Fatal Conceits Podcast

Welcome to another Fatal Conceits Podcast.

In today’s episode, we’re joined by our good friend and regular favorite on the show, Christopher Mayer. Long time listeners will know Chris as the portfolio manager and co-founder of the Woodlock House Family Capital Fund, which he began with Bill Bonner back in 2018.

Chris is also a published author who just released his latest book, Dear Fellow Time-Binder: Letters on General Semantics, which you can find here. His blog, in which he ruminates about life, markets and “this thing we call investing” is considered essential reading around the Bonner Private Research office. Check that out, here.

In today’s conversation, we take an unhurried stroll through Chris’s library and get his take on Jean-Jacques Rousseau’s Reveries of a Solitary Walker, Robert Bruner’s Deals From Hell, the latest Buckminster Fuller biography and plenty more besides. Please enjoy and feel free to share our work with fellow readers, thinkers and solitary ramblers…

Cheers,

Joel Bowman

Thank you for reading Bonner Private Research. This post is public so feel free to share it.

TRANSCRIPT:

Joel Bowman: All right. Welcome back to another episode of the Fatal Conceits podcast, dear listener, a show about money, markets, mobs, and manias, not necessarily in that order. If you haven't already done so, please check out our sub stack. You can find us at bonnerprivateresearch.substack.com. And on the site there you'll find hundreds of articles on everything from high finance to lowly politics and everything in between including, of course, many more conversations just like this one under the Fatal Conceits podcast tab at the top of the page. Today, we're delighted to welcome back to the show long time friend of Bonner Private Research and the portfolio manager of Woodlock House Family Capital Fund, which he co-founded with Bill Bonner back in 2018. A good friend of mine, Mr. Christopher Mayer. Welcome to the show, mate. How do you do?

Christopher Mayer: I am well. Thank you for having me on, always good to talk to you.

Joel Bowman: Yeah, absolutely. You're in a new place up in Maryland?

Christopher Mayer: Yeah. I live in Mount Airy now. It's a nice little town, very green, lots of golf courses around. It's open, it's nice. I like it here.

Joel Bowman: Good stuff, mate. We were speaking just before we hit the record button here and I told you that I would be remiss if I didn't at least throw out one financial question at the very top of the segment here. I guess what everybody wants to know is, after our June lows, we've had a 20 odd percent bounce in the S&P, what many would consider to be the classical definition of a bear market rally. Is this something that, first of all, you agree with? And secondly, does it concern you, as somebody who's in it for the long term and more focused on individual stock selection?

Christopher Mayer: Yeah. Well, everybody wants to know the unknowable, right? Is this the bottom or we have more to fall or are we off and running? I don't look at it that way. I'm focused more on the individual companies I own. And I have to say, this is probably one of the easiest bear markets I've been in yet because I have now second quarter reports in hand for all my companies except one, and they're all firing on all cylinders. I mean, if you just looked at the financial statements, you wouldn't see any cause for concern. You'd be surprised that the stocks were down at all. So I think times like this are an opportunity. What's remarkable, I suppose, is the swiftness of this decline. So we're through August, this is the fifth worst start for the S&P 500, going back to 1928. So that's historically interesting and that ...

Joel Bowman: Anything interesting happened around 1928-29 or there abouts?

Christopher Mayer: Yeah. People like to make different comparisons, and it doesn't have to be catastrophe. I saw somebody on Twitter had put out charts where they said one for the bulls, one for the bears. And they had set up the decline that we see now and matched it up perfectly with '07, '08. But then someone else, they had matched up perfectly with another market where it went straight up. So, when do that kind of data mining you can find the pattern to make whatever argument you want to make, but they're all different in different ways.

And this one feels different in that way, in that the underlying performance of companies so far is strong and there are pockets of the market that are weak. Of course, if some of the retailers have disappointed and banks earlier, didn't do so well, but by and large things seem to be holding up pretty good. So I'm not concerned. I think this is an opportunity for sure. And if you have any kind of time horizon, five years at least, I think you're going to do pretty good while picking up some things today.

Joel Bowman: When we spoke for your segment on Bill's round table, which we recorded, I guess, maybe a month or so ago, you mentioned of course that with the benefit of hindsight, which we would all love to luxuriate in 24/7, you look back at those other market drops that you saw in 2008 and before and now they look like little blips. So who knows what the future will hold, but if you had the steel to hold and even pick up some bargains during that time with some stock selection, you could do very well.

Christopher Mayer: Yeah. And the stock that I mentioned, I think on that call has put in a new 52 week load today, so... It's even better now, right? Yes, yes, yes, yes.

Joel Bowman: There you go. All right. Well, looking at your bookshelf behind you there, one of the things that I love about our conversations, and for listeners and viewers now who are just joining us, I know we've got a lot of new readers on the Bonner Private Research sub stack, so welcome if that's you. Chris and I have had a few conversations here now, maybe three or four where we thumb through Chris's bookshelf and just do a little bit of a deep dive into what makes Chris tick as both an investor and a thinker and a writer. So I'll link to a couple of our previous conversations there so readers can get a little flavor of what we're about here. As we were emailing a little back and forth in preparation for this call, Chris, you nominated a typically, characteristically eclectic clutch of books, as you tend to do. Do you want to take us from the top, maybe beginning with the classics? Where do you want to start?

Christopher Mayer: Yeah, we can begin with the classics. So a lot of these books behind me are old philosophy books. This is my main study here, but then across the hall, I have another library where my investment books and other books are. And then downstairs, there's another little section where some fiction is. And since we moved this library is about half the size it was, but it's the way it goes. But the classics I had recently read and thought I would share is Rousseau, the Reveries of the Solitary Walker.

He wrote this as his last book and it's a series of 10 walks. So he goes off and he writes what he was thinking about on these different walks. If I were to describe it, I would say it's a rumination on happiness. What makes people happy? What makes them unhappy? And so this is old Rousseau looking back, and he's an interesting guy. He's a really good writer, but I have to say he's also a hard guy to like sometimes. I don't know. You mentioned in the email that you had read his Confessions, which I have not read yet, but I've heard about them. Yeah.

Joel Bowman: Yeah, I read that recently, actually just in the past, I want to say six months or so, and maybe a spoiler for some listeners who haven't gone through much of their Rousseau yet, but yeah, he had a long running feud with Voltaire after a friendship earlier in their life. Voltaire was pretty savage in his attacks on Rousseau later in his life, especially for perceived hypocrisy around raising kids and education and that kind of stuff. It's pretty hard to like him after you discover some of those warts, those and skeletons in the closet.

Christopher Mayer: Yeah. Yeah, it was unbelievable, but there are a lot of things like that. But then I think also he's very thin skinned. He seems to take offense pretty easily. But having said all that, he's also a good writer and deep thinker. And in this book, he talks about things that make him almost sound a bit like an Eastern philosopher. He starts talking about, what makes people happy comes from the inside and not being too bound up with externals and being able to be more unaffected by the vicissitudes of life. And he really comes to appreciate nature. There's one letter where he talks about how he gets in a boat and goes into the middle of a lake and just lays at the bottom of the boat, looking up at the sky and loses himself for hours in a peaceful meditation. So I don't know, it's a fun read. And it's not heavy reading either, it's pretty easy to read.

Joel Bowman: Yeah. I think some of these other works, Emile in particular, is notoriously difficult.

Christopher Mayer: And he's known for his political stuff, so I know that that can be difficult too.

Joel Bowman: Yeah, The Social Contract and whatnot. Do you make anything of the rambling philosopher at all? There were others, differing vastly in their world views, such as Nietzsche who wrote in a very aphoristic style. He would go on these long walks and just meditate on what he thought was important. Obviously more recently, Taleb wrote his book of aphorisms and it seems to be one type of medium through which to distill your thoughts and get some clarity for anything like that.

Christopher Mayer: Yes. I think of Henry David Thoreau also. He'd do these walks and he'd write in his journal.

Joel Bowman: Yeah.

Christopher Mayer: Emerson was a great keeper of a daily journal. Kierkegaard was also someone who wrote avidly in a journal. I have his journals right there. But yeah, I think there's something to that. And then even in some of the great Eastern philosophers too, they wrote in little snippets, like Lao Tzu or Laozi's Tao Te Ching and those guys. And that compares to these heavy, weighty treaties that Hegel and Kant would write, they're impenetrable. So I think there's something to say for that.

Joel Bowman: The critique on the top of my finger, yeah.

Christopher Mayer: That's critique of pure reason?

Joel Bowman: Right there, yeah.

Christopher Mayer: I have that there. That's over right here. Yeah.

Joel Bowman: These big, weighty tomes. Those system builders, the Hegels and the Wittgensteins and whatnot, they can get so dense. It's almost sometimes a little impenetrable, but going back to ... you and I have spoken about Thoreau before, and of course Walden. He was social distancing a long time before it became cool on the outskirts up there in New England. I often wonder that, just by occupational hazard, we have our noses so close to the screens, we might be watching ticker symbols or analyzing charts or looking at company reports and that kind of things, if we wouldn't benefit a little from just stepping back, getting some perspective, going to play a game of golf, going for a walk in the woods and decluttering from time to time.

Christopher Mayer: Yeah, definitely. I think that's a good point. And there's the science about that too, about what happens if you press yourself too much. Your brain needs some time to recharge. Concentration is almost like a resource, and if you constantly are at it, you got to give yourself a chance to regenerate. It's also interesting, some of these philosophers, like Nietzsche, some people think that it's because he had such intense migraines and a lot of other ailments that he preferred to write short because he couldn't sit there for that long and write long pieces. I don't know if that's true or not, interesting theory. But it does also seem like some of the philosophers who write shorter do have some love of nature too. They do tend to get outside and they're walking and then they write down these observations. So yeah, I think there's some value in detaching. Even Bill has told me that before. He says we should have some other outlet other than markets. For him, he likes his masonry and he's always working with his hands, but it's good to have something else.

Joel Bowman: Yeah. Over the summer, my wife Anya and I and our daughter were touring around a little bit of Europe. We went to visit the Bonners in their country estate out in very rural Ireland ...

Christopher Mayer: Yeah. I was in early June as well.

Joel Bowman: Oh, yeah. That's right.

Christopher Mayer: We were close in there. We just missed timing.

Joel Bowman: That's right. Yeah. But it is funny to see. Bill will do his daily work and then he'll throw on the dungarees and march down the country lane and spend a few hours doing some masonry work and come back all dusted up for lunch or whatnot. But yeah, I think it's almost akin to when you teach your children, for example, when they've forgotten a word, they get stuck on something. They want to say something and for the life of them, it won't come to them while they're thinking about it. And you have to distract them and get them thinking about something else, talk about what they did that day or whatever and then, all of a sudden, there it is.

Christopher Mayer: I think in the investing world, I mean, there are freaks like Warren Buffet who seems to have no interests other than investing.

Joel Bowman: Big banks. Yeah.

Christopher Mayer: Yeah. I mean, I don't know if you've ever read The Snowball, which is the biography on him.

Joel Bowman: No.

Christopher Mayer: He's really a strange guy. He has a diet of a six year old, lives in the same house all that time, not particularly well-read at all. I don't know if he'd even know who Rousseau was. I mean, he just doesn't have that kind of background and no real hobbies or interests. I mean, he does play Bridge, so maybe that counts, maybe that's something.

Joel Bowman: Yeah.

Christopher Mayer: But it's very strange.

Joel Bowman: He's almost like an idiot savant. You have all these arrested developments in other aspects of one's life. But then when it comes to analyzing markets, his the brain just goes into overdrive.

Christopher Mayer: A lot of the better investors I know do like to read and they are curious. So I think that's a good trait to have, because when you think about businesses, you're learning about people and people have different philosophies and styles. You often think you can tell this history of the world through any different lens. You could tell it through investing. You could tell it through music. You could tell it through food.

Joel Bowman: Yeah.

Christopher Mayer: If you go deep enough, they all come together and these same philosophical topics eventually crop up.

Joel Bowman: It's interesting, isn't it? That was one of Anthony Bourdain's observations that he would use. You mentioned food and we've talked obviously about travel and music and things like that before. He was a great believer that the same conversations are essential to human nature no matter where you go around the world. And you can use something like food, something as common and as communal as that ceremony, as a way of getting into all of the things that were happening in wherever he was, Phnom Penh or Nairobi or what have you. He would talk to people and then get into the rest of it. You could learn about supply lines. You learn about living standards. You learn about history. You learn about the politics of the place, the economics. All of the kinds of things that you see reflected in a stock market, for example, you might see if you really pay attention reflected in just breaking bread with someone in some far flung place around the world.

Christopher Mayer: Yes. I agree with that, and I'm definitely a big Bourdain fan, so maybe that seed was planted. He's a guy I miss. I'd like to have him around, see what he thinks of some of this crazy stuff going on. Of course there's a number of people we could say that about, but he was a good one.

Joel Bowman: We were mentioning as well recently reading the biography of Bucky, or Buckminster Fuller.

Christopher Mayer: Yeah, Buckminster Fuller. Yeah, it was a big, fat book. It came out just recently. It's called Inventor of the Future by Alec Nevala-Lee. And when I first saw it I was very excited because I thought, "Wow, Bucky, as he would like to be called, getting the Royal presidential treatment, this big, fat biography. It's hard to describe what he did. I mean, he was an inventor and he was a poet and he did all kinds of things in his life. He was a philosopher as well. He wrote books and he was a coveted speaker. So he did a lot of different things.

I read this biography and I think it is the definitive biography of his life, the when and the how he did this then and here and there. It sorts through different events and separates some of the myth from what probably happened. So in that sense, it was interesting to read it. But in the other sense, it focused a lot on his personal failings. He had a number of affairs and he had some other problems, so took away some of the magic. If you didn't know who Buckminster Fuller was and you picked up this biography and read it, you'd walk away thinking, what's all the fuss about?

Joel Bowman: Right.

Christopher Mayer: But he was something. I mean, Steve Jobs loved Buckminster Fuller. You know that famous Apple ad "think different" and it goes through 16 or 17 different icons? Buckminster Fuller is in that ad and that was at the request of Steve Jobs. He received 30 honorary degrees. He had something like 25 patents. This book, I didn't feel like it really brought home any of that. He was again, a very coveted speaker all over the world, he had fans all over the place. So anyway ...

Joel Bowman: That's interesting, isn't it? When we talk about historical figures, even as recently as someone like Buckminster Fuller, one wonders if they would even be given a start today or whether they'd be canceled before they got going. I wonder if people would focus so much on their shortcomings? I mean, you're not reading a Buckminster Fuller book for marital advice, presumably. You're reading him for his philosophy on this or his inventions or his thoughts on this and that. I wonder in our haste to dig up the worst dirt on everybody, how much of the good we miss out on.

Christopher Mayer: Of course there's a lot of people like that in history, right? If you were going to go through all the shortcomings, you'd hardly read anybody. I mean, shoot, Heidegger's one of the best examples of that for the 20th century. He's a Nazi, he's out.

Joel Bowman: Ciao.

Christopher Mayer: I mean, look at some of the stuff Hemingway wrote, homophobic stuff and misogynistic stuff. Forget it. So yeah, I don't know. It's a good point.

Joel Bowman: All right, mate, let's move on to your second book here. Is it Deals from Hell, I think we've got up next. That's a great title by the way.

Christopher Mayer: Yeah. It's called Deals from Hell, M&A lessons that rise above the ashes by Robert Bruner. This book was sent to me by a fellow money manager. And well, most of the book is case studies of M&A deals. But if you were to get this book, I would recommend at least just reading the first three or four chapters, because what it really does is that it kills this myth that M&A is a bad thing, mergers and acquisitions. There's a prevalent negative view among people, even professional investors, they don't like acquisitions. And their view is, when you do an acquisition, most of the time it destroys value for shareholders. And in this book, he goes through a lot of research and studies that have been done in M&A and he comes to the opposite conclusion, that M&A does pay.

Joel Bowman: Oh wow.

Christopher Mayer: And it's interesting why that is the case. So he says, an objective reading of more than 130 studies supports the conclusion that M&A pays. And one of the reasons why the conventional wisdom fails, as he says here, people generalized too readily from the findings of a single study. So there are some very high profile disasters, right, in mergers. And that's what gets all the attention versus all the little deals that get done along the way that worked out perfectly well. So the tendency is to exaggerate the failures and the key line here that I double starred, he says: "All M&A is local," which I really like. You really have to look at it on a case by case, deal by deal basis. And it took me a while to get over that hurdle, but now I've found some companies that are really great acquirers of other businesses, just systematically are able to add and plug in businesses to their growing little empire and do very, very, very well.

Joel Bowman: So is this something that's affected the way that you think about the universe of potential investments that you come across on a daily, weekly, monthly basis?

Christopher Mayer: I would say I had discovered this earlier. I wouldn't say this book turned my opinion on what I think, because I'd discovered that on my own, that M&A is really nuanced. And I've discovered a number of these companies. People now call them "serial acquirers" and they have done very, very well. There's a number of them in Sweden. There's a couple in the UK. In the U.S., there are several as well that just continued to acquire companies as their main avenue of growth. And they've been wonderful investments. So what makes those successful versus the failures? This book helps highlight that too. You've got greater propensity of failing if it's a very large deal, if it's very complicated, versus smaller deals, or if you're doing something that's in a business unrelated to yours. There are a number of things he goes through. But I think the value in this book is really busting that general myth and forcing you to think more nuanced about the topic of mergers and acquisitions.

Joel Bowman: That's interesting. I like those myth busting books, those that turned things that you might have thought previously on their head. I'm wondering if the general consensus is such that mergers and acquisitions are bad might not offer a little pocket of hidden opportunity, an overlooked opportunity for people who could get past that stigma.

Christopher Mayer: Yeah, I think it did for a while. And then I think a lot of these serial acquirers are now priced pretty well. So I don't know that that's necessarily true anymore, but it might be. Part of the reason I think is that it can be difficult to model these things because you don't necessarily know when the deals are going to strike or what they're going to look like. And if they deploy a lot more capital than you model, then there's going to be some big surprises. So it's a tough thing to predict and project.

And so if you're willing to go with the uncertainty and you trust the capital allocation, trust the team and the process that they have, and they have a track record of successful deals. And you can do that. You can look back and see whether deals were successful or not. You can see whether there are impairments. You can see what happens to the overall companies' returns on capital, whether they go down over time as they do acquisitions, watering it down, or whether they're able to preserve it or even grow it.

And it depends on the amount of disclosures companies give you. Sometimes you can really dig down and you can see how certain subsidiaries they acquired, how they've done sales and profit wise. And you can back in and say, wow, that was a really good deal. So I think that's the key. It's like most things in investing, in life. You can't go through it too generally, everything has nuance. And our culture forces everything to be squished and reduced to a headline or reduced to a soundbite or reduced to a one single powerful message that you can deliver, but on most things, there's a lot of nuance and complexity.

Joel Bowman: Yeah. And oftentimes I think that looking beyond that the black and white or the binary conception of the world can flesh out a lot of useful information. I was going to ask, because you touched on a few different investing jurisdictions there, Scandinavia, Europe. I know that you invest, around the world, that you have an international portfolio...

Christopher Mayer: Yes.

Joel Bowman: Are there things that you'd look at in particular when you go into foreign markets, say for example, the transparency of their reporting, the maturity of the market in general, or does that all depend on price?

Christopher Mayer: Yeah, there's definitely interesting jurisdictional differences. So even on this topic of M&A for example, there's a solid pocket in Stockholm where there's a dozen of these serial acquirers and they're all good at it. For some reason, it's like a Silicon Valley of serial acquirers there. Culturally, there's something there. There's about it and you don't see anything like that in Germany or France. It's just different. And in the UK, there are a few. And then in the states, there are several. But it's interesting to me sometimes how you can have such big differences in regional markets, even if you compare Sweden to the other Nordics. I mean, there's a lot of differences there in how business will run. For example, a lot of the Swedish serial acquirers will report on return on capital employed. I mean, they'll be right there, a number that they're tracking and targeting. And as an investor, I'm like, that's fantastic! Here's what you want to think about. Right? And not this BS about sales growth or earnings. These guys are focusing on the real things that matter. They get capital allocation. So yeah, I mean, those kind of things are pretty neat when you find that.

Joel Bowman: Yeah. You toss a line over the side of your boat and you find a lot of what you like, you start to bait up again. Good stuff. Just going from the title there, I haven't read the book, but I expected there to be some horror stories in there. Some actual "deals from hell"?

Christopher Mayer: Yeah. I mean, well the classic is the AOL, Time Warner deal. Time Warner bought AOL at the top. And yeah, I mean, then you've got some horrific charts here where they announced the merger and then the company becomes worth less than the deal value was. I mean, it's just a remarkable amount of destruction of wealth on some of these things. So yeah, there are definitely horror stories in there.

Joel Bowman: Right. They're the headline grabbers that you were mentioning before that shaped public opinion.

Christopher Mayer: Well, that's it. That's exactly right. Those are the ones. When people think of disasters, most people can think of these ones.

Joel Bowman: All right then. Let's move on, Chris, to your own latest release. How many is this for you now, mate? You've got to be working on half a dozen?

Christopher Mayer: This is number five.

Joel Bowman: Number five. Okay. All right. Congratulations. Let's get into it.

Christopher Mayer: It's called Dear Fellow Time-binder: Letters on General Semantics.

Joel Bowman: All right. You're going to have to back up a little bit here for our listeners. We're going to go back into some previous conversations. Maybe you could do as your man Korzybski might do and help "map the terrain" for us.

Christopher Mayer: Right, well, if you read, [my book] How Do You Know?, this book is a second crack at those ideas, except that I drop the investing focus. So, How Do You Know is really applying these ideas to investing. And then this is just a more general exploration. I call it letters. I was actually, as I say in the preface, I was inspired by Seneca's letters. He wrote these letters where he explained stoicism, and there's some debate about whether they were really letters or not, whether he would really mail them, but they were written in the letter format as if he was teaching somebody. And I thought that's a good way to do it, so I did this. I thought, if I were teaching someone of these ideas, how would I do it? What are these ideas?

You mentioned Korzybski. Yes, Alfred Korzybski was a guy in the 1930s who created this discipline called general semantics. As you can think of it more as an aid to critical thinking. It focuses on the assumptions that we make with different symbols and language and how they interplay with how we behave. And there's a lot to it actually. There's a lot of different things to it. So it can get deep and get into all kinds of things about causation and things we take for granted. So what makes this book different, too, is it's published by the Institute of General Semantics and they gave me access to the archives for Et Cetera, which is their journal they've been publishing since the 1940s. And another publication they have, The General Semantics Bulletin. So I had these two archives.

I was able to go back and I mined them because there were some interesting characters that taught these ideas over time. You won't know them now, but they're in the book, people like Wendell Johnson, Irving Lee and S.I.I Caldwell, these different people. They're interesting characters on their own. And so I was able to pull out different things from those archives. So it was really interesting to read in the 1940s, what people were thinking about, worried about. War of course hangs over the whole thing and so it was very appropriate then because they were looking at things like propaganda and taking apart the meaning of all these different terms and phrases and the ideas behind them. So, that's one thing that was really fun about doing this book. And I just did it on the side. Some of the letters were already published in their journal, Et Cetera, over the last couple years. And then finally the book came out this year, so I wrote most of it actually in 2020.

Joel Bowman: As you're speaking now, I'm thinking about the messaging, let's call it, what used to be called propaganda before it underwent a public relations campaign itself, and is now called public relations. I think it would've been in the early 1900s when Eddie Bernays was just getting his start in the United States. He was the fellow that brought the world the phrase, "Making the world safe for democracy." And that was the banner under which he convinced Woodrow Wilson to commit American troops to World War I. America was a largely war weary continent as it had only just emerged from its own civil war a generation or so previously. And all of a sudden, with the right "messaging," we have troops marching off to war. And it does make you think, if that was happening then, and if it was happening in the forties, if this was on people's minds, it would be perhaps naive to think that this wasn't happening at some level today.

Christopher Mayer: Yes. I mean, it's interesting to think about why that stuff works. Why does that phrase have power, "making the world safe for democracy?" What does that even mean when you think about it? And so that's what general semantics looks at. I think the biggest thing I've taken from Korzybski really is just that, to be conscious of what he would call "abstracting." So there are all these words and phrases that we use that really don't mean anything when you think about it. They mean whatever people want them to mean. They have dozens and dozens of different meanings, "democracy "for example. "Recession" would be one. Capitalism would be one. You hear people talk, especially politicians, about our "capitalist" system. And then you talk about other people and they're like, What are you talking about? We don't have a capitalist system. We've got something else entirely.

Joel Bowman: It's a corporatocracy.

Christopher Mayer: Yeah, exactly. Right. So all the kinds of labels we throw around. Even political parties. Saying someone is Republican or Democrat doesn't really say much.

Joel Bowman: Right.

Christopher Mayer: It's freighted with assumptions. And then sometimes words as we know them have become so freighted with connotations that we have to invent new words or we have to drop them. We can't even say the old words anymore. You look like you may have some examples to throw in there.

Joel Bowman: I know. I'm not going to a risk cancellation by listing off a shopping list of unmentionables. But yeah, it's certainly the way. And I think also with regards to the way semantics is treated in our modern public discourse. We have a narrowing of definitions that we're permitted to use or that we're almost shoehorned into.

Christopher Mayer: Yes.

Joel Bowman: I'm wondering if while you were mining these archives, doing research for your own work, if you came across any time when the range of concepts, the range of language that we had available to us was so narrowed that it impacted the way we're even able to conceptualize and think about things in the first instance.

Christopher Mayer: Yes. There's a hypothesis I talk about in the book is called the Whorf-Sapir Hypothesis. And the idea is that the language we use actually actively shapes what we think, just like what you're saying. I can think of Whorf's examples because he used to work in insurance and he would say things like ... let's say there was a fire started in some factory and he would have to investigate the fire. And he would find out there were these drums that were labeled "empty gasoline drums." People would be very careless with them. They assume they're empty. But they're not empty. They'll have vapors in them that are very flammable and so on and so forth and that led to their mishandling which started the fire. Another one, I remember there was a time where he talked about how there was this pool of water where they would sometimes dump flammable liquids and things. And they would be a vapor there and someone was there smoking a cigarette and then they threw the match in the water, think it would put it out. Instead, it lit the whole thing on fire and ...

Joel Bowman: The exact opposite, unintended consequences.

Christopher Mayer: Yeah. So his point was you, if you label these things differently, we would actually think differently about them. If you didn't say they were empty gasoline drums, you called them something else, people would behave differently. That's a slightly different point than what you're making, but I mean, it's so endlessly fascinating, because you can go on about this forever. But part of this book too, is there's a lot of little helpers and things. I know just from studying general semantics, to give you one example, there's this whole thing about being mindful of absolutes. So when people say things like "always" and "never." Anytime I hear people use those, it's like a little light goes on in my mind. You have to be careful of that. So you get suspicious of certain words and it can help you ask questions, follow up questions. Like somebody will say, "Well, these immigrants are all thieves. And you'll be like, really? "All" of them?

Joel Bowman: Mergers and acquisitions are "always" a bad idea.

Christopher Mayer: Exactly. They're "all" terrible. "All" of them? Every single one? So there are little clues like that, words that will perk up. And as an investor, that's important because I spend a lot of time talking to people and asking questions and trying to parse their answers.

Joel Bowman: We've never lost shareholders' investments. Never? Interesting. Yeah. All right, Chris, tell us where we can get your book here, it's Dear Fellow Time Bender. I'm assuming it's on Amazon. Anywhere else in particular?

Christopher Mayer: Yes. It's not very expensive. It's 12 bucks. It's 150 pages. I think it'll be a fun read for people who like to think about these kinds of ideas. Yeah, Amazon and fine bookstores everywhere as people like to say, right?

Joel Bowman: Fine bookstores.

Christopher Mayer: And the Institute of General Semantics, they sell it as well, so you can Google that. You won't have any problem finding it. And I don't get any proceeds, by the way. I don't get any royalties or anything. It's done for the Institute, so all proceeds goes toward them.

Joel Bowman: Okay. I'll include a link to Chris's book (SEE HERE) and the others that we've spoken about here, Deals from Hell and Rousseau's Reveries, the very last book of his life. We didn't even get into talking more about his other particular ideas about some very interesting things. I think mostly people tend to focus on, as you said, his political persuasions, the Social Contract and that kind of stuff, but his works reward a whole summer of study at the very least.

Christopher Mayer: I think so. I think if I had to sum up the big idea from that book, I'd say it was his idea that people were naturally happy, but they become unhappy by comparing themselves to other people and focusing too much on external things.

Joel Bowman: Hell is other people, as Sartre said, if you let yourself only exist in other people's opinions. Okay, Chris, I feel like we could go on for quite a bit longer, going through your bookshelves and mine, but let's leave it there and we'll pick it up again next time.

Christopher Mayer: Yep. Thanks, Joel

Joel Bowman: Thanks a lot, Chris. I really appreciate it. And for listeners, again, please head over to the Substack page. You can get plenty of research reports, columns from Bill Bonner, Dan Danning, Tom Dyson and myself, and many more conversations like this, including the ones I referred to, our past conversations with Chris Mayer, where we noodle through more of his extended archives. And with that, we'll be back next week. Thanks a lot.

Welcome back to the Fatal Conceits podcast, a show about money, markets, mobs and manias… not necessarily in that order.

In today’s episode, we’re joined by Bonner Private Research’s macro analyst, Mr. Dan Denning, who’s been monitoring the markets from his “fortress of solitude” up on the high plains of Laramie, Wyoming.

After the worst first six months for stocks in half a century… the worst market for bonds in over two centuries… and the worst for a standard, 60-40 portfolio in… ever, we wanted to get Dan’s take on where he thinks we’re headed from here.

We talk fed hikes, inflation, jobs, housing, energy, BPR’s “trade of the decade” and the looming threat of China’s imploding housing market… and all in (just) under half an hour!

For the less audio-inclined, there’s a full transcript of the show (lightly edited for clarity) below. Otherwise, happy listening…

Cheers,

Joel Bowman

Thank you for reading Bonner Private Research. And welcome to our new listeners! Just so you know, this post is public, so feel free to share it with friend and foe alike...

Joel Bowman: All right. Well, welcome back to another episode of the Fatal Conceits podcast, dear listener, dear viewer, as it were, if you're joining us on the YouTube channel. If you haven't already done so, please head over to our Substack page. That's bonnerprivateresearch.substack.com. By now, you'll be able to catch hundreds of articles from myself, Dan Denning, Bill Bonner, and Tom Dyson, about everything from high finance to lowly politics, and plenty more in between.

There's plenty of research reports up there as well and also many more conversations just like this, which you'll find under the Fatal Conceits podcast tab at the top of the page. I'm delighted to welcome back our in-house macro analyst Mr. Dan Denning, who joins us today from the high plains of Laramie. Dan, how are you doing?

Dan Denning: Yeah, good. It's been a busy couple of weeks, but still blazing hot summer here, so no complaints.

Joel Bowman: As I sit here shivering in my sweater at four degrees Celsius. Mate, you and I were just speaking before we jumped on the recording here, we should make a special mention to a lot of new readers who have just joined us over the past few weeks or the past month. Welcome if you're joining us for the first time. I thought we might start with just getting up to speed with where we've been both with the project and with the markets for the first half of this year.

I think most of our readers probably know the basic setup. Worst first six months for stocks in half a century, inflation at a 40-year high, worst first six months for the bond market maybe ever, and likewise for a balanced portfolio. Do you want to just catch us up to where we are now, eight months-ish into the new year? I know we've had a bit of a bounce of the June lows. There's talk about whether or not that's a bear market bounce or the road to recovery. Where do you map us at this juncture?

Dan Denning: Yeah. I think that's the right question because there's the price action in the market and then there's the big picture. Taking our lead from Bill, we always start with the big picture, which is taking over decades, not just months or weeks or even years. From that point of view, not much has changed since the first half of the year or really since we started in January.

That forecast or that prediction, if you will, is that the markets were extremely overvalued, mostly as a result of interest rates that had been left way too low for way too long. Then we expected lots of inflation because of both the fiscal policy, which is to say the stimulus spending from commerce. Then the support that the Fed gave to markets, which translated into higher consumer prices.

There were a few other complicating factors like the result of the pandemic lockdowns and their impact on the supply chain. That is a really important story for investors ,that the de-globalization that the pandemic has kicked off is probably going to push inflation higher or keep it higher for longer than we think the stock market expects. But it was almost inevitable that after such a terrible first half of the year, you would get some sort of recovery or bounce in markets.

Really the important question is, is that the end of the bear market, or is it a bear market bounce or a rally? I think our view, and I speak for Tom as the investment director and Bill as well, is that it falls pretty squarely within the definition of a bear market rally, which is easy to say academically, because you can look at it and say, "Well, the S&P is up by almost 20% from the June lows." Some of the more aggressive growth-oriented indices and stocks like Apple, the NASDAQ, they're up more than that.

These are really challenging moves for investors looking at the long term, because in the short term you feel like I'm missing out and maybe I'm wrong, but from our point of view, nothing has changed technically or fundamentally to suggest that the primary trend in the markets is still down. So that's what our investment strategy is set up to address is, how do you preserve your capital? How do you avoid the big loss and how do you prepare for this stagflationary environment where you have high prices that are sticky and lower stock prices?

There's a lot involved. There's interest rates involved and real interest rates and things like that. I'd say we got initial confirmation in the first half of the year that our macro thesis was spot on and since then we've seen sort of a counter cyclical reaction in stock markets. You never want to say the stock market is wrong. You never want to say that the price action is wrong, just because it disagrees with your thesis.

But I'd say based on the levels in the stock market right now, we're not going to change our call about where we think things are headed.

Thank you for reading Bonner Private Research. This post is public, so feel free to share it friend and foe alike...

Joel Bowman: You mentioned stagflation there and prices. We've obviously got financial asset prices on the one hand but then prices of everyday goods and services that people consume on the other hand, that's obviously a big part of the picture. What do you say to people who make the case that inflation has peaked?

I heard somebody use the metaphor the other day that the pig had moved through the python, this massive $6 trillion cash giveaway is moving through the system and now we're on the other side of that. What do you say to that argument?

Dan Denning: Yeah. I mean, I'd say it's wrong. I think there's certainly an element that inflation was exacerbated by one-off factors, but that to me seems like the conventional explanation that it came easily and it will go away easily. History suggests that's not the case, that there's a lot of inertia once inflation gets hold. Part of that is just monetary and then part of it's psychological. If you look at real interest rates, so you look at the Fed funds rate adjusted for the inflation rate, it's still negative.

It's around 6%, maybe almost 7%. Markets seem to have gotten ahead of themselves in saying that inflation will come down and the rate of interest rate increases has probably already peaked as well so they might continue to go up by 50 basis points or 25 basis points. But 3% is probably where the Fed will stop and therefore it's okay to go buy growth assets again at really high premiums, at high price to sales ratios, high price to earnings ratios.

Those ratios are down a little bit from last November, but they're still elevated based on their historic high, so things aren't cheap right now. They're not cheap either especially if you think that we're headed toward either a recession or we've been in a recession, or that we'll have stagflation. You're pricing stocks as if interest rates were going to be lower or inflation was going to be lower and earnings were going to be higher.

To me, that's a very rosy scenario and the risk if you're wrong is that there's still another 30 to 50% drawdown out there for equity prices based on where they normally revert in a mean reverting crash. Again, what I've been looking at lately, Joel, is I've been looking at the credit markets, especially if you look at some of the junk bond exchange traded funds, those have started to roll over a little bit.

I say that because sometimes the credit markets are a little bit better indicator of financial conditions than the stock market. I'd say people who think that the Fed is done raising rates and that inflation's going to come down quickly, are hoping that's the case but the historical evidence is that it's not the case.

Joel Bowman: You mentioned real rates, i.e. adjusted for inflation, and we're probably maybe something like 600 basis points behind the curve, as they say, where historically I think it was Volcker who jacked up rates to 600 basis points beyond the curve to get inflation under control when it was at roughly this level 40 years ago.

Just sticking with real-world adjusted prices for a little bit, I know you've talked a lot about real wages, for example, and just to get back to your observation then that a rosy outlook necessarily entails increased earnings for corporations, I'm wondering how people who make the peak inflation argument are factoring in higher earnings when people's real, that is to say adjusted-for-inflation earnings, are lower and even going backwards.

Dan Denning: No, I don't know. I mean, we both read the same people and we try to keep up. I mean, it's an important thing to keep up with data, evidence and arguments that could indicate that you've missed something or that you're wrong about something. But when you look at credit card debt exploding to its highest levels ever, a number of people taking out new credit cards and then the employment figures they vary from month to month, they're volatile. Are they leading? Are they lagging? Are they even correct?

These are surveys. They're not necessarily hyper-accurate accounts of what's going on in the labor market, but if you look at the trends for real wages adjusted for inflation over time, those are easier to understand and they're easier to extrapolate.

That compared to what's going on with energy prices, with healthcare costs, with food prices, with the cost of rent, with the cost of existing homes and new homes, those suggest that it's just harder than ever for normal people on a median wage and a middle class salary, even the rarest of things, a home with two wage earners, a mother and father who are both earning income, it's just the cap is getting bigger and bigger.

I don't find it credible to think that there's going to be a huge rebound from the consumer in the second half of this year that justifies paying higher prices for stocks right now. Now, you talk about the stock market, we still look at individual companies where the setup is more favorable.

I think that's an important point to make is as an asset class, our view on stocks is mostly bearish, but part of our strategy is to own some of them anyway, as part of a diversification approach and to focus on companies that have pricing power, companies that don't have debt, companies who for various reasons that are particular to their industry or to their management seem to be bucking the trend.

That doesn't hedge your risk that when you own stocks in the bear market, most stocks go down, but Tom's actually been really... I say, actually. He's been doing it his whole career. He's been pretty good at finding these little pockets of opportunity. For new readers, or I think who would like to be more aggressive, we're simply not going to do that. We're not going to be aggressive on the short side because we're bearish and we're not going to try and surf these rallies and time the market perfectly in and out.

I think Tom's going to continue his bottom up balance sheet analysis of companies that have a favorable setup and then trade them. I say trade, I mean, these are not long-term holds. We have one long-term hold, which is our trade of the decade, but the other stuff is not meant to be held for years. It's months or longer, but he'll be clear about all that when he sets them up.

Yeah, it's difficult because we all have to do something with our money and it's hard to sit there and watch the market go up and wonder if you've missed something. I think we're on top of the macro trends and nothing has changed in the first half of the year that would cause us to think we're missing the boat on this.

Joel Bowman: Right. Well, let's make that transition then for readers who are following along from what you've outlined then as Tom's tactical trades. They're these little pockets of the market where he sees perhaps an asymmetrical risk or favorable winds blowing, given a particular set of circumstances, but over the longer timeframe, which is to say the remainder of the decade, we've set up the /trade of the decade' as Bill has called it.

This is essentially long conventional energy sources and there's a particular play on that for our readers. Do you want to set the backdrop there and maybe just talk about the slight correction in oil prices that has manifested over the past couple of months. Where we are with that?

Dan Denning: Yeah, sure. I mean, that's an important one because if you want to do something, that's the simplest one to do. I would encourage people to read that report, which we'll probably update before the end of the year, because when we put it out at the beginning of the year, it was really based on two or three important ideas, none of which have changed. In fact that they've all gotten stronger and to extent that data has come out since then, I think it's confirmed what we said.

The first one was just purely driven by the price action in the energy sector over the last 10 years. Anyone who's familiar with the idea of the Dogs of the Dow, that if you buy the worst performing Dow stocks from the last year and they tend to be not always the best performing, but they rally, or you can buy the best performing stocks from the previous year.

The momentum investors would tell you to buy the best performing stocks from last year because they're probably going to be the best performing stocks this year. Contrarian Dogs of the Dow approach is to look for stuff that's done so poorly that it can't get much worse. When it gets worse in the Dow, they just kick you out of the Dow anyway. That's actually what happened with ExxonMobil.

When we were looking, we looked at both the size of the S&P energy sector as a percentage of the entire S&P 500 and the performance of that sector relative to things like financial stocks and tech stocks, especially, and it couldn't have gotten any worse. Well, I mean, I suppose it could have gotten worse, but worse would've been the death of the coal industry and the death of the oil industry, which funnily enough, some people were calling for at the end of last year.

They were saying, "That's it. Oil's never going to reach a hundred bucks again and it's uninvestable." I think Jim Cramer at one point said oil stocks are uninvestable.

Joel Bowman: That's a great contrarian indicator for you right there.

Dan Denning: Yeah. The magazine covers as well. The Economist had a lump of coal in a bell jar saying... I don't remember what it said, something like the end of coal. But those are cultural indicators of what's going on with liquidity and asset allocation and investor sentiment. It was underinvested in from that point of view, but that was the first point that it was bound for a rebound over the next 10 years, compared to the previous 10 years.

The second point was because of regulatory action, which was mostly hostile to fossil fuels that the oil and gas company majors especially had dramatically reduced their capital investment in exploration and in production so that if demand recovered from the pandemic drawdown, which you would expect it would recover at some point, then the industry was not in a position to rapidly increase oil and gas supply to keep up with recovery demand.

Our idea there was that demand would grow. It would resume, and it did quickly. You had the added complicating factor of the war in Ukraine with Russia and how disruptive that has been to energy supplies. That's a big story, which we probably can't get into here, but the idea that energy is being de-globalized or it's being politicized in a way that it hadn't before.

The basic argument was just supply and demand, that the case that fossil fuels were dead was overmade, and that even if you believed that we were moving to renewables in this energy transition, it would be probably decades, not years and certainly not months and it wouldn't be seamless. That was a favorable setup.

The third, which is probably a little more controversial is the very idea that we're moving seamlessly to an energy transition where the internal combustion engine will be replaced by electric cars and wind, solar and renewables, hydro, will all eventually replace coal and gas and we won't need nuclear is a pipe dream. It's a thermodynamic pipe dream and we're already seeing that.

We didn't expect this at the time, but I saw this morning that Germany has two months of natural gas reserves, thanks to its dispute with Russia. That's a country and an economy that set themselves up as if they would always be able to get cheap fossil fuels, but switch miraculously to renewables. You and Byron King have had a lot of really productive discussions on why that's not true and what will happen if you make policy based on those assumptions.

On the investment side, our conclusion was that for those three reasons, the underperformance in the previous 10 years, the underinvestment in the capital required to increase supply and the overemphasis on the energy transition and the idea that everything would be green and electrified, that over the next 10 years it would be hard to find a sector that's going to do better than oil and gas. That you can probably ignore the short-term price fluctuations.

We get that a lot from new readers saying, "I didn't get into the trade when you made it. Is it too late?" What we say is we'll revisit it from time to time to look at when is an attractive time to enter the trade, and that means there's going to be drawdown. We were up by over 130% at one point, and then it came down, then it goes back up. The whole idea... Bill's idea of a trade of a decade was you just didn't have to pay attention to any of that over 10 years.

Find yourself an attractive entry point to the trade, put as much money in as you're comfortable losing, and then forget about it. Don't agonize. If you can't sleep because you've made an investment that's supposed to work over 10 years, then probably it might not be the right investment for you. We'll update that report. I think those three points are still in our favor, and if anything, I think the decline in the oil price has been overdone.

That's an interesting issue, which I'll get into in a weekly update in the next couple of weeks, but I wouldn't worry too much about the price action in the oil market.

Joel Bowman: I should mention there that we recently unlocked a transcript that we recorded back in late December of 2021 with Bill's longtime friends, Rick Rule and Byron King. We had a really great discussion. This was when we were just getting going with Bonner Private Research and they were generous enough to give us their insights on what was happening in the energy markets.

Of course, nobody could have foreseen the events in Eastern Europe unfolding as they did, but that served really just to exacerbate the situation that they had seen there. You can go onto bonnerprivateresearch.substack.com and check out that unlocked transcript. I'll put a link in the notes below this show, but Dan, we're almost out of time here, mate. I've just got one little black swan type question.

A few of our readers have written in asking possibly off the back of one of Tom's observation, he's been writing a little bit lately about the slowdown in China and the bursting property market there. I think he noted that the Wall Street Journal had called the Chinese property market the single biggest asset class by value on the planet and that's something in the order of $53 trillion or some absolutely mind-boggling number there.

Given what's happening over there in China, are you at all worried about being dragged into a global recession? What that knock-on might look like with regards to oil prices? How does that impact the thesis? I know it's kind of a big question to end on, but...

Dan Denning: No. It's a great question. I mean, those are the things we're paid to think about and try to figure out ahead of time. I think it sort of graduates in scope. If you want to start with the oil markets, if China's in a recession or if they're locking down cities or if the property market collapses, or if there's disruption in their property market that causes slower economic growth, then that's going to impact their demand on oil.

They've also shut down a bunch of factories in different places, so I think it has impacted oil demand, which has shown up in the oil price, which was something frankly I had neglected to pay attention to because you just talk about the global oil market and you forget that there are some components of it that drive the price more than others. That I think is something worth keeping an eye on.

I think the two other... To be concise, there are probably two other things we'd look at. One is the financial stability in China and how that plays into whether China has an alternative to the dollar or the truth is China's capital market is still mostly closed to the rest of the world so they could have a property collapse and their banks could collapse, but the government would absorb those losses or they'd transfer them to someone else in the system.

That doesn't mean it wouldn't have a domestic impact. When people have money that they think is in a bank account and it turns out that it's in an investment product and they can't get that money, then that makes people upset. We see some of those stories, probably not as much as we should, but I think that's also a cautionary tale for investors in the West and the United States is that money in the bank. Yeah, I mean, it's FDIC insured so I don't want to suggest that it could be seized like that, but that's what can happen.

China's capital markets aren't ready for prime time. It's not going to replace the dollar or the U.S. bond market anytime soon, but I think the highest level about instability in China economically is how it plays into their strategy with regard to Taiwan and challenging the United States militarily.

We didn't talk about those things because basically from when China entered the World Trade Organization in 2000, until the beginning of the pandemic, there was what we called the symbiotic relationship between China and the United States where China exported goods to the U.S., generated huge trade surpluses, which it reinvested in its own economy to build its infrastructure to re-migrate about 500 million people from the countryside to the cities. That's done. It's not entirely done.

In fact, it may have been overdone in terms of the amount of investment they made in real estate to resettle those people. But if you have an economy where voters... Well, they don't really vote, but if you've got people that are unhappy because they're not sure their money is safe anymore, and you've got a conflict with Taiwan, and you're trying to decide whether the Russian war and Ukraine gives you an opportunity to conduct a military operation that the U.S. might not be able to resist, those are all things that... They're not black swans, because we can talk about them.

A black swan would be something we just didn't even think about and weren't prepared for. We know that there's a possibility for military conflict in East Asia. We don't know if it'll be the North Koreans. We don't know if it would be the Chinese. We have no idea if China would suddenly say, "You know what? We're not worried about our economic situation anymore. We're going for territorial acquisition maybe as a way to distract our people from our crashing economy."

As you said, China's property market is something like 300% of GDP. It's a massive sector which has suffered from massive inflation. It's one of those you have to keep your eye on because when you take your eye off it, that's when it's most likely to blindside you literally because we're all paying attention to semantic debates over what a recession is or over where interest rates will top out.

In the meantime, you've got this giant lumbering economy that may be in crisis mode, and they're making noises about a conflict. Yeah, it's an excellent question and we'll be covering it more for the rest of the year, for sure.

Joel Bowman: Excellent. All right. Well, just on the subject of recession, obviously, Dan, the correct definition is a recession is that it's only a recession if it comes from the recession province in France, otherwise it's just a sparkling economic gut punch. Mate, your readers, our readers, Bonner Private Research readers are going to be able to catch all of your weekly updates every Friday.

Tom writes to our readers every Wednesday, so please be on the lookout, members, for those twice weekly updates. Again, as I said, it's bonnerprivateresearch.substack.com. Check out the dollar report, the strategy report, trade of the decade report and all the transcripts that we post from our special private summits, the latest of which Bill convened a round table to ask our panel, nine guests, two very simple questions, that is to say, what is going on in the markets and what are you doing with your personal money?

We had a bunch of newsletter veterans, many of whom our readers would recognize. Alex Green, Porter Stansberry, Doug Casey, Byron, yourself, Tom, Rick Rule, and others besides. I'm sure I'm forgetting some. Jim Rickards.

Anyway, it was a really all-star lineup. Obviously not everyone agreed because we had nine different people looking at different sectors of the market and trying to keep their eyes on this huge, complex global setup. Anyway, lots and lots of really interesting thoughts there. Again, head over to the Substack page where readers will be able to check that out. In the meantime, Dan, keep safe up there in Laramie, mate, and we'll catch up again very shortly.

And now for some more Fatal Conceits…

Last week we brought you Part I of our conversation with Harvard trained geologist and natural resources expert, Byron King. There was a lot on the table for discussion.

For instance…

Have you noticed news from the Ukraine seems to have dwindled over recent weeks? What was once non-stop, wall-to-wall coverage now garners comparatively little attention. Of course, there are other issues at hand… like inflation at a four-decade high… the worst start to the year for stock markets in half a century… and for bond markets in over 200 years…

And now, we learn that the US has registered two consecutive quarters of negative GDP… the common definition for a recession, and the one practically everyone who follows the economy at all still uses.

But all that doesn’t mean the impacts of the war – and the west’s response to it – are not working their way through the system. In fact, the knock-on effects for international energy markets, global supply chains and even sovereign currencies could hardly be overstated.

As usual, Byron had plenty of insights on all of the above, and more. (If you missed Part I of our conversation, you can catch up here.)

In Part II of the discussion, we pick up the action with the idea of a “methane-backed ruble.” That is, what happens if and when Mr. Putin decides he wants to back his national currency, which is stronger today than it was before the first tank rolled across the Ukrainian border, with Mother Russia’s vast energy reserves?

What does that do to the heretofore assumed petrodollar hegemony? Might Japan, almost entirely dependent on foreign energy (mostly from Russia), be forced to settle its contracts in Russian rubles? What are the other BRICS nations (Brazil, India, China and South Africa) thinking, as they stand by and watch the weaponization of the US dollar? Might an alternative to the petrodollar begin to look attractive to them?

There’s so much to cover, from the war itself to Russian military supplies, the unipolar verses multipolar political landscape, the philosophy of Eurasianism and much, much more…

You can listen to the entire episode by simply hitting play above or downloading the Substack app (see the little headphones button there to listen in).

Oh, and if you like what you hear, please help us spread the word by sharing this episode with comrades and enemy combatants alike, right here…

For Bonner Private Research members, there’s a full transcript, lightly edited for clarity, below the paywall and on our Substack Page. If you’re not already a subscriber, but would like to enjoy the many benefits that come with membership, you can sort that out right here.

We hope you enjoy the show…

Cheers,

Joel Bowman

Joel Bowman:Welcome back to another Fatal Conceits Podcast, dear listener. A show about money, markets, mobs, and manias. Not necessarily in that order, of course. If you haven't already done so, please feel free to check us out on Substack. You can find us at bonnerprivateresearch.substack.com. There, you'll find hundreds of articles on everything from high finance to lowly politics, plenty of in-depth research reports, and of course, many more conversations like this under the Fatal Conceits Podcast tab at the top of the page.In part one of my conversation with Byron King, which we published last week, he and I spoke about the ongoing war in the Ukraine and what that means for international energy markets. Specifically, Germany's coming "energy Stalingrad." We also looked at what a decade or more of under investment in the real, stuff-based economy means for us today. That's everything from a lack of real investment in research and development through to a paucity of human capital. And we spoke about the ongoing financialization of the Western economies and what that might look like in reverse, during a de-globalization phase. If you haven't already done so, you can check out part one of my conversation with Byron King. Again, that's on our Substack page at bonnerprivateresearch.substack.com. In today's episode, we bring you part two of my conversation with Byron. We pick up the action while we're wondering about the potential of a gold and/or methane backed ruble. What impact might that have on global markets and, of course, the long enjoyed petrodollar hegemony. Might all that be coming to an end? I also ask Byron where he sees markets headed for the back half of the year and ask what he's doing personally with his own investments. There's all that, and plenty more, on the table in today's conversation. I invite you to please enjoy it after the break. Getting back to the money underpinning all of this, Byron, I asked you back in May about the possibility of a golden/gaseous ruble. You called it a methane-backed ruble, I think. How has that played out now? You mentioned, obviously, Putin playing his hand with the energy markets. What developments are you seeing along the lines of a potential bifurcation of global monetary systems and so forth?Byron King:Oh, I think that we are watching a slow unfolding of the next step of de-dollarization. I don't think the Russians perceive any real reason to make it all happen in a hurry. The Russians are still insisting on rubles for natural gas, and so there are countries in Europe that are making these deals. I mean, Hungary is like, "The rest of you guys in the EU, you do what you want, but we're Hungary. We want natural gas. We get cold in the wintertime. We want that Russian natural gas," and the Russians are like, "Yeah, sure. We'll make you a deal, and we'll work it out with you." Serbia is in the same boat.There are companies in Italy, in fact, that are again talking with the Russians. "Listen, guys. We want to work with you. We want to make a deal with you." You see that, but at the same time, you've got the high level political types. The Northern European political honchos, who are still banging the drum about how we're going to sanction Russia. "We're not going to buy anything from them," and everything else. It doesn't matter to Russia. They're going to sell their oil, their gas, etcetera to China, to India. Russia just fired a huge shot across the bow over in the Far East with the Sakhalin-2 project, where they essentially nationalized it.They said, "I mean, we know that you foreign companies own sections of this, but we're taking them from you and it's ours now." Now, if you're Japan and you are entirely reliant, 98% reliant on imported energy, much of which is Russian oil, Russian natural gas, you have to be looking at this and thinking, "Oh, my God. Holy smokes. Now, what?" There's so many things going on. There's so many moving parts to it. I mean, the Saudis are talking about not adhering a hundred percent to the old petrodollar idea.Joel Bowman:They're in talks with the Chinese, right?Byron King:Yeah. They're making deals with the Chinese to sell oil in Yuan. The Saudis, they'll take Chinese Yuan, and then they'll go back to China and buy Chinese things.Joel Bowman:And that's 25% of the Saudi total (oil) exports, straight to China, a not insignificant portion. And so, what happens then with Japan? To go back to the Far East, for example. If, let's say, Mr. Putin decides, for his next chessboard move, that he's going to demand gas sold down into Japan – again, another not insignificant market – if he demands that be settled in rubles?Byron King:If they want to keep their houses warm, their industry's running, the chemical industry working, they're going to have to make a deal with the Gazprombank. I mean, Gazprombank, the bank owned by Gazprom, is set up to say, "Okay. We will take your Japanese yen," or, "We'll take your dollars. We, the bank, and we'll convert them to rubles. We will be able to say that you are buying gas in rubles." But, what's really going on here is, there's an international currency exchange going on. Yen for dollars, dollars for rubles, however the wiring diagram is on any given transaction.But what it does, it strengthens the ruble as a currency. I mean, the ruble today is a stronger currency than it was back in February. Again, before the first Russian tank rolled across the border. I mean, when President Biden says, "Oh, we've turned the ruble to rubble," it's like, "Well, that didn't last very long now, did it?" Yeah, sure. In the context of a week or two, you crashed the ruble and things were in turmoil for a little bit, and then the ruble just got stronger and stronger and stronger. We talked about this before. When the Russians said, "We'll pay 5000 rubles per gram of gold." That 5000 has changed since then, but that's still out there.There is a ruble to gold, ruble to natural gas, hence energy to gold if you do your geometry, your 10th grade geometry. If you start to connect these little angles here, there is a ruble energy gold connection to whatever the price of natural gas is, or gold is, in dollars, that feeds back into the strength of the ruble. I think one of the big issues is not what happens when the dollar collapses. "When the dollar collapses." It's what happens after. What will replace it?Joel Bowman:Right. What replaces a petrodollar? What does that look like geopolitically as well, very interestingly, because the US, since the collapse of the Soviet Union back in '89 or '90, has maintained this dollar hedgemony, as a kind of unipolar superpower in the world. As you mentioned at the beginning of our conversation, 30 years of diplomacy that has gotten us essentially to where we are today. Now, it looks like that is being turned to rubble. Just to point out the facts.Byron King:Absolutely. I mean, I think most Americans have a sense that, "America, we're a big powerful country," and everything. If you said to them, "Do you understand the concept of a unipower," They would think, "Well..." If you talked it through, they'd be like, "Yeah, okay. That means we're number one," and all this sort of thing. Well, that's a myth. That is a myth. That's mythology, because America is not number one. We are not an energy-dependent country anymore. We have completely mismanaged our own internal energy system. We're having brownouts and blackouts across the country as the summer unfolds. We've mismanaged basic things, like food supply. I mean, what big powerful country doesn't have baby formula for months at a time? It's crazy.I mean, it's not that America is a weak nation. No, we're not, but the rest of the world, they're coming out of their shells. Industrially, there is simply no competition in basic industry to, say, China. I mean, they pour over a billion tons of steel a year. The United States last year, 2021, poured 85 million. I mean, it was 12 to one. China poured 12 tons of steel for every ton that the US poured. What'd they do with it? Well, they're building China. Building railroads, building cities, building ships, building whatever. Big country, big build out. In terms of Russia and Russian technology, there's this very strange concept in the US and in the West that the Russians are... "They're dumb. They can't do anything right," and all this sort of stuff. I don't know about that.I mean, if you look at the International Space Station orbiting over the earth, two thirds of that space station was built by Russia. I mean, for 10 years, we couldn't even get our astronauts up there without riding on Russian rockets. When people say, "Well, they're getting their butts kicked in Ukraine." No, they're not. I mean, who says that? They must be reading Western propaganda, because if you actually follow the facts on the ground, the Russians are using maybe 20% of their combat power in Ukraine. They're moving at their own pace. They've got weapons and systems behind the lines that they've never used just because they don't want to show us what they look like, but we suspect we know what they are. We don't ever want our guys to face their guys using those weapons, because it's going to be a mess.Putin talks about "new physical principles." Well, that gets back to the unipolar/multipolar aspect of the world. The world is going multipolar. The West has a certain philosophy about what life is and what the culture should be, but so does Russia. There's a concept in Russia, and very, very few people talk about it outside of Russia, it's called Eurasianism. There's a whole school of thought around this in Russia now. It's like, "We are not Europeans. Especially, we're not you Western Europeans, with all your decadence and all your weirdness. We are slightly European, but we're really Eurasians because we span the continent. The iron ribbon of the Siberian railroad ties us together." But, there is a whole school of thought in Russia called Eurasianism. That is how they see their future.That's a whole talk in and of itself. I mean, people write books about it. If anybody's listening to this and they're curious, go to Amazon and dial in "Eurasianism" and you'll find a whole bunch of books all about it written by ivory tower scholars. It's not something that you're going to hear on 60 Minutes, or the nightly news, or something like that, but that philosophically is what's animating a lot of what's going on in Russia, Russia-China, Central Asia with all the 'stans down into India. There is a whole sense that, "Okay. You Westerners, you had your couple of centuries of expansion, colonialism, and all that sort of stuff. You've played a really good game with this petrodollar thing for half a century. You pay us these alleged petrodollars and we send you real tankers full of oil. The dollars never even leave your country, because they wind up back in your banks and your treasury bonds. Somehow or another, we send you stuff, but we don't anything back for it. We're coming to the ending whistle of that game. It's just a question of when, not if.Joel Bowman:It does seem ultimately a kind of war of attrition, as you mentioned, with Russia happy to bide its time there on its Western front. It does seem like Putin will be able to go without Netflix and McDonald's for a lot longer than the West will be able to go without titanium and noble gases, for example.Byron King:Absolutely. People say these things that are just silly. They say, "Oh, the Russians are running out of ammunition." Every two weeks, there's a headline, but they have another two weeks worth of ammunition. No, they're not. I mean, are you kidding? ILook, I'm an American retired military guy and I know, I absolutely know Russia has entire mountains hollowed out filled with ammunition, with train tracks running right into them. If they need ammo, they just load up another train and off it goes. They have everything they need, whereas in the US... For example, just look at US artillery round production for the last, say, 10 years. If you took every single artillery round that the US Army Marine Corps produced in the last 10 years, and you somehow magically put them in Ukraine and fired them off, you would have about a month's worth of ammunition supply. 10 years would be shot off in about four or five weeks.Joel Bowman:That's incredible.Byron King:Right. The last three years of ammunition production would probably last about five days. I mean, that's the rate of expenditure. We say, "Well, we'll just buy more ammo." No, we won't. You need an ammunition factory to do that. You need a big plant. You need steel, you need chemicals, you need electronics. You need people who actually know what they're doing. People think, "Oh, yeah. You just crank those ammo rounds out like hot dogs," or something. Actually, no. You don't. I mean, you practically hand build an artillery shell, which means you need hands, which means you need somebody attached to the hands with a brain inside their head who knows what they're doing. Russia has factories for this. Russia has entire cities where they do this stuff. We don't in the United States, nor in the rest of NATO and everywhere else. It's depressing to talk about, except it happens to be true.Joel Bowman:Yeah. Again, if it hasn't been clear thus far in the discussion, this is just the facts. This isn't in praise of one side or another. This is just trying to basically get to the bottom of what's going on without any political persuasion here. Just the facts, as I said, but it does appear, when you read the Western media, that the "two weeks to run out of Russian ammunition" is the new "two weeks to flatten the curve." And we know how that claim went. Byron, I know you've got a shoot off for another appointment here. Finally, I've got a quick question from our mutual friend, Bill Bonner, for you. It's going to be a huge, huge achievement for you to condense an answer into the couple of minutes that we've got remaining, but maybe you can give a plug for some of your own writings, let people know where they can find all that good stuff. But to Bill's questions, he wants to know, Byron, what the hell is going on in the markets, and what are you doing with your own money?Byron King:Well, I am as worried as anybody else about the markets. The markets have slid down. I think they have further to fall. I mean, I think they could plateau along for a while, but I think they could also fall some more. It's July, and in August, half the world goes on vacation, although that doesn't mean that bad things don't happen in August. Then in the fall, typically... If we're going to have another market crash, why not in the fall? But me? I'm invested in mines and miners. A whole bunch of juniors that I know very well. And when I invest in a junior mining company, it's because I know the people. It's because I've visited the project, the site. It's because I've held the core from the drill rig in my hand. It's because I've looked at what they have. I believe in the asset. I believe in the technical people. I believe in the management. When I'm investing, that is what I do.I think energy has a nice, long upside to it. We've passed that inflection point where we can just fix it with a quick remedy, or whatever. Standby for energy to be more and more expensive over time. We were talking about Germany, and we were talking about exporting LNG from North America to Europe. Well, if we really do turn natural gas into a global commodity ,as LNG, then we in North America are going to be paying far higher prices. If you heat with natural gas, or you use natural gas for industry, it's going up.Where I live, I heat our house with natural gas, and I fully expect my natural gas bill to triple this coming winter. Like a lot of other people, I have cut back on things. I mean, I drive less because gasoline is twice the price. I'm a much more discerning shopper in the supermarket. I actually look at the labels and look at the price tags on things before I toss them in the cart. The travel that I'm doing, it's business-oriented travel. If I can get somebody else to pay for it, that's even better. Get the company that I'm going to go visit to pony up. "Okay. I'll come and look at you, but you guys have to share the burden here." Now, I'm not slash-your-wrist depressed, or anything like that. No, I think there's incredible opportunities out there for patient investors who are looking for bargains. But you've gotta be willing to ride the rough waves.I think gold/silver are wealth preservers over time. It's just a question of when and how long. Other things, like copper and other base metals, they absolutely have to do well because there's not enough out there considering the future demand that's happening as we speak. I mean, the battery metals, the technology metals. We could talk about that all day, but there are some incredible opportunities out there just waiting, which is not to say that in biotech, in robotics, in AI, and in medical system people aren't going to be making huge amounts of money investing in that too. That's just not my strength. If you're looking for the best biomedical ideas, I'm not your guy. But, in terms of what I'm looking at right now? Well, this is the 78th anniversary of the Bretton Woods Conference in New Hampshire, back in 1944. Then, Nixon took the world off of the Bretton Woods standard in 1971, so it's the 51st anniversary of that come August 15th.I anticipate that there is going to be upheaval in the basic units of currency that we use to denominate everything. I mean, we call them dollars now. A long time ago, people called them seashells, or whatever. For a while, people called them gold. What's going to replace the dollar? I don't know, but something is. Something's going to. I think, on the other side of that event horizon, you want to have real things that will preserve your value in whatever it is that they are denominated in or calculated in. At some point or another, a chunk of copper is always going to be worth something. This copper is from Keweenaw Peninsula, Upper Peninsula of Northern Michigan. This is elemental, native copper. This got pulled out of a rock by a glacier. That's why it's rounded looking. This other one here is from Keweenaw too, but this I chopped this one out of a rock. This was copper. Anyhow. This stuff is future wealth, is preserving your wealth.Joel Bowman:Sounds like "stuff" is due for a comeback. And if there's anybody who knows a thing or two about getting stuff out of rocks and from under basins and subterranean, high-pressure deposits, it's Byron King. Mate, thank you so much for giving us the low down on everything from the geopolitics unfolding over in Europe to what we can expect back here in the West, in the Americas. And we didn't even get to South America in this call. We'll have to save that for an entire another discussion.Byron King:Another time. Thanks so much, Joel.Joel Bowman:And thanks to you, Byron. Thanks so much for your time. Always a pleasure to chat to you. Again, readers please head on over to bonnerprivateresearch.substack.com for many more conversations like this and plenty of articles, reports, and other resources besides. Again, it's been a pleasure. This is Joel Bowman for the Fatal Conceits Podcast.

And now for some more Fatal Conceits…

Last week we brought you Part I of our conversation with Harvard trained geologist and natural resources expert, Byron King. There was a lot on the table for discussion.

For instance…

Have you noticed news from the Ukraine seems to have dwindled over recent weeks? What was once non-stop, wall-to-wall coverage now garners comparatively little attention. Of course, there are other issues at hand… like inflation at a four-decade high… the worst start to the year for stock markets in half a century… and for bond markets in over 200 years…

And now, we learn that the US has registered two consecutive quarters of negative GDP… the common definition for a recession, and the one practically everyone who follows the economy at all still uses.

But all that doesn’t mean the impacts of the war – and the west’s response to it – are not working their way through the system. In fact, the knock-on effects for international energy markets, global supply chains and even sovereign currencies could hardly be overstated.

As usual, Byron had plenty of insights on all of the above, and more. (If you missed Part I of our conversation, you can catch up here.)

In Part II of the discussion, we pick up the action with the idea of a “methane-backed ruble.” That is, what happens if and when Mr. Putin decides he wants to back his national currency, which is stronger today than it was before the first tank rolled across the Ukrainian border, with Mother Russia’s vast energy reserves?

What does that do to the heretofore assumed petrodollar hegemony? Might Japan, almost entirely dependent on foreign energy (mostly from Russia), be forced to settle its contracts in Russian rubles? What are the other BRICS nations (Brazil, India, China and South Africa) thinking, as they stand by and watch the weaponization of the US dollar? Might an alternative to the petrodollar begin to look attractive to them?

There’s so much to cover, from the war itself to Russian military supplies, the unipolar verses multipolar political landscape, the philosophy of Eurasianism and much, much more…

You can listen to the entire episode by simply hitting play above or downloading the Substack app (see the little headphones button there to listen in).

Oh, and if you like what you hear, please help us spread the word by sharing this episode with comrades and enemy combatants alike, right here…

For Bonner Private Research members, there’s a full transcript, lightly edited for clarity, below the paywall and on our Substack Page. If you’re not already a subscriber, but would like to enjoy the many benefits that come with membership, you can sort that out right here.

We hope you enjoy the show…

Cheers,

Joel Bowman

And now for some more Fatal Conceits…

In today’s episode of the Fatal Conceits podcast, we speak with energy and resources expert and Harvard-trained geologist, Mr. Byron King.

In Part I of our conversation, Byron gives us his impressions of the recent PDAC miner’s conference up in Toronto, explains why “revenge travel” is turning airports into zoos and digs into all the resources that you didn’t even know came from Russia… but that the world will have a tough time doing without nevertheless.

We also talk about Russia’s relationship with China, the west’s continuing underinvestment in human capital, the financialization of our once great economies and plenty more besides.

This Fatal Conceits podcast episode is public, so feel free to share it with goldbugs, geopolitics nerds and energy nuts alike...

It’s always a pleasure speaking with Byron, a man with a deep understanding of military history, geopolitics and all the various processes that go into inventing, building and transporting the “stuff” we depend on to keep the world’s engines running.

Please enjoy our conversation with Byron King and look out for Part II this time next week.

Cheers,

Joel Bowman

P.S. Members can find a transcript of the show, lightly edited for clarity, below. If you are not already a paid up member of Bonner Private Research, but would like to access the many resources available to subscribers, you can join us today, right here…

Joel Bowman:Welcome back to another Fatal Conceits Podcast, dear listener, a show about money, markets, mobs and manias, not necessarily in that order. If you haven't already done so, please be sure to head over to our Substack page at bonnerprivateresearch.substack.com. There you'll find plenty of articles numbering now in the hundreds, maybe the thousands on everything from high finance to lowly politics, and of course, many, many more conversations just like this one under the Fatal Conceits Podcast tab.Today, I'm delighted to welcome back to the program a long-time favorite of the Bonner Private Research readership. He's someone I've known for many, many years: Mr. Byron King. He's a prolific writer, a Harvard-trained geologist, a renowned energy and resources expert, and among the most popularly requested guests on this show. Byron, it's a pleasure to welcome you back to the show.Byron King:Well, hello. And it is a pleasure to be with you. Thank you.Joel Bowman:Byron, just before we jumped on the recording here, we were talking a little bit about the ease of traveling around the world, flitting from one continent to the other. And I know it's been a lot in the news lately and potentially this ease of travel may become a relic of the past if energy markets continue to go the way that they're going. But before we get to everything that's happening in Europe and everything that's happening globally, I want to just catch up with your travel.Since we last spoke back in May, you were up at the PDAC miner's conference up in Toronto. You sent us at Bonner Private Research, a couple of choice pics of the place. It looked more like maybe a rock concert than a mining show. It was mobs. Give us your impressions from the front lines of the heavy diggers.Byron King:Yes, the Prospectors and Developers Association of Canada, which is PDAC, P-D-A-C, is an annual mining conference. Usually, it's one of the biggest in the world. The last time they had one was in March 2020, literally just days before the world shut down. They did not do it in 2021. In 2022, they were going to schedule it in March, but because of sort of residual COVID reasons, they moved it to June.Now, there are a couple of interesting points there. Usually, the PDAC Conferences is in March because that's a time of year in the Northern hemisphere when a lot of people are not out in the field exploring. The winter is just ending, snows are melting, things are muddy, mucky, you can't get around. So traditionally, that was when all the miners could come down into the big evil city and get together and have their conference. Well, they moved it to June because of COVID, so that created some issues because a lot of people would rather be out in the field working in June and catching the good weather, the good field season.So fewer people showed up on the technical end, a lot of the geologists, a lot the engineers and what have you were out in the field. Now management tended to show up and they actually liked it because they said, "It means that my geologists aren't here and nobody can poach them away from us."Joel Bowman:Very good.Byron King:Because there's a shortage of people in the industry. It's not a COVID thing. It is just a demographic issue that after all these years of under-investment, when you say under-investment, we're not pouring money into new mines and equipment, all that.It also means you're not hiring people, and so when the young people go to college or university, they say, "Oh, gee, where can I get a job? Well, I'm not going to go into the mining industry because there're no jobs."Well, here we are now, years later, and we're saying, "Gee, we have a whole bunch of gray-haired, white-haired people, but there's a whole missing cadre of talent there." You really can't do too much without a lot of smart people working together. That's true in mining and it's true and everything else. That's one angle to it.Now, the good news is, and you mentioned that I had sent you some photos from up there, I was stunned when I showed up. It was Monday, Tuesday, Wednesday conference.On Monday morning the line was unbelievable just to get into the convention center. It's the Rogers Convention Center in Toronto. Big, huge, sprawling facility. Gigantic. There was a line outside the door and the Toronto police were out there, in a nice way, with sort of crowd control measures, lining everybody up, going through these mazes of rope lines and everything else. They can only feed so many people in at a time. And the fire marshal has his rules and all those sorts of things. So it was absolutely crowded. It was absolutely mobbed. There was a large contingent of presenting companies there, management teams and the investor relations people. Not so much the technical folks, because like I said, they're out in the field.A lot of people were there, investors, they looked like just sort of retail investors, tire kickers. A lot of people who are just "mining curious." Some of these people were not part of the mining crowd that you would expect to see. They're not part of the gold bug crowd, the gold stacker crowd, that kind of thing that we've seen in the past. I think what we're starting to see, in an investment sense, is that a lot of people, after a couple of decades of go-go, tech-tech, Bitcoin-Bitcoin, all this sort of chasing the vaporware, chasing the ethereal returns, we're coming full circle.And look, people made money in this stock market, but they made money chasing things that were really hard to put your hands around. I mean, you can't really touch a Bitcoin. It's a little electronic thing. It's not a coin, just in case people don't know that. There is no such thing as "a bitcoin." They try to pretend that there is, but there isn't.But a lot of people, I think, are looking now saying, "Oh gee, looking at the way the world is and the way that monetary policies are going, where is the dollar headed?" Things like that. They want to get tangible. And so, what can be more tangible than rocks and minerals and ores and mines and big plants that stamp out metals? And so we had the gold/silver aspect, of course, but then it's all the other things too. It's the copper, lead, zinc, that the world needs. It's the battery metals for the battery cars. It's the technology metals for all the tech.So it was a crowded situation up there. And over and above that, I'll just mention that international travel, it's fun once you get on the airplane and you go wheels up. I mean, once the airplane takes off, it typically flies where it's going and lands where it's supposed to. But it's those stupid airports. Holy smokes. They're awful! I mean, I actually drove to Toronto for that trip, but I've been on some other trips elsewhere in the last couple of months since we've spoken and it's just miserable. The terminals are crowded. The ticket counters are crowded. The baggage area is crowded. The restaurants are crowded.It's all these people with their revenge travel. "Oh, I didn't travel for two years and I'm going to travel the hell out of it now." And at the same time the airports downsized and the airlines laid off their baggage handlers and they laid off the ground crew, they laid off the gate agents and ticket agents and everything. And so now we have to deal with kind of resurrecting it.It's what our friend Bill Bonner has said numerous times in his daily essays that, "When you shut off an economy, it's not like you turned off the light switch and now you flick the light switch and it all comes back on and the lights are just as bright." No, once you power down and once things sort of relax and just sort of recalibrate to a certain level, you don't just pump it back up, and up and up it goes again. And so we see that in airlines and we see that everywhere. We could talk about that all day.Joel Bowman:Yeah, absolutely. And you put a lot on the table there all the way from under-investment in human capital. There's a whole cohort of students who opted for, let's say, "softer" types of academic pursuits and who forgot how to make stuff and how to build stuff. And actually, that stuff is kind of important in this world if you want to do things like feed people and medicate people and shelter people and move people around. And there's this entire scaffolding that undergirds an economy which you don't get to learning about in gender studies courses, alas.But just to double down and underline your commentary there on travel. Again, it's something that we just kind of take for granted, whether it's business, pleasure or emergency travel. There're many, many reasons that we are traversing the Atlantic or the Pacific, or what have you.Over in Europe, where I've just spent the past three weeks, some in Scandinavia - Denmark and Norway - plus Ireland, the UK and a little bit in Spain. Every single one of those countries at various times during the past month has seen pilot shortages, worker protests, canceled flights, the kind of zoo-like atmosphere at the terminals that you described before, where there's not enough people to get too much stuff done.And a lot of this is the result of so-called supply chain disruptions. But as you alluded to then, it really goes back to turning off the switch of an economy for a couple of years, under-investing for a decade, maybe more before that, and then expecting that we can just resurrect this magical cornucopia, this plentiful energy supply, where things are just there when we need them. But that's, as you said, not exactly how it goes.Byron King:Exactly right.Joel Bowman:So, I just wanted to bring us back to where the rubber meets the road here. This is a subject that you touched on, or rather a place you touched on at the beginning of our little Bonner Private Research project here, when you wrote some very prescient words on the situation in Germany and their energy... situation. I don't even know what we would call it at this point. It's approaching a full-blown catastrophe. And now seems to have bled over into France and the Netherlands, where other dominoes are falling. Do you want to maybe catch us up to speed on what's going on in Germany and then we can work our way across the continent back to the US?Byron King:Oh, sure. Yes. We go back many months to 2021, back to last year. I wrote an article that you were nice enough to publish, titled Germany's Energy Stalingrad. It's a not an unintentional use of a very emotional word, by the way. Stalingrad was the destruction of a German army that was encircled in the Soviet Union in the Second World War. And there were so many ways in a tactical, operational, strategic sense to avoid marching your army to destruction. Obviously, the Soviets are very glad that they destroyed the German army. One side won the war, one side lost the war. Ok. But you would think the side that lost the war, the Germans, would learn something about not losing other wars, not doing stupid things.Now that is translated into a certain sort of German politics that they have these days. There's a certain intentional, non-martial, unmilitary aspect to Germany now. Most of their combat aircraft are grounded. They don't work. I don't know that they have any working submarines. They have a very small handful of tanks. The army is relatively small. And that's probably fine, in a world at peace. But at the same time, they have done everything in a strategic sense to completely screw up their energy situation. For any country, any group of people anywhere, there are three things you need: you need food, you need water and you need energy. Germany has never been able to grow enough food, which is, with the whole "Lebensraum" thing. That goes back a hundred years. More than that actually.I guess they have enough water, but Germany's never had enough energy. It became an industrial power based on coal. They have no particular oil or gas resources. By virtue of trading with the world, they've been able to get the energy they need. But then they intentionally, for the last 25 years, adopted this green-ism, green thinking, and it's the noble virtues of green, that we are virtuous because we are green. And it's kind of like, well, you can afford to be virtuous because you are economically privileged. You're a wealthy country... For now. You've got money, you can buy the things you need and you feel good about yourself. So, "We're going to be green."Now, you go to a place like Germany and you see solar panels everywhere, and you think, "Wait a minute. I understand how the world works in terms of orbiting around the sun and all that. You get a lot of sun in the summertime and you don't get much in the wintertime." And then you have, "Oh, we have windmills and they're doing great." Well, what happens when the wind doesn't blow? Intermittent energy is not a way to run a modern economy. People who say, "Oh, we're going to have renewable energy and run our world." No, you're not. Okay? Don't label me and don't call me names. I'm just telling you that you're wrong. It's not going to happen. But they walked themselves into this.Now, for better or for worse, they tied themselves to the natural gas system of Russia. Okay, if you're going to do that, then you need to adopt a certain kind of politics between yourself and Russia that will keep the lines pressurized. Maybe it's the US pulling puppet strings or it's the NATO concept or it's the EU concept, that of just, "We want their natural resources, but we don't want to like them. We don't want to deal with them. We don't want to accept them for who they are." And then you get into the whole, "Oh, the Russians are this and the Russians are that." I don't want to go there. But there is this thing... The Russians are Russians and the Western Europeans are Western Europeans. And yeah, I get it. I'm in North America. I was not part of Napoleon's invasion army, but I understand there is a thing going on there between East and West. We had our window, our 30-year window of post Cold War opportunity to make things work with the Russians.But here we are today. I mean, I'm not making policy, but here the world is today. The Western world at least is somehow thinking that they can put Russia into a corner and bully them around. And the Russians, of course, have a completely different view of it. The Russians are saying, "If you don't want our natural gas, we've got lines of steel pipe ready to ship it elsewhere. We'll ship it to China. We'll build a pipeline across the Tian Shan mountains and send it down to India. We'll do what we have to do and we don't need you."Which gets back to your question about Germany. What's going on with Germany? Now they are backed into a corner. They have painted themselves into a corner on energy. I told you so. We wrote about it a year ago, and even earlier in other publications.But yeah, it's crazy. I suppose the only good news out of this is that Germany has become an energy example for the rest of the world not to emulate. Don't be those guys. Don't do what they just did, which is paint yourself into a corner. So that the newspaper articles in Germany are talking about, "We're not going to have hot water this winter. You're going to have three hours of hot water a day. There'll be three one-hour windows every eight hours that you can wash your dishes or take a shower" or something like that. German industry, which is the backbone of their economy, is chemicals industries, metals industries, manufacturing industries, all of which need natural gas. Or they need some sort of an energy to make it work. And what are you going to do when it's not there?Now from an American standpoint, I am just appalled at the energy ignorance in America or the energy dissimulation, the idea that, "Oh, don't worry. We have plenty of natural gas here in America and we'll liquefy our natural gas. We'll LNG it and we'll send it over. We're going to have a Berlin airlift to Europe. Except instead of flying coal into Berlin like we did in 1948, we're going to send you LNG." It's kind of like, no we're not. No, we're not. We don't have enough wells. We don't have enough pipelines. We don't have enough LNG capacity. We don't have enough tankers. We don't have enough people. We don't have enough tanker crews. We don't have... And then over in Europe, they don't have enough unloading points to even receive it. So anybody who says, "You don't need that Russian pipeline gas, we'll just send you the LNG." It just strikes me that people are just living the lie.Joel Bowman:Right. It shouldn't go without mention the perhaps very not-coincidental timing of the scheduled maintenance on the Nord Stream 1 pipeline that Mr. Putin has conveniently scheduled in. And as you outlined some of the warnings that the German minister of energy is giving, preparing his nation, "We're going to have hot water shortages." They're also talking about closing down public swimming pools. I've seen them even beginning to dim the street lights. This is Germany, a highly industrialized economy in the 21st century that is in many ways kind of a canary down the decommissioned coal mine, a warning of sorts for the rest of us in the West.And just for a little context for our listeners here, Germany's economy it's a $4 trillion economy. This is a $4 trillion GDP. California, for comparison, is about maybe three and a half; Texas is two. So it's a couple of Texas's worth of industrial output. This is not insignificant.And energy costs there, I had a look at a couple of scary charts. For the 10 year period from say 2011 to 2020-21, before those prices began shooting up, the Germans were averaging about 50 euros per megawatt hour. That's for base load electricity. It's now about 350 euros an hour. This is a sevenfold increase in the underlying costs of critical energy. Think of all of those inputs, all of those factories, every cog, every widget, every everything.And the situation is potentially even worse in France, where their underlying base load energy cost has gone up from about the same average, about 50 euros per megawatt hour over that 10 year period, to now closer to 450 euros. So when you put together France with Germany, and let's say we throw in the Netherlands there, that's another trillion dollar economy, we're looking at something approaching a third of the industrial output of all of Europe. Now kind of weighted under these regulations, being hamstrung by green ideology, and are now really, really struggling to keep the lights on. How long until these dominoes fall our way?Byron King:Well, oh my gosh. There's about 10 different angles on that one. In one respect, Europe's problems are North America's benefit. People are saying, "Oh, the dollar is getting stronger." And yeah, the dollar is stronger and gold is actually sold down a little bit lately. Dollar up gold down. But gold's still in the $1,700 range. I'm not worried. But one of the reasons for that is that if that money is exiting Europe, it's exiting euros and moving to North America to the dollar, the US dollar, because markets are forward looking entities and markets look ahead and they say, "Huh, I don't know how Europe is going to power its way through this mess. It's July, and what's Europe going to be like in December, January, and February?" Right now, as we speak in the middle of July, Europe should be importing gas from wherever and filling the storage caverns, and they should be importing oil and refining it into fuel, filling the oil tanks and things like that.They should be doing all those things, storing up the acorns for the winter, like the smart little squirrel, so that when the winter comes, they have something to use. But they're not doing it. And we mentioned the Nord Stream pipeline. There's a pumping system made by Siemens, the German conglomerate company. Every now and then you have to uninstall the turbines and you have to take them and refurbish them and clean them and fix them and replace parts and all sorts of stuff. That's happening in Canada, of all places. They put them on a boat and sent them to Canada. And there's this issue in which Canada didn't send the turbines back because of sanctions on Russia. And so the Russians are using this as, "Okay, well, if we don't have the turbines, what do you want us to do? We can't pressurize the pipe and send the gas."So the question is, what happens now? Is this just some sort of a political game that the Russians are playing? Like, "If you're going to jerk us around, we're just going to shut your gas off without really saying we're shutting your gas off. We'll blame you for it," which would be a perfectly valid strategy. That's a very Russian way to do it. I mean that as a compliment, frankly. Joel Bowman:You play your cards you've got, sure.Byron King:Yeah, but meanwhile every day, every single day that those cubic meters of natural gas do not show up in Germany and go down into the storage caverns or whatever, that is going to be a tight day come January and February, when it's cold and dark. What can I say to the German minister of energy? "Good luck, sir. Good luck, my friend."Joel Bowman:He's going to need it.Byron King:It's been years in the making. It's been years in the making, but it's being made right now. I've used the analogy of the Ukraine conflict. It's Pandora's box and it has opened. We've opened the Pandora's box and a whole lot of bad things have come out of Pandora's box. We call it the Ukraine. The thing is, though, that that box was there long before the first Russian tank ever rolled into Ukraine. I mean, there were a whole lot of issues, global issues, regional issues, national issues, all stored up in Pandora's box. And when the military operation began and the west immediately defaulted to, "We're going to sanction Russia, we're going to do this, we're going to do that. We're going to send weapons to Ukraine. We're going to fight to the last drop of Ukrainian blood." When all that happened, that opened up the box and all these issues that were frozen issues came out of the box and now they're thawing out; energy issues, food issues, fertilizer issues, manufacturing issues. And it has to do with globalization. It has to do with financialization. It has to do with de-industrialization.People say, "Well, all that world's fertilizer that we want to trade in the worldwide market, a big chunk of that comes from Russia and Ukraine." Yeah, because elsewhere in the world, like in the United States, we've under-invested in that here.Or when people say, "Well, we've got a shortage of diesel fuel." Yeah, because in the United States we've been closing down refineries for a long time. We've been converting real refineries, oil refineries, into these biodiesel refineries, where you basically take cooking oil and turn them into diesel. But they're not available anymore to refine diesel, but where were we getting diesel from? We've been importing it from Russia.It's just amazing. Russia in so many ways is the marginal producer of so many things. And as you learn, everybody learns this in economics 101, the cost of anything is set at the margin. I mean, if the cost of a share of stock is a 100 bucks, well then the whole market cap of that company is based on $100 shares because somebody was willing to pay a $100 for it. Joel Bowman:Right, those marginal producers and the price being set at the margin makes me think of swing voters. This is where elections are won and lost. This is where prices are set. At the margins.Byron King:Well, yeah. I mean, Russia has the most excess oil beyond its own internal consumption available for export, for example. Russia, I believe, has more oil available to export every day than Saudi Arabia, because Saudi uses a lot of its own oil internally. Look at other things, look at Russian natural gas. Russia is one of the largest natural gas exporters in the world. And because they're a continental power, they can string pipelines and do it. They've got that Power of Siberia pipeline that is sending immense amounts of natural gas to China. And there's a Power of Siberia number two, and even number three on the books.Look at the minerals that Russia has, and the metals. Russian nickel, Russian copper, Russian titanium. Airbus and Boeing have talked a good fight about, "Okay, we can get by without Russian titanium." Well, yes, you can for six months, eight months, a year, maybe you can stretch it out, whatever, but you're not going to get too far without Russian titanium.Look at things people don't even think about. They don't even think about noble gases like helium and neon, argon, things like that. You say, "Well, who uses helium? For party balloons?" No. I saw an article. It's in the Harvard Crimson, the school newspaper, not too long ago, about how physics students at Harvard are changing their PhD goals, because they don't have enough helium to do the work that they need to do in particle physics, which requires all sorts of helium-based materials and sources. I think you and I have talked about this, I think was neon gas. Well, who needs neon gas? Well, you need neon gas to make those computer chips that we don't seem to have enough of. Where does neon gas come from? Well, Ukraine and Russia. How do you get neon? You liquefy air and you bring it down to certain temperatures. And at certain temperatures, you have liquid nitrogen, liquid neon. And then you have to separate it. It's very complex and it's very energy intensive, but I mean, Russia has invested in doing it and in the US, certainly we haven't. So it gets into that whole under-investment thing. We've under-invested in things that we need. We've under-invested in people that we need to do the things we need.It's easy to say, "Oh, we have too many people majoring in gender studies," or whatever. Yeah. We do, I agree. You know what else we have? We have too many people who major in applied math or physics or something like that. Then they go to Wall Street and write algorithms and trade because they can make more money using their math skills trading on Wall Street.But of course the good old days of working at the research lab for General Electric or whatever, those are gone because there is no General Electric research lab anymore. Jack Welch made sure of that. And so many other companies are the same. Where corporate America used to invest a huge amount, a large, significant portion of its cashflow into real R&D, the good old days of AT&T, Bell labs, the good old days where oil companies used to do R&D. Oh my goodness, even companies like Boeing, I mean, they have very, very low R&D in terms of what they need to do.You would think that companies would do that work, but they're not, and they haven't. It's because they've been Wall Street driven. Instead of putting the money into R&D, which might take years to pay off, if ever, they'd rather just buy back shares of their stock or just pay a higher dividend and make the Wall Street analyst happy.Joel Bowman:Alrighty. Thank you very much for listening, folks. That will do it for Part One of my conversation with Byron King. As you can probably tell there's lots more left on the table that we discussed, which we'll say for Part Two. You'll be able to find that next week. Byron and I talked about the imminent bifurcation of the global monetary system, what a gold/methane-backed rubble might look like. And we got into a bit of the nitty gritty with regards to the situation over in the Ukraine and had a few prognostications about where that might be headed and what it might mean for energy markets, both over in Europe and back here in the United States. We also spoke about what Byron's doing with his own money and where he sees markets going for the second half of the year.I hope you'll join us for part two of my discussion with Byron King next week. In the meantime, as always, please head over to our Substack page. You can find us at bonnerprivateresearch.substack.com, We hope to see you there and on our Fatal Conceits podcast next week. Thanks a lot. I'm Joel Bowman. Cheers!

© 2022 Bonner Private Research, Carrick Road, Portlaw, County Waterford, Ireland. 

All Rights Reserved. 

Any reproduction, copying, or distribution, in whole or in part, is prohibited without permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal circumstances–we are not financial advisors and do not give personalized financial advice. The opinions expressed here are those of the publisher and are subject to change without notice. It may become outdated and there is no obligation to update any such information. 

Investments should be made only after consulting with your financial advisor and only after reviewing the prospectus or financial statements of the company or companies in question. You shouldn’t make any decision based solely on what you read here. Neither Bonner Private Research nor its employees and writers receive any compensation for securities or investments covered herein.

Dear Listener,

It’s been a wild year in the world of finance… and no place more so than in Bitcoinlandia.

When we spoke to today’s guest, back in February of 2021, Bitcoin had just crested the $40k mark.

It since rallied to $60k… plummeted to $30k… catapulted to $70k… and collapsed back to where it is now, somewhere in the low $20k zone.

We begin today’s conversation with Charlie Morris on the subject of volatility. If Bitcoin aspires to be a viable, non-dollar asset, how important is stability in the market?

We also ask him about BOLD, his Bitcoin/Gold index designed as a dollar inflation hedge, plus his outlook for stocks, his take on the Fed’s dilemma and plenty more.

So sit back, relax and enjoy our conversation with Mr. Charlie Morris.

Cheers,

Joel Bowman

Thank you for reading Bonner Private Research. This post is public so feel free to share it with Goldbugs and Crypto Nerds alike...

P.S. Be on the lookout for a full transcript of this discussion over the next few days… We’ll let you know when it’s posted ~ JB

In this week’s Fatal Conceits Podcast, we’re joined by globetrotting editor of the Real Estate Trend Alert, Ronan McMahon...

If the past few years have taught us anything, it’s that the “new normal” is unlikely to look anything like the “old normal.”

That goes for the financial world as much as it does the job market and practically everything else about the way you live, work and even spend your leisure time.

The “Great Covid Interruption” (and the governments’ responses to it) accelerated a nascent trend away from congested, overpriced, high-crime metropolises toward remote work and retirement destinations… many of them overseas.

Just as Californians and New Yorkers are ditching their overtaxed, over-regulated, over-mandated home states in record numbers, opting for relaxed and rural alternatives, so too are Americans and Europeans in general looking beyond their own borders, wondering…

“Could I enjoy the same – or even better – lifestyle on the Riviera Maya… or Los Cabos… or Portugal’s wild Costa de Prata? And could I do so… for a fraction of the cost?”

With inflation biting big time at home… and self-serving politicians looking to tighten the screws further on honest, working folk… maybe it is time to look for a better way?

We caught Ronan mid-migration, en route from Mexico’s Baja Peninsula to his summer residence in Ireland. What this man doesn’t know about international real estate opportunities is simply not worth knowing. So whether you’re looking to invest some time and/or money abroad… or you just want to escape the rat race for an hour and imagine yourself on a white sandy beach with a margarita and a good book, this episode of the Fatal Conceits Podcast is for you…

Saludos!

Joel Bowman

P.S. For readers interested in learning more about Ronan’s work, you can access a 100% risk free trial of his Real Estate Trend Alert service for 90 days, right here…

As always, go right ahead and drop any comments… including YOUR favorite overseas destination (and why it is so)… in the section below. Also, feel free to share our humble podcast with globetrotting friends and desk-bound foes alike, here…

TRANSCRIPT:

Joel Bowman:Welcome to the Fatal Conceits Podcast dear listener, a show about money, markets, mobs, and manias, not necessarily in that order. If you're a first time listener or you are joining us once again, please do head over to our substack page, that's at bonnerprivateresearch.substack.com. There you'll be able to find hundreds of articles and research papers on everything from high finance to lowly politics, and plenty more besides, including many discussions under the fatal conceits podcast section, just like this. And for today's episode, I'm delighted to welcome back. One of my very favorite guests, a long time personal friend and friend of the Bonner Private Research family, a man with I think possibly the coolest job title in the world that is International Real Estate Scout. Please welcome Mr. Ronan McMahon. How do you do sir?Ronan McMahon:Joel, lovely to be here as always, doing good.Joel Bowman:Fantastic. Now mate, last time you and I spoke, if you'll recall on this podcast, I was in your sometimes hometown of Cabo San Lucas on the Baja peninsula in Mexico. And you were in, I guess, one of your other sometimes homes on Portugal's west coast. Where do we find you today?Ronan McMahon:I'm talking to you today from an Airbnb in Guadalajara-Joel Bowman:Of course, you are.Ronan McMahon:Of all Places. I did just to kind lower the sexiness of it. I'm not quite beachfront. I'm looking out at beautiful flowering, Hacienda trees, but I'm making my way east, my eastward migration from Cabo San Lucas to Ireland to Portugal is underway.Joel Bowman:Okay. Yeah, we were mentioning just before going on air here, that we're both in the midst of packing for our seasonal migrations. For listeners who are unfamiliar with your no air condition and no heating rule that you've imposed upon your life, do you want to give us your migratory pattern of an International Real Estate Scout?Ronan McMahon:Absolutely Joel. So the maybe starting where I'm now in terms of this block of the year, summer is in Ireland. I'm Irish as you well know, I like to take that high summer in Ireland where we've got these long summer days until 10:30, 10:45 at night, everything is green, everything is beautiful. The weather can be okay. It can be mixed. I don't really mind if it's rainy because I'm coming from sunny, Mexico, and I've got my fix of sun. Then typically both shoulder seasons, spring and fall. I like to be in Portugal. It's actually the silver coast that stretch of coast, north of Lisbon, amazing big wide, long sandy beaches, kind of wild Atlantic weather, but it's warm and it's pleasant and I'm right on a beautiful beach and on a great ocean front golf course in Praia del Rey, and got wide open spaces, great food, really, really special place to spend time.And then my winters are in my home in Cabo, San Lucas, Mexico. So there again, I get these beautiful winters in Cabo where it's kind of mid seventies, low eighties, nearly always t-shirt, but often it's long pants in the evening. So following that route, I learned a couple of things Joel when I started traveling, first is weather and at this very conditions are very important to my overall sense of wellbeing. I had asthma, and a mild asthma, when I was young I would've told you it wasn't a big deal, but then when I moved to a low humidity place or spent time in a low humidity place, like Cabo San Lucas, I started to realize, geez, I really, really feel a lot better with this sunshine and low humidity. And I also don't do well in heat. That's the Irish boy in me.So I found life is a lot better when I just move around and follow both weather conditions and places that agree with me. And along the way too, I'll get to scratch a lot of those itches. I mean, I love to live in places that are really quiet and have the sense of isolation while being relatively close to an international airport. But I also like to get my big world class city fixes. So I think no year is complete without some time in London and Paris and so that's how I like to organize and work and do my research and do my deal making along the way as I go.

[Ed. Note: Learn more about Ronan’s Real Estate Trend Alert, and how to start your own 100% risk free trial, right here.]Joel Bowman:Well, I want to get into that work that you're doing and that you've been doing, of course, with Bill Bonner, for goodness, as long as I've known you. And that Bill has been doing since going back, I guess, to the seventies, with the founding of International Living, but just right off the top, it seems like just such a kind of bond spy-esque, existence, just sort of cruising from one place to the next. But you've spent the better part of your career showing people how actually to do this and actually sort of where the rubber meets the road with regards to how they can potentially make that happen in their life. But I wanted to just go back to one point that we mentioned in our last conversation on this show, and that was over the past few years, there seems to have been this catalyzing event with the sort of the global pandemic and people have been locked in their homes for a long time.And now it seems they've gotten out the world is just beginning to start opening up again. They're starting to look over the back fence and reimagine themselves on these sort of grand tours, if you will. But I think one of the points you brought up last time was that a lot of people who had been living in very high price cities, maybe San Francisco or Chicago or New York, came to find that actually, they weren't really getting the bang for their buck with regards to rent, let's say San Francisco, I think it's the highest in the U.S. at some astronomical figure, but it did seem like the pandemic catalyzed a bit of an outflow from those cities. There were, of course, these famous zoom towns and people commuting to work.I know there was a lot of talk about that trend reversing, or maybe even just contracting in the wake of the pandemic, but it does seem like people who got a bit of a whiff of freedom are reluctant to give that up. And that maybe actually, this is the beginning of a kind of reverse migration from those big cities that people are now trying to get out of. Does that resonate with you and your experience?Ronan McMahon:I mean, first of all, Joel, I would say straight up, you will have heard no talk from me of reversal, not for a second. And secondly, this has been the... It's a big acceleration rather than something that COVID has triggered. So let me right back to the start because you're scratching on something here that is so integral to the way the world is changing, it's so integral to the opportunities that we have in terms of how we organize ourselves, and so integral to investment opportunities. So first of all, this was happening anyway. So over the last 10 or 15 years, just this thing of remote work, remote managing a business, remote and enjoying your retirement. That was really, really becoming a thing.I was seeing just the explosion of beach cities, like Playa del Carmen in Mexico, or Lagos in Portugal. So this is all happening anyway, and along the way, there have been a few kind of accelerating events. And it's really interesting to look at these accelerating events because they might surprise you. So one accelerating event was the last crisis, the great financial crisis followed by the Arab spring and instability in the Middle East and North Africa. So I think a lot of people perceive these jolts to the system as somehow leading to stagnation. But what it really means is that the people who are in a position financially and in terms of skills get out. So the great recession, the last financial crisis, upended things, people moved to where... It just challenged everything.So people moved to places like the Costa del Sol in Spain, and they figured out how to make a better life for themselves. And likewise, with the Arab Spring, now this is for a very different type of group, but I think it's a really, really interesting example because all that instability led to an influx again, into places like the Costa del Sol in Spain and Paris. So when the system gets shaken up, what happens is people reassess. So before COVID, we had been seeing this it was almost like a rough run, people left... Maybe that's an inappropriate analogy, but the people left San Francisco, because it was too expensive and too this and too that and to the other thing, and they moved Austin. And then from Austin, they were moving to Tulum or to Panama or to Lisbon. And then COVID hit and everything goes up in the air and people are going straight from San Francisco to Cabo San Lucas or Tulum.Even though people are flooding into Austin as an example, many, many people are also leaving and going to these other locations. During COVID, we saw how older people were less inclined to travel. Since things have started opening up and freeing up, they're traveling in great numbers to enjoy their time and enjoy their retirement. I'm seeing more and more of these places, these very desirable places to spend time. Think about living in your dream beach city, you've got pristine white sands, you've got the best restaurants imaginable, you're surrounded by a group of like-minded individuals, your accommodation, and all your costs of living are a quarter or a fifth of what they're in in San Francisco.These places are developing into their own ecosystems with their own startups, with their own vibrancy, with their own energy. This genie is not going back in the bottle. Now, Joel, that's not to say people won't return to offices to some extent, and that's not to say that every company will be remote or stay remote, but just remember the have a dramatic impact on places like Cabo San Lucas are like Lagos in Portugal. It just takes a very, very small percentage of San Francisco tech workers or New York bankers, it just takes a very small amount to them to really, really move the needle. And this is creating maybe the biggest investment opportunity of my lifetime in places like, these places I'm talking about.And I'm thinking particularly about kind of Cabo San Lucas as I speak with you because tomorrow we open a new opportunity that's members only to my group of real estate investors. And in Cabo San Lucas, we've just seen incredibly fast rates of capital appreciation from our members only deals. And we've seen rental rates more than doubled since pre COVID. So it's been a great opportunity in terms of financially for us to be able to tap into these trends too.Joel Bowman:Yeah, that's fantastic. And I'll include a link to the work that you do at Real Estate Trend Alert in our transcript here. (See Ronan’s RETA service here.) When you and I was speaking about Cabo San Lucas and I was ironically there and you were in Portugal at the time, one of the things that struck me that you had observed, and this is speaking as a, I won't say a young father, but the father of a young daughter is that when people move to these... To work remotely in places like Cabo and places like in, on the Maya Riviera, et cetera, or in Europe, they bring with them a certain demand for example, education for their kids. And you were seeing small communities of generally like-minded individuals, young professionals with elastic salaries that were now going a lot further.Those people were starting to demand on location, education for their kids, which I know for a lot of people a lot of my friends in the U.S. are paying through the nose for what they're increasingly finding out is substandard education or indeed indoctrination for their kids. And as with people who are starting to work remotely, people who are living remotely are quickly realizing that for a lot less pennies on the dollar, they're able to afford some help around the house, a nanny, a private tutor, piano lessons, all this kind of stuff that would've just been absolutely impossible had they stayed at home, but that creates a whole sort of sub economy that's very vibrant in places like Cabo. Would you agree there?

Ronan McMahon:Absolutely. And I mean, this exists at every level. You take you as a father of a young child you're thinking about the various infrastructure that goes with that. Maybe you're an avid golfer and you realize that now you come here and you need golf lessons, or you're a tennis player, and you need tennis coaching followed by a massage and you like certain types of food. And all this is just people and ideas in a mobile virtual world, people and ideas are the resources that make an economy kick. So not only do you have, and do you develop that service infrastructure, nannies, kindergartens, accredited schools, universities, all this stuff, but you also find that ingenuity starts to get transferred.So for example my team is dotted around the world. And now I see for example some of my team is based in Medellin in Columbia. So now we need to get tech consulting services, close to that person and close to that little team. So now we're going out a level in the ring because it's more convenient to have our tech consultants close on hand to that person. It's easy for them to connect and collaborate on certain things. So now these little pods, so where I maybe had two team members, now maybe they have another four or six people supporting them and providing frequently very, very high level services. And those services are priced at a global market price because all those people are selling their time and selling their ideas and selling their brain power into a global market. So it's transformational what this brings to a lower wage economy when all of a sudden you've got this cohort that are earning at U.S. levels.Joel Bowman:Yeah, there's a huge opportunity there and having lived abroad myself in the middle and the far east and down, down here in south America, I think when we spend our childhoods in one country in, be that Europe or in the U.S., or in Australia, in my case, we get used to a certain type of market and forget that it's a big, big world out there. So speaking of which one of your mantras, I guess, or one of your sort of guiding principles when it comes to looking at places around the world to invest, and you've mentioned a few of them here is this idea, this path of progress idea. And I wonder if you could just take a second just to explain that what you mean by that, and then we can get into some places that potentially you're looking at presently.Ronan McMahon:Yeah. Exactly Joel. What I see as a path of progress event is something that makes a place and typically in my context, it's a place that's very beautiful, very attractive. Something happens that all of a sudden makes that accessible. So historically, that's been big infrastructure event. A new airport comes to a Caribbean island, a new bridge connects two areas. So big infrastructure projects that made beautiful places that were historically difficult to get to much much more accessible. So the big examples of this I like to use Mexico's Rivera Maya as the classic example, because this is the stretch of coast that starts out of Cancun and goes down to Tulum, those pristine white sand beaches. And there was nothing there, go back to the sixties, there was, I mean, literally nothing. A few Mayan villages in land, but nothing on the coast.And then the Mexican government through their tourism promotion body came up with the idea of creating a tourism destination. So they built Cancun airport and built the infrastructure for a hotel zone. So this was like a master planned tourism event. And then from there, they built roads. So first Cancun developed, it developed, thanks to that improved air accessibility, then they built a highway to Playa del Carmen, development followed, and then onto Tulum. So it's typically these big infrastructure events that improve accessibility. Now, that idea of this being infrastructure driven, I'm really broadening it out over the past couple of years to include things like technological developments that allow for remote work just these big changes that support and accelerate these trends.Joel Bowman:Yeah, that's very interesting. I was speaking with our mutual friend Will Bonner, Bill's son when he came to visit his dad up in Salta and we traveled around... And this is in the Northern reaches of Argentina for our listeners and where Bill has some property and he, and Will run a wine partnership up there. Very remote part of the world, really arid kind of Luna-esque landscape in many ways. And that's part of the reason that they have their wine partnership up there. This really extreme altitude vineyards and extreme conditions for growing grapes.But it's very interesting, he was mentioning that, or one of our co-travelers was mentioning that the Saltan government had some conversations or some inroads with setting up Starlink internet access up there, which is this decentralized very, very futuristic sounding private internet satellite connections. Which when I think about something like that it going back to the sixties, it was, you had to land an airplane on a strip somewhere to bring people and bring opportunities to a place like Cancun. Now we go to somewhere it's that this is about as remote as you can get up in, on the Bolivian, Chilean border in far Northern Argentina. And we walk around and we see kids in cafes on their laptops doing their business. It's this sort of progress. It almost feels like the whole world is opening up. In that scenario, how do you pinpoint one particular place over another when something like a tech expansion or liberation feels like it could be just super ubiquitous.Ronan McMahon:And just the other thing too, Joel, that's going on is that the governments right across the world are competing for us. There is just now this succession of golden visa programs, remote work visas. Governments right across the world are looking to attract in mobile people. So it comes down to, and so just, how do you pinpoint the next areas that are set to explode? For me, this is really, really easy right now, because what we're talking about is a mass acceleration. So there's this variety of places that have proven themselves free acceleration to be the most desirable places for remote workers, for mobile people, for retirees, for this whole cohort, which it's very interesting that can exist so seamlessly side by side, because you say digital nomads, people might have some preconception, but you go to a place like Playa del Carmen in Mexico, and you have young trendy, digital nomads, you have young families, you have older retirees. These places broadly have the same kind of basket of things that are appealing to everyone.So our strongest opportunity in terms of tapping into this is to go with places that have already proven themselves pre COVID, pre mass transformation, that's number one. And secondly, look to their hinterland and to see where the next places in proximity, where is the overflow going to go? So to give an example and I'm, again I've just been the past few months in Cabo, and that's where I've been doing a lot of research and scouting, but Cabo are the lost Cabos area of Mexico. Let's say Cabo San Lucas and San Jose del Cabo. That's had this massive explosion fueled by a range of things, including all this stuff we've been talking about, plus improved air accessibility.Now, on the margins of that, there's this whole bucket of new places, okay. So Cabo San Lucas has been this like, well established Uber luxury destination for decades. In the last couple of years, development has been moving along the coast to Pescadero and Todos Santos. I predicted transformation of both Pescadero and Todos Santos five years ago, now those two areas and Todos Santos is a Pueblo Magico, Pescadero is an area 10 minutes closer to Cabo San Lucas that's got an abundant supply of water. So it's attracted all these really cool foodie destinations. But those places you've got, let's call it the overflow. And I'm hesitant, it's quasi overflow, but it's also that the pioneers who came there 10, 20 years ago all of a sudden Cabo is too mainstream, too many big box stores, too many of all these things that are attracting maybe the more conventional, practical people. Next thing, the pioneers are going an hour down the road.So outside of Cabo, we're seeing this transformation of the Baja I've just come from La Paz, which is the state capital of Baja, California Sur. And that's this beautiful sleepy kind of seaside town with the lovely Malecon. And it is just exploding with new restaurants, just this vibrancy in the foodie scene, new boutique hotels, new niche developments popping up all around. So the Todos Santos and Pescadero are along the Pacific coast that runs north of Cabo San Lucas. You go east of Cabo and you hit the east Cape, and that's on the Sea of Cortez side. And again there, there's all this new funky stuff happening. Some of those beach towns to the east of Los Cabos like La Ventana, they feel like Tulum on the Caribbean side of 15, 20 years ago.So the way to play this is to back the horse, that one in a more challenging environment, that's step one, that's the most solid play. And then the more speculative play, if you want to get out ahead of the next trend, find the places that's one step removed, one step away from that proven place. And you can take wild speculative hunts on, let's say an Albania, for example, I could make a very compelling argument for why Albania might be very much worth looking as a speculative long term punt. But then I think to myself, why would I bother looking to Albania when I can look two hours north of Cabo San Lucas, where I literally can look two hours north of a market where the average nightly hotel rate is $455, where a significant portion of the tourist industry is the luxury segment with nightly rates starting at 1500 bucks a night, where you go in through the airport and you see everything from new budget airlines to the most congested, private jet parking lot I see everywhere.So that in my view, Joel, we can look to kind of very speculative upsides in a way that's very low risk by following that strategy.

Joel Bowman:Yeah. So interesting that you mentioned Albania, my wife and I were there, what would've been maybe 10, well, eight years ago say, and we were at the very Southern tip there just right on the Greek border at a little place called Butrint. And my wife is an avid classist and has her own classics website, classicswisdom.com., if you want to head over and check it out. But we were there on a, just on a whim it's very difficult to get to. At least it was at the time. You had to go... You couldn't cross over the border from Montero, you had to sort of zigzag ferries up and down the Adriatic, and we ended up getting a taxi to take us over the Greek border. And went on a floating bridge, and there was a mule ride. At some point it was very, very off the beat track, but once we got to the beach, my goodness, it was just a little slice of paradise.And there was an old ancient ruin there that was said to have been Odysseus's first stop on his way home from the Trojan war. It was all very, very interesting. And we had the place practically to ourselves because there was literally, nobody had heard of it. And Albania of course, had been such a hermit kingdom for so long that it was... It very much felt that we were off the beaten path and maybe the opposite of Corfu or something where it was just a more regular open to practical travelers, shall we say. But it's interesting that you remark on Todos Santos and places like this.I've been thinking for many years that it's these little in the knowledge communities who are going a little further beyond who discover these things. And I'd heard about Todos Santos many years ago, having grown up as a surfer because of, as you, of course know, it's been and long been a big destination for big wave surfers off the west coast there. And it's interesting to see now these people coming in and putting tennis courts in and infinity pools and that's in the next wave of progress, but it does go to show that you really need to be amongst those circles, talking about these places, getting your boots dirty, doing the investigative and scouting work that you do, because it's oftentimes within those small communities, just word of mouth where you hear about the next thing that's taking off.I wanted to ask you about Tulum on the other coast, because I know you've been doing some workout there, and then maybe sort of get into exactly what kind of opportunities it is by way of construction and investment and pre-construction deals you're able to leverage for your readers and into a bit of the nuts and bolts. But I guess just selfishly I'm very intrigued by what I've heard about Tulum recently. Can you give us a bit of an insight there?Ronan McMahon:Yeah. And just when you mention surfers too, Joel, I think of Nicaragua and I think of how the first of international visitors were those avid surfers who crossed the border from Costa Rica. Costa Rica gets discovered, Northern Costa Rica becomes moderately busy. Again, those people on the frontier on the edge, they're looking for the next place. You just see this time and time again, the artists, the French and Italian cooks, you just follow these types around because they're only looking for the best. So they're mobile, they'll go wherever is best. And they, different groups unlock are they both find, and then they also create some of these transformations because a lot of these transformations come about when a certain community brings a certain design sense or something to a neighborhood and triggers a gentrification.And Tulum is just one of those places where you just have this like 13 kilometers of just absolute pristine beach. You have got an area of town around, along the beach that backs the beach, and then you've got Tulum town itself, which is vibrant and diverse. It's just incredible to just see the transformation within Tulum. Yeah, I remember it's probably just a few short years ago, popup restaurant. So Tulum was the place when Bill created international living, the very first issue of international living in 1979, I believe was about Tulum. And Bill rode about finding naked hippies frolicking in the beach. Now, there's still hippies and partially clad hippies, but there's a type of-Joel Bowman:Now there's highly paid models.Ronan McMahon:And there's the types of hippies who are paying $1,500 per night to stay in a beach house.Joel Bowman:Right. I'd take a piece.Ronan McMahon:Yeah. So like, I mean, I for a long time, every time I'd go, I'd send Bill a photo of a kind of line of hipsters queuing up to have dinner in one of these trendy restaurants. And Bill was blown away that this was Tulum. And then he came down there with me just before COVID became a thing for us. So I guess, February of 2020, but it is just this pristine, beautiful beach, for me, it's the nicest beach on earth or one of the nicest beaches on earth, certainly that top, top, top tier, and you just have this amazing experience of great food, great beach, people bike around the place.It's just very funky and very vibrant and just really, really beautiful. And then so much to do around because you've got ancient Mayan ruins on the cliff, you're a short drive to Coba, which is this Mayan ancient Mayan city. You've got Cenotes which are these kind of these sinkholes so the whole peninsula is built on limestone. So over the centuries, some of these have just collapsed into giant holds that just leave these beautiful, fresh water kind of sink holds or lakes with caves. And it's just really, really beautiful and a very, very special and vibrant and diverse place.And it's created a huge real estate opportunity just for all those reasons that we've talked about. And investors who've got in have, have done extremely well and will continue to do extremely well as those both long term and short term rental rates increase.Joel Bowman:Yeah. I bet I'm cognizant of the fact that I'm sure our listeners realize in both yourself, Ronan and myself, that we're wonder lost people. And we could rhapsodize about exotic places around the world, probably for a lot longer than we've got time for on this particular show. But I wanted to get to exactly how investors, whether or not they're people who want to spend a significant portion of their time, let's say, and actually physically be in one of these many places that we're talking about, or if perhaps they wanted to place sort of a, put some capital down and invest in something along the risk profile from steady high rental rate security to perhaps something more speculative at the other end, how your Real Estate Trend Alert can help identify opportunities for them and get them started on one of those paths.Ronan McMahon:Yeah. So I guess, Joel first of all, the research that I do along with my team, because again, it's a very, very big world. And since I've founded Real Estate Trend Alert way back in 2008, I've realized that it's a big patch of ground. We have to cover. So the more help I have the better, but we pan out across the globe and we find places that are set to be very, very strong beneficiaries from these big trends that we're seeing. So the first thing people can do is invest in those recommendations. So for example, five years ago was a, what I would call a macro recommendation, which was to buy land or homes in a certain neighborhood of Todos Santos. And that's a scenario where I've identified the place that's on the up. And I've explained to readers what I see as the best way to profit from it.The next step where it becomes, I guess, more easily actionable for readers is where I sit down with the developer and I use our group buying power to negotiate special members only pricing and terms on the deal. So for example, tomorrow in Cabo San Lucas, we have a new members only deal that's opening up. We get to buy ahead of this deal being announced to the general broader and local market. We get to pick the best inventory and we get a very, very significant discount on what the developer will charge to everyone else. So the benefit of that is we get the benefit of the group buying power, because I invest along with my fellow RETA members in many of those deals in fact, in this Cabo deal tomorrow, I plan on buying two condos.We get the benefit of our combined group buying power because when I sit down with the developer, I can get a pricing based on us taking a big number of condos. Maybe it's a hundred condos rather than just getting a price on one condo for myself. And then secondly, we also to get to leverage me and my teams research, identifying the best neighborhoods and very, very importantly, the best developers to work with. Individually, every RITA member should absolutely do their own due diligence, but we certainly do a lot of the grunt work and provide a lot of the filtering out of the people that you certainly don't want to be doing business with. So there's the macro research that you can just take and figure out your own land deal yourself, or we'll introduce you to brokers in many cases and you go figure out your pricing and do your own negotiation there, and then from time to time probably about eight times a year, we'll have a big member only deal. And that's what we have tomorrow in Cabo San Lucas.Joel Bowman:All right, mate. Fantastic. I'm looking forward to joining your group on one of these future joints, somewhere around the world, but I think before then, you and I might have a chance to catch up in Ireland. I'm going to be there for most of... Well, I'm going to be there for a short while at the end of June. I'm not sure what your movements are, but we might potentially be able to sneak in a pint of Guinness sometime along the way.Ronan McMahon:Would absolutely love to. And are you going to be circling back through Ireland as well?Joel Bowman:I'm not quite sure yet, where we've got a bit of a... It was interesting you were mentioning that so many retirees are now reentering the outside world again after the great interruption that was the past couple of years and my parents are among them. So they had a lifelong dream trip that they had planned to go to Scandinavia and check out the fjords in Norway. They had planned that trip for February of 2020, so obviously that got shelved and they were sort of waylaid in Australia for a couple of years. So anyway, they've now just embarked on that trip, long overdue. So my wife and daughter are I are going to go and meet them, check out the fjords and hang out with the grandparents for a little while.The reason that we're coming through Dublin just, and my readers are going to hear a bit more than they probably want to hear about this, but I'm going to go to the birthplace of your kin, Mr. James Joyce. Of course, he has his blooms day celebration on June 16th of every year. So this is the Centennial celebration a hundred years since the release and publication of Joyce’s Ulysses. So geeks and literary freaks such as my own kind will be converging on your fair capital for June 16th celebrations and following in Leopold Bloom's footsteps. And again, my readers will hear way more than this, about this and than they want to, but that's the primary reason for going. We may circle back through depending on time constraints and some other things, but one way or another mate, let's make that Guinness happen either there or maybe well, we've got plenty of other places to catch up in the world too.Ronan McMahon:Absolutely. And my summer base is very close to you all. So I'm 33 minute drive from Bill and you all. So if you're taking a summer tea or a summer malbec under the big tree in front of his kitchen, which is a lovely spot to look down on the black water and the rolling Hills of East Cork and Waterford, that would be a lovely spot for us to connect and catch up there too.Joel Bowman:Oh, perfect. Mate, let's make that happen. Okay. I'm going to put a link to your Real Estate Trend Alert underneath, and Ronan as always. It's a real pleasure catching up, and I hope that our readers have enjoyed this virtual tour around the world and are looking forward to embarking on one of their own pretty soon. Please, to our readers checkout our Substack page once again, it's bonnnerprivateresearch.substack.com for many more conversations like this. Ronan, thanks you very much for your time. Catch you again soon.Ronan McMahon:Thanks, Joel. Take care.

Thank you for reading Bonner Private Research. This post is public, so feel free to share it with homebodies and globetrotters alike...

In this week’s Fatal Conceits Podcast we are joined by Bonner Private Research’s own macro man, Dan Denning...

When we last touched base with Dan, back in late March, markets were enjoying (what hindsight now reveals was) something of a bear market bounce off their mid-month lows.

But Dan was not convinced.

He warned that “The Generals” (mega-cap S&P 500 stocks) were poised to beat a disorderly retreat… dragging the broader markets lower as investors “re-evaluated and repriced the future.”

Fast-forward to this week and we see the Dow down 9%… the S&P off 13%… and the Nasdaq lower by almost 20%… just since that powwow.

No surprise then that we were keen to get Dan’s insights on the state of play today… from Mr. Powell’s reappointment at the Fed to the greenback’s relative strength against foreign fiat currencies over the past month… to his outlook on gold and the Bonner Private Research asset allocation strategy in general.

We’ve got all that and more to get to today, in Episode #65 of your Fatal Conceits Podcast. Please enjoy…

Cheers,

Joel Bowman

P.S. If you’re not already receiving all of Dan’s premium research - including his weekly Friday market notes, plus research reports like the BPR Asset Allocation Strategy and the upcoming Dollar Report - make sure you get access to it all here. Good for what ails ya.

Thank you for listening to this episode of the Fatal Conceits Podcast - A show about money, markets mobs and manias. This one is public, so please feel free to share it, with market leaders and followers alike…

TRANSCRIPT:

Joel Bowman:Welcome to the Fatal Conceits Podcast, dear listeners, a show about money markets, mobs, and manias... not necessarily in that order. My name is Joel Bowman. I'm coming to you from the literal and geographical end of the world down here in Argentina. If this is your first time listening, please head over to our Substack page. That's at bonnerprivateresearch.substack.com where you can check out 100s of articles on everything from high finance to lowly politics, and also plenty of research reports and market notes many of which are penned by my guest today, Mr. Dan Denning. Dan, welcome from the high plains of Laramie. How are you doing?Dan Denning:Good. Thank you. It's nice to see you again.Joel Bowman:Well, I don't know if you know this, Dan, but just in preparation for our discussion today, the last time that you and I recorded a conversation for this show was at the very end of March, which now in retrospect looks a bit like a bear market trap for those of us who are following the money off the March lows. And I just went back and did the math since our last recorded discussion. The Dow is down 9%. The S&P is down 13%. The Nasdaq, almost 20%. And during that conversation, you were warning that "the generals" may be beating a disorderly retreat. That turns out to have been a very prescient call. What did you know then that others were not predicting... And where do we lay now?Dan Denning:Yeah. I remember that conversation. And I guess to be fair-minded, I probably didn't say anything different then than I haven't been saying for the last three to five years. So, I don't want to be one of those guys that say, See, I told you so, and people say, Yeah, but it's the whole stop clock thing. But I would say that the overall thesis for Bill and I, and Tom Dyson had bought in Bonner Private Research and it has been now for well for a while, is that if you looked at all the traditional metrics for valuation in the stock market, not at the company level, but at the market level, they all were historically massively overvalued.So, the price of sales ratio on the S&P500 was over three. The market cap to GDP ratio for US stocks was over, it may have been over 200 at one point on the Nasdaq, but it was certainly well over the historic average of 80 and was closer to 150. And on an earning basis, too, if you looked at Robert Schiller's specifically adjusted price, earnings ratio, stocks were expensive.And then, there were other indicators that we used and have used over the years like margin debt, that show that when liquidity is available and interest rates are low, stock prices are very high and risk or growth assets become, as they say on Wall Street, elevated. So, we've been saying that for a long time and they just kept going up. So, that didn't make them less risky though.So, I think what happened and what's happened since you and I last talked is, one, there's been a discussion of higher interest rates, which definitely affects the pricing of growth assets, but more broadly, people have been thinking about the future and saying, "Well, maybe the next 10 years are not going to be as great as the last 10." And that shift in sentiment has been coupled with changes in liquidity.And that's probably the big thing for investors to realize is that when liquidity starts to thin out or dry up in financial markets, then it generally means lower prices for everything. And that means not just growth stocks, but most stocks and also government bonds, and also, to some degree, gold. Oil seems to be the exception, which we can talk about later if you want. But yeah, I think at the top end, the generals were the best performing highest flying growth stocks of the last 10 years.Especially since, you could go all the way back to 2009, but really since March of 2020 when the S&P doubled and the fed got extremely accommodative. We said, those stocks, and by those generals, I mean Apple, Microsoft, Amazon, Google, Facebook had already fallen, Meta. Netflix had already fallen. Peloton. These other outlier stocks. They weren't very large, but they were the most overvalued.So, we think there's still more to go, but it doesn't go in a straight line, and our central bankers aren't powerless, so it's going to be an interesting summer for sure.Joel Bowman:Well, let's talk about our dear leaders in the central bank, Dan. Mr. Powell has been recently reappointed as fed head in chief. Is this just exercise in that old definition of insanity, just repeating the same thing and expecting a different result, or is there something more sinister at work here? It's a little bit of a toss-up it seems between some manufactured breakdown in the old monetary system if you want to get conspiratorial.Or is these just people who really down to their core belief that what they're doing is competent handling of the economy and that they can turn dials and pull levers and get it going in the way that they think that they can?Dan Denning:Yeah. It's funny you ask that question because I was just reviewing Tom Dyson's weekly update, which he publishes on Wednesdays. And he sends his draft to me and I just give him my reaction and some thoughts and observations. And it reminds me of an old, when I used to go to the barbershop in Estes Park, Colorado, it was run by an old friend, family friend. And I got to know him over many years, because I first went there when I was like five, and I kept going all the way through my adult life until he passed away. But he was a member of the John Birch Society. He carried a copy of the constitution in his front pocket, and we always talked about politics.And the one point I always made with him, which wasn't original to me was, it's hard to imagine a conspiracy of 3000 people being effective and efficient when it comes from the same organization that can't deliver the mail. How's the government capable of masterminding or faking a moon landing or doing this or that, or killing Kennedy, and at the same time, they're just ruthlessly incompetent at other stuff?But with respect to monetary policy, I think there's three different constituencies that Federal Reserve works for. One is political. One is financial, and one is institutional. So, if you look at all three, the institutional constituency are the 400 PhDs or economists that have only ever worked for the fed and whose livelihoods depend on providing research that justifies the government's policies or the central bank's policies.So, in this case, I think there's a group of people that actually believe they know what they're doing and that it's their job to provide the intellectual justification for zero interest rate policy for quantitative easing or for the latest moniker, which is the reverse wealth effect that if we engineer stock prices lower in a controlled, organized demolition, then people will feel less wealthy and that will moderate inflation. Sounds absurd.

And I haven't read a lot of the research that purportedly justifies that policy. But I think in that case, they probably genuinely believe that lower stock prices will in some indirect way lower inflation in the United States, which is course, one of the mandates of the Federal Reserve is price stability. They're wrong. And probably, they're not stupid people but they just have existed in a bubble for a long time.They're completely divorced from the real world and they have no idea as Jim Cramer famously said in 2009 in his meltdown on CNBC, "They have no idea. These people have no idea." So, that's the one constituency.Joel Bowman:Quotable moment.Dan Denning:It was one of the great moments of all time.Joel Bowman:Teachable moment.Dan Denning:Actually, that's the second constituency, is the Fed's second constituency is the financial markets. It's bankers. Remember, it's a private institution that was given the license by Congress or the authority by Congress to manage the nation's money, and it's run and owned by banks. So, to that extent, their job is to run, manage the dollar, and manage financial markets so that banks don't blow up. And we could talk all day about what's been going on in the last 10 years.But that's part of what Powell's doing is saying, Look, unless there's a huge problem in the credit markets where a hedge fund blows up or a systemically important bank is in trouble because of assets that it holds, then we don't mind lower stock prices and high inflation because we don't work for the American people. We don't care about inflation. We work for the bankers. So, that's the second constituency. So, the second is Wall Street.The third is Washington DC. It's the elected officials. And I think that was interesting this week that President Biden in one of his press conferences mentioned that it was the fed's job to control inflation, and inflation makes all of the people running for reelection in Washington very nervous right now. Because in the real world where people are paying $4. 50 a gallon for gas, and that's just the national average. It's higher in California and other places.

And where their food costs are going up, and where rent is expensive, and where the 30-year mortgage rate is now back over 5%, and house prices look like they've peaked. And a pocketbook issue is traditionally a much more motivating force for voter turnout than a social issue or even a foreign conflict.So, I think the political constituency that the fed serves endorsed J Powell overwhelmingly and said, "Please stay in charge because what we want you to do is we want you to hold interest rates below the rate of inflation so that we can continue to run these massive deficits without a real penalty on the dollar or without a sell-off in the US bond market."So, Powell answers to those people in the sense that the Fed is the central bank of the United States government, and the United States government has $30 trillion in debt, is supporting a war overseas, and everything but a declaration. And now realizes that from a demographic point of view, they're going to have to spend trillions more in the coming years on an older population that hasn't gotten back to work and that has learned to expect money from the federal government.So, that's a long-winded answer of saying, he serves three masters. He serves Wall Street, he serves Washington, and to a lesser extent, serves the people who have drunk the Kool-Aid at the fed and believe that you can turn the dials and pump the levers and manage the economy like a machine. And it's a giant mess for all of us, unfortunately.Joel Bowman:Well, just on that giant mess, anecdotally, and I know this is not a hard science measurement here, but I've been reading a lot of old essays from back in the '70s, Joan Didion, and just re-steeping myself in the zeitgeist of the '70s, which seems to be enjoying some dubious recrudescence right now, much to the chagrin of voters around America, many of whom don't want to relive those days, which we can get to in a little bit…But I'm wondering, just what appetite, maximum appetite, your average voter, who is suffering at the pump, at the grocery store, how much more can those people can be squeezed. How much more do you think the American people can take before they vote the bums out as they're constantly promising to do, but there never seems to be a shortage of bums in Washington on either side of the aisle, but before we see this massive revolt to the other side?Dan Denning:Yeah. I think it's a good question. If you look back, and also, I don't think it's so much that people are wondering if they can stand an era that's a lot like the 1970s because a lot of people just don't remember that. There's a whole generation of investors for sure that haven't lived in a period where interest rates rose, the dollar fell, golden oil rose at the same time, and there was persistent inflation in consumer prices. So, for a lot of Americans, this is an entirely new experience.And it connects in a visceral way that it's not inflation as an economic concept. It's a quality of life and a cost of living concept that my buck doesn't go as far as it used to. And therefore, my kids aren't eating as well, or we're not eating as often, or we're having to change our behavior because of things we don't entirely understand. So, that will translate into some political dissatisfaction, which I'll go through this really quick because I think it's interesting and it's also my job to think these things through.And ultimately, I don't think it'll matter, but what will happen is unless abortion becomes a massive issue in the midterm elections because of the Supreme Court ruling. And unless there's an escalation in the war in Ukraine, and unless China suddenly relaxes its lockdowns in these vaunted supply chain issues resolve themselves and you see lower inflation, then you should see a change in the control of both houses of Congress in November.So, the Republicans will take the Senate and they'll take the house, but you'll have a democratic president. So, you'll have two more years of Biden. So, typically that would immediately mean a lame duck presidency that you wouldn't expect to see any major legislative initiatives in that time. But then, you also see historically this brinksmanship between both parties about who's willing to do the least before the next presidential election so they can blame the other party for not doing anything?So, do they want to run the economy into a ditch and say, "Look what happened, the Republicans took over Congress and we had a recession, which it looks like we will have this year." So, those are all interesting speculations. And you can go back and look at the presidential cycles and the history of the stock market. And there's some interesting data which doesn't really yield any conclusive results.But I would say that's the main point for individual investors is going to the voting booth in November is not going to solve the problem with the dollar because whoever's in control, whether there's an R at the end of their name or a D at the end of their name, there's almost no willingness by anyone in Washington to be realistic about the fiscal mismanagement of the country and the long-term problem they've created with the value of the dollar.I'm working on a report right now for paid subscribers that we're just calling the dollar report, which says, "Well, where do we go from here?" The dollar's been actually quite strong against other paper currencies this year. Gold has held its own more or less. Okay, the Russian roubles done very well, which is in a whole another story. But we're trying to focus on the long-term, big picture of where we're at historically, and historically to bring it back to the '70s.This is the end of what we think monetary regime that began in the 1970s, which is a global dollar standard backed by nothing. People expected the United States government to be a good custodian of the value of the dollar. And therefore, people were willing to hold it as a central bank asset, or as a reserve, as an emergency safe-haven money for a crisis. Now we have a crisis and we learn that the US government is happy to tell people that money is no good.And they've told that to foreigners and especially the Russians. And we think that, that money is no good for anyone. But the trouble is, this is just a classic asset allocation problem. You'd rather own cash in a liquidity crisis, but when there's 8.5 % inflation and the central bank is willing to actively destabilize or devalue the currency, then cash is a difficult position to hold long term. So, that's a big problem that we're working on right now.But I think like you said, it's a once in a generation problem. And what we want people to realize is that problem is now. You need to be thinking about that stuff now.Joel Bowman:And it really is. This is a once in a half century problem. We're talking about the beginning of the '70s, and there are obviously so many transpositions that you could make, whether a change or at least a shock to the global monetary system as we saw with Bretton Woods and arguably are seeing some potential bifurcation of the international monetary system at present with banning the Russians from SWIFT, and there being all geopolitical murmurings between China, India, Russia. There's a whole lot on the table there that might go beyond the purview of this particular discussion.But what do you make of, and you alluded to this in your remarks, what do you make of the fact that the dollar, the greenback has over, probably since we've last spoken, certainly over the last month, has performed extremely well against not only paper currencies, foreign paper currencies, but in particular foreign paper, commodity backed currencies?I'm just planning a trip at the moment with my family where we're going to be in the eurozone. So, I'm looking at the exchange rates of Norwegian kroners, and euros, and British pounds, which have all, historically, performed pretty well against the US dollar. And I'm happy to report that my holiday is getting cheaper every week as the US dollar seems to hold up very well against those currencies.So, how do we make sense of that seeming disconnect? How do you purposefully inflate a currency away or devalue it, let's say by 8.5% a year, and still have it stack up strongly against these other fiat promissory notes?Dan Denning:Yeah, that's a great question. And because it seems counterintuitive when people look at it and say, "How could the dollar be getting stronger when all these horrible things are going at the ground level?" So, I think there are two answers. The first and obvious answer is interest rates or expectations for interest rates differential in those expectations. And that's a little bit, curious as well because the market, the future's market thinks that based on what the fed has said from its meeting notes and its public statements, that it will raise its benchmark interest rate to 2.5%, 3% by the end of the year.It hasn't done anything yet. It hasn't reduced the balance sheet. It hasn't begun running it off. It's just said that it's intending to combat inflation, and therefore monetary policy will be tighter and interest rates will be higher. So, that's part of the move in the currency markets is anticipating that there's going to be a yield on the dollar again and on a relative basis, it's more attractive.I guess there's three elements, but the second is less interesting to me because I don't think it's true, but it's a safe-haven bid that when people don't quite know what's going on. They run home to mama and the dollar is still mama for now. So, there's that element of behavior. I think the other, which probably is the most interesting and to me the most explanatory and predictive is it's a liquidity issue.So, one of the things people can look at if they haven't had a chance to is go back and look at this theory by a former federal bank, a Federal Reserve governor named John Exter called Exter's Pyramid. I like it because I'm a visual learner, and it reduces financial markets and asset class decisions to a triangle. It's an inverted triangle. And the idea is just liquidity pyramid is it's at the top end of the liquidity pyramid and financial markets.You have very large asset classes in terms of their nominal size but they're far removed from real value. So, their value is based on lots of variables. So, for example, in today's markets at the top of his pyramid would be the derivatives markets, interest rate, derivatives, currency, derivatives, those things. So, there's a huge liquid market in financial transactions, but the underlying value of those securities or instruments is related to something else that's far away.So, we saw that, for example, back in 2007 and '08 with the residential mortgage-backed securities, and that whole bundling of mortgages was an example of a derivative.Joel Bowman:It seems to be a good shape when talking about this.Dan Denning:It's a pyramid scheme. So, as you move down the pyramid, the type of asset becomes harder, maybe a little bit more liquid but it's smaller in size. So, you would get corporate, the corporate bond market, the government bond market, the equity market. And at the narrow end of the pyramid, you get cash, which actually in terms of the amount of cash that physically exists and circulates a small relative to the size of bank accounts and savings. And then, at the bottom of his pyramid, which is the whole point I'm going through all this is gold.So, it's the least liquid. It has the least utility in terms of its economic use, but it's the most stable and it's the hardest asset. Now, other people might claim that today, if you were redoing that pyramid, you'd have to add digital assets in there somewhere. But in terms of size, they're very small. They were 1.5 trillion or maybe 3 trillion at the peak. Maybe they're half that now. So, they're interesting but I wouldn't say material to this discussion unless we were going to just talk about money.So, the whole point is that in a liquidity crisis. So, we started with valuation crisis where valuations got reset from very high to somewhat more realistic. But the whole context of the thing is that as interest rates go up, the availability of credit and cash goes down, liquidity drains from the entire pyramid and money moves from the top to the bottom, and it gets destroyed at the top and it finds safety at the bottom. It doesn't mean it goes up.Like for example, gold and dollar terms is not going up right now, but my view is that gold isn't going anywhere. It's the dollar that's moving relative to gold. So, I think that the dollars apparent strength is only apparent if you understand it in that context, that there's a liquidity preference for US dollars for lots of reasons. And compared to other currencies on an interest rate basis, it looks like it might be more attractive, but we're not focused on any of that in the long term.We're trying to focus on how people can de-hedge or hedge their dollar risk, because I think ultimately anyway, that what you said is what's going on is that our financial authorities realize that one of two things has to happen. They can either allow inflation to go out of control to deflate the value of all this government debt and they have to pay a political price with high consumer price inflation, or they can allow the bond market to collapse. So, it's either the currency or the bond market.And our view is that it's probably going to be the currency. And so, for people who save in that currency, who invest in that currency, who are going to retire in that currency, then that becomes the number one issue to try and solve. So, that's why we're working right now on the dollar report, which is a big job, but that's our understanding.Joel Bowman:A big undertaking. Yeah. So, you mentioned gold there. And of course, in addition to the dollar report, which you're working on, Tom has his Dow-Gold report up on our Substack, which again, if you haven't visited is bonnnerprivateresearch.substack.com. So, head on over there for all the research that Dan's underscoring here. A lot of people have thought that in times of great uncertainty, and it would be difficult to imagine, I guess, a time of more uncertainty coming out of a global pandemic and in particular, various governmental responses to that pandemic.

And now we have the threat, maybe again, a once in a generation threat where people are talking about nukes and something that may have seemed unimaginable just a few years ago. It's hard to imagine more uncertainty. Most people think that when that happens, okay, there may be a flight to mama dollar as you've described, or many people think daddy gold is the other parental safety instrument.Obviously, as we speak here, gold has underperformed relative to the dollar in the past month or two. Are you looking for there to be some point at which dollars start cycling into gold as the safe-haven asset?Dan Denning:Yeah, I think so. I think that discussion is whether investors, a lot of investors, including retail investors will again see gold as an investment rather than as a method of saving or a vehicle of saving or capital preservation. Obviously, that has and does happen in precious metals bull markets is that the price action in the underlying commodity, gold or silver in this case, attracts retail investors who then bid up prices of mining stocks and you see the cash for gold phenomena on TV, where people are encouraged to bring in their grandmother's jewelry and trade it in for cash. Excuse me.I think there's an interesting analog with this, with what's happened in the crypto space, which I am not an expert on and I should qualify my statement, but I have noticed that there are two types of people that I've noticed. There's the people who expect to get rich in crypto by buying low and selling high. So, they were never really enthusiasts or even understood or cared about the idea that this was different money or a different saving or a different asset.They just wanted to get rich in dollar terms so they could buy Lamborghini or a new house or leverage a house, any of that stuff. So, this was just a speculative vehicle for them.Joel Bowman:When it was going out, they wanted to get on board. As simple as that. That's the whole funny thing.Dan Denning:Yeah. And I think that is the case typically in bubbles, which we may get again in mining stocks related to gold and silvers. You'll get a huge attraction of people who are not interested in the monetary discussion. They just want to get rich, or they need to get rich because they're retiring soon or they lost a bunch of money in the stock market. So, that'll be really interesting, and it's a good thing that we have a lot of friends who focus on mining stocks, companies that are currently generating great cash flow. They're returning it to shareholders.And if the price goes higher for gold or silver, they'll do really well. But that's really not our focus at Bonner Private Research right now. So, Tom and I probably have slightly different view on this, but I would say I don't know when I would sell my gold, but I wouldn't really care about the dollar price on a short-term basis. In fact, I don't care about the dollar price. I view it as a form of saving, as a way of getting money out of one type of financial asset and into anotherTom's view is slightly different in the sense that he thinks, and I think history shows that there are these major rotations out of asset classes. So, out of gold and into stocks, into stocks, out of gold. So, that's the whole point of the Dow gold ratio is to save in gold until stocks are cheap. And then, when stocks are cheap, to move out of gold and back into stocks. And I think as an investment strategy, that'll work because it has in the past. So, that's one of the major research reports that we publish.But for me, I think at some level, I don't think the retail investors, I think they disappear in bear markets because they're by definition the marginal investor. They end up getting wiped out because they buy high and they sell low. They didn't have a lot of money, to begin with. The transaction costs eat them up, and the lack of quality information tends to blow them up really quickly as well. And that's what's happening right now.So, that money's not going to be left. It's not going to be around to drive precious metals prices higher. So, that's not the reason for owning gold bullion. The reason is on a long-term basis, the dollar is being systematically devalued by the central bank. And we think gold, whether coins are bullion is the best store of value during a transition like that. So, there's a couple of different angles on it, but I think that's where we're at right now with it.Joel Bowman:Right. You mentioned energy before, just to flip between the commodity sectors and just by way of segueing into your trade of the decade, which you, Bill, and Tom have concocted, essentially long energy without giving too much away. And I guess the de facto, even though it's not strictly a pair-trade, it would necessarily in some way, I guess be short the dollar just because of the fact that you got out of the dollar and into energy.But do you want to give us a quick update on how that's going and speaking about these cycles you mentioned a chart depicting energy, having recently overtaken tech as a sector in the market, has now just started to outperform as oil has risen and the big tech generals have beat a disorderly retreat.Where are we in that cycle? I know we're only a couple of years into it, but it seems like it's been a roaring trade even at this early read?Dan Denning:Yeah. And I guess I'm obeying the rule of three today or some Trinitarian principle because everything has three aspects to it. But when we first researched that and published it in January of last year, it was really a cyclical argument that said that the energy sector, especially on the S&P500 had underperformed for 10 years, and the technology sector was the best performing sector for 10 years. So, just mean reversion and market cycles would show that was unlikely to be the case for the next 10 years.So, if you drilled down to it into a little bit deeper, you saw there was other evidence of that. One example was that I think in the early '80s, when the oil price peaked or when the oil price was high, energy sector companies, percentage of the S&P market cap were much larger. I don't think they were 30%, but they were somewhere between 13 and 23 if I recall correctly. But the point was, they were a bigger part of the real economy and they were a bigger part of the stock market because oil was a bigger part of the world.A lot changed over the next 30 years. So, by the end of 2020, tech companies, I think there were just five of them that made up 25% of the market cap of the S&P500. And, of course, at the peak in March, or it was really earlier in January, Apple became a $3 trillion company briefly. You had the race to 2 trillion with Amazon and Microsoft, and then you had, before it fell, you had Meta or Facebook knocking on the door.Just on that basis, we just said, "Wow, energy is way under invested in and technology is way over invested in." And that actually translated into capital investment. And by that, I mean the energy companies after the oil price peaked in 2014 and then crashed for 2011 in that whole period, they were just starved of capital. They didn't invest in new projects. They didn't invest in new supply. And there was a lot of reasons for that.One was, there was a lot of oil. The oil price was going down. The amount of regulation to explore for and bring new oil and gas into production was going up. So, it was discouraged from a political point of view, a regulatory point of view. And then, you had clowns like Larry Fink and Michael Bloomberg who were saying, and even Jim Cramer in 2020 saying, "These things are uninvestable, for moral reasons, for climate reasons, and for economic reasons that we should just stop investing in oil and gas companies."And some public pensions have done that too. They said, "Well, they're not carbon-friendly, so we're not going to give these industries capital." So, all that meant is that these industries, the supply of oil is not growing and the demand for it reached pre-pandemic levels and then went past it. So, look at the oil price right now, despite the prospect of a recession in the United States, and despite a lockdown in China's biggest cities and despite a war from one of the world's largest oil exporters, I say despite, I mean, that contributes to it. Its price action has stood out.So, that confirmed our thesis that this whole idea that the world was going to suddenly run on electric cars and that we weren't going to use oil, gas, and coal anymore was a marketing slogan. It was a political idea. There were other objectives going on. So, there was a lot of reasons that we thought that trade was going to be a good one. The question right now is, as you pointed out, we think that easy money has been made that they were really, really undervalued or mispriced last yearThey're less mispriced than they are now, but we think that because it's a long-term trend, in other words, it's going to take years to reallocate capital to the sector, to go out and find more oil and gas, to build pipelines, to build refineries. We think there's more money to be made. It just means you have to do more research and find out where. So, is it upstream? Is it downstream? Is it pipeline companies? Is it refineries? That's something Tom's been looking at quite closely.And so, we're going to continue to look at it, but the trade itself is really simple and just based on that basis that… and maybe that's probably the broader point is that we think something changed in the last year to where this idea of soft power or growth being the most valuable thing in the market has changed that real assets like coal, oil, gas, and gold. Those are more valuable now. And they're the source of both political power and real earnings for companies. So, that's a change in leadership in the market from the companies that produce real assets are in the ascendant and the companies that produce future revenue growth like Amazon, Apple, Microsoft are in the decline.Joel Bowman:Yeah. And it seems that, that delineation between the real world delivering real assets to real customers with real companies that produce real profits, as opposed to companies with just unimaginable, and as it turns out, very unprofitable growth projections, yield the opportunities that Tom's looking for with his tactical trades, special niche situations in the market, in particular pockets of the market, where people haven't been looking for a little while.And he sent around just an update on the performance of the stocks that are on the watch list. And they're doing handsomely, especially given the fact that the broader market has been more or less bleeding red for the year. So, that's all good stuff.Dan, I'm going to be up in the US in June. We've definitely got to get together, or rather July, actually, I’ll be in Europe in June, spending my very powerful green backs while they've still got some staying power. And then, in July in the US. So, we'll have to get together up your way to record another one of these in person if we can.Dan Denning:Yeah, that would be great. And I would just close by saying, I think for us right now, Tom's getting ready to publish his next monthly issue. He does one a month, which is a fuller investigation of where we're at. And we discussed those things. And we think two things, these recent evaluations has further to go. So, things will get cheaper on evaluation basis. But now based on the recent earnings reports of companies like Walmart and Amazon, what people have to factor in is the prospect that companies are just going to be earning less money in a recession. They have higher energy costs. They have higher transportation costs, and they have a consumer who's facing these higher costs at the retail level, who has some disposable income but is spending more money through their credit card. And so, we think there's that factor of has the market priced in a recession. And in that case, when you have deflation in financial assets and a recession at the same time, it does change a little bit your tactical strategy of where the money's going to be made.So, it's a month-to-month thing. We have a long-term focus, but in some ways, it's a really fascinating environment to be trying to connect the dots, which is what we do, and then try to avoid the big loss, which we think we're in the middle of, and then try to get to the other side of the crisis, which we think is a long-term crisis. So, very busy times, but we'll have time for lunch and a bottle of wine, for sure.Joel Bowman:All right, Dan. As you say, we're early on, potentially in this cycle. There's a lot more work to do. So, finally do head over to our Substack. This is my third repetition of this, sticking with your rule of three today, Dan. It's bonnerprivateresearch.substack.com. Check out all of Dan and Tom's excellent research, and of course, Bill Bonner's daily missives. And we hope to see you there, Dan. We'll catch up again soon. Thanks for taking the time, I really appreciate it.Dan Denning:Thanks, Joel.Joel Bowman:Cheers.

Thank you for reading Bonner Private Research. This post is public, so feel free to share it with generals and foot soldiers alike...

In this week’s Fatal Conceits Podcast, we are joined by long time friend of the Bonner Private Research group, Mr. Byron King...

A Harvard-trained geologist, ex navy pilot and nuclear weapons expert, Byron lends us his unique insights into the unfolding situation in the Ukraine… including sanctions blowback, the bifurcation of the global monetary system, a gold/methane-backed ruble… and what it all mean for the US and Europe.

We also touch on the continued erosion of trust in America’s once-great institutions in the wake of the Supreme Court leak, why inflation is here to stay, where the stock market is headed from here… and what individuals can do to avoid the fallout.

It’s always a pleasure catching up with Byron. We hope you enjoy this conversation, a transcript of which will be available – gratis – on the website (or below)…

Please feel free to drop your comments in the section below and to share it with friend and foe alike.

Cheers,

Joel BowmanHost of The Fatal Conceits Podcast

Thank you for reading Bonner Private Research. This post is public so feel free to share it.

“[T]hat's not central banking. That's band-aiding a hemorrhaging, suppurating compound fracture of a wound. It's a sucking chest wound and you're giving the patient an aspirin saying, ‘I hope you feel better.’ Doesn't work.”

~ Byron King, geologist and editor, Lifetime Income Report

TRANSCRIPT:

Joel Bowman:All right. Well, welcome back to the Fatal Conceits Podcast, dear listeners, a show about money, markets, mobs, and manias. If you haven't already checked out our Substack page, please feel free to do so, where you can sign up for our daily e-letter. We have hundreds of articles on the sites there, covering everything from lowly politics to high finance and everything else in between. Of course, you'll find research reports and more conversations just like this one.

That's bonnerprivateresearch.substack.com. And now, today, I'm very, very excited to welcome our special guest, longtime friend of the show and of the Bonner Private Research family, Byron King. Byron, welcome to the show, mate. How are you doing?Byron King:Very well. Thank you, Joel. It's a pleasure to be here. And hello to all of our Bonner Private researchers out there who subscribe and make it all possible. Thank you.Joel Bowman:Yeah, outstanding. Mate, as you and I discussed over a couple of emails before we scheduled today's show, there's so many things that I want to get your insights and expertise on, not least of which the unfolding situation on the Eurasian steppe. We've got supply chain issues to talk about, we've got inflation heating up, there's market meltdowns, there's all kinds of things going on here. But I thought just out the gate, worth speaking the day after Federal Reserve Chairman Jerome Powell's announcement of his 50 basis point rate hike, which, for those at home paying attention, puts the Fed a long way behind the curve with regards to real inflation, which, pick a number, is running anything from 8.5% officially to maybe some multiple of that, depending on how you calculate it. Markets, I'm just looking at right now, are awash in red this morning after a brief window of optimism yesterday afternoon. Byron, what's your take, 24 hours in?Byron King:Well, I wasn't surprised to see the 50 basis point raise. It was telegraphed well in advance. But if you want to see central banking, that's not central banking. That's band-aiding a hemorrhaging, suppurating compound fracture of a wound. It's a sucking chest wound and you're giving the patient an aspirin saying, "I hope you feel better." Doesn't work. You want to see central banking? Look what the Russian Central Bank did two months ago when the sanctions hit. The conflict started in Ukraine they jacked up their interest rates in Russia to 20%. Bam, just like that. That was their way of saying to the world, "You might not like us. You might not like what we're doing and you're putting sanctions on us and kicking us out of SWIFT and everything else, but our rule book is still a valuable item and we're going to pay you 20% for the rubles. And oh, by the way, we're going to buy gold based on rubles."

Joel Bowman:Right.Byron King:You want to see central banking, that's central banking. What we saw yesterday is just American politicking. And it's the same silliness that we've seen in monetary policy and so much of everything else that passes for policy in America these days. We have an ungovernable country run by people who don't know how to govern and a lot of people who don't want to be governed. Where does that leave us?Joel Bowman:Right. Something of an ineptocracy at hand here. What would the Fed have to do, in your opinion, to kind of “pull a Volcker,” if you will, and stand strong behind its currency? What would it have to do to get out ahead of the curve and send a strong enough signal to the market that it was serious about protecting the integrity of the greenback?Byron King:Well, if they did pull a Volcker and they raised interest rates to well above what we see as inflation, they would have to do, I would say, at least 10 or 12% rate rise, which, of course, is politically impossible. And it's utterly fantastical to even think of our Washington DC policymakers doing something like that because they're cowards and they can't really do things that require bravery. The markets would crash, people would hate them. We would certainly get the Supreme Court and the Roe v. Wade decision off the front page for at least a day or so if they did that. But of course, America's concentrating on that, as opposed to other things that are important, like, oh, the value of the dollar going forward, or perhaps even a nuclear war with Russia. Who cares about that when we have some little toady in the Supreme Court who can leak out a decision in advance. This gets into a lot of different things, but Paul Volcker should just be rolling in his grave.He did what he had to do, he jacked interest rates up to 19% and he killed inflation and the country lasted another, let's say, 35 or 40 years, although monetarily it's been just sort of falling apart, certainly since the 2008 crash, which was never properly addressed. Gets into a lot of different things. But people write books on this stuff. We're just having a conversation.Joel Bowman:It is almost unfathomable to think about what kind of havoc a 10 or 12% rate hike would wreak upon the markets. I'm looking at the tickers on the broader indexes this morning after just 50 bps and we see, as I'm reading the scroll here, the Dow's off 3%, over 1,000 points down. S&P down 3 1/2. The NASDAQ, tech-heavy NASDAQ, of course, was down over 5% earlier this morning. So this is with just a half a percentage. It's almost unthinkable to imagine the carnage that would come down the pike if they pulled a Volcker or jacked up as did Putin.But you bring up an interesting point there, of many interesting points, Byron, and maybe this is a little off topic here, but just given the Roe v. Wade leak and the timing of it all, without getting into that sort of quagmire of a debate, what do you think this says about the confidence or the lack of confidence, just in the institutions of the United States which have been the backbone, the scaffolding of the democracy, or the republic, rather, that the founders envisioned. They've become extremely politicized and one can't help but imagine that this leak whiffs of timing with the upcoming election and whatnot, but it does seem to indicate a kind of erosion in the confidence of America's institutions. Is that the way that you read that?Byron King:Oh, I think it's a major crack in the dam. And I mean, nobody trusted Congress. They leak like a sieve. Nobody trusts the executive office. They leak like a sieve. You can agree or disagree with what the Supreme Court does in its decision making. I don't think anybody who really follows the court would ever have a question, though, that they are a collegial bunch who, they engage in their debates behind closed doors. And when they are finished, out come the decisions. Whatever the decision is in Roe v. Wade, it is what it is. I mean, there's going to be a decision one way or the other. It is what it is. All that the leak did was put it into play in a public sort of way. And you lose confidence in the whole process.People may know it. I have a Navy background. I was in the anti-submarine warfare business. Rule number one of electric boat, you don't talk about electric boat. Rule number one about submarines, people who know a lot about submarines don't talk about submarines. People who don't know a lot about submarines try to tell you, convince you that they do. You don't talk about submarines, you know? Yeah, that's where I come from. You don't talk about submarine stuff because that's how quiet you want to keep it. You don't talk about what happens in the Supreme Court. If you're a clerk and you go there and I don't care how much you really want to, "Oh, I know this, I know this. I have to tell somebody."No, no, no, no, no. You cut your wrists, you jump off a bridge, you take a pill, whatever you have to do to not... You don't do that. You don't do that. Somebody did it. I mean, was it a clerk? I don't know. We may never know. But it's just the idea that in a broad sense, the US is becoming more and more ungovernable. It's big country, 350 million people. They say 330, but really there's like 20 million that the Census Bureau doesn't count just for political reasons. But big country, it's widely diverse, massive disparities of wealth, massive disparities of opinion. And can the country still function? Well, there was this one little place on the top of Capitol Hill, the white marble building with these stone statues in front of it where we could at least have a little bit of confidence that, okay, there's rational thinking going on behind the bronze doors. I guess not. I guess not.

Joel Bowman:It seems like just another in a long list, or a long convoy of institutions, from academia to corporate America that now seems to, as you said, enter the fray for hyper-politicization. And I'm wondering as we can talk a little bit about the situation on the Eurasian steppe and sort of get into all that. But just to kind of preface that, it does seem, to your point about political polarization, it does seem now that every week there's a shiny new object, a shiny new subject on Twitter or on the social media channels, whereby everybody has to fall immediately in line with their partisan kind of checkbook. And it seems that no matter where a rational, level-headed, circumspect inquiry might lead you, there's no time for that.You immediately need to make up your mind on subject A, B or C, and it needs to be in complete alignment with the rest of party left or party right politics. And of course, we saw that with everything happening over in the Ukraine. You know a lot more about this than I do, but I was very, very surprised to see the rapidity with which people who I had long friendships with who had never mentioned the Ukraine before, who gave no indication that they were experts on Eastern... I've got some traffic outside here, but who gave me no indication in our 20 or 30 years of friendship that they were PhDs in the history of Eastern European geopolitics, and within three days, knew exactly which flag they needed to put up, whether it was a Russian flag or a Ukrainian flag, to indicate their position. Talking about an ungovernable country, I'm wondering what role our media platforms play in this polarization of the body politic.Byron King:If you have studied, let's say, World War I, for example, the First World War, and as it played out in Europe, if you studied what happened in the United States, there are a lot of eerie similarities. In the US, they took the British side, although there was a very large German population in the United States. First thing the British did when the war broke out was they cut the cables under sea from Europe, from mainland Europe, to the United States. So the only news that came to the US was filtered through London, through the British sources.And in the US, as World War I progressed and eventually as the US entered the war there was a tremendous war fever, an anti-German fever. They banned speaking German, they banned teaching German, they burned German books in the United States. A big part of the Prohibition movement that eventually became the Prohibition Amendment had to do with bias against beer, which was considered a German substance. The ancient Egyptians actually invented beer, but that doesn't matter. Doesn't matter when you're trying to make a certain point here. And so here we are today. I mean, you are in Argentina, I'm in the US. I'm not in the Ukraine, okay? I watch what's going on.I'm a Navy guy. I was combat-coded air crew in the US Navy. I was a nuclear weapons guy. If they had said, "Go out there and bomb that spot," that's me. If there had been a nuclear war that would've been me blowing holes in the ocean. I hate war, man. I want nothing to do with it. I did Desert Shield, Desert Storm. I was in the Middle East in the '90s. I visited a lot of people in the last 20 years who got their legs blown off in Iraq and Afghanistan. What's going on over there is just human tragedy. Russia invaded Ukraine. They should not have done that. There's a lot of things that could have happened to keep that war from happening, but it happened and it's there.But the idea that a whole lot of outsiders are now... We're all in it to win it, as certain politicians in Washington are saying. Politicians on the outside are saying, "Oh, we're behind you. We're going to fight to the last drop of your Ukrainian blood against those terrible Russians." I have to wonder about that. When the politicians go to Kyiv and they're getting medals for bravery, we're trying to reenact World War II again. We talk about World War I, trying to reenact World War II. We got Churchillian rhetoric. "We're going to fight on the beaches and on those forests and on the hillsides." Okay, I get it if your country's being invaded, you say things like that. But we're talking about Lend-Lease. It's like, oh, for God's sakes, we're going to do Lend-Lease again.We give 50 crappy destroyers that leak to Britain and we get all this other stuff back. I don't see the balance of what's going on there. We're feeding these weapons into Ukraine and we're prolonging this conflict. And people are saying, "We're going to fight this war for months, for years. We're going to weaken Russia. We don't want Russia." I mean, if you're the Russians what do you think about that? There was an article, it was in The New York Times, the headline of The New York Times at the top of The New York Times just yesterday that US intelligence is going to Ukraine and this is how the Ukrainians have killed these Russian generals.And even if it's true, even if it's true, you don't say things like that. For me to help this guy kill a general, I'm an accessory to murder. That's an act of war, by the way, when you feed information to somebody and say, "Here, go kill that guy." And especially a Russian general. I mean, what are we doing? What are our policy makers doing? People say, "Well, should we just let Ukraine get overrun?" Here we are. I'm thousands of miles away from this situation. We're dealing with two people. I've met real Ukrainians, real live Ukrainian Ukrainians. I can't say I've ever met a Nazi, though.Maybe I have, I just didn't know. But I've met Ukrainians and I understand kind of this Ukrainian conception, and I know a lot of Russians, and I understand this Russian conception. These tribes have this thing that goes back centuries, 1,500 years, something like that. And I'm over here in the United States and I don't quite get it. I get that they have something, but why is there something, my something? And as a great power, as the United States, as a great power, even though it's ungovernable, even though we can't decide on policy, we can't decide on how much to spend or not to spend, we fight over leaks from the Supreme Court, despite all of that, we're a great power and we have to be careful about getting involved in big wars with big countries.And Russia's a big country. It's big geographically, and it has lots of nuclear weapons. These guys have 6,000 nuclear weapons and they have ways to deliver them. We're not talking about embargoing Cuba. We're not talking about beating up on Iran. We're not talking about beating up on North Korea, not that that has ever done us any good either. We're not talking about fighting some little third-rate army, like Iraq or something like that. We're talking about a nuclear superpower, and it's very troubling from my end. I'm not making policy, I'm not in Washington DC, but I don't know that the people in Washington DC know what the hell they're doing either.

Joel Bowman:No, well, they're giving us plenty of reason to think that they don't know what they're doing, which brings me to this concept of this law of unintended consequences. And as we all rush to formulate and broadcast our opinions, sometimes called virtue signaling, as quickly as we possibly can to show that we're on one side or another side and let all our friends know that we're with them, I wonder that in our haste to enact policies such as the various sanctions that have been visited upon not just Russia as a state, but also Russian individuals.And we're talking about confiscation of private property and extra-jurisdictional confiscation of private property, which, if you were trying to set an example of not acting like a global authoritarian dictatorship, you might want to have a look at some of the things like the rule of law and start abiding by those. But all that aside, just from a kind of reputational standpoint, how have these sanctions, particularly those from the West against Russia, do you think, damaged our credibility in the eyes of other nations that may not be so sympathetic to our causes, such as, obviously China, India, et cetera?Byron King:I think sanctions have been an ongoing disaster for many years. When I was writing Whiskey & Gun Powder and other newsletters with the Agora Group over the years, I often mentioned that sanctions are not working, sanctions are not effective. They don't change behavior of people who don't want to change their behavior. And so with the sanctions against Russia, we've basically backfired against ourselves. To say that, we don't want to buy your oil or your gas, or we're going to kick you out the SWIFT system, we're going to kick you out of all these other international organizations, we're confiscating your sovereign wealth, we're confiscating your oligarch wealth.It's a disgraceful abuse of the US Constitution in the sense that... The idea that we go to, let's just pick oligarchs for a second here. I don't think I know any oligarchs. Again, it's kind of like, I don't... I've met Russians. I don't know that I've ever met a Russian oligarch. I've never been on a Russian oligarch yacht. I have seen a couple in my travels and they're pretty impressive, but nobody ever invited me on board. But the idea that okay, you're a Russian oligarch and we don't like you, and we're going to take all your money and we're going to seize your yacht, and we're going to take your real estate from London, or wherever it happens to be, I was kind of, wait a minute. This Russian oligarch, did he drop a bomb on somebody and kill them in Ukraine?Was he driving a tank? I missed that part of the logical connection here. What'd this guy do? Why are we taking his money? And then the sovereign part of it, the sovereign wealth, "Oh, Russia, you have, whatever the number is, $300 billion. We're going to scoop that and just drag it off the table." It's kind of like, whoa, we just told everybody in the whole world, every country in the whole world that buys US treasuries or that keeps money in US banks or US institutions or US bonds or US... That if we don't like you, and maybe it's something very bad that we don't like you about, but if we don't like you, we're going to take your stuff.You've just diminished the credibility of the dollar, you just diminished the credibility of your whole system. During the Crimean War in the 18- early '50s, 1853, Russia was fighting Britain, France, over Crimea, of all places, but Russia and Britain were still having commercial dealings. Russia paid interest on bonds, Britain paid interest on... Because this is what proper businesses did. And this was during a real war. Right now, it's Ukraine and Russia, with obviously NATO's backing it up. But call me old-fashioned but I missed the declaration of war against Russia if there was one. Technically, we are not at war with these people although we're doing everything short of it. And who knows? Perhaps we're doing everything necessary to egg it on eventually, which talk about...Joel Bowman:It does seem a little bit, just watching some congressional testimony from... It used to be the case that, and I'll just use sort of air quotes here, if we're doing audio only for this podcast so listeners know, but it used to be that there were neocons on the Republican side who were hawkish, who never met a war that they didn't want to march somebody else's son off to, but then you had this socially progressive liberals at home in the United States who were again, air quotes, supposed to be dovish when it came to interventionist foreign policy.But it does seem now on Capitol Hill that you have, to use your term, egging on, you have a whole bunch of congressmen and women from the floor that are looking for any excuse to, "When do we get to send the fighter jets in? In what scenario would we deploy the next level up of weapons?" You almost get this kind of mad rush for war. And I'm just wondering if we're not sort of thinking all of the consequences through as the situation escalates.Byron King:Absolutely. Outside of the certain cadres within the military, very few people in America, and very few people in American policymaking understand the military and/or war making. You can study all sorts of history in colleges across the country: social history, diplomatic history, environmental history, history insight, history in this, history in that. You can study all different species of history, but try to find a program at a reputable university in military history. You won't. There are a couple, they're very few.So Americans tend intellectually, and certainly in our policymaking intellectual classes, they tend not to understand issues of military, military thinking, military history. To understand modern military matters takes a degree, and probably an advanced degree, in a hard science, lots of math, lots of physics, whatever. I think the last war that people could have understood without knowing chemistry, physics and math was maybe the Spanish-American War, because by World War I, with radio, with sonar, with long-range artillery, it was starting to get into calculus. World War II-Joel Bowman:The cavalry was already the last war by that stage.Byron King:Exactly, exactly. By World War II, we were doing lots of math and lots of physics and lots of chemistry. Again, radio, radio electronics, radar, sonar, nuclear power, jet engines, things like that. If you don't understand some of the basics of those things you don't really get... You can read a lot about it, and you can read a lot of comic books about it. You can read a lot of fantasy fiction books about it and think that you know what's going on. But the people who are out there banging the drums, saying, "Oh, let's do a no-fly zone," they don't know what they're talking about in terms of what that involves and what you're up against.Certainly when you want to do a no-fly zone against Russia, are you kidding me? Give me a break. And one more thing, let me just add to that. I've talked to people and they say, "Well, you know the Russians, they suck. Their tanks blow up or kill other guys. I've seen the pictures." Yeah, they have bad equipment, bad training. They had a bad plan when they started out. But a lot of people start their wars with bad plans and they learn and I think the Russians have learned. And when you've got a country like Ukraine with whatever the number is, 44 million, or 40, or 35 million, or 32 million, whatever that number is now because people have been moving out and this and that, versus Russia with 144 million people, and the legacy of the Soviet militarization of that entire continent, you got a hell of a fight.When people say, "Oh, the Russians, they're going to run out of weapons. They're going to run out of missiles," and I say, "Are you kidding me? No, they're not." They have entire cities devoted to cranking out ammunition. "Well, they were using junky artillery shells that didn't explode." Yeah, so what? They've got train loads of that stuff that's going to come in and it will explode. And "Well, they're going to run out of advanced missiles." I don't think so. They have entire factories in the mountains that crank out those missiles like sausages. So I'm just saying that if you want to get into a fight with these guys, you better appreciate what that involves. For the last, pick a number, 75 years, the United States has never fought against a country that can really, truly hit back at us.I mean, the Korean War, we fought China. Soviet pilots fought against American pilots in the Korean War and they actually did pretty well, frankly. And in North Vietnam, Soviet equipment and Soviet advisors and Soviet trainers were right behind the North Vietnamese. And although it's hard to really say that technically we ever fought mano-a-mano, American against the Soviet in North Vietnam it's not hard to imagine that they were right behind. And the Vietnam War in certain respects was a real slap in the face to American military might. We lost 10,000 aircraft in the Vietnam War. 3,500 were high-performance jets shot down.I talk about this a little bit. I was fortunate in my life and in my Navy days to be... I went in the Navy after the Vietnam era, but I had instructor pilots who were there. I was trained by guys who had dodged service-to-air missiles over Hanoi and Haiphong. And we talked about this stuff. And the Soviet equipment in the '60s was pretty good for its time and it has gotten better and better and better over the years. So when people say, "Well, the Russians..." Do not dismiss what's going on over there, just because over what we've seen in the last month and a half. Okay? You saw a line of burnt out tanks. Okay, yeah. That happened.But don't dismiss them as a military power. The policymakers are so cavalier in Washington about this. They just think that war is a video game, war is a comic book, because they don't understand it. They never studied it in college. Never studied it in grad school. A lot of them, most of them, never spent one day of their life in a US military uniform, never did one push up for one drill instructor, and they don't know what the hell they're talking about. They're more than happy to send the kid down the street over there to get his legs blown off. Just saying.

Joel Bowman:Right. What's that old Creedence Clearwater Revival song? Reminds me of the Fortunate Son. I always have that lyric, "I ain't no senator's son." They aren't going to be marching off to war anytime soon. But it's interesting that you mentioned the resilience of the Russians. As if we needed to underscore that point, surely the most of the 20th century went to illuminating the point that Russians can go scorched earth, they can hunker down, they can withstand sieges. And I even saw during the last few months certain reports that they were going to be running out of energy. And that's when I thought that surely we've jumped the shark here. Russia run out of energy?Anyway, so we can maybe use that to segue-way into speaking a little more broadly about the energy markets, because it does seem that Russia have a lot of aces up their sleeve, and again, this isn't a commentary on the political situation, this is just sort of hard facts on the ground. You've written fairly extensively about a version of either a gold or methane or gold and methane-backed ruble. First of all, maybe just sort of tell us what you mean by that and then we can get into some of the ways that impacts the situation, both in Russia and in the US directly.Byron King:Okay. It goes back to what we were talking earlier about what does a real central bank look like? Russia, when they got sanctioned, they raised interest rates to 20% and they said, we're going to pay 5,000 rubles per gram of gold. Now, since then, they've said, well, we'll negotiate that 5,000, but it's still around that number. So when you do the math, a gram of gold, 31.1 grams is an ounce, you do the math, you translate it from rubles to dollars on the exchange rate or whatever, depending on what your ruble rate is, the Russians are saying that we will pay, back then it was about not quite $1,600 an ounce of gold. Today with the exchange rate of the ruble, that 5,000 rubles per gram, it's up well over $2,000 an ounce for gold.What the Russians did with that was they basically put, let's call it a bumpy floor underneath the price of gold, or, well, they backed their ruble indirectly with gold and they put a floor under the price of gold. Because if you're a paper gold trader, if you're a paper trader and you try to trade it down and really crash the price, if you get too far below that Russian gold ruble number you're going to get arbitraged, right?Joel Bowman:Yeah.Byron King:But then the next thing they did, and this is part of it, these things all fit together, the Russians said, we're only going to sell our natural gas for rubles. We want rubles. And so it's like, wait a minute. They want rubles for their gas, that they got rubles over here that they'll pay for gold. All of a sudden, you've just connected the price of natural gas, methane gas, to the price of gold. Now they're saying, over time, we're going to sell our oil for rubles as well. We just haven't got there yet because there's been a lot of contracts in the way and there's a lot of legalisms that worked out, and there's just a lot of mechanics involved in something like that. And then just the other day... And I forwarded it to you, in fact, I believe you saw it. The Russians are saying that if you sanction us, we're going to sanction you, unfriendly countries, we're not going to sell our products to you; oil, gas, uranium, which is a big part of what Russia exports, other metals; nickel, titanium, fertilizer, whole list of things.So to the extent that Russia has now said, we're not going to take your dollars or your euros or your yen or your pounds, or what have you. We're only going to take rubles for the goods that we export. And they've tied their ruble to the price of gold. Russia has just basically created a commodity global economy that is tied to the price of gold. And now, you can say, "Well, we're not going to play that game. We in the West, we're not going to play that game." Fine. Go without the Russian gas, go without the Russian oil, without the Russian titanium, without the Russian fertilizer, without the Russian you name it, without the neon gas that you use to make the computer chips, without the sapphire substrates that you need to make the computer chip, without all that stuff that the nuclear-armed gas station over there exports, you go ahead.Be yourself. We're creating, in a sense, instead of a global world, we're deglobalizing, that's for sure. Then we're creating two different economies. There's going to be this debt-based fiat economy where the central bank doesn't have the guts to raise interest rates to kill inflation. And then we've got this commodity-based economy over here where Russia says, "We have lots of oil. We have gas, we have nickel, we have palladium. You come and pay us in rubles." But now you've got to get across that barrier and "How do I get some rubles? How do I get me some of those rubles?" So, there's your commodity-based ruble, a commodity-based global currency. And then the other side of that, the big 800-pound gorilla on the other side of the room here is that here's Russia, here's China. China needs everything.They need the oil, they need the gas, they need the nickel, the palladium, you name it. Whatever Russia exports, China will take it all if they can. It's the Halford Mackinder concept of the world island on steroids. It's the Heartland theory. It's these geopolitical theories that have evolved in the last 120 years or something. You got the Alfred Mahan navalist Influence of Sea Power theory. You've got the Julian Corbett theory of sea power influencing land. You've got Halford Mackinder with his Heartland theory. You've got Nicholas Spykman in the 1940s with kind of that Rimland theory. But basically, you've put Russia with its resources and China with its industry and its people together and they've created that core world island. And China's already well on the way with its Belt and Road to kind of tie the Heartland together. Add up the numbers of people involved; China, throw in India while you're at it.Joel Bowman:I was going to say, India, yeah, it's right there.Byron King:You're looking at four and five billion people on the face of this earth. And you can have a hell of an economy when you take four billion people and you tie them all together with resources and a form of trading where people settle their accounts routinely. The West is just going to be... We're going to be on the Rimland, so to speak, on the outside.

Joel Bowman:And I think are the Indians buying that sort of Urals blend at whatever discount it is now, 20% or something? There's some meaningful discount, isn't there, between West Texas, Brent and the Urals blend? It was about 20% when I last checked, but it might have come up a bit since then.Byron King:The numbers that I saw, and this was just a couple days ago I was looking at it, if the global number was $105, $110 a barrel, Russian oil was going for about a $25 to $30 discount. So let's say $75. Well, guess what? Russia produces oil at an internal cost of far less than $75. Their production cost per barrel could be... Let's say that it's $25 a barrel. It's actually less than that, but I'm just going to use it because the math is easy. But if they sell it for 75, they're still making 50 bucks a barrel.And okay, so they're leaving that $30 on the table for some Indian guy or some Chinese guy or some other global trader or whatever, that's the slot that they're going to get out of it. And there's all sorts of tricks going on where the Russian tanker will come out off shore and they'll offload their oil into another tanker and then they'll put some other oil in it from a completely different source. But as long as you got 51% not Russian oil, or only 49% Russian oil you can still sell it as just... Nobody can say, "Oh, this isn't Russian oil anymore." Only the chemists would know and even-Joel Bowman:And they're probably paid not to know at some level.Byron King:When you have a refinery to run and you've got to put the product in over here to get the product out over there sometimes you just don't worry about where it came from as long as you can check off the boxes on paper.Joel Bowman:Yeah. And you can turn the light on. Talk us through a little bit, because you and I spoke about this, we've spoken about it a couple of times now. And of course, when we first touched base after some time at our emergency winter catastrophe summit, this was back in December 2021, we can't have known all that was going to come down the pike geopolitically within just a few months from then. But you were banging the table back in late last year about Germany having surrendered a huge amount of its energy independence by sort of decommissioning its nuclear plants, and this kind of green pipe dream, and then having to revert to lignite.Now they're in a very precarious situation indeed. But just with regards to taking Russian raw materials, and you can take Ukrainian raw materials off the table for that matter as well, while we're speaking. But what does it mean for people in the West to no longer have access to, or have very restricted or very conditional access to, for example, 30% of the world's fertilizer or chicken feed or organic seed, all of the things that you just mentioned. How, when an American goes to a grocery store, three, six, nine months from now, what is the reality that is going to confront them that they might not have fully processed yet?Byron King:Well, here we are. We're talking in the early part of May and it's the spring planting season in the Northern Hemisphere. And you plant the seeds, you put the fertilizer on there, and a whole lot of other inputs and hard work and expenses over the growing season. Without the upfront fertilizer, which you might say it's available, but it's very expensive. So this reports I hear that a lot of farmers are just, we're going to use less, we're not going to use as much, whatever. Come the fall, come the harvest we're going to have lower harvests.And in terms of where the ags are going, as the commodity traders say, price of wheat, price of corn, price of everything's going to be going up, so there's going to be less just raw food being produced from the farms and the fields. The processing isn't going to be any cheaper at all, because costs of energy are high and getting higher. Diesel, which is what we run tractors on and what we run tractor trailers on and generators and things like propane or the things that farmers use to dry the grain when they harvest it, it's wet and they put it in the silo and then they pump warm air through it to dry it out, so otherwise it rots.All of those inputs are going up in price. So in terms of individuals, what are you going to do, Joel? What am I going to do, Byron? The listeners out there, the watchers, what are they going to do out there? You're going to go to the store and you're going to say, "Oh, my goodness. A gallon of milk is almost as expensive as a gallon of diesel fuel." That's a joke. It's a macabre joke. A loaf of bread is pick a number, $2, it's going to be $5. There will be things that happen. Farmers will say, "Oh, I can't afford to keep these livestock fed." So off they go to the slaughterhouse.So great, there's going to be a time when pork chops are cheap or there'll be a time when certain kinds of beef is cheap or something like that. Yeah, that's because they're killing all the cows, killing all the hogs, because can't afford to feed them. And so off they go. As this unfolds, I expect to see scarcity across the world. Parts of the world are going to experience extreme scarcity. Parts of the world that have money and have supply chains and sophisticated logistical systems, there will still be things on the shelves.But I remember about two years ago, little over two years ago, just when COVID was kicking off, I wrote an article in Whiskey & Gun Powder, and I actually said something like, we're probably going to see National Guard units guarding supermarkets to control crowds as people go in and out just to buy their food with their masks on and all their anti-COVID gear and everything, because everybody bought into that narrative as well. I certainly think that the price of food historically has always been a revolutionary point in time. When Marie Antoinette said, "If they have no bread, let them eat cake, ha ha," well, she got her head chopped off, didn't she? When you look at all those color revolutions 10 years ago, 11, 12 years ago, that started... The Tunisia revolutions-Joel Bowman:The whole Arab Spring?Byron King:Yeah, the whole Arab Spring. It started in Tunisia with a food seller who had a little cart. And he was just eking out a bare existence, a bare living. And along came the cops to rough him up and take his cart. And he killed himself and the next thing you know the country was in revolution.Joel Bowman:I think he set himself on fire.Byron King:Set himself on fire?Joel Bowman:Yeah, if I remember correctly. Yeah. I don't think many of us are wondering what's going to be on the shelves in a few months time, our favorite cereal or whatever. But for those who don't have a whole lot of wiggle room, you dip below that minimum daily caloric intake level and all of a sudden civil unrest becomes not just an attractive alternative, but the only thing you've got. And you get enough people together who feel like that and all of a sudden governments can topple and dominoes can fall.Byron King:Well, it takes us back to what we mentioned at the beginning about the US becoming an ungovernable country. Because you don't have to read too many news articles or go too far to see articles about these store lootings that go on. And certainly in big cities where people just crash into some drug store or a convenience store, whatever, and these flash mobs, and they just kind of loot everything off the shelves they can stuff into their bags and run away. And it has to do with the whole concept of how hard do we police the country anymore. Are the district attorneys going to prosecute? California has the $950 law, so that if you steal anything under $950, they won't even bother. You just walk away with it. There's that. But transform that. Imagine that transformed into supermarket mobs, where hungry people are out there saying, "Oh, no, I only have 50 bucks in my pocket and it's going to take $200 to buy the food that I need to feed the family."Next thing you know there's going to be a flash mob down at the Shop 'n Save or a flash mob down at the Vons or something like that. And you're going to have National Guard troops outside with their vests and their guns and their helmets and stuff kind of letting people in, one at a time, one at a time. It's going to be like the Soviet Union, where you'd walk into some store, you'd go and some shelf that had almost nothing on it, you'd say, "Oh yeah, I want one of those." They give you a ticket. You go and you pay for it, take the ticket back. Then the surly clerk behind the counter, okay. They wrap it up in a piece of greasy newspaper and hand it to you, something.Joel Bowman:Rock hard piece of bread and some crusty, brand imitation gruel or some such. I feel like it's not as if we haven't... Not to sound conspiratorial, but we have been conditioned, or gaslit or whatever terminology you want to use, to expect boots on the ground in certain cities to ward off so-called, euphemistically-termed “peaceful protests.” We have gotten accustomed to a lot more authoritarian overreach from the state, especially during the past couple of years of lockdowns. Who would've thought that just a couple of years ago you had told or, say, 30 months ago, if you had told an American, maybe just in heartland America, "By the way, there will be officers of the law handing out fines if you don't have your face covered in public areas. You won't be able to leave your home or your apartment. There'll be all these kind of mandates that encroach in a way that we had never experienced before." They would've thought you had lost your marbles.Byron King:It has been surreal. It has been surreal. I remember I wrote about this in Whiskey & Gun Powder two years ago where the Los Angeles police arrested somebody for paddle boarding in the Pacific Ocean.Joel Bowman:I saw that. Yeah. Amazing.Byron King:This guy is like... He's like 200 yards offshore.Joel Bowman:He couldn't be more socially distant.Byron King:He's just paddle boarding and they send out the boat police or whatever, the fish police or whatever to arrest him. But we saw it everywhere. We saw it in Britain. We saw it in Australia. We saw it in New Zealand. The cops brought out their inner whatever it is that makes people not like them. Obeying these stupid edicts from the people above, if you're walking in the park without a mask and there's nobody within a quarter mile, "Oh, we're going to cite you for that." Not too far from where I live there was a woman who was sitting in the far section of the stands in front of a sports field, watching her kid play soccer or football or something, I don't know. And some cop just sort of walks up to her and arrests her for not wearing a mask. Well, there was nobody there. And then she resists and now it's sort of like, "Oh, well, you resisted arrest so now we're really going to arrest you."Joel Bowman:Goodness gracious.Byron King:This is a country where a year ago or a year and a half ago people burned down entire sections of cities and got away with it. But at the same time, little old ladies got ticketed and hauled into court for not wearing a mask. I mean, it's crazy.Joel Bowman:It is certainly an opportunity for everybody to bring out their little Eichmann, I like to call it, their little petite fonctionnaire rule-following impulses, and get to boss a bunch of other people around. Byron, I know I'm pressing up on your time, which you've generously given to us today, but I do want to get just your take on one more issue, which just came across the news wires this morning. And I would be remiss if I didn't get your input on this. And this is news that the Biden administration have announced that they will supply bids to restock the SPR, the Strategic Petroleum Reserve. I know you had been writing about that. I wrote about them having drained it not so long ago, after many senators... By the way, just a little backstory here for our listeners.It was a couple of years ago when a fashionably unpopular president suggested refilling the Strategic Petroleum Reserves at, I think, something like 22 or 25 bucks a barrel. When prices are low, you're supposed to buy, according to conventional wisdom. Anyway, that was quashed because it was marketed to the public as an unwarranted and unearned subsidy to big oil and big gas. And so you had people like Senator Chuck Schumer skiting and gloating that he had put the kibosh on refilling the nation's Strategic Petroleum Reserve. And then we saw late last year, and then earlier again, in 2022, the Biden administration tap that Strategic Petroleum Reserve. And now with prices way back up over 100 bucks, he's talking about... Well, not just talking about, he's giving the markets advance notice that he will be purchasing something in the order of 60 million barrels.Then there'll be three tranches, so it'll be 180 million barrels, thereby sending the price even higher in expectation. It reminds me a little bit of Gordon Brown's Brown Bottom when he told the market in advance that he was going to be unloading half his majesty's gold coffers and that way tank the price in advance of the auctions. But is this just more unintended consequences? Is it stupidity? Is it arrogance? Is it just something that we're not seeing? Is it genius in the disguise of idiocy? What are we looking at here?Byron King:I actually hope that it's not stupidity because if it's stupidity, these people really are pathetically stupid. I had an old professor who used to talk about the too dumb to live rule, the guy who crawls underneath the bus to get his hat after it blows off his head and the bus pulls out and squashes him. Well, some people are just too dumb to live.Joel Bowman:Another Darwin Award contender, yeah.Byron King:Yeah, really. You've summarized it very well. My real worry is that these people actually do understand what they're doing. We're going to drain the Strategic Petroleum Reserve for some political spectacle. We're going to say, "Oh, we're selling the oil. We're going to sell the oil and drive the price down." Of course, it didn't drive the price down. And of course that particular oil, those barrels that have been coming out of the SPR, most of them have been going on a tanker and sent off to foreign destinations. They're not going to some refinery in Houston or some refinery in Philadelphia, some refinery in Long Beach so that Americans can put it in their tank and burn it up as they drive around. No, no, no, no, no.Most of that oil went overseas. It still is. But here we are, we're going to refill the reserve. My solution, my suggestion to that is that what the US government should do is what it has long done. It should take a royalty, what's called a payment in kind, from oil companies that are producing oil on US federal leases; federal lands, federal offshore. Okay, let's say you're an offshore oil production platform out in the Gulf of Mexico and you produce, pick a number, you produce 10,000 barrels a day. Well, your royalty to the government's 12.5%. But rather than write a check to the government, give us 12.5% of the oil that comes out and that'll go to the salt domes in Texas or Louisiana. That's what they ought to do.And that way there's no real cash burn that goes. But for the US government to just go out and say, for whoever it is that's going to buy this, Department of the Interior, the Defense Logistics Agency, whoever, to say, "Oh, yes, we'll write you guys checks and we're going to bring in tanker loads of oil, from where? From Nigeria, from Saudi, from whatever and we're going to pump it into... It's just crazy economics. And it actually brings us back to the very beginning of our talk today, which is the US has this incredible debt. And our federal bank, our central bank, is doing these tiny, little baby half percent steps to address the inflation problem.And it's all just window dressing, it's all narrative and it's not even good narrative anymore. It's kind of like really dumb comic book narrative. It's dumb comic book governance, governance by imbecility or something like that, policymaking by imbecility. I'd like to think that Winston Churchill was right when he says America will always do the right thing after it's tried everything else. Maybe we will, but for now just invest the best you can. Go for hard assets, energy, mines and minerals, gold, silver, land, ag, real stuff. Companies with real factories full of smart people that make real things, that kind of stuff.

Joel Bowman:Yeah. Well, speaking of that, Byron, tell our readers and our listeners or our viewers, depending on the medium in which they're imbibing this, your insights and expertise, tell everyone where they can follow you, where they can get your latest research and keep up to date with your thinking as America tries everything else but the best thing on that long road.Byron King:Well, you'll find me writing a periodic article in a St. Paul research pub called Lifetime Income Report. And you'll sometimes find me here at Bonner Private Research. I know that I promised the readers a couple of times that I'd give them a few updates, and I'm behind on that so I do need to catch up. I am going to be at the Vancouver Resource Investment Conference in Vancouver in May, 16 and 17, I'm giving a talk on the 17th. That'll probably be on YouTube. And I sometimes write for an outfit called Investor Intel, which is up in Toronto. I send them an article every now and then. So I get around. But I certainly enjoy talking with you, talking with the old hands from the olden days of Agora, because everything has changed and transformed so much.Joel Bowman:Indeed, it has.Byron King:I'm around and I'm not going anywhere. I'm not writing Whiskey & Gun Powder anymore, which was a publisher's decision. And it's too bad because I kind of miss that format.Joel Bowman:Yeah, I love that. One of my long time favorite reads from the Whiskey Rebellion onward. Well, Byron, as you know, your insights and expertise always have a grateful home at Bonner Private Research. Whenever you want to flick us over an article, we're more than happy to forward it on to our readers and listeners. And so on that note, do check out our Substack page. Again, it's bonnerprivateresearch.substack.com, and I'll include all the links to Byron's various writings. And he is a man of letters, so they are prolific and they can be found in many different places. So I'll put links to all of those down below where you can follow on with Byron's work. And Byron, I think I got to about a quarter of the things that I wanted to ask you today, but maybe that just means we've got many more productive conversations in the near future.

[Ed. Note: See more of Byron’s work at St. Paul Research, right here. Also his many, many memorable columns at Whiskey & Gunpowder.]Byron King:What it means is we have to do this again, huh?Joel Bowman:Outstanding. Byron King, thank you so much for your time today, mate. I really appreciate it. Until next time.Byron King:Thank you, Joel. And good luck to everyone out there.

Thank you for reading Bonner Private Research. This post is public, so feel free to share it with friend and enemy alike...

© 2022 Bonner Private Research, Carrick Road, Portlaw, County Waterford, Ireland. 

All Rights Reserved. 

Any reproduction, copying, or distribution, in whole or in part, is prohibited without permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal circumstances–we are not financial advisors and do not give personalized financial advice. The opinions expressed here are those of the publisher and are subject to change without notice. It may become outdated and there is no obligation to update any such information. 

Investments should be made only after consulting with your financial advisor and only after reviewing the prospectus or financial statements of the company or companies in question. You shouldn’t make any decision based solely on what you read here. Neither Bonner Private Research nor its employees and writers receive any compensation for securities or investments covered herein.

“So there are a lot of lessons to be learned here about how governments can really clamp down. So when their policies and their central bank policies are failing, they'll try all sorts of tricks to stop people protecting themselves. You've got to essentially try and get ahead of them.”

~ Robert Marstrand, Investment Director for UK Independent Wealth

Ed. Note: Learn more about Rob’s work at Fortune and Freedom, right here

TRANSCRIPT:

Joel Bowman:All right. Welcome back to the Fatal Conceits podcast. A show about money, markets, mobs, and manias. Not necessarily in that order. If you haven't done so already, and you're just tuning in for the first time, please head over to our Substack page, that's at bonnerprivateresearch.substack.com, where you'll find plenty more articles on everything from high finance to lowly politics. And of course, many more conversations just like this. I'm joined in the studio, actually here in Buenos Aires today, with my good friend and long term Argentine expat, I guess, Robert Marstrand. Welcome Rob.Robert Marstrand:Hi Joel. Well, great to see you, as always. Joel and I, usually when we're sharing time, tends to be over a fat steak and a glass or two of the local Malbec, but here we are in a studio.Joel Bowman:Yeah, indeed. We might have to take a rain check on that meal until later in the day. Mate, first of all, you were telling me just before we got on air here about your trip in a kind of a lunatic taxi. And it struck me that was somewhat metaphorical for some of the topics we're going to talk on today. So give us a little bit of your backstory with regards to arriving here. What would it have been 15 years ago or something like that?Robert Marstrand:Yeah. Well, I actually immigrated here in 2008. As your listeners can probably guess, I hail from the UK originally. I'm English from South East England place called Sussex. My first time in Argentina was in 2002, which was an interesting time because it was just after, or almost actually in the middle of a massive financial crisis. So Argentina defaulted on its debt and had a massive two thirds currency devaluation around that time, so the peso collapsed against the dollar. I still have a pair of boots by the way, I bought it back then, August 2002. I bought a pair of ankle boots. They cost me the grand total of $20. And it's still going strong.Joel Bowman:How much was that in pesos at the time? Because that's obviously collapsed.Robert Marstrand:Well, I suppose by that point it would've been about 60 pesos.Joel Bowman:Right. And how much did you pay for your taxi ride in this morning? Just so readers can get an idea of how much the peso has collapsed.

Robert Marstrand:Well, my what should have been a 10 minute taxi ride that took five minutes because I was being driven by a maniac, and that I believe probably had a rigged meter that bumped up the price, cost me about 300 pesos, which is about $1.50.Joel Bowman:Right.Robert Marstrand:It should have been about a buck.Joel Bowman:Right. So you've got completely ripped off and had to throw in an extra couple of quarters. Mate, you and I share a lot of articles, just regarding what's happening in current affairs, both down here in Argentina and in your home country, mine, and in the US. An article, a wall street journal article came across our collective desk within the past couple of weeks describing what I think may turn out to be the kind of inflationary ghost of America's future, or maybe even the future of many Western nations, that are just now seeing inflation tick up to once in a generation highs, depending on how you measure it. But for the Argentines, where we currently have an official inflation rate of over 50% right now, it strikes me that the people here have been dealing with this for... Goodness knows how long they have adapted, they've anti-fragelized themselves to some extent. How do you see having lived here for the past 15 years, the people of Argentina adapting to this... what for many people would be a completely foreign and very, very out of whack economy?Robert Marstrand:Yeah. Well, I'd say when I arrived here in 2008, inflation was about 15% a year, one, five. And it's just gone up and up and up since then. So it's never had low inflation since I've been here. I forget the long term average, but it's some monstrous number, because they had high pre-inflation back in the 80s and so forth. Look, all the stuff that happens here, borrowing money you can't afford to pay back, printing money like crazy from the central bank, it's happening in the US and across Europe, for that matter. It's something I write about and look at quite a lot, if you look at US bank deposits, since just before the pandemic started, so let's say February 2020, US bank deposits are up about 35%, 40%. So in just over two years, the economy is more or less the same in size, in terms of volume.It went down during the pandemic and came back. Guess what? You get inflation. Well, guess what? We have inflation in Argentina too, because they keep printing masses of money. And you know what? Politicians, central bankers here will often say dumb things like, "Inflation is not created by the emission of money, or money printing."Joel Bowman:It's greedy capitalists or price gouging.Robert Marstrand:... it's whatever, it's speculators, it's whatever it happens to be, whatever they happen to claim. I remember a few years ago, there was a head of the central bank here who said exactly that "inflation wasn't created by money printing." And there was a finance minister, or maybe he was vice president by then, who said that "inflation only affects the rich." It's the poor that get affected most. Now here in Argentina, frankly, who gets affected most depends on where they fit into the social structure. So the very wealthy who have overseas assets and foreign currency assets and so forth, don't get affected that badly. The people at the very bottom who just have a bad life, whatever happens, they're struggling badly. They rely on handouts from the government, they tend to be adjusted for inflation, so they struggle along, I think at the same level by and large.So the people in the middle, they get squeezed, it's the middle class, the people that have salaried jobs, and maybe their salaries don't keep up with the inflation and pay, so in terms they're paid in local currency. So those are ones that get squeezed. But it's brutal, 50% inflation a year, you're talking about prices doubling in less than two years, a year and a bit.Joel Bowman:And this is something that I think to your point about a lot of purchasing power for real wages, that is real wages going down when adjusted for inflation, this is something that I think people in the United States... And I'm not sure about the UK, but I imagine that many countries in the Euro zone and Australia, Japan and elsewhere are now just experiencing for the first time. So some of the strategies that people in that article down here in Argentina were using were things like, going to the store when there were discounts, coupon, clipping, this kind of thing, but also delaying payments, taking out loans and then paying in installments, which sounds counterintuitive, but if you think that your money is going to be worth... Or rather, you know that your money is going to be worth 50% less, 12 months from now, then it does make a certain amount of sense to take out a loan and pay it back with deflated currency sometime in the future.But it doesn't say a lot about planning for the future when you're trying to get rid of your money as quickly as possible, or diversify into other assets. Is this something that people in the US and across the West, broadly, are going to have to learn to deal with in the future?Robert Marstrand:I think they are. If you've got dollars sitting in the bank and inflation's running at 10% a year, you're losing a lot of buying power, because you certainly aren't getting a lot of interest from the bank at the moment, right?Joel Bowman:Right.Robert Marstrand:I've seen people here, if you've got a few extra pesos at the end of the month, you stockpile whatever you might need in the future. So I've seen people loading up their storage units with things as simple as toilet paper. You might buy some wine, you might buy some canned foods, you might buy anything that's not going to degrade. People here also, I've heard about people who maybe wants to build an extension on their home, but they don't have all the money up front, so they'll buy a few bricks at a time. At least the brick is still a brick, when it comes to sticking it together into a wall. Whereas a pesos is going to be worth a lot less. Will people get to that, or learn, relearn to do that in the US and the UK and other places? Well, they may have to, if it carries on like this.

Joel Bowman:Right.Robert Marstrand:People also tend to have... If you have a pension fund, if you follow standard advice, you probably have huge investments in US treasury bonds, or gilts, as they are in the UK or whatever in other countries, these are dreadful places to be. If they're paying you like 2% a year and inflation's at 10%. So people got to think how to get out of some of the stuff they're used to, their local currency, their bonds, their whatever. Of course, people here are very clued up about that. The trouble is the government is very aggressive about blocking the exits. Well, yeah. People here, if you have spare pesos in your bank account, if you've got anything left at the end of the month, I think you're limited to something like $200 a month that you can buy in a-Joel Bowman:In foreign exchange, in foreign currency.Robert Marstrand:Yes, for the official markets, which gets you the better rate. So there are a lot of lessons to be learned here about how governments can really clamp down. So when their policies and their central bank policies are failing, they'll try all sorts of tricks to stop people protecting themselves. You've got to essentially try and get ahead of them.Joel Bowman:So unpack that a little bit, because this is something that you and I talk about, and people down here who save, invest, earn in another currency like dollars or British pounds, this is something that we bandy about pretty regularly, this idea of parallel rates. But I think that's something of a novelty to people in the US or Australia or the UK where we have an exchange rate for, let's say Australian dollars to US dollars, and that's the exchange rate. Why is there a parallel exchange rate? Explain that for our listeners, let them know why there's such a huge spread between the official and the unofficial, or rather blue rate.Robert Marstrand:Well, that's quite a rabbit hole to go down, because I think there's something like five, six or seven different exchange rates, so depending on which one you want to pick.Joel Bowman:Right. So let's go with the blue.Robert Marstrand:Yeah. So there's the official exchange rate, which everyone would be familiar with, which is, you go your bank and you want to buy some foreign currency to go on holiday or whatever, and they'll do it at the exchange rate plus their commission or whatever. But over here, there's also the other extreme, it's called dollar blue. I don't know why it's called dollar blue, but it is. It's the black market, but it's called the blue market here. And it's officially illegal market, it's backstreet dealers that you go and you take your pile of cash to, and they'll convert it, either from pesos into dollars or dollars into pesos. And that exchange rate is roughly twice the official rate. So I forget what the official rate is exactly now, but let's say it's 110 pesos per dollar...Joel Bowman:Something like that.Robert Marstrand:... you go to your backstreet guy and they'll probably give you 210, 220, something like that, the other way around. And then in between, you've got these other rates, so there's a legal market through the bond market for getting money in and out of the country, which trades bonds between New York and Buenos Aires, which is close to that black market rate. As far as I'm concerned, that's the market rate, that's the real market rate, it's legal and it's much higher than official. Then in between, the government imposes taxes on foreign purchases. So if I go on holiday, let's say from here and buy something with my Argentine credit card, they automatically add an income tax on that if you like. So that puts it somewhere nearer.Joel Bowman:How does that...?Robert Marstrand:... disincentivize me spending money overseas basically, they want me to spend my pesos here.Joel Bowman:Right. They want to keep you captive as it were and not let any of that peso leakage. So explain how that happens. It's something like 30% or something, I think that tax on foreign credit card purchases.Robert Marstrand:Yeah. And it's got some name, it's the solidarity tax or something. So there's that if you buy stuff, and there's another one, I think if you buy flights to go overseas, there's another tax added. Something odd goes on. Anyway, I-Joel Bowman:Does that get deducted just directly from your account?Robert Marstrand:Oh yeah, it's done through your bank. So your bank is instructed by the government to automatically add to that to any purchases you make overseas, and then it gets taken out of your account, and then goes to the government. So people-Joel Bowman:Is it really your money? Who says it's your money?Robert Marstrand:Governments have all sorts of tricks that they can come up with to control the gates, to control capital. And of course, the US already has capital controls in the sense that if you're a US citizen and you move overseas, you still pay tax to the US on your foreign income. And if you wanted to give up your... As I understand it, if you want to give up your citizenship, you'll pay a massive exit fee. Because I had a neighbor in London years ago, he was actually a German. His wife was English, lived upstairs. And he'd lived in Washington for a couple of decades, and he left the US. And to his shock horror, discovered he had to pay some massive exit tax on the notional value of his pension, which wasn't even funds he had, it was just a notional value of money he might get in future. And he got whacked with this massive bill. And he wasn't even American, just lived there for 20 years.Joel Bowman:It's extraordinary.Robert Marstrand:There are capital controls already.Joel Bowman:Right. And I guess some of these controls and taxes are more conspicuous than others and certainly people don't tend to think of inflation as a tax. But as we mentioned, if you're watching the purchasing power of your dollars or pesos or pounds or pengős or złoties or whatever, depreciate by 10%, 20%, or in Argentina's case, 50% per year, that's certainly a tax on your quality of life. I remember you did a little bit of work when you were, I think, maybe when you were riding with our mutual friend, Bill Bonner, some years ago in unpacking all of the business taxes here in Argentina, if you were to operate what they call [foreign language 00:15:10], if you were to operate a business strictly above board, you were to cross all your Ts and dot all your Is with the tax agency here. And it was some extraordinary amount, something like 130, it was above a 100%, I remember.

Robert Marstrand:Yeah, it was a study done by one of the big global accounting firms. I think it was covering about 40, 45 countries, something like that. And they looked at all the taxes levied on companies. It was sort of mid-cap, small mid-cap companies, it wasn't big multinational, just the small stuff. They looked at all the taxes levied in these countries, and their conclusion, and Argentina was the only one that achieved this, was that if a normal business paid all the taxes that it was supposed to, it was guaranteed to make a loss, which is obviously insane. I would hate to try to be a local entrepreneur here, I think it's a phenomenally hard place, it ranks very low in the world. It's not quite as bad as say, Eritrea or North Korea or somewhere, but it's not that far.So effectively, you reach the conclusion when you read stuff like that, and talking to people. If somebody's running a business here, they have to break the rules to stay above water. And not just that, if they don't, the guy next door will be, and so how do you keep up? So it's an insane situation.Joel Bowman:And if they're running a profitable business here, there must be incredibly nimble and entrepreneurial and anti-fragile and it's quite a testament to their business acumenRobert Marstrand:I know some very successful entrepreneurs here, and I think they're probably some of the best business people in the world, given what they have to put up with.Joel Bowman:Right, right. Hardened in the crucible of Argentine politics.Robert Marstrand:If they were gifted, the kind of environment that people enjoy in the US, let's say, say in certain states, this place would rocket. It would be an absolute overnight success within not that many years.Joel Bowman:Right. Well, the natural resources here-Robert Marstrand:Yeah. You get this place 10 years of a decent, stable set of rules that were sensible, and a tax system, and employment law that was sensible, I think this place would absolutely be boom.Joel Bowman:So let's talk about that then, because I know you headed back to the UK in a month or so with family. When you go back to the UK, when I go back to Australia or we visit the US, and I'm sure you hear this as well, I oftentimes hear people pining after... with a romantic tear in their eye or advocating for these very, very progressive taxation, let's say, or broadly socialist policies that... Of the Stripe, which have led Argentina to exactly the lamentable position that it finds itself in today, where it has an abundance of human capital and abundance of natural resources, and can't seem to get it together, where other countries like the UK, like the US or Australia, how do you address the dinner table conversation where somebody who's telling you with a straight face and without any hint of irony that "what we need more of in the UK is some Argentine-like policies."Robert Marstrand:Well, God, where to start with that? I have to say, as you know well, I'm about to go over the big barrier of my age, beginning with a five, rather than a four.Joel Bowman:The half ton.Robert Marstrand:I have to say that as I get older, my appetite for having arguments with people over dinner tables or otherwise is diminishing because you lose patience with it. But that said, I do observe a lot of the views and the actions, and I find it exasperating. In fact, one of the reasons I immigrated, despite all I've said about Argentina's problems, Buenos Aires is a lovely city and I do love this part of the world. But when you don't live in your country of origin, it's easier to put mental distance between yourself and the nonsense that's going on. When I go back to the UK, I'm instantly thinking, "Why on earth are they doing this nonsense?" And just this week, just in the last couple of days that in theory, they have a conservative government, which is, I suppose, broadly a bit like the Republicans, it's different, but it's slightly to the right, in theory.Joel Bowman:Small city conservative type of-Robert Marstrand:Supposed to be in favor of business and all the rest of it. I think they're left of center personally, but that's my view. The chancellor of [Vecheko 00:19:49], which is like the... What do you call it? The sector of the treasury.Joel Bowman:Right.Robert Marstrand:It's talking about putting windfall taxes on oil and gas companies. This is madness. This is in the middle of a global energy and commodity crisis. And they're talking about slapping extra taxes. These are companies, which by the way, are investing billions of dollars every year into renewables as they move away, they don't have a choice, moving away from oil and gas over time, but it's going to take a lot of years.Joel Bowman:And a lot of money.Robert Marstrand:Slapping taxes on them slows that down. So it would be idiotic. So that's just one example of what exasperates me. It's not just taxes, it's just lots of petty rules. And it really took off in the 90s, when Tony Blair came in with what's called New Labour.Joel Bowman:Well, he had the hand of history and shoulder.Robert Marstrand:Yeah. He had the hand of history, and the God, he had hand of something on him, I don't know... They just started bringing in lots and lots of petty rules. It was sort of a effectively job creation, all these non jobs in all the bureaucracies of the state. And they wrapped up. I think I once calculated in the UK during the Blair government, that adjusted for inflation and population, that government spending per person in real terms, so just for inflation, went up something like 40%.Joel Bowman:It's incredible. Incredible!Robert Marstrand:That's talking about big state. And they've never dialed it back. In theory, we had a conservative government since what, 2010?Joel Bowman:Right.Robert Marstrand:And it's never gone down again.Joel Bowman:Well, that's the way, isn't it? It tends to be rules are easily put on the books, but it's very, very difficult to appeal.Robert Marstrand:But also if you give lots and lots of bureaucrats, lots of jobs, they're going to be busy bodies and they're going to bug you and get into your life. And I find it, just drives me out the wall personally.

Bonner Private Research is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Joel Bowman:And also I find a perverse incentive structure, where in the marketplace for all, its rough and tumbled turbulence or what have you. If you're a losing business, you tend to go out of business. If you're not satisfying your customers or you're not meeting payroll or you're not growing earnings or you're not producing value for your shareholders, et cetera, then you don't stick around for very long, or you become an acquisition target or whatever happens to you, but that capital becomes eventually liberated. It seems to be the opposite when it comes to conversations about the state, where any program you happen to point your finger to, whether it's the war on drugs, or the war on poverty, or the war on terror, or the war on COVID, or any of the above and plenty more, it seems the more inept the agency is, the more money it gets. And as you say, that just kind of the Leviton growth.Robert Marstrand:Well, being the finance nerd I am, I dig into things like, what's the real tax burden on people? Because we think we pay a certain amount of tax, but what's it really? Now, I can't give you the numbers for the US, and also it varies by states and all that kind of thing. I was looking at the numbers in the UK and I reckon, rich or poor, high income or low income, if you add in, so all the direct taxes, income taxes and whatever, but then you look at the taxes embedded in the prices of things you buy. So all the taxes that corporations pay. So the income tax for their employees, their local taxes on their property, their corporate taxes and et cetera, et cetera, in UK, we have value added tax, which is a sales tax as well. You add all of that together, I reckon that just on average, across all the stuff you buy, probably about 40%, maybe more, it's just tax in the price of everything. It's probably even more or in Argentina by the way.But I reckon that people roughly speaking were paying about 60% tax across the board. And most people probably think they pay about 20%.Joel Bowman:Right.Robert Marstrand:It is insane. And it just goes up and up and up. The UK recently that the tax burden is the highest relative to GDP. I think it's been since the second world war or something, or maybe it was the 60s, I can't remember, but it's high anyway, that's the point.Joel Bowman:Right. So whether it's this inflate or die or tax and spend mentality, it does seem that-Robert Marstrand:Well, sorry. Just a crucial point is here...Joel Bowman:No, go ahead.Robert Marstrand:... obviously, we have this cost of living crisis going on, and price of energy and food and everything is rocketing. And I think it could go on for a while. No one ever talks about the fact that so much of that cost is tax.Joel Bowman:Right.Robert Marstrand:Could the government not scale back and cut some taxes and reduce our cost of purchases? Hey, not even talked about.Joel Bowman:Not in the nature of the beast. So going back to what you said before about this, the proposed windfall tax for oil and gas companies, which have just been the whipping industry [foreign language 00:24:43] of the last decade let's say, a similar windfall tax proposals have been tabled in the US, and it just strikes me as perverse that at precisely the time when we are experiencing... Let's be generous and diplomatic and say, tensions in the global energy markets, we've had under-capitalization in this particular industry. I think the high watermark for dollar spending for global exploration was around 2014, something like $800 billion. That was not coincidentally the high watermark for the last high in oil prices itself.And whether it's being squeezed by environmentally sustainable governance and all this kind of stuff, it seems like it's very difficult for entrepreneurs and businessmen to invest in critical energy if they're being beaten around, boxed around the ears by governments. What's your outlook... I know I've already had a huge run up in energy prices, and we talk about this a lot in our newsletter upon a private research, but what's your general outlook for global energy prices in next short to medium term?Robert Marstrand:Well, I think it's likely that oil and gas prices stay pretty high, especially in Europe. Of course, there's a big disparity right now between North American natural gas prices and European natural gas prices, because it's cheaper to deliver gas through pipelines than turn it into a liquid, stick it on a ship, sail it across the ocean, turn it back into gas, which is the liquid natural gas, liquified natural gas. I'd say the prices are likely to stay high. Because even if this whole thing is wrapped up in Ukraine tomorrow, is everyone going to rush back to buy Russian commodities? And Russia being such a massive producer of both oil and natural gas. I suspect they'll be sanctioned for years, maybe decades, until there's a change of leadership. And by the way, people talk about removing Putin. Well, who knows if the next guy isn't worse. So don't get too excited about that idea.But just a bigger picture... So I'd say prices probably stay high. Bigger picture for all the hoser about the shift to renewables and getting to net zero by X year, depending on which government saying what's on, what day of the week, people forget... There's a great piece of work done every year by an oil company called BP, it's big oil company, you've probably heard of it. Where they do a world energy review, although they're an oil gas company, they look at coal, they look at nuclear, they look at wind and solar and the whole bit. And the stark reality is that 84% roughly of the world's energy comes from hydrocarbons. So that's coal, oil, and natural gas. Then you've got a chunk that goes to, I think it's something like 10% goes to nuclear, comes from nuclear.Another chunk similar comes from hydro electricity, so damning up rivers to create lakes and then running the water through turbines. And then there's only a little bit left. That's the renewables, in quotes, the solar and wind piece mainly, and few other bits, biofuels maybe. How are we going to get that tiny piece to replace the 84%? Well, it's going to take a damn long time. So the fact is, whatever people say, oil, coal, natural gas are here to stay probably for decades, especially in poorer countries that can't afford the new technologies straight away. They can barely keep the lights on as it is in many cases. And don't forget, everyone talks about... Everyone, well in Europe, we can cut ourselves off from Russian oil and gas, and let's all build lots more nuclear power stations.Well, great. But guess what? Nuclear technology is subject to restriction some proliferation because of fears about weapons. Right?Joel Bowman:Right.Robert Marstrand:So all those poor countries, what are they going to do? They can't build nuclears, they're not allowed to, no one lets them. So I don't think this thing is going to evolve anywhere near the way that the politicians claim they want it to evolve. I think poor countries, big places like India or parts of Africa or wherever, they're just going to say, "Look, we need energy to keep the lights on. We need to keep our populations heated or lit or fed. We need tractors, we need..." Whatever. I don't think they're going to shift to massive, great solar and wind farms anytime soon. There'll be a bit of noise around the edges to keep people happy, but it won't happen, simply won't happen.Joel Bowman:Right. And it does strike me that in many of these... you mentioned India or Sri Lanka or nations that are decidedly not energy independent. And we've spoken a little bit about Sri Lanka before, but there are a lot of places where a large and meaningful portion of the population live at or around the breadline level wearing, as you mentioned before, inflation herding, not the richest people, contrary to what the Argentine government would have you believe. But inflation actually hitting the poorest people, we see 10%, 15%, 20% rises in the cost of energy, combined with the inflationary pressures that these people are feeling. It does strike me that this... Much like the Arab Spring in 2009 or 2010 or whenever it was, it does strike me that we might be a lot closer to civil unrest in volatile pockets of the world than we might necessarily be factoring into the geopolitical equation.

Robert Marstrand:Yeah. There's no question. People complain about rising gasoline prices or food prices or whatever in wealthy countries, but in poor countries, poor populous countries, this is life or death stuff, if you can't feed yourself. And throughout history, revolutions have always been caused basically by populations becoming hungry, that's the final trigger point. It doesn't matter how authoritarian the government is. If people are starving, they hit the streets, and they will throw their lives on the line because they're going to die anyway. Now the people that really struggle, so the rural poor usually just about scraped by because they've got some plot of land, they can plant some food, they might have a goat or sheep or whatever. It's the urban poor that really struggle because they can't grow their own food and they're scraping a living.And so that you think about some of those big cities in India or wherever. I haven't actually been to Africa yet. I know you have, but I imagine some of those big African cities are pretty grim. And those are the people that are likely to riot. And you mentioned Sri Lanka, Sri Lanka's economy relies on tourism to a large degree. And of course they got slammed during COVID because people weren't traveling. And I have a brother-in-law who has a business there as it happens. He lives in England, but he has a business in Sri Lanka. And they're going through rolling 5-10 hour power cuts at the moment, there are food shortages, they've just defaulted on their debt, they've had riots, so the place is going into meltdown. Indonesia, biggest producer of cooking oil in the world has recently started restricting exports of Palm oil, which is controversial for some people because of they have habitats where the trees are, orangutans and things.But throughout Asia, it's a very important cooking oil. This also goes into the filling in Oreo cookies by the way, and shampoo and all sorts other things. But that's another sign, a big country, 200 million people and they're restricting their exports of an important food stuff. So I think we're going to see a lot more of this through those poorer countries. And of course, Argentina also has restrictions on some of its food exports, particularly meat, beef here is produced in great quantities, because it's all about suppressing the price in the domestic market. If all these big food producers start cutting off exports or restricting them in some way, obviously it has knock on effects to the importers, the Sri Lankans of the world.Joel Bowman:I know a lot has been made of these so-called supply chain disruptions and I've heard it said before that, well actually supply of chains are the economy. Supply chains aren't a part of the economy. Supply chains are the capillaries and the arteries and the veins getting necessary nutrients to different parts of the marketplace. We've seen, I think in the UK, certainly in the US and in Australia, I've noticed there have been... people are starting to notice empty shelves. This seems unthinkable after a generation of more or less uninterrupted growth and this cornucopia of goods and services that are ever being made easier, and at our fingertips with the advent of various technologies and such, but it is interesting to note that, now, for the first time in decades, people are looking at shortages, they're looking at long lines at the gas station. Just how fragile are these supply chains. And given what's happening in Eastern Europe and the energy markets in general, how likely are we to see more of those kind of empty shelf syndrome in markets around the world?Robert Marstrand:Well, I think the whole two years of the COVID pandemic was a great wake up call to a lot of companies who were operating these just in-time supply chains from right around the world. One simple example would be the car manufacturers who... I quite like cars, I don't like modern cars that have so much computer technology loaded into them. Of course they're completely reliant on all this computer technology now. And the shortage of chips has created... Basically meant they had to shut down factories. And that's why secondhand cars' prices have gone through the roof, because people can't buy new ones, it is absurd. China is still locking down its cities. So Shanghai recently, and this week there's been fears about them locking down Beijing. That clearly creates supply eye chain issues, if you shut down all the big cities in China.Joel Bowman:I think Foxconn was the-Robert Marstrand:Oh yeah. They supply Apple, right.Joel Bowman:But yeah, when you locked down 25 million people in Shanghai, 25 million more people in Beijing, these people go to factories, they make products, those products get shipped to America and the UK or not as the case may be, so yeah. Mate, it's a little bit of a grim outlook. We're just bumping up on the end of our time here. But before we get going, I want you mention where readers or listeners rather can find your work. I know you're with Southbank Investment Research in the UK, give us the details on your work.Robert Marstrand:Yeah. Southbank Investment Research, it is a branch of the same outfit that you are involved with. It's mainly for a UK audience, but we talk about the investment world in general as well, the products called UK independent wealth, and I'm sure I can provide you a link or something that people can come and find us if they want to.Joel Bowman:Right. All right, well, we'll have to organize a little bit more time for our next podcast or maybe we'll be lucky enough to do it over a steak at Don's and a big fat glass of Malbec. But Rob mate, thank you very much for joining me in the studio today. And for our listeners, please don't forget to head over to bonnerprivateresearch.substack.com, where you can find plenty more conversations like this and many, many irreverent articles about high finance and lowly politics besides. That's all for this week, and I'll catch you again next Sunday.

Thank you for reading Bonner Private Research. This post is public so feel free to share it.