The return of the wolves with Grant Williams

Speaker key:

BS               Boaz Shoshan
GW             Grant Williams

BS              Hello and welcome to another episode of The Gold Podcast. My name is Boaz Shoshan, I am an editor at Southbank Investment Research and I’m joined today by a very special guest, Grant Williams. Now Grant is the editor of Things That Make You Go Hmmm, a financial newsletter, and he’s also the cofounder of a company called Real Vision which is effectively the Netflix of alternative finance.

Grant has a long history with gold; he’s even recorded documentaries on it, and he has a very interesting alternative view. There’s one of those views that I would like to ask him about in this podcast, which is on the status of gold as the apex predator within the financial ecosystem, which I am sure you will all find very interesting. We’ll kick off with that, Grant welcome to the podcast.

GW             Well thanks for having me, it’s a pleasure to be here.

BS              So Grant, in terms of where we stand in the macroeconomic habitat at the moment, where do you see gold and what do you make of the status of the dollar as the global reserve currency?

GW             I guess there’s two answers to that; the first is that gold has two different places depending on who you’re talking to frankly. As gold was taken out of the financial system in the early 1970s when Richard Nixon closed the gold window in August of 1971. We entered this purely fiat era, where there isn’t a currency in the world that’s backed by sound money. That has perpetuated and proliferated now for 40 years. Which is fine but along the way because we don’t have this backing, the debts that, having no tie to gold, that were enabled to be created out of thin air, it just builds up and builds up and builds up, and at some point it becomes unsustainable.

Now I and many other people, who are pejoratively referred to as gold bugs, would argue that that point was crossed a while ago. Until the belief in central bankers’ ability to maintain this thing evaporates, this can go on for some considerable amount of time.

That’s one view; the other view is that of people who understand what gold is, in terms of it being money. There are many thoughts throughout history of very famous fanciers, very famous economist thinkers who will tell you that JP Morgan in fact said gold is money, everything else is credit. He’s absolutely right.

I think the people that understand what gold is and represents are scratching their heads waiting for the end of days, and for gold to return to its predominance in the financial system, which it’s held for thousands of years. We just happened to have lived, all of us and everyone listening to this podcast, through the only fiat money era in history. So to us that’s the norm, and we humans are particularly poor at adapting to big changes, and the reintroduction of gold into the financial system would be a huge change. So it’s dismissed as a completely ridiculous idea for most people who follow such things.

BS              Quite, but gold still does have some role in the modern monetary framework of the world. I mean the central bankers, still hoard it, trade it, etc. How do you think they perceive gold then?

GW             It’s an interesting question, I mean gold forms the foundation of most central bank’s monetary reserves, I mean the US has 8,000 tonnes of gold, they haven’t sold any gold in 25, 30 years. Europe has a ton of gold; you look through Asia, you’ll find central banks have being buying gold aggressively. Turkey, who are currently going through all sorts of problems, have been buying gold aggressively. The Philippines… There’s a long list of countries for whom gold represents true wealth, I mean true wealth. That’s not just the central bankers of countries particularly in the East, but it’s also for the citizens, Indians, Chinese – citizens are veracious hoarders of gold.

As you look at the way central bankers think of it, they will tell you that a gold standard is an unworkable idea, and in many ways it is because of the changes that will be required to this debt edifice. The point of the presentation I gave, that you referred to, was that people think of this the wrong way round. People think that a decision will be made to reintroduce a gold standard, and all hell will be let loose. The contention I made is that it’s actually the other way round, and all hell lets loose and the only solution is to reintroduce a gold standard to provide some stability to the monetary system.

I think central bankers; they don’t look at gold on a daily basis like many conspiracy theorists believe. I don’t think that happens; I’ve spoken to guys at high levels, not only inside central banks, but also in supranational bodies that monitor and deal with central banks. They tell me this is not a focus of central bankers, but the very fact that they keep such a significant portion of their reserves in gold, speaks I think a lot louder to the intrinsic value of it and the instinctive understanding of that by central bankers.

BS              Indeed. In terms of gold’s role as it’s evolved over this purely fiat period. We look at the rest of the monetary system. In the presentation you gave called Cry Wolf, it was gold’s role as an apex predator. When Nixon took the world off any kind of gold standard whatsoever by closing the gold window; that has allowed effectively the deer to multiply to a huge degree. Could you go into that metaphor for us, and go exactly into what you mean by that and some of the effects of that?

GW             Yes of course. The presentation arose out of something that I watched on a video a year or so ago. It was a short documentary about the reintroduction of the Grey Wolf to Yellow Stone National Park in the mid-90s. The Grey Wolf had been, at one point, the most proliferous mammal in the world. They were in North America, they were in Europe, they were in Asia. They were very much the apex predator in every ecosystem, and by apex predator I mean that they are a predator that has no natural predator. So they’re at the top of the food chain and they essentially control the ecosystem.

The Grey Wolf was hunted into extinction, ironically in the 1970s when gold was also made extinct by Nixon in terms of the financial system. In the mid-90s a movement was made to reintroduce wolves to Yellow Stone National Park. Of course this was met with enormous opposition; people talking about how the wolves would kill the deer and ruin the environment and this would be just a terrible idea.

This conversation raged for a long time because Federal tax dollars were required for this programme so it became a big debate. Anyway, to cut a long story short, in the end they agreed that they were going to introduce 31 wolves to the three and a half thousand square mile park. That was a compromise of sorts. So in the mid-1990s the 31 wolves were reintroduced into Yellow Stone.

When it happened there were people marching outside and holding placards up: save the deer, save the elk. What happened actually confounded a lot of people, what happened was something called a trophic cascade. This happens in nature, and what happened was the wolves, yes they killed some of the deer when they were reintroduced, but more importantly what they did was they changed the behaviour of the deer. The deer started moving away from places where they could easily be trapped by the wolves. They started going to different parts of the park where they thought they could escape the wolves.

Very quickly the ecosystem of the park started to regenerate. The plains that had been grazed away by the deer over the years started to come back and as the park regenerated, it brought back wildlife. It brought back weasels and voles, and it brought back mice and rats, and that brought back the birds of prey. As the trees regenerated, it brought back bears to the park because of the berries growing on the trees.

So you had this remarkable transformation of the ecosystem in Yellow Stone National Park because of the reinsertion of a natural apex predator to an ecosystem. What was remarkable and astonished people was the wolves actually changed the behaviour of the rivers. Because the deer weren’t grazing on the riverbanks any more the banks strengthened, and the course of the rivers became more set they didn’t meander, they changed their course.

This astonished a lot of people and rightly so, I mean no one really foresaw this set of circumstances happening. I tried to quote this to the removal of gold from the financial system. In its absence with this essentially unlimited ability to create credit, the financial ecosystem has been taken over by bankers and financial professionals who are solely employed to create money.

BS              The deer in this…

GW             Yes, and they’ve taken the role of deer, they’ve grazed the financial system away to earn fees for practically nothing. So I think if gold is reintroduced as an apex predator it does change an awful lot of things. That change cascades down through the system. It weeds out bad credits, it weeds out bankrupt companies, it weeds out unhealthy actors that really are surviving on the largess of governments and central banks.

You create a more solid foundation for the financial ecosystem. Let’s face it, the financial ecosystem like every other natural ecosystem is made up of us; it is natural. It’s not a man-made construct; we put rules in around it. At the end of the day every chart you look at of a stock price is nothing more than the expression of collective emotion of everybody involved in that stock, that’s really what it is and nothing more.

So my argument was that reintroducing gold to a financial ecosystem would likely have some extraordinarily unforeseen but important benefits, but again you have to get pass this idea that it’s a decision that will be taken to reintroduce a gold system. Reintroducing some sort of gold standard would happen as a result of financial instability, political instability and social instability.

BS              Going back to the deer as an illustration of how much the deer have grazed away, and with the grazing being on the rest of the population – it’s only the politicos and those involved in the financial industry, the people who surround the printing press in society who’ve multiplied. I did like the expression that it wasn’t the silence of the lambs but the protests of the deer, which are all the people who oppose a gold standard – but of course it couldn’t be done, it would be incredibly deflationary, etc.

But going back to how this would come about, it wouldn’t be in great times everyone will decide to go back to a gold standard. It would start with some kind of crisis, a giant deleveraging event. Where would you see such an event coming from today? There are all sorts of crazy things going on in the fiat world, as it is.

I was at a Deutsche Bank presentation the other day, where it was discussed with bonds being completely overbought, they’re now offering private credit solutions, which among many other things involves using music royalties as a means of a synthetic bond by using royalties claimed on music copyright to create a form of yield. Which investors can then take because yields are so low everywhere despite the Fed raising rates, etc.

Where does the risk come from, where does it arise from? You have Jerome raising rates; you have a very, very strong dollar at the moment. Where’s the risk in the financial system that you see a giant deleveraging event coming from?

GW             Look, the risk for me centres on the central bankers because they have inserted themselves into this process, and they’ve now assumed essentially all responsibility for it. The example you just gave is perfect, this is the financial deer grazing on anything they can find to feed themselves.

BS              Yes, exactly.

GW             This is exactly what’s happened, the fresh grass has gone and we’re trying to make money out of music copyrights, this is exactly it. In my presentation the three conditions that I said would occur if a gold standard were to be reintroduced were political upheaval, social upheaval and financial market upheaval. If you look around you, we can see the social upheaval.

Everywhere you look there is discord, I’ve never in my 50 plus years on this planet, known a more discordant society that we see now. I mean people have lost the ability to have a reasonable discussion about everything, everybody is emotional about everything. That leads to left against right, man against woman. We’ve seen things on Twitter; everywhere we go there’s this anger that’s just pent up.

You look at political upheaval; I don’t think we even need to go into that much. We’ve seen Brexit, we’ve seen Trump, we’ve seen far-right candidates in Austria, Hungary and right across Europe getting elected. There is political upheaval and instability all around the world, which just leaves financial market instability.

BS              Which have done the complete opposite in recent times, despite everything else, risk assets continually ploughing to new highs, and of course you had the property booms in major cities across the world. Where do you see this coming to a head?

GW             I think that’s exactly the point Boaz because of this insatiable demand for credit and to this point this ability to supply that credit, that’s what’s kept the third part of this trifecta stable. That’s what’s stopped any financial market instability, but we are seeing strains from a strong dollar, we are seeing those ripple right throughout Asia. The problem there is one of excess borrowings in dollars, and a lot of companies that cannot afford to roll over their debt, so once the debt gets too expensive, we start to see a cascade of bankruptcies.

The system is so unstable that just a common-or-garden recession when it comes along and it will come along. I mean this is a cyclical environment, there will be another recession. If that comes at any point in the next 18 months, we may not have reached the point where the Fed has enough bullets to throw at that to try and stave of that recession.

Again we’ve had a trophic cascade in Yellow Stone National Park. A bankruptcy cascade through the financial system would be catastrophic at this point because there are so many companies and countries who are wholly reliant on unlimited access to very cheap, historically unprecedented cost of capital. When you reach a period where you have negative interest rates and you’ve had interest rates at below 1% for ten years, that builds up a reliance on that.

I mean the average cost of funding in the United States and their 20 trillion dollars of debt is just over 2%. It doesn’t take much for that to go up to suddenly cause enormous problems, in terms of the interest coverage and the chunk that takes out of the budget. So everywhere you look there’s tremendous fissures in the financial system. Any one of which could get much, much wider very quickly.

So at this point it really is a case of can the central banks keep this together long enough to generate real growth, which I would argue with this much debt is going to be almost impossible for them. Or are these whispers of a synchronised global slowdown going to get to them first because if that happens, the Fed has 1.5% to play with in terms of cutting the federal funds rate. Previously it’s been 350 to 500 basis points that they’ve thrown at every recession.

So we are on very, very shaky ground. The strange thing is markets are making all-time highs, but there’s a reflectivity there between market belief that banks will “do whatever it takes” to keep this thing together – so if you’ve had a promise like that from the central banks that “Don’t worry, we’ll do everything that’s necessary to keep this thing together.”

People eventually buy into that and they will just go long risk assets thinking they’ll get bailed out by the Fed. Until the point where either confidence evaporates in the Federal Reserve, which could happen very quickly if they are either unable or unwilling to do something that the market needs them to do to stave off some sort of crisis, or we get a big correction and whatever the Fed has left in the chambers is done doesn’t have the desired effect.

There are two ways confidence can evaporate; if confidence evaporates in the Fed’s ability to maintain the stability then I think we’ll see a very, very unruly outcome.

BS              Do you think the Fed takes the responsibility or they feel they are responsible for the state of the rest of the world? You had Powell saying a while ago, how we’re pretty much just the central bank of the US. All of the repercussions of US monetary policy in other places in the world is highly exaggerated. Then he had the Indian bank central governor, writing that piece in the FT saying the absolute opposite.

We’ve got this big dollar rally at the moment, do you think the Fed will ease or it could be a pause in their hiking cycle, and that they take responsibility for what’s going on everywhere else because they know if things go bad everywhere else, it’ll cause problems in the States?

GW             I think that one of the big problems we have in society as a whole today, that nobody takes responsibility for anything anymore. If you can abdicate responsibility that seems to be the first thing everybody thinks about when put in a particular situation. So no, I don’t think the Federal Reserve will take responsibility. Do I think responsibility is there’s? Absolutely I do.

Unfortunately they’re not about to volunteer that. I think Jay Powell is very set on continuing this hiking cycle. I think at this point in the cycle everybody realises it’s kind of every man for himself, and domestic policies always trump international policies in politics, and I think that goes for central banking. At this point Powell is not going to stop hiking until the pain is such that we get some kind of Plaza Accord or another Shanghai Accord or some kind of agreement amongst central bankers to try and weaken the dollar.

I don’t necessarily think that will be through a pause in a hiking cycle, I suspect that will be a coordinated action on central banks that communicate that they all believe that a weaker dollar is everybody’s best interest. To this point that’s all it’s generally taken in the past – for jawboning by central bankers to here’s what we want, and the market compliantly assumes they’ll get it and so they play along.

I don’t know that that will work with 14 trillion dollars of dollar liabilities out there, which are getting squeezed right now. Historically the Fed as the leader and the other central banks have always broken things before they’ve then been tasked with fixing them. They’ve always hiked interest sessions, this won’t be any different. There is a point out there of pain and once we cross that threshold, whether it’s 2%, 2.5% or 3%; who knows. No one knows where that is.

There is a point where things will unravel, and the Fed will arguably keep hiking until they reach that and then panic to try and put the genie back in the bottle.

BS              Quite, but will the Fed hike until there is unravelling within the US? Or are we talking about a global issue where there’s contagion across from emerging markets into the US, for example?

GW             I think they are focused on the US. I think that is their focus, they are trying to do what’s best for the US and down the torpedoes. The problem is, as you pointed out quite rightly, that the contagion happens quite fast and it will be quite broad. So there will be a point when everybody comes to the Fed and says look, no mess. What you’re doing is creating trouble elsewhere in the world.

At that point the Americans will have a decision to make. We saw in 2008 how the central bank community can sit a bunch of politicians in a room and scare the bejeezus out of them and get them to sign on to all kinds of dramatic actions, when the TARP were put through.

BS              Right.

GW             So I think that’s what will happen, but I don’t think Jay Powell is going to be looking around the world and thinking to himself, you know what, I should probably ease off here because it’s causing problems. I think he will have other central bankers banging his door down, saying you’re crippling our economies. The compromise that we will have will start with a communiqué about how nobody wants a strong dollar and everybody wants the pressure to ease.

Let’s see if that works, as it has done at every point for the last couple of decades. If it doesn’t work – which it may not this time because the numbers are now in the tens of trillions as opposed to tens of billions as it was the last time these things were tested – then that’s the point where, is it every man for himself, or is there enough coordination amongst central banks that they will come up with a solution that works for everybody? My fear is that we have reached that every man for himself juncture, and that would be very worrying indeed.

BS              Speaking of every man for himself; you have written in the past quite extensively on the East trying to move away from a dollar-centric financial systems and the reliance on the dollar in several different ways. Particularly with China and oil, and also Russia as well. I believe that they’ve quintupled their gold reserves, and now they’ve sold all their US Treasuries as well in Russia.

Speaking in terms of every man for himself, it’s as though the East is properly into this idea now. Do you think that, say, an internationalised renminbi, that’s something that the financial system is really ready for? Is the plumbing there yet in time, if we have another crisis, for this thing to go online and a load of countries in the East, for example, to then adopt the renminbi way cheaper and then be able to survive without the dollar?

GW             I don’t think even the Chinese are ready for that just yet, let alone the broader world. What I believe is that system is slowly being put in place. The signs are everywhere and they’ve been appearing for a number of years now. If you look very carefully in the headlines, you’ll see a lot of deals being struck between places like Iran for example, who have been pushed out of the Western financial system through sanctions.

This is a big problem, the US has essentially weaponised the dollar because of the agreement in 1973 the Saudis stuck to only sell oil for dollars, that’s what put the US dollar at the centre of the financial system. Obviously any country that imports oil needs to hold US dollar reserves. So there’s been this bid for the dollar for 40 years. What that’s given the US is tremendous power to use the dollar as a stick to beat people with, to put sanctions on them, to stop people having access to the SWIFT system, which is a dollar payment system across the world.

So that’s gone on for a long, long time, but as the East has got stronger and wealthier over the last couple of decades, particularly after China’s entry into the World Trade Organisation in 2000. You’ve seen these countries get more reluctant to leave themselves at the mercy of a truculent US. You’ll see bilateral agreements being put in place between China, which is the biggest importer of oil in the world, and places like Russia who are exporters obviously; places like Iran to trade oil directly for renminbi or to swap it for gold.

This attempt to attempt to bypass the dollar payment system is a really important thing for people to understand. Were the dollar payment system to work, were oil to be freely traded in euros or renminbi, then every country in the world that currently holds dollar reserves would, not necessarily divest themselves of the dollar reserves, but they’d have options. They wouldn’t have to hold…

BS              They wouldn’t have to hold as many or it wouldn’t…

GW             Correct, they could hold euros, they could hold renminbi, they could hold a basket of currencies, and it just weakens the demand for dollars. What it also does, is it removes from the US the ability to punish people for what they deem to be misdeeds. As those punishments have become more frequent and more draconian in recent years, with the US itself struggling a little bit. The desire to move away from that system has increased.

As I said if you read the headlines carefully you’ll see these headlines being signed left and right, to deal oil directly in renminbi. It’s a not a big system yet, it’s growing, it’s growing quite steadily and it does present a clear and present danger to the current dollar system, there’s no doubt about that.

BS              It’s not just oil either, I think the Chinese are making a lot of moves in Africa with other commodities. Well the original ambition was to internationalise the renminbi, and they seem to be very set on that. With the dollar as the global reserve currency, there’s obviously that perpetual bid for dollars that has allowed these massive deficits for a very long time. With other nations using dollars less – with global FX reserves, which are of course mostly in dollars anyway, peaking several years ago, I think 2013 was the date – there’s obviously less of a bid for dollars, so there’s less sterilisation of those deficits of the US Treasuries that get issued.

When do you think this starts to become an issue for the US government, just in terms of paying the bills? Paying for these hypersonic weapon systems that they’re getting Lockheed Martin to make, and all of the social security spending that they’re getting into?

GW             Well it’s a great question and it’s arguably the most important question, but again if you look at it from a mathematical standpoint we’re way past that. The US can’t really afford to have a 21 trillion dollar deficit; they just can’t afford that unless interest rates are at 2%, and unless everybody in the world is willing to take Treasuries. Arguably if the US was a balance sheet, you’d have some very serious concerns about financing them at a couple of a per cent.

Again, the problem with all of this is the fragility of the system is really built upon a failure, or an inability rather, of people to conceive of a way that the world around them might be different. So as bad as things might look, people default to “This is just the system, this is just how it works, it’ll be fine.” It has been fine for the last 40, 50 years which is the extent of our experience.

You know anybody that reads history will understand that this has all happened before and every time it’s happened the outcome has been the same. Empires rise, empires fall, fiat currencies… As Voltaire said, paper money always goes to its intrinsic value, which is zero. There have been over 3,000 fiat currencies in history, all of which have gone to zero, the only ones that haven’t are the current crop. At some point they will go to zero as well. The trigger for that is essentially unknowable…

BS              The unknown, unknown.

GW             Yes it really is. I guess the frustrating thing when you talk about stuff like this is it’s the “when”. The when is the unknowable and that’s the one question that everybody always wants answered; you know, when is this going to happen? We don’t know because it’s not a case of when the debt gets to this level and the interest rate gets to this level it’s over, it doesn’t work that way, it’s a confidence game in the true sense of the phrase.

So confidence is a very ephemeral thing, it comes and it goes, and when it goes, the same way that confidence went in the Roman Empire, which was extraordinarily strong and broad and deep, it declined and it fell. Same with the British Empire which at one point covered 24% of the land mass of the world. That ended up not being a reserve currency any more. Portugal had the reserve currency, Spain had the reserve currency.

To try and imagine a world where Portugal was the reserve currency of the world is unthinkable today, but it happened and the US is having its day, it’s had its day. It’s arguable the mightiest empire the world’s has ever seen, but it too has done what every empire has done, it’s extended itself, it has taken on enormous amounts of debt to continue its position, and that ultimately is going to be its undoing. Will it happen in the next few years? Probably not. Will it happen very quickly? Very possibly, yes.

BS              You say no one alive who’s been operating in financial markets was operating in financial markets at a time when there was a gold standard. All we’ve ever experienced is this fiat world. Are there any dynamics that you see that everyone just takes for granted, just as the norm in financial markets because you’ve operated in them for a long time, that really wouldn’t exist under a gold standard or they are purely a product in some way of being off a gold standard?

GW             Look, it’s one thing, it’s credit, it’s excessive credit. The gold standard allows for the extension of credit but it’s limited. It’s limited by the amount of gold in the system, any particular pilot system, any country. So it’s not that there’s no credit on a gold standard, but it’s backed by something and as we’ve gotten away from the gold standard, the entire financial system is now not only upon, but dependent upon the provision of credit.

There’s a chart that I’ve put in just about every presentation I’ve ever done, which shows GDP versus the total credit and if you draw a line in 1971, when we went off the gold standard, and you draw another line in 1980 when interest rates peaked. You’ll see the two charts run; you can barely see one over the other up until 1971, where they start to diverge because suddenly you do have the ability to extend credit.

When you get to 1980 and the interest rates peak and start coming down, then the gap between the charts just explodes. It’s not until you get to the top right of the chart and you see the dip in 2008, when we did have a credit contraction. I mean in the scheme of things, it’s tiny.

When you think back to the chaos that unleashed on the world, just that contraction of credit, you realise just how significant it would be if we did see the end of the ability to keep extending credit. With interest rates essentially at 5,000-year lows and at the zero bound, people will have said, can interest rates go negative? No of course they can’t – but they have. Can they stay negative and can they go, as some people, as some academics would suggest, to 3%, 4%, 5% negative? I would argue no, I just don’t see how that’s going to happen.

This idea of negative interest rates was repudiated fairly quickly but the market. It does feel like a moment in time, there are little pockets of it still but they’re very special situations – at one point I think we had 15 to 20 trillion dollars of debt trailing at negative rates. That went away fairly quickly and so I think there’s the makings of a line is the sand there that the world won’t cross. If that ability to cut your way out of trouble is gone, then you’re going to have to start coming up with creative ways to be able to take the money you need to fill the holes.

When you can print it out of this air, there isn’t a bill in the world that’s difficult to pay. But at some point when faith in that has gone, you have to either let everything go to wall that’s built on an unstable credit foundation through bankruptcies, insolvencies whatever. Or you have to find real wealth to pay off the debts.

When you’re done printing, the only place you can create the money from is to take it from people who have real wealth. So it comes in the form of taxes, it comes in the form of expropriation, it comes in the form of bail-ins, it comes in the form of all these things that we’ve seen happening. Very slowly, all the blocks are being put in place. This idea of a cashless society, which they’re moving very quickly towards in places like Sweden. The idea that you can’t have cash, the idea that everything that you own is electronic and within a system, gives governments the ability to take whatever they need from you, there’s no way out of it.

Coming back to gold, gold provides that. Gold does provide a means to have wealth outside the financial system, and it’s stood the test of time for thousands of years. In a crisis you could be in any major city anywhere in the world with gold coins and you’ll get spot for them. That’s just the way it works.

BS              Right.

GW             If you look carefully and you understand history and you look around you at the building blocks that are being put in place, it’s pretty clear what’s happening. It’s such a big concept to understand, given the way the world has been for our entire life times, that most people won’t continence that kid of change because it’s human nature to believe that seismic changes really don’t happen very often.

BS              It’s the gradual changes over time that they’re able to accept?

GW             Yes.

BS              It’s interesting what you were saying with the cashless society, obviously that herds everyone into slaughter houses really in the event that you needed to do a massive bail-in. Interestingly in the UK, I’m not sure if you’ve noticed it but you probably have, the unexplained wealth orders, is that something that you’ve noticed?

GW             Sorry run that by me again?

BS              A new power of the state in the UK is known as an unexplained wealth order. The idea when it was originally passed was to go after people with foreign money…

GW             Drug dealers and money launderers I presume.

BS              Yes, etc, etc. They’ve been used in the UK a few times already, but you just see the capacity for this to be abused. As asset forfeiture programmes in the States were. Where with the whole stop and seize issue, where you had these very militarised police departments funding themselves by just pulling over people on the motorway, and then taking their money effectively. Do you think in the next crisis we will see just this; there’ll be the authoritarian advance just in order to keep all of the plates spinning as it were?

GW             The only thing that would shock me is if we didn’t see that sadly. If you think about this whole 1% versus the 99% argument, it’s perfect. It really does create a licence to do this kind of thing. The example I always use in the US is if you wanted to raise some money pretty fast, and you table a bill that would impose a once-off 10% tax on any properties over five million dollars, or three million dollars. Pick a number with a million after it because only really, really wealthy people have a three million dollar home.

You can play that to the 99% very easily and get an enormous amount of buy-in to confiscate wealth from people who have it. No one can move their house, it’s not as though you can hide it, it’s there, you pay taxes on it every year and hey you know what, stop whining you own a ten million dollar home, you can afford to put a million bucks into the kitty of the state.

The ability to then demonise the wealthy who have got so much money they can afford a five million dollar home and won’t contribute to society – this is what creates these fissures; this is what creates these divisions within society. Unfortunately this kind of thing, this is just me thinking about how it might happen. This kind of thing, this grasp for wealth on the part of governments, who are struggling to be able to finance themselves at ever higher rates, is essential to the maintenance of the “empire”; and I don’t use that in a pejorative way.

To me it’s not a case of if, it’s a case of when. Once again this brings us back to gold, this brings us back to the uses that gold has in terms of protecting yourself from this kind of thing. In 1933 Franklin Roosevelt outlawed the private ownership of gold, could that happen again? Yes it could, but owning gold outside your home jurisdiction, owning gold overseas in a vault outside the banking system at least gives you a chance, it gives you a fighting chance. At some point that’s what people are going to be trying to establish, a fighting chance that’s all.

There’s no guarantee as to what measures might be put in place to pay the bill which now runs into the hundreds of trillions of dollars. Unless you try and come up with contingency plans, you’re really sleep walking into the jaws of disaster.

BS              The never-unprepared approach would certainly be a good plan to go by.

GW             Yes.

BS              I do notice we have gone down a rather dark route…

GW             Yes, look, I know I’m glad you said that. The point of all this is to do the thinking. What I say to people when I talk about this stuff is look, I’m not telling you this stuff is going to happen, I’m telling you that I think it’s a very, very strong possibility it happens.

BS              Yes, I’d agree.

GW             All people need to do is sit and think about it, and do the thinking and if people put the chance of these sort of outcomes happening at 1%, then don’t worry about it, you don’t need to worry about it, just go about your life. If you think there’s a material chance of this happening then you move to the next step and say, “Okay, what do I need to do to give myself the best chance of coming out of this as unscathed as possible?” No one’s coming out of this unscathed, if this kind of unravelling happens.

It really is a question of at least do the thinking and then decide for yourself whether you think this is something you need to protect yourself against. If it isn’t, that’s absolutely fine. No one’s saying this is going to happen tomorrow unless you do this, you’re in trouble. This is a case of here’s some potential outcomes for you, if they happened, what would you do? What situation would you be in and how might you protect yourself?

BS              100% and as an insurance policy and it doesn’t have to be a huge effort that you make. I’m personally a big endorser of purchasing gold anonymously, with cash, outside of the remit of where you can be tracked by criminals or data harvesters. Even if you were to entertain this idea somewhat, you know just 1%, 2% of your capital, just in case, seems like a very rational idea.

GW             Exactly right, I mean it’s a dark conversation for sure, as you quite rightly pointed out. It’s just that, it’s a conversation and I think if you can’t have the dark conversations, they don’t have to end up in darkness. But to countenance poor outcomes is what risk management is all about.

BS              Right, on that note, maybe to lighten the conversation somewhat, we’re living in this very fiat world. There are some companies of course that are definitely icons of this lower rate environment, such as Tesla for example or Netflix. I understand you have some quite strong views on these subjects. What do you think is going on in Elon Musk’s head at the moment?

GW             Oh boy, bringing out that subject at the end of a podcast is… That could turn this into a three part mini-series.

BS              A saga?

GW             Look, it’s extraordinary to me. I’m on the record as saying that I think the company will go to zero. I think given the events of the last couple of weeks, with Elon Musk’s tweet about taking Tesla private. I think he has exposed himself to fraud charges and criminal charges. I think the whole thing’s amazing. I think at the root of it, this is precisely what happens when the cost of capital is zero. People will throw billions of dollars at a dream, which when you have someone taking about colonising Mars and doing all the crazy things that Elon Musk is doing.

I promise you if the cost of capital was 7%, 8%, he wouldn’t be getting funded to the tune of billions of dollars. In a zero rate world if you can fund someone who can sell you that dream, maybe he gets to it. Well what are you giving up, the fact that the company is burring through billions of dollars a quarter is again testament to the fact that there is credit freely available.

As with all things I think Musk’s behaviour in the last couple of months speaks to the pressure he’s under. As the company really still struggles, they still lose money on every car that they sell. The idea of making it up in volume, it still doesn’t work no matter how many times you try it.

So I think he’s under pressure, I think he’s getting more erratic, and I think the events of the last ten days, particularly with this funding secure tweet, are perhaps the beginning of the end. It remains to be seen because he has a tremendous following, a real fan base who follow everything he says and believe in him and back him. That’s great to have, but unfortunately most of them aren’t grizzled financial veterans. Tesla Twitter, I would recommend everybody just dabbles in every now and again because it’s extraordinary it really is.

I have been struck by the fact that the bears are all finance veterans that have read balance sheets, and seen frauds and witnessed this sort of thing before. The bulls are all guys that have bought Tesla cars and believe in Elon. That’s fine, it’s a shame that the whole thing gets a little nasty at times, but I think the feelings are so strong on both sides.

Ultimately the thing is going to play out, I have my views on where it’s going to end up and it’s not going to be pretty, but could I be wrong, maybe Elon emails me from Mars one day with an email that just says “Suck it.” I don’t know but I’ve seen this stuff before, and this just looks very familiar to me, just more high profile and a lot bigger than some of the others.

BS              Right. Netflix as well, that seems to be…

GW             Netflix is slightly different. Netflix is a great company it’s just the valuation. There’s no problem with Netflix the company, but the valuation that the market has given Netflix assuming subscriber growth that at some point will exceed every single person on the planet. I have no problem with Netflix whatsoever, I think it’s a great company, but in this market we’re in, valuations are crazy in some places and I think Netflix is not trading anywhere near the correct valuation, and were it to do so, you’d see a significant fall in the shares. That doesn’t mean that the company’s going anywhere, I think the company is solid. Personally if it did trade at more sensible valuations, I’d want to own the thing.

BS              Right.

GW             But right now it’s egregiously overvalued and at some point gravity is going to return.

BS              I think it was in one of your newsletters, you made the comparison that Jerome Powell had been thrown a hospital pass, which any of our listeners who’ve played rugby will understand. In terms of just for the time being, how long do you think things will stay as they are? We’ve started to see the London property market start to take a bit of a turn, same in Australia, which I think you’ve written about quite extensively. Do you think we are nearing the end of this great, great cycle?

GW             I think we have to be for a number of reasons. One obviously is we’ve reached zero, and while interest rates can theoretically go up to anything you have to assume, despite this brief period of negative interest rates, I still think zero is a sensible limit on one end of that scale, so that’s one reason.

Secondly, I think the overvaluation that this zero cost of capital and the malinvestment it’s caused… I was in Toronto recently and I was shocked, absolutely shocked at the amount of development going on in Toronto. There’s cranes everywhere, which is not unusual, there are cranes all over the world. The middle of Toronto is a sea of construction and it all looks to me like it’s going to be finished in about a year from now.

If you look at how stretched the cycle is now, in the US particularly, this is the longest expansion in history now. It just feels as though, if we’re not at the end then we’re very, very close to a point where a decision is going to have to be made by someone like Jay Powell, by Mark Caney, by Mario Draghi, by someone. This is not going to go away because growth miraculously returned. Which I think was the hope in 2008; if we can just keep this thing together, the cyclical nature will determine the growth comes back.

If you look at GDP around the world, you’ll see it has been steadily declining everywhere. I mean we’re not getting 12% out of China any more; we’re not getting double digits out of India. They were the engines of growth, that allowed this to perpetuate even when the West was down to 2, 3%. But we’re not there, so don’t think this is going to go away on its own. So I think a decision is going to have to be made somewhere.

There are two kinds of decisions. One is a proactive one, okay we need to take some hard decisions to ensure that this thing doesn’t get out of hand. The other one is a decision of the kind we saw in 2008, where oh my Lord look what’s happening we need to do something.

One of those two decisions is going to have to be made, and I don’t recall any experience of a politician deciding to take any pain on his watch because it would be better for the future. I’ve yet to see a central banker hike rates and damn the torpedoes simply because it was the right thing to do. Their mandate is to maintain stability in financial markets and generally speaking hiking rates too far doesn’t do that. Ultimately this is not going to be a decision that gets made; this is not going to be a choice that we have as to when to have the crises.

BS              It will be an event.

GW             It’ll be an event. Again that brings us perfectly back to what we began talking about which is this natural ecosystem. Finance is a natural ecosystem. This is why gold has been money for 6,000 years and it was always at the base of the financial system, it’s a natural element. I don’t want to get all astrological on everybody and start talking about that. We humans have a system; we’ve removed the apex predator. That apex predator has been gone for 40 years now, and in the interim there’s been all sorts of damage done to the environment.

At some point I don’t think it’ll be a decision that’s made happily, but the decision to reintroduce the apex predator to stabilise the ecosystem to me is inevitable. I mean am I right? Only the future will tell. To me and everything I’ve read about history and the past, it tells me that it’s an inevitable event, I just don’t necessarily know that it’s imminent.

BS              Very well said Grant. It has been an absolute delight having you on the podcast. We have overdone our time sadly, but I do have one passing question to ask you of a more light hearted nature than the grave ones we’ve been asking so far. I had it with a financial adviser friend of mine which is, who do you think would win in a fight, Mark Carney or Jerome Powell?

GW             Look Carney is a lot bigger, but I think Canadians are just too nice. Canadians are just nice people. I think Powell would probably fight dirty. I’ll give it to Jay Powell despite the obvious edge in stature and age.

BS              Fair enough, I think I would probably take your side. I think Mario Draghi could probably take both of them to be honest.

GW             Oh yes, at the same time.

BS              Easily. Thank you so much for being on the podcast Grant. Please do tell our listeners how they can hear more of your stuff and where they can get in touch with you.

GW             They’re welcome to check out my letter, Things That Make You Go Hmmm. Which is, and as you said, I am one of the co-founders of Real Vision, we’ve called it the Netflix of finance just to give people a sense, but we travel around the world interviewing finance people about finance. These are long-form interviews; we offer trade ideas, all kinds of research. You can find out more about that at

BS              Very good. Thank you very much for joining me Grant; it’s been a great podcast. My name is Boaz Shoshan, I’m an editor at Southbank Investment Research and we will see you in the next episode.

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