Transcription
The stock market has yet to wake up to that very fundamental reality. If you just don't know something, you have to place a lower valuation on a company.
There's only one thing, one thing, that will get precious metals into a proper bear market, only one thing, and that is a complete I I think AI is a huge bubble. I actually think a lot of the AI hype is even less justifiable than some of the dot-com nonsense.
Could the days of geopolitical stability and predictable market outlooks be over and behind us? In a world tumultuous events and uncertain uh turn of the corners pretty much every week, we have a situation where it's really important to not only stay up-to-date with the news, but stay on top of what is moving when it comes to big picture macro events, so we can stay ahead of the game.
John Butler is here to discuss exactly what is shifting right now, what investors should be paying attention to, and what ultimately is the outcome of global markets. He is the author uh of the M4 Report. You can check him out on Substack, and we'll be going over every everything from the Federal Reserve to uh debt crises around the world, uh sovereign debt issues in America, and what's going to happen next with markets and precious metals.
Welcome back to the show, John. It's been a while. Congratulations on uh restarting your Substack. Everyone should check it out. I'll put the link down below.
Well, thank you very much, David. Pleasure to be back.
I want to congratulate you on not only uh uh restarting your work, but also uh on the prolific uh um venture that you've embarked on that's uh a lot of a lot of good articles on the M4 Report, and uh people should check it out. Let's talk about something you've written about recently, which is location, location, location. That's the off the title of this particular piece. Control over land has been contested since the immemorial, but not all land is created equal.
Let's talk about uh the current situation in the Strait of Hormuz and the possibility that the Houthis are now, like you wrote in the first paragraph, soon possibly also controlling the Bab al-Mandab Strait, which along with the Strait of Hormuz is a major oil choke point. The Bab al-Mandab Strait under normal circumstances, according to what I've read, should see about 4.2 million barrels of oil pass through daily and most of that goes through the Suez Canal into Europe. It's not as critical as perhaps the Strait of Hormuz when it comes to supplying 20% of the oil world's oil, especially into Asia, but it's still critical nonetheless. Walk us through your current assessment of the situation at hand.
Well, the point of this article is to restate something I've said before, but in a way which is perhaps a bit more accessible to the layperson. And the basic concept is that control over land is asymmetric in the sense that forcing land or a or a waterway, such as Hormuz, to be open to trade is much, much harder to do than to simply deny access. And history's full of examples of this. The Peloponnesian War between Athens and Sparta is a phenomenal example of that that I've written about extensively prior, but in this case, this article focuses on examples around Europe.
And this is the situation we're in, right? I mean, Iran clearly is the weaker power in this conflict. Their their military has been absolutely decimated by repeated attacks by the United States. Hence why Trump is threatening to disproportionately go after civilian infrastructure now because eventually you run out of targets. But the fact is the fact is is that Hormuz is a critical waterway. Roughly 20% of the world's energy, petrochemicals, fertilizer, and a handful of other essentials flow through Hormuz. And Iran doesn't need a first-rate military. It it it It needs almost nothing to cause enough of a threat to shipping through the strait to make insurance companies unwilling to provide insurance, and it all breaks down from there.
So, you've got an asymmetric situation here, and Iran is well aware it's an asymmetric situation, and well, I'm I'm not taking sides in this. I'm taking a purely realistic balance of power view of it. They they've played a pretty good hand so far, and and I think probably Trump and his team are a bit disappointed. But, the reality is this. The reality is this. The choke point is choked. It's been choked off and on for quite a long time now. It appears fully choked uh at time of our recording this. And that's doing all kinds of unseen and unappreciated damage to the global economy. And that damage is, in sum, stagflationary. Less supplies coming out, prices are going to go up, growth is going to get hit. We haven't seen it yet because stocks available stocks are being drawn down, and they're being drawn down to buy time. They're being drawn down by China. They're being drawn down by the United States. They're being drawn down by India and any other large country that saw the potential for disruption.
Okay. But, those stocks will run out. Yeah, how does the world change fundamentally following the realization that choke points control the world? I'm talking about everything from geopolitics to financial systems and how people will adjust to this realization.
I mean, that's that's a huge question, and believe me, I could go on for hours. In fact, I think I've written an entire book about it, but um the reality is this. Uh um Pax Britannica lasted a long time. There was a not quite seamless transition from Pax Britannica to Pax Americana. The common element of those two regimes was that freedom of navigation was more or less guaranteed. If you wanted to trade, you could trade. If you wanted to access to markets, you had access to markets. If you wanted to try to seek efficiencies through just-in-time inventories or whatever it was anywhere in the world, chances are you could find a way to do it.
This is the first time now in a long time, that is a long time as in the disruptions of the early 20th century, when you simply cannot take trade for granted. You can't take freedom of navigation, freedom of access for granted. And everyone's going to take advantage of that in their own way. The The US will take advantage of it in its own way. Iran is clearly taking advantage of it or drawing to in its way. Um It's a bit of a free-for-all in in terms of how this is going to play out. Now, I have some ideas how it will play out. And if you go to my Substack, I offer a little bit of a little bit of detail there. But it really is a guessing game. But that's the point. It's a guessing game. If you're valuing a global company and you don't know whether it's going to be able to continue operating the way it is, the way it is specified, the way it is diversified, the way it's leveraged, all of it, you're going to place a lower valuation on that company. And the stock market has yet, in my opinion, the stock market has yet to wake up to that very fundamental reality. If you just don't know something, you have to place a lower valuation on a company. And yet, look at the valuations we're trading at. Something's got to give.
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And you also wrote in your uh report that the Strait of Hormuz isn't just about crude oil. It chokes it chokes off essential downstream products like fertilizers, petrochemicals, all of which guarantee, what you write, a cumulative stagflationary shock. Tell us about this um finding.
Well, that's the thing, right? When you add it all up, the fact is all of these essential inputs they might be very very basic inputs, they might be inputs we take for granted, they might not be the sorts of inputs that uh are are treated with high valuations because they're not seen as innovative and not seen as sources of fresh growth in the global economy, but they are essential to just keeping the lights on. And so, when you can't even keep the lights on, of course, you're going to have to start spending a lot more money on keeping the lights on as best you can. Um so it's both price inflationary and growth negative.
Mhm.
The 1970s are a good example of what that looks like. And as we know, the major stock markets moved more or less sideways in the 1970s. But inflation was running in high single or double digits for much of that time. And so by the time you got into the early 1980s, the price earnings ratios on major indices were in the single digits. And yet here we are still trading it, you know, round numbers 20. Uh in for for for the US indices, for example. That something's got to give, like I said a moment ago. So that's that's the problem. It's not just about energy. Yes, energy's an input into everything, but a lot of that everything actually itself needs to flow out of the Gulf and is unable to do so at present.
Are you surprised that the stock markets, the Nasdaq and the S&P 500, haven't reflected these risks that you're talking about right now? Yes, we saw a correction in early March, but we also had a V-shape recovery. And now it looks like earning season and the AI build-out continues to be the dominant drivers of valuations growth. So why aren't these choke point risks that we're discussing right now, the downstream products being choked off, why aren't they being reflected in valuations?
Look, David, I I think I've seen this show before. I mean, we saw it in in 1999-2000 when the Nasdaq went up every day even though the rate of of failure of uh dot-com IPOs was increasing. You know, we saw it in the mid to late 2000s when anyone pounding the pavement of the US real estate market knew that the hype had long since rolled over. And yet somehow Wall Street found a way to keep the party going because they were earning such fat fees from securitization of all manner of mortgage-backed securities. Um this this to me is yet another example of, you know, Wile E. Coyote running off the cliff. He just hasn't felt gravity yet. And look, I know that's kind of a a trite argument to make and I and I don't want to sound clever because it's actually not a clever comment to make. But that that's the sense I get that that it's just a matter of time until you finally get smoking gun evidence. Sometimes that's what it takes. You finally get a handful of major corporations coming out with profit warnings or coming out with horrible earnings or someone missing, God forbid, an interest payment and having to reschedule debt. Uh we've seen some of that in the private uh credit market, by the way. But but if if that continues to to progress uh as it's begun now, at some point, you know, it it makes the headlines. And then everybody panics. And I I think that could happen any day. I really do.
I think right now the main worry for investors for most asset classes, especially when it comes to precious metals, I saw Bank of America lower their gold forecast, for example, is the rising interest rate regime that people are talking about. Now, in 2022, the last time we had a Fed funds rate hike cycle, all asset classes, bonds, stocks, precious metals, they all took a hit, as you recall. Uh that seems to be the primary concern for a lot of people right now. How likely is it that we're going to get a repeat of 2022? And second part of the question, if everyone's expecting a rate hike potentially the market's already pricing that in and we don't have to worry.
Well, there you go, right? I mean, one of the simplest ways to understand short-term market dynamics is buy the rumor, sell the fact. Fundamentals will ultimately win out long term, but as Keynes said, in the long term, we're all dead. And so, most people who are active traders in the market follow some short-term process in in addition to a long-term process, such as, you know, Warren Buffett, for example. Um in this case, there are two examples I'd like to point out. First of all, the war itself, right? Gold and silver are on a tear going into January this year. Uh war breaks out in February, and they sell off really hard. To me, given the fact that the two-year rally that gold and silver had had clearly drawn in a lot of the momentum crowd, it was only natural that you would get a buy the rumor, sell the fact reaction. Which in silver was particularly strong, but then silver had outperformed gold. And silver's naturally more volatile than gold in the first place. So, while that may have surprised a lot of people, and, you know, I disappointed a lot of people, in my opinion, that had nothing to do with fundamentals. It was all market dynamics. And now, you take a look at the broader stock market, and in in some ways, you're you're seeing something which is not not not dissimilar in the sense that, you know, until until there's bad enough news, until there's reason to take profit, until there's reason to get out, um people won't people won't act. So, so people are still buying into some hype here, as it were.
Now, regarding real interest rates, and and as you mentioned, real interest rates have a historical correlation to the prices of of precious metals.
That's right.
But but that relationship goes through step changes. That is, shifts in the demand function/supply function. Although the supply function is pretty is pretty solid. It's more of a demand function shift. Every once in a while, for any given level of real interest rates, gold and silver prices uh simply go up anyway. Why? Because the demand function shifts. For example, you get sanctions, and uh countries think, "Gee, we're going to hold fewer treasuries because we're being sanctioned, we'll hold more precious metals instead." A lot of that's happened in recent years. Or you simply lose trust in the financial system. That's probably what happened in 2008. Gold sold off initially, and then it came roaring back before anything else did to a new high in 2011. So, I think we're going to see another round of that. I I I think the fact is right now uh we're in a situation where real interest rates have risen a bit, but there's a wave of inflation building. There's a wave of stagflation building. Central banks will find that very difficult to deal with. They will not be willing to raise interest rates further into a slowdown. And gold and silver will get right back into uh an uptrend. And if that is combined with other heavy-handed actions such as sanctions or other things that make uh Western currencies less attractive as stores of value vis-à-vis the time-tested gold, silver, and so on, real assets, then we're just going to get right back into that uptrend. There's only one thing, one thing that will get precious metals into a proper bear market, only one thing, and that is a complete departure from the inflationary, inherently inflationary, neo-Keynesian policy set that the world has been following off and on since the late 1980s. That is the only thing that is going to reverse the bull market in precious metals, the only thing, and I see no evidence that that's going to happen.
In what scenario will we have more fiscal responsibility, if you want to use that word, or a less of a widening of the deficit?
Look, I mean, you know, to quote Dick Cheney, the late Dick Cheney, you know, deficits don't matter. The fact is, politically right now, the the public has not felt enough pain to think that it matters what, you know, what whether the government spends more than it takes in, whether it issues a lot of debt. Um, we're reaching again, we're we're we're reaching some sort of point beyond which that it's not going to be that easy anymore. I live in the UK, a country which is sailing very, very close to the fiscal wind, a country hugely dependent on foreign capital, and yet one that doesn't have the military, political, or economic influence globally anymore to be able to demand that foreign investors hold their debt. They're going to have to pay a higher interest rate. And given the level of debt the UK has, much of which is off-balance sheet, by the way, I I can't stress that point enough. The same's true throughout Europe. Um, the it's something's got to give. So, it's not just the UK. I I think continental Europe also has the same problem. And once you get into a debt spiral, that is the interest expense uh, becomes the single largest budget item, it it's all over. And and that could happen within just a couple years.
Speaking of Europe and the UK, the European Central Bank, the ECB, raised its key policy rate in June, uh, possibly a front running the uh, Federal Reserve, which may or may not do the same later this year. Well, the markets are expecting them to do that. I wonder how much of the inflation that these central banks around the world are reacting to is based on [snorts] supply shocks that we've talked about. In other words, not demand-driven, and so probably, the argument here is they're making a policy mistake by contracting money supply when there's no change in aggregate demand.
Yeah, I think that's a fair point, but again, you got to put the you got to put the horse before the cart here a bit. You know, how did we end up in this situation? The The fact is is that as Milton Friedman, you know, reminded us time and again during his long life, inflation is always and everywhere a monetary phenomenon. If you get a supply shock, but the money supply is stable, then the higher prices for whatever is suddenly reduced in supply have to also result in lower prices for whatever has not been suddenly reduced in supply because the money supply is stable. So, higher prices in one place have to mean lower prices in another place. But, we're not living in that world. And that goes back to what I said a moment ago, that we're living in this inherently inflationary neo-Keynesian policy world where the moment there's a supply shock, central bankers find some way, however overt or covert, to throw money at it. And it it it it it can take the form of government guarantees. It can take the form of all kinds of things. You just don't know. But, the reality is that they they will find a way, and that way will ultimately prove inflationary.
If interest rates do rise into the end of the year, I'm talking about both the Fed funds rate, which will move the short end of the curve, as long as well as the long end of the curve, what happens to gold and precious metals?
Oh, I think in the near term, because of the momentum and technical damage that's been done from a, you know, again, a short-term market trading point of view, you you you have to put in a proper floor, right? You have to put in a proper floor that gives actual fundamental driven buy and hold people a reason to begin accumulating again without fear of near-term loss. Now, that said, I actually think you could see a lot of evidence in the chart that that that process has already begun, but I'm not sure it's complete. And certainly, if central banks get hawkish on us here, which in my opinion can only be temporary, then yes, you could see prices decline further from here. But temporary is temporary. The the flexibility that, you know, heavily indebted countries, such as, you know, the EU members, the UK, Japan, and of course the United States itself, when you add up state and local debt, the US's debt burden is essentially the same as Europe. And these these countries simply do not have the ability to run hawkish monetary policies without completely dismantling those supply-side constraints in their economies domestically, welfare states as it were, um as well as resolving the issues regarding the Gulf, uh and other supply issues around the world. It's not just the Gulf. The Gulf's the biggest one, but there are some other supply issues, such as sanctions on Russia, uh trade disputes with China, uh with Canada for that matter, which might be escalating. Um those don't help matters at all.
What is the long-term solution to running a country with a prolonged deficit? Taking the country that you're currently based in, the UK for example. Earlier in the year, it was reported that uh their spending on welfare exceeded tax receipts for the entire country. Now, you don't have to be a PhD in economics to see that this is not sustainable as a fiscal policy, but surely they're they're they're funding this somehow. You know, what what is the ultimate constraint here? Essentially, if you if you have no constraint, you can continue running a deficit like this forever.
Oh yes, of course. I mean, right, if you if you if you if you can violate the laws of physics, then fine, you know, off you go. But but but the reality is that um it's it's all debt financed. Uh it's all a confidence game. And when the marginal investor loses confidence, then you lose your ability to uh roll that debt over. And again, this is why I think the sailing close to the wind analogy is a pretty good one here for the UK, for Europe, for for North America, for Japan for that matter. And and so again, I can't I don't know which butterfly flaps its wings and sets off the reversal of confidence in this unsustainable, inherently inflationary, neo-Keynesian policy set. But at some point, it it will happen. What's intriguing though is that you have a few examples around the world of countries, including a couple in Eastern Europe, including Argentina, that have gone through hyperinflations, have gone through debt restructurings, and defaults, who have re-emerged as as a quite rapidly growing economies now. And they set an interesting example for the rest of us to follow. Now that said, an example is one thing. That doesn't mean that the global investor base is going to suddenly flock to Argentina, Bulgaria, Slovakia, and other countries that actually have really got their economic acts together over the past couple decades. Argentina very recently of course. But at some point, you know, at some point they'll be like, "Oh, we've had it with Britain. Bulgaria, here you go, right? Here's our capital." At the rate we're going, it's going to happen at some point.
John, let's take a look at this IMF report about inflation. Well, the World Economic Update Outlook Update in general, which leads back to our conversation about global interest rates here. So, the title of the article, well, this particular report is Global Economy in Crosscurrents of War and Technology. And it says here, "Global headline inflation is expected to increase from 4.1% in 2025 to 4.7% this year in 2026 before declining to 3.9% in 2027 27. I believe they're making some of the same assumptions that you were earlier when it comes to the um temporary status, shall we say, of the hawkishness of the global central banks? Because if you assume that inflation is going to be persistently higher, one should assume also that central banks will be persistently hawkish. So, are you in line with their projection here that inflation will eventually taper off and cool down next year?
I I again, I think some of it really is dependent on whether or not there is some sort of settlement to be reached in a reasonable time frame in the Gulf. I I Again, to go back to Milton Friedman again, he he later in life, even though he was a champion of independent central banks, later in life, he was very very open about the fact that when a central bank comes into a prolonged conflict with the government, the central bank always loses. And and he he couldn't come up with a single example the other way around. Uh and he lived a long time, right? He I think he makes it almost 100 years old. And and I think the same would happen here. I I I think if this drags on, central banks will accommodate the inflation. If things are resolved somehow, then I think the tendency will be uh a bit more hawkish. And yes, inflation will come down, but it will come down naturally anyway as the supply shock fades. So, a a a lot is hanging here on on what happens in the Gulf over the coming few months. Now, I'll say a few specific things about Kevin Warsh.
Mhm.
What's in interesting about him, he is the first Fed chairman since Greenspan who enters office having been openly critical of Federal Reserve policy. Now, everyone forgot cuz Greenspan was in office for so long that before he became chairman, he was actually quite critical of Fed policy at times. Um he had a business, Townsend Greenspan, his economic consultancy, that was openly very critical of Fed policy at times. And and yet and yet he gets the appointment. Um no one else who's been appointed since uh was remotely critical, ever. And yet Warsh has been. Does that mean he's willing to stick his neck out and be more hawkish than his predecessors? I think he might well have that tendency. But the reality, if he's trying to raise rates into a supply shock and crashes the economy into recession, it's not it's not going to last very long, in my opinion. He'll eventually give up, cut rates, uh real interest rates will decline, investors will see where it's leading and go right back piling into precious metals again.
If that's the um expected outlook, why bother with interest rates at all? One has to wonder.
It's It's funny you say that because it it you can step back from some charts. You can step back from some charts and you can make a case that post-Bretton Woods relationships between policy rates, yield curves, stock market valuations, precious metals prices, all the big macro stuff, you can argue that all of those relationships have become so unstable now, it is simply a guessing game. It's just a guessing game. Nobody knows anymore. There was a time when people thought that it was the gold standard that was the source of instability. Now you run the numbers and it's totally [clears throat] the other way around. Um I don't know where this is leading, but again, at base, I know that investors facing uncertainty ultimately will uh shift into what they see as lower risk assets. They'll demand lower valuations for what they do choose to invest in. Cash is king. The best cash of all is that which can't be devalued you know, debased, defaulted on. And that's precious metals. I I I I fail to see a way in which we don't get back into a bull market here.
Okay, I want to >> come back to precious metals uh towards the end of the interview. I was reading some polls about the popularity of Trump uh in Canada where I'm based. Um and it's not very high. Uh I don't remember the exact number, but it's it's it's Yeah, it's not very high.
Except Alberta.
This comes except Alberta. Yeah, this was a national average of couple thousand people. Anyway, it's not it's not indicative of every single province and place, but um the this comes on the back of Trump's new tariffs on Canada, 50% on certain goods. Uh my bigger question is trust in Trump throughout not just Canada, but also Mexico, Western Europe has been lower uh than for previous administrations according to polls, sentiment, uh and various media reports. I wonder how this will impact A, trade relations with America going forward even after Trump leaves office in a couple years. And B, the strength of the dollar. Where ultimately do all of these things you know, are all these popularity contests so to speak or all these just ephemeral, it's passing, it doesn't really matter long-term. What's your assessment? Or do you think there's permanent damage done to the fabric of American strength?
Yeah, per- permanence a big word. I I I would agree that Trump's mercurial nature and willingness to use brinksmanship on a whim regarding God knows how many issues now um is a is a is a source of of of lost trust by the rest of the world. You know, the contrast with say Eisenhower's presidency is unbelievable, right? Um there was not one country in the world that did not perceive Eisenhower as an honest broker. They wouldn't necessarily agree with his all of his administration's policies, but no no one thought that he was suddenly going to change on a dime. Whereas with Trump, you you truly have no idea what's going to happen next. That's just the way he is. And I mean look, there's a reason he got elected. I mean clearly there there's a substantial portion of the American electorate that wanted to send DC a message and they did. But that message now, of course, has uh you know, circulated around the world and has caused a lot of countries to reassess their understanding of the United States as the well, the previous hegemon who's perhaps no longer a hegemon is struggling to remain a hegemon, claims to be a hegemon, but we are moving into a multipolar world. Now, the interesting thing oddly about a multipolar world, once the US accepts it's a multipolar world and begins to act accordingly, the US will become more predictable again. In a multipolar world where every country is in pursuit of a balance of power vis-à-vis its rivals, you actually get more predictable outcomes. And international relations theory is fairly clear on that point. Declining hegemons tend to flail around and do all kinds of of things that cause all kinds of trouble. Again, the Peloponnesian War is a is a is a classic example. There are others. And and so we're going through that phase. The the US is is going to have to come to terms and will eventually come to terms with becoming what I call a normal country. A powerful country, but a powerful country that needs to accept the power of other powerful countries. And you'll end up with a Nash equilibrium dynamic, which is much more modelable, um rather than this flailing and you know, post-imperialistic declining hegemon Trumpian uh stuff that you just don't know what to what to what to think is is going to happen next. So, we're going through a difficult time. Uh the the US is is not setting a great example. Uh the the British declined in a way that was arguably more orderly. That their last big screw-up was Suez, and that only lasted a couple of weeks. Um
Mhm.
This is going to drag on a bit longer, I'm afraid.
Do you think it's somewhat ironic that perhaps Trump's push for NATO allies to spend more on defense, up to four to or four to five percent of the GDP on defense, has made European allies less dependent long-term on American military power, which some could argue actually weakens America's hegemony?
Well, it's a good question to ask, but in a way it helps to illustrate the point I was just making.
Yeah.
That is the the classic way to manage a multipolar world to your own national interest is to rely more on your rivals having issues with each other than with you directly. So, for example, the best strategy for the US here, given that, you know, its economy is not what it used to be, um sadly, uh and that uh you know, obviously Russia has been resurgent following a very prolonged period of of near destitution by the population. Now they're doing quite well. Uh obviously China is on the rise, India is on the rise, although perhaps not as impressively as China. Brazil's on the rise. The the best way to adjust to that is to be a balancer. That is, if you want to get your way in international relations, you want to support at the margin countries that share a common interest with you and not support at the margin countries that don't share that common interest with you and to play that game skillfully. The Britain actually did this pretty well uh post the Napoleonic Wars. Um e- e- even prior to the Napoleonic Wars, you could you could argue they played it well. Um and that's one of and that was one of the reasons why they defeated Napoleon. But uh to make a long story short, the US, in my opinion, should do what the national security strategy published late last year says. Retreat to the Americas. Go ahead and exert incremental, marginal influence over strategic points elsewhere in the world, but do so uh in a focused way, in a decisive way, in a cost-effective way. No more Afghanistans, no more Iraq's, no more Vietnams. W- We're We're done with that. That to me is the right strategy and when that document came out, I was actually very hopeful that the United States would not engage in another prolonged conflict in Eurasia. And yet here we are. Go figure.
So, if we're not going to have another Iraq or Afghanistan, meaning putting soldiers boots on the ground, soldiers in the country in an invasion, how does the US military resolve this conflict? They can't stop the missiles from hitting cargo ships. Uh diplomacy hasn't worked. Ceasefires haven't held. What to do next?
David, there is not a military solution to any of the US objectives in this war. There's not. There's not. There's no military way to prevent Iran getting a bomb someday. There's not. There's no military way to keep Hormuz open indefinitely. Fine, you might be able to keep it open for 72 hours and then, you know, when two carriers are lying at the bottom of the Gulf, you know, you you declare victory and go home. There's no military solution to this, okay? Um I'm amazed that it's gone this gone on this long. I really am. And I'm not even an expert in these matters. I just read the history books. I'm sorry, but the Hormuz area is a is a natural fortress. It's mountainous. It's got steep cliffs all around it. It's as large as South Vietnam and half a million American troops with cutting-edge military technology and weaponry and tactics couldn't even hold on to South Vietnam. Who in their right mind thinks this would ever work? I I Anyway, the idea that somehow Wunderwaffen, wonder weapons in German, that's what Hitler bragged about when Germany was losing from 1944. The idea that Wunderwaffen are going to save the United States in this matter, I'm sorry. I just don't buy it.
Let's take that and extrapolate into investment themes here. So, if there's no military solution, if let's say this prolonged conflict drags on, um do we live in a time where elevated geopolitical risk just becomes the norm? In other words, markets just re-rate and it becomes normalized and we move on or does this eventually blow up into some more systematic shocks that manifest in different ways here.
Well, look, believe me, I wish I could wave a magic wand and you know, make all this go away. Um but, you know, reality is what reality is. I I would be very surprised if we would get through the collective disruptions, the specific war we just talked about, the the fact that balances of power are shifting the world over, sanctions, trade wars, etc., etc. Um are not always easy to resolve. The idea that this is going to be over in just a a year or two's time when you you look at all of these uh risks, I think is very optimistic. Look, I'd like to be optimistic. I have four children, right? I mean, I'm heavily invested in the future. But, you know, you look at the world as it is and it's not a pretty picture. I would be very surprised if major stock market indices got through the next couple of years without sinking into low double-digit valuations. We're we're talking sort of price-earnings terms. Um could even get back to where we were in the early '80s. I it's it's certainly possible. But, the idea that we're going to hold on to where we are is is wildly optimistic in my opinion. Now, that said, valuations can adjust in two ways. Earnings can go up and that can be inflation, right? It can just be inflation coming through or multiples come down.
Yeah.
My suspicion given the stagflationary nature of everything we've been talking about is that it's some combination of the two. That is, earnings can go up for basic industries with pricing power, but multiples are likely to come down. And so, from an investment point of view, that's where you want to be invested, right? You want to be invested in basic industries with pricing power. Everyone needs food, everyone needs clothing, everyone needs shelter, everyone needs to keep the lights on. And the companies that provide that are going to do just fine. Uh whereas AI, bells and whistles, luxuries, untested technologies, unproven technologies, um
Well,
I I that's I that's what I'd avoid.
Everyone will need AI and it won't be a luxury anymore. Agree or disagree?
Disagree. I actually think AI makes us stupider and less productive. Now, I I I I can't prove that point here in a short period of time, but I actually think we're going to get to a point where people deliberately avoid AI because it it has it could because it they'll sense it has prevented them learning and they'll sense it's made them less, not more, productive. It's not a blanket statement. There will be exceptions to that, but I think if you look at the economy as a whole, I actually think that's kind of what's going to happen when the smoke clears.
Okay, so if we don't need AI, the question then becomes will the AI capex build out slow down? I think that's what the market are watching for right now is the slow down in capex spending, uh which would manifest in basically a re-rating of a lot of different stocks in semiconductors, chips, uh and then finally the Magnificent Seven themselves. Uh is that risk overblown right now or that's something you're you're you're following as well?
Oh, I I'm definitely following it. If you go to my Substack, you'll see several articles on the topic. I I I think AI is a huge bubble. I actually think a lot of the AI hype is even less justifiable than some of the dot-com nonsense regarding the in the late 1990s when people were registering domains and IPO'ing without having a single employee or any any cash flow at all. Um the you you've got all kinds of opaque stuff going on here. Um private credit's involved. Uh it it's Anything that's on the front page of the Wall Street Journal seven days a week. Well, actually just Yeah, the Journal does come out seven days a week. Anything that's on the front page of the Wall Street Journal 7 days a week is is something to treat with skepticism and I certainly would do that here.
Okay.
[snorts]
Finally, back to gold now. $4,000. What is gold waiting for for either a breakout to the upside or a complete breakdown back down towards 3,000 if that's the case?
Look, as I mentioned earlier, if you look if you step back from the chart
Mhm.
there there really was this exponential mania that that was taking place before the war broke out. That gave all all the momentum chasers a an entirely understandable reason to buy the rumor sell the fact and they sold the fact. I suspect based on the more recent price action, they're largely out of the market now. You do see the long-term fundamental buyers such as central banks still buying at a steady rate. That to me is is an important indication of as to what the longer-term outlook looks like, but the most important indication of all is what I mentioned prior. The only thing that stops silver, gold, precious metals, real assets generally getting back into a sustainable uptrend if not as fast as we did see for a couple years there is this neo-Keynesian inherently inflationary policy set and I just see no evidence that any major government in the world is in a position is anywhere near appointing people in charge who are going to come out and say, you know what? We've kind of eaten a bit too much of this free lunch now. We're going to have to shrink the money supply or at least hold it stable. We're going to have to shrink the deficit or at least hold it stable. We're going to have to actually get people working again. We're actually going to have to start helping one another as opposed to trying to freeload off one another. I I just see no evidence for that.
None at all. What What is a safe haven asset today given inflation has pushed up interest rate expect interest rate height expectations as well as perhaps put pressure on gold traditionally viewed as a safe haven.
Well, what I've always argued always is a big word. What what I've argued for over 20 years now
Yeah.
is that while precious metals have a place in every portfolio look at history run the numbers, right? If you don't have at least 15 or 20% precious metals exposure in your portfolio, you're miles off the efficient frontier you should be on that's just that's just long-term reality. But the fact is precious metals are not the only real assets. And so what I've argued for a long time now is you want exposure to real assets in a diversified way. You want exposure to energy. You want exposure to agriculture. You want exposure to petrochemicals and other chemicals that are low on the economic value chain. Limbo investing is my term for this. You you want to get as low as you can get. Now, I have nothing against new technologies. I have nothing against innovation. But they have to actually work. Right? Does net zero green technology work without subsidies? I remain unconvinced. Does AI truly make us more productive? I have yet to be convinced. Whereas do we need energy? Yes. Do we need basic chemicals? Yes. Do we need food, clothing, and shelter and keeping the lights on? Yes. I don't need any convincing for any of that.
Yeah, so final question then if we assume that the supply shock that we've witnessed is going to eventually normalize which we talked about earlier, are there any commodities that will find it difficult to come down in price? In other words, commodities that have gone up because the supply chain crisis, which of them will be the stickiest upwards?
That's a very good question actually and to be honest I will struggle to get really specific there because
Okay.
you just don't know. There's so much that's up in the air right now. I'll offer a few thoughts here.
Sure.
Other factors equal, energy is required to keep the lights on. Base metals are not required to keep the lights on. They're required to increase the number of lights. More lights, more wires, more copper, for example. But just to keep the existing lights on, you need energy. I think energy may be the safest safe haven other than precious metals. And you might say, "Well, wait a minute. If the war ends, then oil prices go right back down." Not so fast. The war might end, and Iran might charge a you know, who knows what to get stuff out of the Gulf afterwards. I don't know. So, but the idea that you shouldn't be invested in traditional energy to me is a non-starter. In the same way you should have a core precious metals holding, you should have a core energy holding. And I've been recommending the Argentinian state oil company for 3 years now, because guess what? A lot of people think the world's largest oil field, undeveloped oil field, is in uh the seas off the Falkland Islands and Patagonia. And the Argentinian oil company, of course, is going to get a huge share of that development. So, that's a place to look.
Okay. Excellent. Thank you very much. John, tell us about uh what we can expect from the M4 Report. Give us a teaser of what you're working on now and what uh is going to be released next.
Well, we discussed a handful of topics, all of which I've written about in recent months. The M4 Report is dedicated to the idea that as an investor, you need to look at the world in a way that is not distorted by basically uh wrong economic thinking, that is neo-Keynesian, inherently inflationary monetary thinking. As an investor, that just muddles things up. You need to look at real value. You need to look at real assets, you need to look at true sources of diversification, and you need to be able to learn from history and think long-term, especially going through some of the stuff we're going through now. That said, that said, I have a traditional mainstream financial background. I know how to construct portfolios, I know portfolio maths, I know how to manage the risk-return trade-off across different asset classes, so on and so forth, and I blend that in when and where appropriate. Look, it's it it's it's the collective wisdom of my 30-plus year financial career in the United States, in Germany, and in the United Kingdom. I like to think I bring a lot to the table, but hey, you know what? It's not for everybody, but I certainly would encourage everyone to at least have a look at at the sorts of topics that I write about.
Okay. Thank you very much. Appreciate it. Let's follow John Butler in the links down below. I'll put a link to the M4 report. Where else can we follow you?
I have a Twitter handle, Butler Gold Revo, if you'd like to follow me on Twitter. But otherwise, those are the best for sure places to follow my work.
Okay. Links down below, follow John there. Thank you very much, John. Take care. We'll speak again soon.
My pleasure, David.
Thank you for watching the show. Links down below to follow John, and please do subscribe and like this channel.