anybody’s scenario. The analogy is like in between when Bear Stearns collapsed and Layman Brothers collapsed, everyone’s like, Oh, okay, this is contained. Maybe we’ll muddle through. Maybe subprime is contained and so on. Are we there? I don’t know. It feels very similar. I was an executive in a publicly traded company at that time, and God knows that was a true crisis. When you’re an executive, obviously your entire net worth is wrapped up in the company stock. And when the company stock drops 85, 90, 95 % in the span of six months, you have a couple of glasses of whiskey and look in the mirror and ponder your life decisions.
And one wonders whether we’re in that moment between Bear Stearns and when Lehman collapsed or not. And ultimately, the difference between now and then, though, which shouldn’t be underestimated, is the Fed has a track record of breaking the rules when it matters. In the post COVID lockdown, the Fed broke the rules and started buying corporate bonds. And that act, which was patently illegal, was a turning point in stemming the crisis. And so you can’t just look at the existing rule set and say the Fed is trapped and ergo, we’re going to go into the abyss because you must not underestimate the creative license with which certain laws and regulations simply won’t apply if the pain is perceived to be high enough.
Keith Weiner:
I think there’s an analogy to playing chess against yourself when you say, I got him. He’s going to have to fall into my checkmate because you know how you want the other side to move. Exactly. Of course, if you’re playing against another human being, they don’t make that convenient move that you want them to make. They do something else. And I was going to say, we’re talking about market to market losses. Suspension of market to market was touted as, if not the fix, certainly a big fix coming out of the last crisis. And if you look at when FASB changed the rules, talking about changing rules, that was almost to the day that the market bottom ticked and went on to this incredible bull market post 2009, was this at all, you don’t have to market losses to market anymore. You can just say it’s hold to maturity. And so they were fixing the symptom, I guess, of that crisis and then selling the seeds for another crisis whose root is now born in, we don’t have to market losses to market if we just declare that it’s hold to maturity.
Doomberg:
Well, that’s why this new Fed program only feeds that moral hazard because everybody now knows that when push comes to shove, a few banks will fail. But at the first sign of contention, they will change the rules. And so whether or not it is QE, it is a further message from the Fed to the markets that when push comes to shove, the Fed will do what the Fed deems necessary for financial stability, which means for speculators, your objective is to simply get too big to fail. Even if you’re in a shadow banking system, if you’re too big to fail and you could connect yourself to a too-big-to-fail bank in such a way that your failure would threaten them, you’re going to be bailed out. The psychopathy of doing that deliberately, we have an unblemished track record in history of people pushing the edges of the rules to make money for themselves. And all the more harder will they push if they perceive that heads I wind tails, the public purse loses. Now, the fact that very few people have gone to jail post-financial crisis and the prospect of any bankers going to jail now seems preposterous, it’s a distillation of psychopathy to be totally honest about it.
Doomberg:
You have to literally bluff the health and well-being of the entire financial system in order to make a few more bucks for you. But that’s what happens and it happens over and over again. And so moral hazard is real. And one wonders how it all ends. And by the way, we’re not calling for it to end anytime soon. The example of Japan is I think, instructive here. There have been people calling for a doom loop in Japan, a fiscal doom loop in Japan for 30 years.
Keith Weiner:
The widow maker trade.
Doomberg:
Winner maker trade, one of many, of course, like the Hong Kong deepeg trade. I don’t think we’re anywhere near it. And all this talk about bricks and de-dollarization is interesting and real and insightful. But we’re so early. We’re in batting practice, pregame. We’re not even in the first inning yet in that regard in our view.
Keith Weiner:
Absolutely. I’m a big fan of Adam Smith’s quote, there’s a great deal of ruin in our nation. And these policies are ruinous, but there’s so much accumulated wealth and wealth is still being created, of course, as well. So it’s a race condition, use the term from software, the race condition between the destruction of capital caused by these ruinous policies and the perverse incentives versus entrepreneurs creating more capital. And I agree, it’s definitely not tomorrow morning. Definitely not this year. It’s years away, maybe even decades. And meanwhile, the trends are worrying. And to your point, I was going to add one other thing, which is there’s that old expression, the history doesn’t repeat, but it rimes. And as you think about the coming credit crunch and other problems, are they going to do exactly the same things in exactly the same way that they did in 2008, 2009? Probably not. Are they going to do other things that are similar ish that essentially amount to bailouts but under different names? And I was suggesting that this term bank facility, whatever they called it for repo of the treasury bonds, is a QE ish in a way.
And okay, they’re charging them higher interest rates. But is there any doubt that if those higher interest rates become material to harming the banks, that the Fed will then declare that the interest rate unilaterally just declared the interest rate being 0.01 % or whatever they feel like.
Doomberg:
Yeah, 100 %. No question. And in fact, that is the most powerful difference between now and during the heat of the panic in ’08, ’09, which is the market now believes that given enough pain, the Fed will respond. And so it actually decreases the likelihood of that pain materializing, which is why we’ve seen stocks do hold up amazingly well, despite what all of the macro indicators indicate will be a significant credit crunch, which leads to economic contraction, which leads to a collapse in earnings, etc. We’re seeing stocks hold up actually quite well. We’re seeing risk on in the most speculative, the front running the pivot. And if they’re perpetually front running the pivot, do you even need the pivot? There’s a big difference right now between back then because back then you didn’t know. We still believe the rules were the rules. I have visceral memories of watching the markets in crisis, CNBC. Every Sunday you were worried about which bank was going to be taken under by whichever bigger bank. Back then, one assumed that the rules still applied. And then the deductive reasoning, deductive analysis of the cascading contention really was pretty scary. But you couldn’t even ponder that TARP and all of the other programs and QE and so on.
And that would ultimately be deflationary. I remember I had friends buying physical gold and putting it in shoe boxes because they were assuming that the monetary system was on the verge of collapse. And what the big lesson was from back then, which I do believe is top of mind for investors today, is that when push comes to shove, they will break the rules. So the rules aren’t instructive for scenario analysis and game planning in the way that they used to be when the rules mattered. The rules don’t matter anymore. Now, that has significant long term negative consequences for the sanctity of our institutions and the ultimate stability of our society.
Keith Weiner:
But we’ve got to go through it.
Doomberg:
Yeah, we’ve proven if your base case is that we’re going to allow us an infinite amount of pain for rich people, you’re foolish. It’s just not what’s going to happen. And so the market is front running all this, too, which is the big difference between this potential financial crisis and the one that we all were probably shaped by 15 years ago now.
Benjamin Nadelstein:
Well, Keith, I want to jump in there for a second because Dombard brings up an interesting point, which is that, okay, after 2008, not only did they calm the markets, they stopped the crisis, the panic is over, but actually, things looked really great. We had a huge bull run in markets, prices even fell. All these crazy gold conspiracy nuts, they all said, the financial system is going to break. There’s going to be hyperinflation. But it didn’t happen. Actually, the exact opposite happened. Pete, how could you possibly explain that?
Keith Weiner:
My argument, D ean Burgg, I don’t know if you read any of my stuff on this. If you only wanted if you’re only concerned about consumer prices and you’re willing to ignore the many, many harmful effects of falling interest rates, you should want falling rather than rising interest rates. The nominal driver of Powell’s hikes today is to fix inflation. And by hiking the cost of capital, by hiking the cost of financing trade, by hiking the cost of replenishing your capital when your plant is worn out or adding new, by hiking all those costs, ultimately, return on capital has to be greater than the cost of capital. So in 2008, what they did was they cheapened capital. And then what we got is cheaper prices, or at least downward force on prices. And then, of course, rising regulatory pressures were in the opposite direction. I’ll let you make a comment.
Doomberg:
On that as well. Well, of course, we’re fascinated by and spent a lot of time thinking about energy. Every nail looks like something we could hit with our energy hammer. But I would say that if you view energy as the master resource, lowering interest rates and making liquidity cheap led to the ability to finance shale revolution in the oil patch, which led to a macro environment where the world was producing excess energy relative to what it could efficiently use in the near term, which led to highly deflationary environment. And now, ironically, as Powell is raising interest rates, it raises that cost of capital, as you said, and the capital that was destroyed in the shale patch, which was really the driver of growth in energy globally for the better part of that decade, we’re seeing now a pullback in the shale patch, which we actually counter intuitively think might actually be pretty inflationary. And so that is the transfer mechanism that we observe for low interest rates leading to deflation and high interest rates leading to potentially actually even more inflation, because ultimately we view currencies as overlaying energy transactions and energy being the way in which you carve out a high standard of living from an otherwise highly disordered environment.
We were about to test that hypothesis with oil prices and the OPEC cuts and potentially turning over in the shale patch. I was fascinated to listen to the CEO of Pioneer on the Power Hungry podcast by my good friend Robert, his wife, Brice, Robert H. S. Latt Price’s podcast. He was talking about some of the challenges, especially in the Permian Basin and taking off of natural gas and so on. And we view energy as the prism through which everything else can be explained. It’s a useful model for us, mostly because that’s where we come from. But also I do think it does explain a lot. In the post financial crisis era, with ultra cheap money and policy, you could finance a lot of drilling and you could create this gusher of not only oil but natural gas that the rest of the world was able to access for extraordinarily cheap prices. And now we’re seeing the reverse of that.
Keith Weiner:
Yeah, that’s right. That totally makes sense.
Benjamin Nadelstein:
Let’s talk about natural gas for a second. Another widow maker trade, Doomberg, we see $2 per million btu in the US, 100 btu in Europe at some points. Huge arbitrage opportunities. Why don’t people jump into natural gas when we see these wild swings? Isn’t this where people make money?
Doomberg:
Yeah, we wrote a piece, our most latest piece here is called Guilt by Association. One of the challenges is there’s such a hunger for oil and the increment of growth for oil is in the Permian Basin. And in the Permian Basin, oil comes with a lot of associated natural gas and natural gas liquids. And so a gating function or the production of oil is doing something with that natural gas. Now, natural gas is a gas, which means it’s difficult to ship. It’s difficult to handle. It’s the cleanest of the fossil fuels. It’s a wonderful molecule. We all, 60 % of US homes, I believe, cook with natural gas indoors. And we like to say you wouldn’t barbecue indoors, you wouldn’t burn charcoal indoors, but you burn natural gas indoors. And that tells you just how much cleaner natural gas is and how much of a better fuel it is. We have such an abundance of natural gas in the US that in order to maintain the growth of natural gas in the premium basin, we’re actually flaring, burning, or in worst cases venting natural gas directly into the atmosphere, which is a scandal like it.
The first thing you have to know about natural gas is it’s incredibly regional and the price of natural gas is determined by how well connected you are to a pipeline network to people who could use it. Environmentalists have, to their credit, if you’re measuring credit by how effective they are at making it difficult for energy producers to give us the life nourishing energy that they so validly provide for us, they have been very effective at stopping pipeline projects, postponing pipeline projects, suing, resuing, litigating ones that have already been approved, basically being nuisance. We have this amazing situation where natural gas is in a rut in Texas. It’s not even like Europe in the US. California was paying $55 per million BQ for natural gas as recently as December. And in the Waha Hub of the Permian Basin, it’s currently priced at a dollar per million B2. And so we have this amazing abundance that through our own mismanagement, we are not able to take advantage of. Same thing with Boston, by the way, New England. They import natural gas via L&G from Montr in a dead in Tobago when they are 200 miles from Marcellus. All they need to do is build a pipeline and they could get natural gas for three, four dollars a million BTO and they’re paying 10, 20, 30 dollars a million B2 natural gas via L&G because they just refuse to build the pipelines because of NIMBI ism or environmental Malthusian radicalism.
Pick your favorite descriptor. The Henry Hub price in Louisiana is just one price. It happens to be that that is the US benchmark. That is the price that is referenced in the ETFs of natural gas that individual investors can speculate in. Now, of course, these materials are highly inelastic and we had an unusually warm winter both in Western Europe and in the US. And while people were gearing up for a crisis and storing excess natural gas, the crisis never really came. And also, these markets are interconnected. So Europe, Germany in particular, retreated to the coal mines and brought back on 16 gigawatts of coal power. And that reduced the need for natural gas, which then all of a sudden you had all these people… The classic boom, bust cycle of, hey, natural gas for export at an L&G terminal is going for 20, 30, 40, 50, 60 dollars per million btu. My cost is a buck 50. I’m going to drill as much as I can. Everybody makes that decision at the same time. Demand doesn’t materialize and then you have a gull up. But in the US, in particular, it is a heterogeneous policy around pipelines that is trapping natural gas in certain regions and starving natural gas from where it’s desperately needed, like California and in New England.
And so we have this really amazing situation where we have this interconnected markets where in this case, natural gas is a byproduct of oil production, and it has something has to be done with it. And in many instances, up to a billion cubic feet per day, it’s just being burned because they need to get rid of it and they don’t have pipeline capacity to take it off. Now that will be solved in the next two to three years. But that is the situation today. That is why you can have in California, which is a very short flight from Texas, natural gas selling for $50 to $5 per million PTO. And in the Permian Basin at the Waha Hub, you can’t give it away. It traded negative around the same time. It traded negative in the Permian Basin, I believe, in November. And in December in California, natural gas is trading for $55. An alien coming down from another planet and observing this situation would be very confused by it, is the way that I would describe it.
Benjamin Nadelstein:
Keith, I have to send it your way now because we just touched on so many interesting points, but also interesting in relation to gold, because we talked about bid-ask spreads, we talked about arbitrage, but also we talked about a glut where there was this, Hey, let’s produce as much of this natural gas as we can. And then next thing you know, the demand wasn’t there and there was a glut. Why aren’t we seeing a glut in gold, Keith?
Keith Weiner:
We’ve been accumulating gold for so far as we know, 5,000 years, and there’s no limit to the accumulation. The concept of a glut is inapplicable to gold, which is, of course, the property you’d expect out of something that’s money. It’s not. Gold isn’t brought to be consumed. Natural gas is brought to be consumed. And to Doomberg’s point, it’s difficult and expensive to store it in the meantime. It’s not quite as pure in that sense as electricity, but it’s definitely not a liquid that you just stick in a tank. And so if there’s too much of it in your tank is full, nothing you can do with it, you’d flare it off. And nobody ever has that problem with gold, ever. Nobody ever runs out of storage space for gold. Nobody runs out of desire to have more of it physically. It’s so expensive that unless you’re really, really really rich, you’d never have. I mean, a cubic meter of gold is a couple of tons, I think. It’s so incredibly heavy that you just don’t have that issue. And of course, gold being so expensive per ounce, the cost of shipping it to anywhere else in the world is so low relative to the value of the gold that if there were one area where gold was slightly more valued, one area where it’s slightly less valued, it’s easy to exploit that arbitrage and buy it where it’s cheaper.
Keith Weiner:
So you end up with a pretty uniform pricing unless government tax or otherwise limit the import of gold. So places like Vietnam, places like India, where they play around with the taxes. When the tax is high, then you can see the local price disparity that’s not arbitrageable. But otherwise, the arbitrage is there. And I wrote an article talking about efficient markets and dismissing the idea that efficient markets means that somehow everybody knows what the right price is, or that it’s priced in. But I said what efficiency really means is that the price is uniform pretty much everywhere. If you saw that, I think I used the example of wheat in London as 20 pounds, and in York, it’s two pounds. There’s something wrong. And Dewey Murph is describing that exact wrongness in natural gas. And of course, the answer is New England has been famously fighting against pipelines for years or decades, I guess. And that’s what the wrongness is. And so if you can’t bring the natural gas from here to there, it’s not arbitrable. And we tell people who don’t realize that may make a bad based on a simple error.
Benjamin Nadelstein:
Doomberg I want to jump now to that very core issue, which is that it’s not technically infeasible. It’s not physically infeasible, but politically, a lot of these options are infeasible. So I want to ask you now, do you see a nuclear renaissance as even possible, or are there such significant barriers to this occurring that we shouldn’t be thinking about this at all?
Doomberg:
So before I dive in, I just want to add to what Keith just said because I think it’s a very important point, if you don’t mind. We wrote a piece called Coking Gold back in November of 2021 where we described a really amazing phenomenon where the price of gold in London and the price of gold in New York diverged by 6 %, which was unheard of. And it had to do with obviously with COVID and so on and the inability to fly these gold bars to close that arbitrage. And it actually came down to the specifications of the contract where in I believe London was 400 ounce gold bars and New York was 100. And so you had people who had bars that could be resmelting, capturing this $100 an ounce arbitrage that opened up, which was historic. And in the natural gas market, we’re talking about multiples of hundreds of % based on very small geographic differences. And so, Keith is 100 % correct in that the efficiency of our market should be measured by depth of liquidity and bid ask spread and swiftness of arbitrage because that deviation only lasted for a day or two before it was swiftly closed, even in the middle of COVID.
And so I think that’s a very important point and one that’s especially important when you consider natural gas. Coal can be shipped everywhere. Oil is a little bit trickier. Natural gas is even harder. And that’s why we see these interconnections. And it makes for fascinating analysis and often provides interesting investment opportunities. So to your question now on nuclear, I just want to make sure I got that point on the board. It depends on which country you’re talking about, and it depends on your time frame. So there is no path to significant decarbonisation that does not involve nuclear power. And so either we will stop caring about decarbonisation or we will revert to nuclear power. The only question really that matters is when will that realization happen? So either we will stop worrying about carbon emissions and just burn coal and natural gas and all, which many in the emerging economies have decided to do, especially based on Germany’s behavior in the past 12 months. Or we will make a swift reconciliation with the benefits of nuclear power. And I could recommend a great podcast I listened to on a road trip recently this week. Dr. Chris Kieffer and the Decoupled podcast had the person in charge of nuclear power from the United Arab Emperates, and they just brought on three of their four world scale 1.4 gigawatt reactors on time, on budget, and they have given this gift of base load power for their relatively small country and population for the next 60 years. And they’re basically going to meet all of their net zero goals through the effective use of nuclear power. We’ve often argued that if nuclear power was invented today, it would be haileded as a civilization saving technology, and we would be implementing it post haste. And it is, it truly is. There are no technical challenges or even financial challenges that would prevent us from achieving much of the stated objectives of the environmental alarmists around carbon emissions that just can’t be solved with nuclear power. And so their continued opposition to nuclear power tells you, in my view at least, that it’s not really about it’s not really about reducing carbon emissions, it’s about reducing people. It’s about lowering standard of living and preserving nature for nature’s sake and minimizing humanity’s impact on it. There is no acknowledgement that there’s two parts of this equation. There is the total standard of living we could deliver to all the humans on Earth, divided by our carbon emissions. And if that is the equation we wish to arrange our society around, then let’s not forget that there’s two parts to that equation. And so, something will break in every country in the world. Either they will abandon carbon emissions or they will embrace input power. Because there is no middle ground. It just can’t happen. This fantasy of 100 % renewable, completely intermittent with magical batteries that are immaculately appearing without having to do any mining or spending all of the diesel fuel it takes to do that mining is a fallacy. And even just this week, the Biden administration, with their new EPA mileage standards that essentially force something like 65 % of all new cars sales in 2032 to be electric, it’s just impossible. It’s not going to work. It’s probably impossible. And so there will come a point where the pain associated with trying to do the impossible becomes intolerable to the populace.
We’re not at that point yet. We’re still living in a fantasy world where Biden thinks that administratively by diktat, they can completely transform an industry as vital to people’s standards of living as a transportation sector. So that’s great. There’s lots of investment opportunities that come from that. Lots of money will be wasted. Lots of grief will happen. There will be some fantastic opportunities to create wealth for you, but integrated across society, this is provably a disaster, and we just keep deciding to go down this road, especially when we’re actually insolvent. We’re talking about misappropriation of trillions of dollars of real money at a time where we can barely afford to print the debt that we already owe. And yet, we all just accept this as table stakes, background noise, the energy companies will still keep producing, etc.
Keith Weiner:
To your point about math, and I agree with you that the real goal is to reduce people and not to reduce carbon. And so anything that actually works, they oppose, and everything that they promote is promoted because it doesn’t work. That’s a feature, not a bug. But there was an infamous picture that went around of some protest. And I don’t know if this was a fake or if this was real, but it certainly captured the sentiment of a lot of folks in the protest movement that this woman holding the sign said, Who do you care is about oil? We ride the bus. That about captures it for me. There’s such a degree of magical thinking that I think the bet you’re talking about, Domborg, is a bet. When will people go to the of give up this magical thinking and start to actually look at reality? And is there a pain point sufficiently great? It’s German and close to that with people freezing in the winter. The freezing in the winter make people give up some of this magical thinking. Hopefully it does, otherwise we’re in deep trouble.
Doomberg:
If we canvass the world for the state of magical thinking, China has none of it. China is building out coal at a pace that dwarfs the pace with which the rest of the world is trying to whine itself off of coal. Pakistan got burned by LNG and Germany. South Africa is in the middle of an energy crisis and whether or not the genesis of that crisis long predates the current situation. The current situation is an often convenient thing to blame as they pivot away from their carbon commitments. Pakistan, by the way, quarter billion people, not a small country. Indonesia building a green energy park to get all the metals that are needed to facilitate this energy transition. That green energy park magically is powered by coal. Pakistan has made a commitment to wean itself off of LNG, to never be burned again, and to accelerate its domestic production of coal. Even Germany, whatever they’re saying, forget what they’re saying, 16 gigawatts of coal came back online at the snap of a finger at the first sight of crisis. Germany retreated to the coal mines with the speed and efficiency of the evacuation of Dunc urke. They stepped back from the abyss.
Now, the worst case scenarios did materialize, thankfully, but they just closed their last three remaining nuclear power plants. Go back 90 days and rerun the European winter without those nuclear power plants, and it’s not a pretty sight. They’re going into next winter, assuming a three Sigma warm winter is going to be the base case. What if we get a three Sigma cold winter? And we’re not cheering for that, by the way. There’s this conundrum that you have as an analyst, which is I don’t want catastrophe to be proven so that we could be proven right. I would much rather be called an alarmist, which we have been accused of being when people weren’t freezing in Germany this year because it was a three Sigma warm weather event, to which we say, great, this is the desired outcome. We’re not sitting around here hoping to be proven right at the expense of the suffering of millions of people or thousands of our subscribers to make it real for our business. We have a very healthy subscriber base in Europe and we would like for them to be able to afford to work. Our hope is that the leaders won’t take all of the wrong lessons from this narrow escape which can be attributed to good fortune.
But the earlier evidence is that they are in fact going to do so. And so there will come a time when we have a three Sigma weather event to the reverse and that we will see. And whether that will be the maximum pain point which truly causes people to flip. But look, India, China, Brazil, Pakistan, Indonesia, the Middle East, South Africa, none of them are going to give two Fs about climate anymore. Like, Germany’s behavior compared to what Germany said was the aha moment for the rest of the world. And we’re talking about 4 to 5 billion people. And so that’s over. They’re just not going to meet their climate commitments, and they are dwarfing any savings we can have. So in this famous debate I had with Professor King on Jack Frawley Show, we’re going to run the experiment, like brace for impact. If the alarmist predictions do come to pass, then we’re just going to have to bear and react to them because that’s what’s coming. We’re not going to cut carbon emissions meaningfully, period. And Joe Biden himself, at the first sign of $5 a gallon gas last year and did the strategic petroleum reserve to the tune of a million barrels a day.
And the recent production cut by OPEC Plus is purely because they’re mad that he won’t refill the strategic petroleum reserve now that prices are down to more manageable levels. Joe Biden doesn’t believe what he says. And he did that ahead of a very critical midterm election. And he was right and it worked. And that just proves to you how little pain is necessary for even the progressive politicians in the US to pivot. Talk about a pivot. Joe Biden pivoted on energy, demanding the oil companies produce more, flooding the market with oil from the strategic petroleum reserves, approving the Willow Project in Alaska. $5 a gallon of gas leaned so scared Joe Biden that he abandoned his more radical environmental support on a moment’s notice. And that’s just undeniable.
Keith Weiner:
I agree with everything you said to add one thing about nobody should be cheering for essentially the collapse of the greatest civilization that ever occurred on Earth. That’s what makes it so difficult psychologically to speculate on some of these destructive things. If you’re speculating on, and therefore you have real money riding on the outcome, then you start to find yourself psychologically wanting to cheer this horrible thing. And I remember retweeting, I don’t remember who it was that said it, that nuclear war between North and South Korea would be good for gold. And I just went off, I tweeted that several times with different comments created a thread, just like, have you not reached the point where you realize just how mad this is? Like, sure, you might have a $5,000 gold price if nukes are being exchanged between Sol and Pyong Yang, but is that really what anybody would want? So it’s a.
Doomberg:
Fantastic point. And I would say it comes down to the difference between speculating and hedging. So I’m all for hedging tail risk. Here’s the example I would use. Every year, I pay $2,000 to insure my home, roughly. That’s probably pretty typical, depending on where you live and so on. When my house doesn’t burn down that year, I don’t begrech that $2,000. And I’m not hoping that my home burns down so I can collect on that insurance. Now, that’s certainly a crime that some people commit, especially when the value is… You get what I’m saying. But by and large, most homeowners are cheering for a fire so they can collect on their insurance. And what you’re describing is exactly that phenomenon, which makes no sense to me. So I own gold, both physical and when I have excess funds, I’d like to park in gold. I express that through I usually just invest in physical uranium. It’s brought physical gold trust. But I’m not hoping that gold will suddenly be worth $10,000 because in those scenario where gold is worth $10,000, A, I don’t have enough of it in gold, and B, we got bigger problems to worry about, societal breakdown, so on and so on.
I’d like to live in a world where my kids can be educated and be upstanding citizens and have families and enjoy a good life, the precious life that I’ve been able to both live and to deliver to them as children. This is what we should all be hoping for. We should not be hoping for a calam to either validate an investment or to prove a thesis intellectually. And we’ve been very consistent on that point, even at the peak of the European crisis, that we’re not hoping are actively opposing further contingent in this crisis because there’s no winners in that. Like, again, owning 100 % of nothing is still nothing. Very famously, of course, Jim Kramer, who catches a lot of heat on Twitter, most of it justified. I remember distinctly him on NBC maybe a decade ago talking about the nuclear trade, and not like uranium, but as in nuclear war. He said it was a very brilliant line. He said, anytime I saw stocks crashing on increased possibility of nuclear war between the US, and the United States, I bought that dip every time. Because if I’m wrong, who cares? I’m dead. And if I’m right, I’m going to make more money.
And that’s actually the way to look at the trade. When you have full panic and possible contingent, as we learned at the bottom of a 809, I have distinct memory of COVID. This is a great story to tell. At the peak of the COVID panic, a company I followed for years, Tech Resources, you may know them. They’re a great mining company in Canada, bulletproof balance sheet, copper, zinc and coking coal, a little bit of gold and silver mixed in there. Great leadership, totally steady balance sheet. That thing was trading at $5 to $6 a share. I knew that company inside out. And it was at the peak of the panic in COVID. And my good friend Tony Greer, who runs TG MacRO, was making the call of his life, saying that this is the bottom. Fed has saved us. You want to go as long as you can get. I’m hovering over the mouse, debating whether to put a significant portion of my net worth in tech resources. And I couldn’t convince myself of that Jim Kramer nuclear trade. And one of the biggest regrets of my life, of course, because… And by the way, as it went from 6 to 10 to 15, I felt like I had missed it.
Classic retail mindset. And as we sit here today, that stock is trading for $45.21. I knew the company and I had convinced myself that the biggest sin was I didn’t buy the bonds. The bonds were trading for $0.65 on the dollar and these were money good. They had maybe 4 billion in debt and 40 billion in assets and there was no scenario where those bonds were going to be made whole. And I didn’t even buy those because you had become convinced that while nuclear wars happen, like the Jim Kramer trade. And so to your point, I’ve learned through that experience that when you see something truly on sale and there’s a panic going on, you should buy it and you should not be hoping for panic so that some trade that you have will do good. Like famously, Bill Ackman going on TV and crying about the end of the world while he had all of these credit default swaps that made his year. Very, very fascinating thing to consider. And we actually reverse that now, which is when we see true panic. And if we’re wrong, it means the world’s over. That’s when you go all in because if the world’s over, who cares?
Benjamin Nadelstein:
I think I got a famous quote told me one time, which is that never bet on the end of the world because it only happens once and you can’t cash in. I think it’s an interesting discussion topic. But Dunberg, while we have you, I want to ask you at least one more question here. We’re in the gold business, obviously, we’re a little bit different. We do investing and financing in gold, so we pay a gold fixed income. And one of the ways that we do that is by financing miners. And I want to ask a question here for gold financing, specifically with this green energy transition, if it is to happen. Does mining see an inflow of investing dollars? And what about gold mining specifically? Now, we do our financing in gold, so maybe we’re a little bit different than the rest of that business. But do you see the rest of that mining business getting dollar inflows? I would.
Doomberg:
Say, as a general rule, yes. Well, put it this way, the amount of money that is being thrown at this from the inflation reduction act alone and the amount of co investment that will flow from that is being significantly under estimated interview by the market. We’re talking hundreds of billions of dollars. Now, whether or not permitting and all those other things slow that down to the point where maybe it’s not as big as the ticker might say it would be, the sticker price. For gold, I would say the thing that I would look at, and I don’t know the answer, I’m just thinking on my feet is there’s an awful lot of gold as a byproduct for some of these mines that are producing copper and zinc and the other metals that you would need. And if I were looking for somewhere where the market might be underestimating the impact of the green transition on the supply of gold, it would be there. My experience in mining, I grew up in a mining town. My father worked at a mine, and then obviously I know tech resources and other miners and studied them very carefully is that there’s an awful lot of byproducts.
And the piece we just wrote, of course, about natural gas and byproduct economics and the need to put these things somewhere it can really distort markets. That’s where I would be trying to model, try to get an edge on the market to understand, hey, if we’re going to truly bring on A, B, C, D and F mine, what is the % gold? What are they doing with it? Do they have a royalty agreement? That’s where I would see the impact of the green energy transition impacting gold versus mining gold for gold’s sake, where gold is the primary product of a mine. I would be looking at byproduct and whether some of those flows might be underestimated vis a vis the market. But again, that’s just my on my feet answer to your question.
Benjamin Nadelstein:
I want to ask you a final question that we ask all our guests, which is, what’s something that I should be asking all the future guests of the Gold Exchange podcast? We’ve had Brent Johnson come on and say, Well, what about all the foreign central banks? How are they going to get out of it? Not just focusing on the Fed. We’ve had Jeff Snyder come on and ask, Okay, what about the Eurodollar market? Danielle DiMartino Booth was just on. She wanted to know about the debt ceiling. So Doomberg, what is the question we should be asking all of our future guests?
Doomberg:
What is your short and medium-term view on whether we will be in a macro environment of relative energy excess or energy scarcity? Because we do believe that that is the first in the tree diagram of analysis that one should do at the macro level because they’re completely different universes that have different sets of rules. And if you don’t know in which setting you’re in, it can be very challenging. And so I would say a year ago, we were in a period of energy scarcity, and now we’re in a period of relative energy excess because as evidenced by the fact that OPEC has to cut in order to maintain prices anywhere near they would need for their domestic budgetary needs. And so keeping an eye on the relative energy production matrix and what their view is on that and how whether we are in a period of energy scarcity or abundance would affect the base of their analysis, because people are gold experts or interest rate experts or pick your favorite. Have they considered the energy angle to their macro view? And if not, why not? That’s what I would be asking future guests.
Benjamin Nadelstein:
Where can people follow more of your amazing work? And if they want to read you and obviously follow you on Twitter, where can they find you?
Doomberg:
Our pimary outlet is at doonmberg.Subsack.Com We do have a Twitter account @DoombergT, but we’re doing less on Twitter, if I’m being totally honest. And Substack, of course, has just released this Notes program, which feels like Twitter, but not really. And we’re actually running our next piece on the Twitter Substack Wars, and our view being big on both Twitter and Substack and what both should be doing and what the future of content creation looks like. It’s a really fascinating time and not to spoil the peace, but as computers and technology and AI take over more and more of what humans have to do for work, we’re seeing an explosion in the content creator space as people yearn for these things that make us actually human. And we think that’s a huge mega trend. And the resolution of the sub stack Twitter, Instagram, TikTok, social media wars is going to define the Internet for the next 10 years. And it’s pretty amazing to be in the middle of it. And that’s the subject of our next piece. And so we would prefer people go to doomberg.substack.com and follow us there. Free subscribers get pretty lengthy previews to all of our pieces.
Paid subscribers get the full piece and the ability to comment and interact with the team. And we’re also now on notes, sub stack’s new Twitter cologne, I guess, for lack of a better phrase, but that’s very, very new and interesting and cute and innocent now. And it’s only a matter of time before it all gets ruined, I suppose. But that’s where you can find us. And look, guys, Benjamin, Keith is really fantastic and I appreciate the invite and very, very much enjoyed that discussion. So thanks for having me on!
Benjamin Nadelstein:
Doomberg thanks so much. Thanks for coming on to the Gold Exchange podcast. I know these issues aren’t going away, so we’ll have to see you again sometime soon!
Additional Resources for Earning Interest in Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
Leave a Reply
Want to join the discussion?Feel free to contribute!