Wealth Preservation During a Fourth Turning | Russell Napier

What's up everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.

What you're about to hear is the third episode in a podcast series hosted by me and my co-host, Grant Williams, titled The Hundred Year Pivot. In it, we speak with some of the smartest and most plugged-in people we know to help position ourselves, our organizations, our families, and our portfolios for the once-in-a-century economic, political, and geopolitical reordering that we believe is currently underway.

In today's conversation, Grant and I speak with economic historian, author of the Solid Ground Newsletter and Keeper of the Library of Mistakes, Russell Napier, about the end of the economic, monetary, and global trading and security order that has been the biggest driver of global growth for the last 30 years. The consequences of the changes we discussed for economic and national security, social cohesion, investment, and wealth preservation are nothing short of tectonic. Among other things, we discussed the Trump administration's economic and trade strategy, efforts to isolate China, the creation of new monetary systems, and the search for new safe assets, the realignment of global power, the escalating risk of war with China, and how investors can seek to anticipate and position themselves for the accelerating repatriation of capital flows, the onset of capital controls, and a prolonged, potentially multi-decade period of financial repression or wealth preservation will take precedence over making money and chasing outsized financial returns.

If you want early access to the episodes in this series, go to hiddenforces.io/subscribe and join our premium feed so you can listen to these conversations when they first publish using your favorite podcast app, just like you're listening to this episode right now. And with that, please enjoy this incredibly timely and important conversation with our guest, Russell Napier.

Welcome everybody to the third episode of The One Hundred Year Pivot. Joining me for another fascinating conversation, my good friend and co-host, Demetri Kofinas. Demetris, how are you my friend?

I'm doing great, Grant. How are you doing?

I'm doing just dandy. When we started this, you and I, we were just kicking around this idea and there were two people who just jumped to the top of the list of places to start with this. Because I think it was, as we said in the initial introduction podcast that we did about this, they were the two that kick-started us down, two slightly different roads, but on this journey individually. And they've brought us back together. Neil, how obviously we've spoken to already. And the second of those two is our mutual friend Russell Napier, who's about to be joining us.

This is another conversation that I'm really excited for to come at it from this slightly different lens. We actually batted some additional names around for people that we think would be great to have on the podcast and on this series. And I'm so stoked by the list. We've got some commitments already and it's going to be terrific. It's going to be epic.

I think so. It's going to be so, so great. And I'm curious, I don't know about you, but the response I've had in my inbox from my subscribers has been one of... It feels like a genuine excitement. People are like, "I'm so glad you're doing this YouTube together. This is going to be great. And I love the way you're taking it and I'm going to be curious to see where it goes." And there does seem to be some real excitement about this.

Same thing happened to me, but it's funny, I feel the same excitement that they feel. It feels like a... I don't know, this is not the best analogy, but it feels like the playoffs series. It's like the playoffs are coming and I have something really to look forward to and this is just something so different than what I've been doing for the last seven or eight years with the show. It creates a new dynamic that's very exciting. Like I said to you, there are people that I put on our list of people to speak to that I've spoken to, I've loved speaking with, whose work has been really influential to me and who I haven't had any desire to speak with again. Because I'm like, "All right, we pretty much said everything," and now it changes everything. Having you on this journey, it's just exciting. I'm super stoked just like the audience.

We're super stoked today for a reason. Because we've got, as I say, our mutual friend Russell Napier, join us. With Russell, this whole idea of financial repression and national capitalism, it's been so interesting to watch it slow burn into people's psyche and recognize it. And there's a lot of people that I've come across who have been talking about it. And then when you say, "That's exactly what Russell Napier has been talking about for a couple of years now," they say, "Wait, what? I need to read that stuff." And then their eyes open, they're like, "Oh, man, I'm not alone." And there's this feeling that you and I had when we did our original podcast that was the genesis of this. That feeling of unease and searching for either kindred spirits or advice or confirmation or challenges or whatever it may be. There's so much going on and we're just searching for some way through it all, which I'm excited to do and who better to help us on that journey than Russell.

Yeah, Russell had the most complete framework. I've been saying this for some time. The most complete framework that I felt was the most compelling to explain the changes that were underway. And I think the first big confirmation signpost in my opinion was the recent move in the euro-dollar exchange rate. And I remember being at a conference with Russell not long before that happened... Right before it happened. And he was just giving his usual speech, his worldview, his framework. And what's most amazing about it is I think just how on point it has been, which makes him such a great guest to bring on early on in this series that we're doing.

Well, talking of which, I see him, he's just popped in, so why don't we bring him into the conversation. Russell, mate, great to see you. Thank you so much for doing this with us. We're both incredibly excited to talk to you.

Thanks, Grant. The world is changing and there's never been a better time to have a chat about why it's changing and how it's changing.

Amen. Dmitri and I have talked about this in previous episodes of this podcast, just how your framework of national capitalism and financial repression has been a great sounding board for us. It's played out remarkably similarly to how you said it would for a few years now. And as this world gets crazier and more stuff happens, as I was saying to you off mic, for me, it's been a great place to go back to anchor myself in terms of, "okay, how does this deviate from or adhere to what Russell said, just so I know where we are in the process." So I think a great place to start would be to give us the bare bones of that. Flesh out your overall thesis and I think it'll resonate with people. And then we can, maybe, Dmitri and I can go on a little wander with you on little side routes from it.

I think it's helpful in any situation to try and split the disease from the symptom. And I think what's happening at the minute is there's a lot of symptom about, and people are getting carried away with a symptom. It's like coming out in spots that's ever happened to you as a teenager. Otherwise, they don't come out in a straight line and it's very difficult. So let's try and get to what the disease is before we discuss perhaps some of the symptoms. So it's the global imbalances and actually everybody knows what they are. It's just that they can't see that these symptoms are related to it. So let's run through a series of those global imbalances. Total non-financial debt to GDP in the developed world is the highest level ever recorded in the human history. That's a hell of an imbalance. So there's number one. Number two, we have wealth inequality, particularly in the developed world. Well, sorry, it's more politically acute in the developed world. Everybody knows about that one as well. We also have trade imbalances, which tend to be getting a lot of the headlines today, but people forget that a trade imbalance in our world of the free movement of capital is also a capital imbalance because all trade balances have to be financed one way or the other. And at the core of all that, I believe we have China. Now before anybody gets too excited, I'm not accusing China of any grand designs here, it's just been a product of that exchange rate they chose many years ago. And it has driven these imbalances and those imbalances now have to be unwound. And that's the disease. It's how we unwind those imbalances. Now we have a politician who's keen to unwind them in Donald Trump. He claims that the thing he's most concerned about is the impact on blue-collar America from those imbalances. And that has shown up in the trade account, but presumably in the wealth distribution as well. But we see it everywhere else, that these imbalances have to be unwound. So now we are trying to work out how they're unwound, what the consequences are for asset prices. And I think if we stick with the unwinding of that and some of that may well feed into generational changes as well. Then we are roughly on the right track for wealth preservation and maybe we can tell the difference between the symptom and the disease.

It's fascinating to me because this for a while now, and I think you were probably one of the earliest people that put little pebbles in the back of my empty head rattling around thinking about this. This idea of, let's call it redistribution. Not in the communist way, but this idea of getting a leveling of so many things has to me been the ultimate place where this has to go. There has to be a squaring of account, there has to be a more equal balance. It's never going to be fair because the world just isn't fair, but there has to be some attempt to redistribute this wealth and redistribute all those things you talked about. And for me, the issue that has been in my mind as I think about this has been is there a way to do that without pain, which I quickly came to the conclusion there wasn't. And if you want to disavow me that, I'd love to hear it. And then it's the question of what's the least painful way to it? And that's where I get stuck because the pain is going to be severe, it's going to be the kind of pain that we haven't witnessed in a generation and a half.

First of all, am I right in thinking about it that way? And if so, how do you think about the best way, the most efficient way and the least painful way to redistribute that and make sure that pain goes in the least painful way possible?

In terms of all those rebalancing, and I think this is something we have to come back to around, deal just with it a minute. The greatest pain that could affect all of us, our children and our grandchildren is conflict with China. So the one that we have to hope and pray that is avoided is that one. Now let's talk about the more mundane pain in which is economic pain.

I'm going to push back just a little bit, Grant, it depends what perspective you look at. Now, my career, your career, Demetri, we look at the focus of people who have savings. That's what we do. And for those people, pain is the right word because we've done this before. Well, let's take the war out. So we did it from 1945 really up until the 1970s. And if one was an owner of savers, the pain didn't start in the 1970s. It started a long time before that. And one thing's in particular of the owners of British government bonds and just how much money they lost in real terms in the '50s and the '60s. However, the '50s or the '60s was not a bad time to be a blue-collar worker. It was a relatively good time to be a blue-collar worker. Now a lot of that was based in America on consumerism, in Europe, on rebuilding Europe. And the French by the way call that Les Trente Glorieuses, The Thirty Glorious Years. Well, it wasn't 30 glorious years if you were an owner of capital. Your bond, particularly the French bond values were destroyed in the three to four years after World War II. You didn't make any money lending money to the government. And corporates were pretty well controlled and constrained in terms of profitability with various regulations. So that's obviously a financial repression, but it's really, really important to point out that for much of blue-collar people living under a financial repression without savings, it wasn't that bad. And for younger people, it wasn't that bad because by definition they tend not to have a lot of savings. So it depends where you start in this.

I really like a wonderful interview with Evelyn Waugh, which I came across on the BBC iPlayer. He was one of the richest men in England before the Second World War because he'd been an incredibly successful author, interviewed I think in the early 1960s. He was asked what happened to all the wealth because he was pleading poverty. Whether that was true or not, I don't know. And he said, "No man in this country..." He referred to the United Kingdom. "No man in this country has made any money honestly since the end of the war." And in a financial repression, it's regulatory arbitrage. That's what we call it in our business, regulatory arbitrage. It's a euphemism for something else. But his whole point was that if you were just a standard saver buying standard savings products, then you absolutely felt pain. And if you made money in that world, you had a different skill set. I won't go through some of the British archetypes of that era because most people who are not British won't understand the concept of the spiv and other things, but it's a different way to make money. But it's very difficult if what you do is buy portfolio assets and hope that that's going to pay for your retirement. So pain in indeed for the saver, I'm more hopeful that it's not pain for the worker, if you like. It's pain for both Grant, then it's a different type of pain. I think it's a social fracture. And I think there is potentially a way that this isn't a social fracture, but I can't work out the way when this is positive for savers.

One of the things that you've been very good at is pointing out how what you call the non-system, which was the system that emerged organically from the de facto end of Bretton Woods in the early 1970s is coming to an end. And I'm curious, one, to ask you whether or not you feel like the events of the last maybe three months or so, confirm that hypothesis on your part. And the second question is to what degree does policymaking actually matter here? Because it does feel... And this is a thing that's also useful about Neil Howe's framework, it does feel that some of this is just almost inevitable. The forces are secular. And so, one of the questions that I have been wrestling with, and I know that a lot of our listeners have been wrestling with as well, is not only does the strategy matter, what is the strategy and is there such a thing as the optimal strategy or is most of this just going to be the forces that are secular that are driving it?

It's a great question and I think at any time in history you look back and you see a politician taking policy decisions. It's rare that any historian concludes that that happened in isolation, that it wasn't the product of other great forces. In other words, it was a symptom but not the cause. And I think that's exactly what we'll do with the Trump administration. We won't look back and say, "Trump caused any of this." We'll say that other things caused Trump. So in some ways the other things are driving policy, it's not policy driving these other things. And one of the mistakes I think we can make as investors is to assume that the politicians are making the decisions rather than being driven to those decisions by circumstances. So I think that's absolutely right. Which is why when we began the conversation, I began with the imbalances. As long as we keep coming back to the imbalances, it may be even possible to predict the Trump administration because ultimately that's what's going to drive them through this. Just in terms of what it is and why it's ending, I think it's really been a decision by China in '94 to link its currency to the dollar and then a basket which was followed by many other emerging markets who really had no option by 1998 but to do the same thing. That created a massive flow of newly created bank reserves in the emerging markets in particular China, it created a flow of purchasing of debt securities of the developed world which pushed those two unrealistic levels relative to growth of the economy. It widened the gap between the discount rate and the growth rate. Consequences, well, leverage went up because it makes a lot of sense to borrow money when the discount rate is disconnected from the growth rate. Asset prices go up for the same reason. And in China in particular, a lot of that excess money creation, which in any normal economy would've ended up in consumption transmitted through the banking system, gets into investment instead and turns off as even more higher exports at lower prices and even bigger and bigger and bigger imbalances. So that's the non-system, Demetri. And the reason I had to run through that is if you attack trade, very clearly, you're attacking that system. That's exactly what you're doing. You're trying to end those imbalances. I think it's always difficult to work out exactly what's happening in the Trump administration, but I don't think they fully thought through the consequences for capital. The Secretary of the Treasury is a smart man. He probably did, I'm not sure everybody did, but the idea that trade wars aren't capital wars is the problem. So yes, the system's breaking down. But Grant and I have been at the sharp end of this for a long time, capital moves a hell of a lot quicker than trade, and that's what Trump has done. He started those hairs running and if the capital runs, yes, it affects the current account, eventually. It makes it adjust. But those hairs are running. One of the key questions is could they be stopped? Can they be stopped or is this running now and it can't be stopped? So yes, it's coming to an end. Yes, the Trump administration is speeding it up, but perhaps not in ways it fully understands because it'll happen quicker through capital than trade.

I feel like the narrative for what we've seen the last few months with the movement of capital out of US capital markets and into Europe, as has been reflected in the Euro-US dollar exchange rate, has largely focused on anticipated fiscal spending out of European capital, especially out of Germany, associated with the Bundestag's recent vote to amend the constitutional debt break and the European Commission's own language on accommodating increased defense expenditures within the Stability and Growth Pact. It hasn't necessarily been government-driven efforts to repatriate capital in order to shore up domestic currency exchange rates and depressed bond yields that you've talked quite a bit about. How and when do you see this next phase of forced repatriation happening?

I do agree with that. At this stage, it hasn't been compelled. The repatriation of capital has not been compelled. It's been through free choice for one reason, and that's the reason that you mentioned. Which is a massive change in Germany, which really will change the future of Europe in good ways and bad ways. We can come back to that. I think a second one though, Demetri, is the Trump administration's policy, which is to say, "I am a bad partner, I am an uncertain partner, I am an unreliable partner," and that is my opening negotiating position. And when you do that, you tend to lose capital. So it's not just been about Germany, it's been about the withdrawal of capital and the initial data seems to suggest that the Japanese have been particularly big sellers. So it's not just about uncertainty breaking out in Europe in regards to property rights and other rights in America. It's happening in other places. So I think those two things are underway. The interesting thing about this is that on the whole bond yields in Europe have tended to come down in response to this. So the need, Demetri, for a compelled capital repatriation, if you like, is particularly acute if these bond yields go up, that's not been the first impact. I'm not saying it isn't going to be an impact. I think it is going to be an impact, but the first impact is for those bond yields to come down. So the need for French government, German government to get really upset and say, "My goodness, we've got to do something about the bond market" is not currently there. It will be there, but it's not currently there. So I think that's the sequence that we've gone through. But I would say a large part of this capital repatriation at the minute has been the great success the Trump administration has had in frightening away capital rather than the lure of the great German economic boom to come. The German government's just downgraded its own economic forecast despite its change in fiscal policy. So absolutely both of those. But let's not underestimate the power of Donald J. Trump and frightening capital from his shores.

I'm glad you bring this up because this has been one of the most notable features of the last month or so amidst all the tariff turmoil. And again, you're coming back to being a practitioner at this for a long time. It's very hard to remember any instances where we had dollar down, stocks down, bonds down, U.S. Treasury bonds down. And I'll throw gold up significantly into that mix. When we talk about this framework of yours of financial oppression, national capitalism, that's a sea change in how the world is organized and the means by which the riverbanks of capital are altered and manipulated to try and make sure it flows to the places it needs to go according to those who are trying to steer it. And that to me, these little things represent big, big, big changes. The first big change for me was what we saw happening in gold before all this happened. We saw something happening in gold which suggested that things had changed and this moving gold was not speculative, it wasn't the normal stuff we see in the gold market. This was a steady accumulation of gold. We've seen since 2013, I think net foreign official holdings of treasuries have actually gone sideways or declined slightly over the last 10 years, which is surprising. But we've seen also a massive increase in holdings in the Cayman Islands and it looks for all the world as there's been a move to put official holdings in places where they could be much more easily sold without scaring the horses. And so if we think about these really big changes happening, I'm curious as to your thoughts about what surprising alignment in capital flight in the month of April is telling you about where we are in this process.

These relationships are breaking down between lots of financial assets. I think what that tells you very simply is we're in a period of structural change, hardly a surprise. So I'm not sure why everyone's so shocked that suddenly these relationships break down. And on top of that, there's a bigger structural change is that for the first time in my lifetime, people are questioning property rights in America. You probably know, I'm involved in a little festival in Wales called The Weekend of Mistakes, and it's for members of the public. And we talked about this. And the first question from the floor from a pensioner, a well-informed pensioner I should say, I don't think this guy had been a coal miner, Grant, but a well-informed pensioner is, "Will my property be safe in America?" Now in my lifetime, I'm not really aware that we've ever had to ask that question before. And that a even well-informed pensioner in Wales is asking that question, tells you something about why these relationships may be breaking down. Because we've lived in a world where we constantly talk about return on capital and suddenly people were talking about return of capital. Now that, I'm not that concerned about property rights in America, I think the Constitution will hold. It's been a very firm constitution. FDR did certain things that were probably anti the constitution, they didn't actually survive. So I'm positive that property rights survive in America, but those questions will continue to be asked. And a level of the issue of property rights is the free movement of capital, which is something else which is now being asked. And as more and more of those questions get asked and they are the right questions in whatever form they're going to be, all of these relationships

Begin to break down. And it's not the first time. We have been here before. I'm thinking of the late 1960s; imagine having a 60/40 equity bond portfolio in 1968. And it had done beautifully all the way from... Well, not beautifully, but it had done... American won anyway, had done okay from the end of World War II. And then all the relationships started breaking down. He was like, "Why are all the relationships breaking down?" Well, the global monetary system was breaking down, all the imbalances up until that point as forecast by Robert Triffin were all beginning to break down, and none of it should be a surprise. So I don't think any of this should be a surprise.

Of course, the real problem is that when old relationships break down, it's incredibly difficult to work out what the new relationships will be. And I think the real problem here is that we have lots of machines managing money, and those machines are using the relationships over the last 30 to 40 years, which is that old system. So you get really, really high volatility if you've programmed machines to trade off 40 years of data on the belief that that's the long term. Well, it wasn't the long term; it was one form of monetary system that comes to an end, and they do come to an end every 30 or 40 years. I'm saying we lost the Bretton Woods '71. I don't know what the system from '71 to '95 was called. It had lots of names, the snake, the Smithsonian, all sorts of things, but we've had one since '94, and it's breaking down. So that's why all those relationships break down. And that's why I think a guiding star through this is to always come back to what are the imbalances? And if 10 years from now they have been unwound, what should I own to preserve the purchasing power of my savings through the unwinding rather than get too caught up in the volatility?

I think one of the... And I don't know if it's a trap, I don't know if it's actually correct or not, so let me just put that out there. But I think that one of the traps that we can easily fall into is thinking about the global currency that's most commonly used for invoicing and transacting, which is the dollar, as also the primary reserve asset. And I wonder is it possible... And that maybe this moving gold is also partly reflects this, is it possible that given the fact that there is no clear alternative to the dollar for the time being, that it remains the primary currency for invoicing and transacting globally as the primary unit of account, but that what we're seeing with gold is a reflection of the loss of faith in U.S. bonds? And perhaps even a bit of a loss of faith in U.S. capital markets? And that the world is searching for some kind of reserve asset to diversify out of while continuing to use the dollar for trade? And that this is the dynamic that we're going to be existing in for the foreseeable future until some competitor or perhaps even an international standard brought about by new international institutions or a new consensus around existing ones forms.

So will there be one system going forward, or will there be two? It's the first call. My view is there's two. Not everybody agrees with that. Some people think that America and China can come to a settlement. I think there's two. If there's two, the other one I think is going to have to use quite a bit of gold to build credibility. The RMB has been open as a reserve currency I think since 2014, certainly for quite a long time. Its accumulation has been very limited. To your point, Demetri, it's been used for trade, but it doesn't seem to be used as a reserve asset. In fact, not actually used widely for private sector assets either. So if China's going to have its own system, and I don't think there's much point wasting time now discussing who else might be in it, I think gold's going to form a part of that. So one of the reasons I suspect that gold is doing well is that somebody, whether it's China or others, are preparing for that.

In terms of the dollar, one might argue that in a world ex-China... What a word ex-China means is a Cold War with China or Cold War with Russia and then won't be wrong with Russia before the dollar would become even more of a reserve currency. This is not to say that gold is negative. I think the private sector in particular would be very interested in accumulating gold, but I don't know to what extent Scott Besant runs through all of these scenarios, but in a world ex-China, what could it be apart from the dollar, and the dollar gets shored up.

I am sitting in my study looking at my walls here, at the Decline of Sterling by Catherine Schenk, and I think it's a must-read for anybody. It's not everybody's cup of tea because it's, my wife would say, dense. I like dense. But anyway, our problems with being the reserve currency as well, it's not all an exorbitant privilege in this world of capital repatriation. And it became a bit of a burden for the United Kingdom to be the legacy reserve currency at the end of the war. It was actually bigger than the United States dollar. So maybe we could talk about that as well. But I would say bottom line on terms of that experience for the United Kingdom is that we couldn't allow capital flow out of the country. And I think if I was trying to design or imagine how a new system ex-China would be designed, it would not be with the free flow of capital even if it's anchored on America and the dollar.

So in terms of where the dollar is in the system, to me that's important. I think it's not going away. I think it could become more important as we split into two. But I also think perhaps more important for people who listen to this is it's not very clear to me that the free movement of capital within the new system would be... Allowed is too strong a word, but not as free as it has been heretofore. So the dollar stays part of that system, but it's a very different system as the Bretton Woods system was where the dollar was absolutely king, but actually capital did not move that freely across borders.

Russell, you mentioned there... This is something very interesting, and people normally go back to when they talk about the dollar's primacy. They go back to Bretton Woods and they talk about how post World War II, the dollar was the reserve currency, but the point you make there is absolutely correct about Sterling Steel being bigger. It really wasn't until, I guess Suez, is that the British pound actually met its Waterloo, if I'm mixing my metaphors terribly here. But perhaps you could just give people a little understanding of that path because I think it's an important one for people to get that you can still have some primacy but be chipped away and chipped away and chipped away and suddenly find yourself at the point where you're on bended knee and at the whim of another power.

I'm glad you mentioned Suez. A lot of people listening this won't know what on earth we're talking about, but it was a British military venture in Egypt. And the crucial thing there is what America did. America was against this and said specifically to the British, if you go ahead with this, if you continue this, we will sell our sterling reserve assets. Now, there may be other reasons why the British withdrew from that venture, but that was certainly part of it, that I think is what we call geo-economics, a threat on reserves. So that threat alone was enough to change the trajectory of British politics. And actually the British Empire, if you like. America was against the British Empire. It seems like a pretty wise position with a benefit of a divide side to be against an Empire. But anyway, so that was that.

More generally over the period, the peculiar issue with British reserves is they're mainly held by Britain's former colonies who had provided ample resources, particularly in forms of commodities during World War II and amassed British sterling balances over that period and then had to be restricted in liquidating those. I think certainly Nigeria was a big holder, India was a big holder. It's not the states that you necessarily think that are big holders of reserves today. That was just a product of a colony and empire and World War II. And gradually and slowly they had to negotiate the removal of the reserves. So you can imagine if governments had to negotiate the removal of sterling balances, the private sector hadn't a hope in hell of getting its private balances out. He just couldn't cope with it. And Sterling had various devaluations in the late '40s and the late '60s. And of course, they were all blamed upon those famous men who live in Zurich called the Gnomes of Zurich, who was a famous phrase of Harold Wilson. I think Harold Wilson, maybe not. Anyway, that it was the Gnomes of Zurich who were responsible for all these terrible, terrible things. The Gnomes of Zurich, we don't exist today because we can all move capital freely, so we don't need the Gnomes. And that went on and on.

And just to finish on where it finished, and I read that, I went and I looked at the front page of the Financial Times the day, the UK stock market bottoms, which I think is January 1974, and the headline was, "Stock market collapses as Nigeria removes final sterling balances." So if you like, that retreat actually fit in relatively nicely with a long-term difficult period for equities. And equities were very, very cheap at the end of World War II, and they did okay for a period. But that was a horrible period of withdrawal of sterling balances so that there's a legacy if you get it and you just can't let it all go at once. And where we began this conversation is the need of other countries to get that money back down and how you go about coping with that. And my issue is ultimately can America allow it to flow freely out?

I want to bring it back to this conversation about capital controls and maybe the word order of operations is not quite right. It sounds a bit too mechanistic for what we're describing here. But what are the things that in your view need to happen or are likely to happen before we see capital controls put into place in the United States? There's some trigger events, and then there's things that happen which are capital controls, which we don't recognize as capital controls. The obvious trigger, the clear trigger is a jump in treasury yields. We are already in a situation where the interest expense of the American government is very high. So it's interesting that's now called the Liz Truss moment. That's what it's known as across the planet. So a Liz Truss moment could indeed do something about that. I would point out that the first port of call is not to stop foreigners selling your bonds; it's to force your locals to buy them. Forcing foreigners not to sell is exceptionally Draconian, exceedingly dangerous, and really does undermine the reserve currency status of your dollar. So you see I link forcing locals to buy your own bonds as a capital control because invariably what you're asking them to sell is they're overseas assets. Now that's not traditionally called a capital control, which is for those of us of a certain age, remember it was a complete ban on movement of capital cross-border. So it would be a rise in bond yields that make it difficult for the government to finance. Clearly the private sector pays a premium to the government. So if it triggered a private sector debt crisis because interest rates were rising so highly, then you go to forcing your savings institution to buy, which is effectively a repatriation of capital. And only after all of that, if it's not working, would you then go for the nuclear option, which is to try and restrict foreigners from removing capital from your economy.

Now this is a really interesting point because there are then two sets of economies in the world, those running large net international investment position surpluses and those running deficits. And those running surpluses and the two that obviously jump off the page, the big ones are Germany and Japan, would not be in a particularly bad situation if they were doing this, but those running particularly large deficits in America. Everybody thinks America is the biggest in the world. It is the biggest in the world in numbers, but as a percentage of GDP, actually France is probably just as bad as the United States of America. So you then begin to divide the world up into... In terms of if you like the old form definition of capital controls, who'd have to get to that horrible form first where you stop foreigners taking money out. I think maybe it's France ahead of the United States of America, but it wouldn't necessarily be Germany or it wouldn't necessarily be Japan. And foreigners actually have fairly low weightings and portfolio assets in both of those countries.

How do investors and businesses approach managing their cash balances and inventory management in this world that we're describing? It's a great question. It's all part of de-globalization, isn't it? Because you feel indeed to have cash balances in the currency where you're going to spend. And certainly as an investor, I don't feel that at all. Just as well, all my assets would've been in the UK stock market for the last 30 years if I had, which wouldn't have been a great place to be. So as an investor, I don't feel that. So as a business, I might want to have more domestic cash just in case. And that's part of de-globalization. And in inventory, whether it's the productive capacity or the actual inventory itself, I might want to have that slightly closer to home than I would've had before. So these are questions we've all been asking about trade, but you're asking the right questions. What does it mean practically in terms of cash management? What does it mean in terms of capital flows? And those things happen much more quickly, and I suspect that actually that's already happening, I think perhaps over the last couple of months. One of the things we've is businesses taking these preemptive actions just in case because there's no premium; you're not getting a big premium. When you raise the question of return of capital rather than return on capital, you need a hell of a big premium to stop you from doing something. There isn't much of a premium between the various interest rates. So perhaps we're already seeing a retreat of cash for a more mundane purpose. I look at it from an investment perspective, but you've quite rightly raised the issue of cash flow, cash balances, inventories, and maybe that's underway as well. That's what de-globalization is. We seem to think it's about trade, but it has to be about capital and cash.

Just building on that, I had dinner last night with a fascinating guy who wears two hats. He's a hedge fund manager, but also has a business, a manufacturing business. And to hear him talking about the issues he's seeing just with the tariffs and supply chain blockages and the immediate impact that this is having on his business, it's a small technology but manufacturing technology-based startup. And he was apoplectic about this, and another gentleman at the table who does a lot of work in Germany had been in Germany talking to a group of business leaders in Germany, and he had with him an American financier who may end up with a political role. And he said that there was white heat coming out of the Germans, at what they termed economic vandalism of the Trump administration. Demetri's question is such a great one because the world that we inhabit when these things happen, we are spending our time thinking about what are we to do about this? What's going to happen? What should we do? Businesses are thinking about, okay, what do I have to do now? And they're two very, very different courses of action. We can have this moment of inertia where we think, well, maybe we'll just let this play out a bit longer. We've seen yields spike, and we saw there was an immediate reaction when the ten-year spiked. So maybe that's what we need to look out for. The businesses from the ground up, they don't have that luxury. They're having to make changes to how they operate right here, right now. So when you think about those two very different forms of impetus to do something, how do you think that might resolve itself? Because it feels to me like it's going to have to come from the bottom up. It's going to have to come from that necessity and those actions that are taken out of need rather than sitting there cross-legged gazing into the sky wondering what we think might happen in positioning for it.

Absolutely. If my negotiating position to the two of you is, I'm an unreliable partner who cannot be trusted, but I come back to do a deal and say, no, I can be trusted, it doesn't matter. This is the problem. Once you say this uncertainty, and you've described it very well about white heat and fuming, the idea that that goes away in 12 months because actually there aren't any tariffs and that's a possibility that there aren't any tariffs or they're exceptionally low, it isn't possible. It isn't going to go away. So that realignment of business, of supply chains, of inventory, of cash balances is permanent, is going to be with us for a long, long time to come. Because those businessmen you spoke to can't... Having faced this cliff edge of risk, they aren't going to come back in a year and say, let's face it all over again and don't worry, it's all going to be fine. And who knows, the next president could be even more dramatic anyway. So profound long-term implications.

It is worth saying that when America says it wants a smaller current account deficit, it is saying it wants less capital. The two things... And a flexible exchange rate. The two things are mirror images of each other. So it's actually demanding less capital. That is what America's saying. They're saying stop putting so much money into America. That's what you're saying if you're going to run that position. So our interest is where is it going? That's our interest in the rebalancing, whereas it going? Some guesses at that in terms of Germany and Japan, but what we're doing in this interview is raising the parallel issue, which is not just about financial capital for investment; it's more operational capital as well. And we used to call it friend-shoring. Janet Yellen used to call it friend-shoring, and now people think America doesn't have any friends. But it's still... I don't know what we're going to call it now if we can't call it friend-shoring; let's just call it reshoring. I've been writing a lot about people reducing their China risk. And now if you're a European, you want to reduce your China risk and your American risk, my goodness reshoring in spades. The whole concept that some people seem to believe that because America is an unreliable ally, that China has become a reliable ally. I don't think that meets much of a test here. So Merz, for instance, the new Chancellor of Germany who was very pro-America and anti-China now finds themselves very anti-China and being forced to be somewhat anti-American that accelerates reshoring, that accelerates the return of capital to home base, whether for operational reasons or for savings reasons.

I have a few just thoughts I want to throw out here. Just one at the top is that we're having this conversation discussing, I think largely so far the secular forces. And my question is going to end up really focused on the policy questions and policy changes that we earlier identified as not necessarily being the most important things, at least not for the long-term, Russell, but I think there's an important question there to ask. But I just want to say things can change very quickly, and the world changed quite a bit after Russia's invasion of Ukraine in 2022. And I'd love to maybe get your opinion, Russell, on how investors should even factor that in to their equation. But my specific question is about the discrepancy that we see in this administration, just like we saw in the previous Trump administration, between the president's official policy statements or whatever you want to call them, whenever he is talking to the media or he's tweeting. And then what his advisors like Scott Bessent come out and say. And it was interesting because Scott recently gave a talk where he said that America going it alone does not mean America not cooperating with its allies and it also requires mutual respect and some other things like that. I remember watching that and being like, wow, that is so far from what the president is saying. And the question is, I think for investors, one of the central questions is who do I listen to? Do I listen to the president, or do I listen to his advisors? Who's actually running the show here? This is about China. So what Scott Bessent is saying and what is becoming evident, I think more by the day is that I think it was a wrong policy, but still it's a policy which was to shock the allies, to persuade them to do a deal in China. I've heard that circulating. Is there any basis to it? What is the basis to that argument in your view?

Well, actually Scott himself has made quite a few comments along those lines that this is really about... The grand imbalance is really in China. There are other... I can't remember that comment the day that Trump said he was going to lift some of these tariffs. Everything went up, and Scott Bessent came out and said, "We always said this to our allies; it depended how you responded to these things." And China put their tariffs up for the people who didn't. It was to try and shake the allies into a belief that they have to be more aggressive on China. So I think if we go forward in a few years, that's where we'll see. So you should listen I think to all of them because which one's a friend of China? Are we going to amend? Are we going to name somebody within the administration who's pushing back on the, let's alienate China thing, because I don't hear that one? People say they've got 150... They got through a thousand different views. Well, the one I haven't heard yet is... Well, you occasionally hear Donald Trump saying we can do a deal with China. But the terms and conditions under which Donald Trump wants to do a deal with China are effectively China containment. Let's be brutally honest about it, and China's not going to agree to that. And we can get into the details of the exchange rate policy, which I think is particularly problematical between the two nations. Rachel Reeves, the Chancellor of the Exchequer of the United Kingdom is in America at the minute and made a lovely comment yesterday that it was clearly an obvious that there was a gross imbalance in trade in the world and it was with China and the United Kingdom would be happy to work with you, and this is what you got to do. You rock up in DC, you proclaim that China is the root cause of all this, and there is some grounds for that. I'm not saying it's fabricated, and that's what I see in Scott Bessent, but I don't see anybody who's going to push back against that. And Marco Rubio of course is exceptionally anti-Chinese, and I think it's Navarro isn't it as well, who's very anti-Chinese. So to look through the administration, it's always possible to sit down and forecast 30 things the administration's going to do. Ultimately as a historian you say there's only a couple that actually matter. In my opinion, all that matters about this Trump administration is where America's relationship will be with China in four years when it's over and where they will force the rest of the world to be by the time the Trump administration has gone. And if we focus on that in the Trump administration, I think the rest, you can't call it noise. It's important that it creates volatility, but it's all about China.

Does that mean that China is still "not investable?" In my opinion, it's not investable. That the prospects of a fully blown Cold War with China, ala, our Cold War with Russia because it's technically a Cold War because we're providing armaments but not troops. That is where we were probably going to end up with China. And I hope that it isn't going to happen, but the prospects of it remain high, and this administration is pushing that, I think aggressively. People listening this may have heard that the Enola Gay left from a small island all those years ago; that was a huge floating aircraft carrier, not floating, but anchored aircraft carrier effectively was just reopened. The Indo-Pac American defense is moving closer to China. This is about China. The Ukraine is about getting American troops and armaments somewhere else, and it's getting them to China. Now we can all hope that somehow that is all done in a peaceful fashion, but you can't ignore that it's happening and it is happening and it's happening pretty quickly. So that is I think where we're going to end up. That

To me, makes them un-investable because you could end up like Sberbank. Sberbank trades in Russia, has a value. It's very difficult to turn that into dollars that you might want to spend in your retirement.

That is likely where we end up with China, and it can happen by accident. The Gulf of Tonkin incident was... At least it started as an accident, which is a North Vietnamese torpedo boat firing on some American naval vessels. It can start by accident. Two great tectonic plates are shifting, and you don't know when and where.

My great concern here is all my clients, my professional investors, all know exactly when and where these plates are going to shift. They all know it's going to be Taiwan, and they all know it's not going to be for five years. And that is silly. It really is quite dangerously silly to say that you understand that it could happen tomorrow morning. So I think Chinese assets remain un-investable; I really hope I'm wrong about that. But that's everything I see, the Trump administration has one word running through it, and that one word is China. Russell, don't worry if it does happen tomorrow morning, we'll edit this bit out. Don't worry, we'll have time to do that. So don't fret.

But let's stick on China because, as you said at the very beginning of the show, your big fear was that the thing that could do the most damage was a conflict with China. And also, you highlighted there that Chinese exchange rate policy is also an important financial component to this. So piece those together for us and help us understand and help the listeners understand the problems with China's foreign exchange rate policy, perhaps the weaknesses it has and the threats it can point in our direction. And then talk about why that conflict with China is the thing that scares you the most.

So the interesting thing about the Chinese exchange rate policy is its now very negative for China. And for many, many years, it was actually very positive for China. So people may wonder why would any country pursue a policy which is so negative for it? I also wonder that; we'll speculate on that in a minute. When you link your currency to somebody else's, you lose control of your domestic monetary policy. Now we have to pause a little bit because it's not quite true in China because it has capital controls. But you give away a significant flexibility to control the price, interest rates, and the quantity of money in your own economy. And these are really very, very crucial things for anybody to control. Whether they're controlled by an independent central bank or the government, they're really very fundamental, and China has given that away. And what therefore does determine the price and quantity of money is the size of its external surplus, which is not just a trade surplus but also a capital surplus or a trade deficit or a capital deficit. And to me, it's insane that the world's second-biggest economy, run by a man who likes to control things, has given up control of the thing that really matters, and therefore it seems to be unsustainable.

And in holding onto it, he's driven China's total non-financial debt to GDP ratio to 192% of GDP. America's about 150. We go back 15 years; China was half the level of America. So we're really not seeing anything like this for any major economy in human history, debt to GDP to go up that quickly. He needs to do something about it. We all know how to do anything about it. He can phone up Tim Geithner. Tim can help him. He can print money; he printed a lot of money, but you can't do that with the exchange rate policy. So I think he's going to have to do something about that. I would devalue initially because you'd be obviously wanting to create a lot more renminbi. That's the whole point. And how you go about inflating away your debts, that would look like a grand gross deflation shock. But I think we probably know now that tariffs fall pretty closely behind that when Xi Jinping has to get into that world. And then we get into these really interesting questions about how do you reconstruct one global monetary system after that? Of course, my conclusion is you can't. You'd have to construct two global monetary systems after that. That's why that exchange rate is so important.

And also, Grant, it forces people to take sides. So if I was running Malaysia and the renminbi devalues, it's very tempting for me to devalue the ringgit. But the Americans will be very keen for me not to devalue the ringgit, and they'll promise me in return, great access to American markets, which is I really think what Scott Bessent is up to. I think people have got this wrong; I think that's what he's trying to do here. And therefore, if you follow the Chinese currency down, you may be saying, actually, we are in the Chinese bloc. When I do this talk in Asia, I get a lot of pushback from people who say, "I've got a very Anglo-Saxon view of the world." And I think that's an acceptable criticism of it. But my view is that most people choose not to be in the Chinese bloc. Now I think if you're sitting in Singapore or something, you may come to a different conclusion, but my opinion is most people choose not to be in the Chinese bloc, whether they're Vietnam, Malaysia, Thailand, Philippines, Taiwan, South Korea, Japan; they choose not to join the Chinese bloc. So I think you should really get somebody on to discuss Asia. There's a different opinion on who's happy to be in the Chinese bloc rather than have some... I'm not an Anglo-Saxon, as you know, Grant, I'm a Celt, fully signed up. But proud Celt, well, Anglo-Saxon characteristics, let's put it that way. So yeah, so that's what that movement in the currency means. I think it's very difficult to sit on the fence after that currency moves.

You took the words out of my mouth, Russell. My next question was literally going to be, after Grant's, about what this means for some of those largest economies and countries that sit somewhere in the middle or, in the case of Russia, have leaned much more heavily towards China as a result of the fallout with the United States. But I'm going to throw Russia in there too. The countries I'm thinking about are Russia, India, Saudi Arabia, Turkey, and Brazil. Is there a path in which these countries can, or some of these countries can walk in between these two currency systems? Or do they have to choose concretely? And if they do, do you have a view on where they fall?

So we have had a non-aligned movement before. This is exactly what happened in the last Cold War, and it wasn't very successful for those who tried it. I think of Indonesia; I lived in Asia. For those people who know the history of Indonesia and have watched that incredible movie The Year of Living Dangerously. With the benefit of hindsight and even at the time, it was quite clear that the CIA toppled the government of Sukarno and replaced them with general Suharto. American intervention in Latin America during the Cold War for people who tried to be independent, was not very successful. India perhaps didn't, but with dire economic consequences maybe of their own choice in terms of the nearer approach to economic management. But for those who tried to dance the line, it wasn't very successful. So I'm not saying that they wouldn't try, and it looks like India's trying; I think many people think India's trying, and they've got very, very, very strong cards to play, so why wouldn't they play them? But ultimately, I don't think they go into the... They can stay non-aligned for a very long period of time, despite being much bigger and much more powerful economy than they ever were from the '50s, '60s, and '70s. I think it's exceptionally difficult. So maybe they'll try, but I actually think everybody will ultimately have to choose a side. Brazil really doesn't have an option. Because it's so far away from China, and it's just... There's a seventh fleet to contend with if you want to keep trading with China. So I don't think it's an option.

Well, Australia would be an interesting one. That's much more of an interesting question, considering how dependent they are... Absolutely fascinating because when the Australians come in to see Scott Bessent, just imagine what that conversation's going to be like. He's going to say, "Stop selling them iron ore." They're saying every single aircraft carrier that they have is made from Australian iron ore, and we are now sending our ships to defend you from China. And the Chinese did a stupid thing by putting those ships off Sydney. And he's saying, "Look, we're going to defend you, but you've got to stop selling them all the stuff they're making armaments with." Now we know, Grant, that there's been a 30-year economic expansion in Australia based upon selling commodities to China, and that discussion- And houses to each other. For Australia, it's really, really, really difficult because to say we're not going to sell it to China if that's what the Americans ask for is huge economic ramifications. Now obviously, Mr. Bessent promised lots of business for America, but still. So Australia is the one, the Americans are building an air force base in Northern Australia. So the commitments that we are all talking about, isn't it terrible how the Americans are reducing their commitment to defending Asia, also defending Europe, but they are massively ramping up their defenses of... So if they're demanding more of Europe to defend itself, what are they going to demand of their partners in Asia for the higher levels of defense that are coming? And I think you're absolutely right to focus on Australia because that's the most dramatic one of all. But if you see yourself as defended by America and Japan more than any other country in Asia sees itself as defended. Maybe Australia comes second. This is why they're in the quad. The quad is India, Japan, Australia, and the United States of America. The quad, this defense pact in Asia, gives you some idea of who really, really, really realizes that without America, they're in big trouble. Now what is America going to demand from Japan? What is it going to demand from Australia? And if it goes in with that really hard demand on Australia, I'm really, really scared at that stage because this is where we were in the '30s. We tried to cut Japan off under the League of Nations. This was something short of war; it was supposed to be a good thing, but it forced the hand of Japan to do something pretty barbaric at that stage. So if the Americans force Australia down this path, the prospect that Xi Jinping has to do something slightly more offensive, it gets very, very high indeed.

This makes me think of the Biden administration's policy on export controls. One of the criticisms is that they weren't tight enough, and the reason, when you asked officials in the Biden team why they weren't tight enough, is they were worried about escalation. And I don't know if it's an appropriate question to ask in the sense that I don't know if any one of us can ask it, but I'm curious, Russell, whether you think walking tight ropes like this is even possible. I think the easier answer to that is it's the risks of accidents go up, as you say, it's above our pay grade. But what we do know is the risk of accidents go up. And as an investor, that increases your risk premium without us having to try and second guess what actually is going to happen. We're just going to say that the risks are up. And part of that risk is Chinese assets become un-investable. That's part of the risk, that if we just make a mistake in this path. So we're going into a high-risk strategy where the consequences of mistakes are truly dire.

Just one more thing I wanted to throw out here because I kept thinking as we were talking about this, we were talking about some of these countries like Russia and India, Saudi Arabia, but Turkey, Brazil, and what we're really talking about is a reorganization of the global order. We've talked about it in monetary terms, but it also obviously matters in terms of security. And I think what is most underappreciated about American power is American soft power and the credibility, yes, of the American security umbrella and the ability for the U.S. to protect allies, but also the competency and credibility of American leadership in being able to actually lead a new order. The question that I keep asking myself is does this administration have the ability to do that? Where do we look for information to give us a sense of who's leading that effort, how it's coming together? Because what the administration has been very good at is smashing the current order and getting people off their asses. But where do we look for to get a sense of the direction of travel and what that order is going to look like and if the U.S. actually has the credibility and trust to lead it? I think in any era where you smash things up, it's incredibly difficult to put something new back together again. So even if you pick the 10 greatest statesmen in the history of the United States of America, I think this would be a challenge. It's not as if the Trump administration is uniquely unequipped. I think anybody's uniquely unequipped for this because this isn't real estate, this isn't the art of the deal. There are far too many moving parts here. Some of it's about pride; some of it's about subjective issues. So I think rather than getting into criticizing individual members of the Trump administration, we could say it doesn't really matter who'd be running America and either be incredibly difficult at a great structural change of this magnitude to try and manage this given the surprising bits of the machine that will be breaking down somewhere else. You have to keep coming back to what does this mean for an investor? And it means very high risk. Even if somewhere, a wonderful policy wanders into the White House and suddenly gets authority, I'd still be incredibly nervous that that wonderful policy wonk is capable of managing this transmission in a way that's good for savers. Now maybe they could do a better job at managing it for what's good for our children and grandchildren in terms of military conflict. That's what we would all hope. But in terms of savers, it's just difficult to imagine somebody who comes along with this wonderful ability to control things. I think investors are putting a lot of faith in Scott Bessent to be that guy in the room, and he's a smart guy, but he's really anybody that smart. Well, that's smart and that capable of steering Trump where he needs to go. That seems to be an even trickier thing, no matter how smart he is. Not just Trump, Xi. Absolutely. We know less about Xi, but he may be subject to some of the same, right euphemisms, let's call them fragilities, the same fragilities as the American president. And if you've got those two facing off, they may be not. Maybe they're both geniuses; I don't know. But when you get two characters and then you throw Putin in the middle. We deal in a word of reason, and there's more than reason going on here. There's vanity, there's pride, there's a lot of other things. And it's not just Trump. It also seems that the Chinese care more than maybe we appreciate about how they're seen and being respected. We've seen examples, for example, when I think it was the GM of the Houston Rockets, as an example I've used before, was traveling through China, and when he was in Hong Kong, he made comments about the protests, and this stirred up quite a hornet's nest in Beijing. And this has been a consistent MO. And you can't imagine someone that stirs the pot more than Trump. So again, there I wonder, he's great at one thing, which is stirring the pot and changing the dynamic and breaking an unworkable system. But I worry about who's going to be there to pick up the pieces. There are too many moving parts. This is not mano a mano the way he thinks it is. And we've just seen capital moving that probably he didn't expect. Nobody is that smart to... This is a 3D chessboard, and the president's been playing checkers.

We've touched on NATO a little earlier on and America's changed there. And thinking about investor flows and the point you made about repatriation of capital, it's difficult to argue the logic behind America's change of heart around NATO. The piece I read the other day that said, why should 300 million Americans pay to defend 500 million Europeans from 10 million Russians? Which is a fair question. And I think that if you strip out the Trump factor and you picture a room full of serious people sitting down having a discussion, there is a very easy discussion to be had here that, look, you guys need to start paying your way. And Europe has been able to channel those funds that they've saved from spending on their own defense into, as I was discussing at dinner last night, free university and universal healthcare and all these great things that Europe has that America doesn't. And so you can make a very, very cogent case as to why this is actually the right course of action. Once that happens, however, we're now at the point of a national security imperative, and these countries have to find this money. So when we get to work out how that's going to happen, we get to this capital repatriation. We've already seen some of the larger European, particularly Scandinavian pension funds, talk about how they're going to reallocate assets away from the US. They haven't said where, but one can assume that it's going to come home. Japan has, I think long been looking for an excuse from the government side to pull a few of the big pension funds into the room and say, "Hey lads, we need a bit of help back here." We have everything in place here for capital to flow, not just in dribs and drabs, but with an imperative back to Europe, back to Japan. And not only is there the imperative for it to do that now, you're doing it at a point in time where America has never been really so overvalued so consistently against all these markets. Everything has been put in place by this NATO move and some of the other dominoes that toppled afterwards to completely realign and reshape capital flows. And I'm not sure that people perhaps recognize just how seismic this potential change we're going through really could be. I'd love to get your thoughts on all that and feel free to push back and call me all the names under the sun.

I agree with that. And it'll last 15 to 20 years. That's the bet that people don't get. So we can have that. That conversation's all over the front page of the papers, and when does it stop? Which week does it stop? When do we get back into the S&P 500? That's the story. When are the Japanese coming back? But the forces that we've discussed in this so far, I think make it absolutely clear that this is underway for year after year, after year, after year. And that's what we have to get our heads around as investors. And that's where we started the call. There are imbalances. Those imbalances will not exist in 10 years or 15 years. The question is how they're unwound, and that's how you begin to benefit from them. So the capital flow has to return.

I thought the Asian comment on NATO was really interesting. Prior to the election of Donald Trump, NATO was run by a man called Jens Stoltenberg. And Stoltenberg said, "We, NATO, now have a role to play in the Pacific." It's called the North Atlantic Treaty Organization. But anyway, they have a role to play in the Pacific. So the head of the organization, clearly under great pressure from America already, from the Biden administration, was already shifting its focus to the Pacific. Now, what does this look like if you're Xi? It's very easy for us to keep going on about Trump, but if you're Xi, this looks awful. You've got the world aligning to continue. And it wasn't Trump who started this; it was Obama who started the pivot to Asia. Politicians are wonderful at one thing and perhaps only one thing, which is coming up with wonderful names for certain policies which are not necessarily wonderful. The pivot to Asia in China was China containment. So there's a lot to blame Xi Jinping for. I'm no fan of Xi Jinping. But what did you think he was going to do the day you said you were going to pivot to Asia? What did you think it was going to do? So this NATO thing was already underway. And if NATO was going to have a Pacific focus, it was clearly going to have less of a North Atlantic Treaty focus. So these things are going to go on for a long time. And the only way out of it is some amazing deal, geopolitical deal really about who controls the seas around Japan, South Korea, Taiwan, the Philippines, and Vietnam. Now if you think we have an American president prepared to concede all of those things to China, then perhaps there's a deal to be done. My view is that this president can't do it, the next president can't do it, and the president after that can't do it. And that is why this is going to go on for a very long period of time. And once again, people read about this in the papers every day, but then don't ask the obvious question, what does that mean for capital flows? And that's the question we are asking, and it means repatriation of capital flows. And there's some real flash points down there. And the biggest flash point to me is not Taiwan; it's Vietnam. Which is being put in a shockingly bad position by China's intervention in Cambodia. China's movements around the South China seas and creation of New Islands down there. And Vietnam could easily, easily purchase American armaments in some size, and it's got an 800-mile border with China. That is the Cuban Missile Crisis. Most people tell me the Vietnamese are very, very clever people. If anybody needs to play one side against the other and not come down to one side or the other, it's the Vietnamese. But Xi could be forcing them. And that is the Cuban Missile Crisis for China if American armaments start pouring back into Vietnam and capital is moving. Oh, if only I'd owned the Magnificent Seven. Well, actually, if only you'd owned Mitsubishi Heavy Industries and Rheinmetall. And that was to do with these great geopolitical shifts. And they're just beginning. We keep coming back to the same point. This is just starting.

How important is the resolution and the terms of the resolution of the Russia-Ukraine war for bringing more clarity to the subjects that we're talking about today and to maybe stabilizing some of the security dynamics? There's a famous quote from President Nixon; do you remember he said, "We're all Keynesians now." Well, we're all geopoliticians now. And it's one of my points, Demetri, about a slight plug for my course here. Nobody in our industry is in any way qualified for any of this. I came in 30 years ago when this was a fairly amateurish industry. And I mean that frankly, it had just been deregulated; we'd had a big bang here; anybody could get in. Grant and I got in, so anybody could clearly have got in. But subsequent to that, they recruited MBAs and they recruited people with degrees in finance, and they didn't teach any of this stuff in business school, and they didn't teach it on the syllabus. So it's a good point not to turn me into a geopolitical analyst because I'm not, but I am a historian. And historians maybe have something to say about this even if that's not... It may not be as good as a geopolitician, but it's certainly better than an MBA, let's put it that way. So I'm afraid that I think the industry is unqualified for this, which is why there's a scramble on now for expertise. So that was a slight aside from the actual question. Settlement of the Ukraine war is not, in my opinion, that important, which sounds strange. America's shifting to China anyway. And obviously that shift can probably be a bit quicker if they can reduce their commitments to armaments going to the Ukraine. But it's happening anyway; it's not going to stop. War in the Ukraine, peace in Ukraine don't make any difference to the pivot to China, the pivot to Asia; it's going to keep going regardless of where that goes. So there are other reasons why it's important, but keep coming back to the same point. The thing about the Trump administration is China. And the Ukraine policy is entirely based around getting something going with China. Now, ideally, people talk about reverse Nixon. I think that's fanciful. I suspect even the Trump administration thinks it's fanciful. It's just more pragmatic than that. Let's shore up what we would have to call in this context, the western front, while we go onto the eastern front. And that doesn't change whether there's peace in Ukraine or not peace in Ukraine. I want to hand it over to Grant if he has any other questions. I just want to mention the course that you were talking about, that Russell is the practical history of financial markets course, which is available both online and also in person in Scotland, in Edinburgh, where the

Library of Mistakes is, so. And actually, coming up in London a couple of weeks, if anybody's interested, just go to Library of Mistakes; you'll find details. We have a handful of places left. It's interesting; we're not full. I would've thought we'd have been full, Demetri. I thought everybody… We'd be looking at a little bit of financial history, but we are nearly full. But there's—Well, hopefully this helps.

I know that I was speaking with someone, actually two days ago, who either bought a ticket already or was going to buy it and was asking whether they should take the online course as well in preparation for it. And I said, "You can never be too prepared. You can never be too prepared." Grant, why don't you go ahead. And you can never get too much Russell Napier.

Well, Russell, just before we close, perhaps you can just maybe sum up, and for the people listening that are trying to navigate their way through this from an investment standpoint, whether they're looking after their own money and worried about that or their professionals in the industry. If you can just give us a sense of just how to think about this. Are there any tips for how to read the news, or how to think about the way these shifts are happening, or even just get your mind better set to understand the magnitude, what we talked about? I think you've done a brilliant job of helping people understand that this is a lot bigger than buying the dip, and the volatility we've seen is a microcosm of the long tail volatility we're going to see.

Yeah, so don't trade. So you probably know, Grant, I wouldn't give you that advice last year or the year before and the year before that. But it's particularly appropriate when volatility is high that you don't trade. Particularly appropriate when we are in a period of structural change, and the volatility on the way to the structural change is very difficult to predict. So you really shouldn't be trying to trade this. It's going to be very, very difficult. I think maybe we've learned that over the last two months. The longer-term lessons on unwinding the balances are actually fairly straightforward if you've got the guts to do it and then the guts to stick with it. So I would say that preserving wealth now is not about intelligence; it's about courage. And it is the courage to do the following things. If we're going to inflate away our debts, which, as we discussed, is probably the only political way that isn't incredibly dangerous, don't own bonds. There are some wonderful charts. Well, actually, I'm looking at another book in my library here, which is *A history of interest rates*. And we can look at those all the way back to, I think back to Genoa, if you like, bond yields. Bonds tend to go in 30- to 40-year bear markets in bull markets. And ours began in 2020, 2021. So don't own bonds, and you'll be tempted along the way to trade them and own them. And if you're a very smart trader, maybe you should do that. But if you're not a professional trader, you should not try to trade bonds, and therefore you shouldn't own them. You see that alone is radical; is radical. It's a radical, radical statement, and without mentioning any names, I go to see professional investors who run multi-asset portfolios and say, "Well, we can't do that." I say, "Well, why can't you do that?" "Well, all our competitors have got 40, so we can't go to zero." So people listening to this will be running their own money; they can make up their own minds. But I think that's a radical thing to do.

Another radical thing to do is to try and have your money in a place that isn't going to impose capital controls. So I invest all over the world. I'm particularly—invest quite a lot of money in the United Kingdom at the minute, which I think is very cheap and has got lots of things going in its favor, which is a very non-consensus opinion. But those investments happen to be held through Singapore. And if I was concerned that I'd got all that wrong at the press of a button, the cash balances on sealed rest in Singapore, which is a company that's highly unlikely to restrict capital outflow because they're battling capital inflow, and there may be a few other places like that. So you have to think about these things that we maybe didn't think before. You might say, "Well, it'd be terrible if I had all my money in Singapore and I want to retire in America." Well, no, because the American government will always welcome your capital back in. That's not the issue here. So you want to think about that. In the world of capital repatriation, we have to work out one of the two assets in the world, most likely to be liquidated at a capital repatriation. And they're really, really easy. They're the S&P 500 in treasuries. It's really very simple. If you look at any global portfolio in the world really these days, certainly anything in the developed world, anything where there's no existing restriction on capital controls. So you have to be very concerned about those assets, which is not the same thing as saying you can't buy equities in America. It's just saying you have to be concerned about those assets.

Something else we had—I run the Library of Mistakes here in Edinburgh. We had Sir John Kay speak last night on his new book. Just looking at the largest companies in the S&P 500, you really don't find a 30-year period where the guys at the end of the 30 years are the same five largest companies that they were at the beginning of the 30 years. That's one of the beauties of America. Actually, we could call out a form of creative destruction. But the likelihood that these guys are going to dominate the next 30 years is really quite unlikely. Although it's absolutely consensus thought that they must do that, it's never actually been accurate. It's never been true. So you've got to be particularly cautious of buying the winners of the old regime. And the winners of the new regime are more likely to fall into what we call the value bucket. And it's more likely to fall into investment, fixed asset investment in a developed world and people who compete with China.

Now here's the problem. If I was running your portfolio, Grant, I came into you and said, "Well, Grant, we get no bonds. We got 75% in value stocks, 25% in gold." And you'd say, "That is the riskiest, most radical approach I have ever heard of." But you'd only say that in comparison to the competitors. I do not believe either of those asset classes is risky. I think you'd be hard pushed to call them risky. But in the context of the current thought and the last 30 years relationships, they're called risky. And at a time of great, to the point I've made to Demetri before, at a point of great structural change, you don't need to own risky assets; you just need to own risky quantities. And that I think is how we begin to navigate our way through this. Finding active managers who can do that for you, as we've discussed previously, Demetri, is not easy. Because active managers have, one way or another, got caught up in momentum. That's the other thing. One of the things we look at in the course is momentum in the stock market actually works. It does work, but it's not going to work at a period of structural change. So to survive, I think for the last at least 15 years in fund management, most people have got a little bit of momentum in there. And this is not a period to be with guys who are doing the momentum thing. So you need to get to the value thing. And there are active managers out there who can do that. And I think they're licking their lips. I should say that I know, got a friend in New York, and he only buys American stocks. Got incredibly cheap stocks in his portfolio. As you know, Grant, Demetri, there are reasons why stocks can be cheap, but they look like reasonable companies. They're just companies that nobody cares about. They tend to be quite small; they tend to be quite illiquid. Something that most people listening to this will know is that most institutional investors, you can't really buy anything on there by… I don't know, what is it? 50 billion. And there are lots of great companies trading under 50 billion that don't have a market cap of 50 billion, that don't really have institutions on the register to any great extent, and therefore have not seen their valuations distorted. So it's great opportunities. I don't remember who I was speaking with about this, but we were talking about how if an active manager went to his risk department and said, "I want to buy these stocks in these particular quantities," and that was basically replicating the S&P. They tell them, "You can't do it. It's too risky." It's just a great point about quantities.

I also want to mention, your course has come up a few times. I just wanted to mention as someone… I've taken the course, and I actually spoke with someone else recently, not the person I mentioned earlier who said they had just finished taking it and how transformative it was. So I can't recommend that enough for people listening. We'll put all the details of that in the transcript and stuff.

Russell, what you said there, this mindset shift, for the last 20 years, people have been talking about which stock should I buy? And it seems to me that the shift here, if you were to really boil it down based on the timelines we're talking here, it's really not a question of which stock should I buy anymore; it's which companies do I want to own? Then thinking like you want ownership in something because you're not renting it; you're not going to buy this thing and then flip it for a higher price. You need to put your money in places where you can own things. It's a really great point. In my first book, there was great statistics for the NYSE on the number of shares, but also the number of shares that turn over in a year. So you can therefore divide one by the other, and you can work out at any given point in history, until recently, the average holding period of an investor. And in the '50s and '60s, it was eight years. It was 80 years. There were no futures markets to confuse that. It was genuinely eight years. And of course, there were people who made a lot of money in that period of time by just buying and holding good companies in eight years. So we're looking at a world probably of significant less liquidity, maybe not back to that. But we got to remember there was a time when that was a normal holding period, and what we've seen recently is abnormal. That chart's really fascinating because it includes 1929, isn't it? And I can't remember, that sort of liquidity, short-term holding period. I think it was the 1970s before we got back to where we were in 1929. But in 1929, it seemed perfectly normal, and then it was abnormal for decades.

Does that also mean that we could see more companies begin to issue dividends?

Absolutely. We have an interesting chat on that for people who want to go onto Library of Mistakes website. We've got a guy called Dan Paris on there talking about dividends. And a different way of rewarding investors is a great point to me because they've got a large percentage of return in that period after World War II would also have come from dividends rather than capital appreciation. It's difficult. Grant pointed out that if we look at U.S. equity valuations, and I think the one that I use anyway is a cyclically adjusted PA, is very, very high. It was very high in 1966 as well, not as high as is today, but very high. And it then produced really dire returns after that. But if you'd gone and bought value/dividend payers, amazingly on that huge bear market from '66 to 1982, you actually made a positive real return. Because you weren't taking the valuation risk, and the dividend was always there to some extent bail you out. And that was calculated on reinvested dividends. So even in a grossly overvalued equity market as America was in '66, equities were the answer, bizarrely, just not the ones that were in the index. And I think the beautiful thing today is if you look outside America, there are a lot of… Even on the index aggregate level, there's a lot of stock markets that look considerably cheaper than the United States of America.

I'll make a bet with you here, and hopefully I'll be around to pick up on this. Eight years from now, we'll get back together, and we'll be talking about British exceptionalism. Demetri, you'll have to take the other side of that, because I can't do it obviously.

Well, I look forward to that, and I think we will have to record that one in celebration in London. The point is there's always an exceptionalism somewhere. And it's always bogus. So while certainly the Japanese one was bogus, the East Asian one was bogus, there was an Irish exceptionalism, which turned out to be just as bogus. There was a Greek exceptionalism, Demetri, as you'll remember as well. There'll be another exceptionalism somewhere. We just work out where the ingredients come together for people to delude themselves that there's another exceptionalism. I'm going to bet on the United Kingdom. Maybe it's Greece, Demetri, it's been through hell and back again. But let's try and work out where the exceptionalism is going to be in 10 years from now and invest in that. I'll go for the UK. If you gentlemen have any submissions, please feel free to make a bid.

Well, we've officially timestamped it. I'm waiting for those mugger hats to come out, Russell.

Well, sadly, I've got a mugger hat already, so—

Okay. Well, listen, Russell, this has been absolutely terrific. We're so grateful to you for doing this, and we're grateful to you for the help you've given us in the years leading up to this conversation and given us the grounding you've given us to help us think about it. Where would you like people… We could send them to libraryofmistakes.com, but is there anywhere else you'd like us to point people to when we sort the transcript out and stuff like that?

I'd just say libraryofmistakes.com, go to the tab that says lectures and keep scrolling down. Sometimes people don't, and it's just full of lectures on financial history and things that I think can be helpful, and they can choose from all of that. And if they want to be entertained, I would strongly recommend they go to see my friend Dr. Paul Kosmetatos, speaking on the Leith Whiskey bubble of 1890. Yes, you can have a bubble in absolutely anything if you're so minded. And Leith, by the way, is the Port of Edinburgh, and there was a whiskey bubble there. And just to whet people's appetite, it includes, core to the whole story, are talking parrots.

Also, I want to say I'm an enthusiastic subscriber to and receiver of The Solid Ground Newsletter, which I really love, Russell. It's such a wonderful newsletter. I get excited whenever it comes in my inbox, and it forms a core part of my regular research. And I also want to recommend people check out the Library of Mistakes podcast where they can hear your conversations with experts and people that some of whom they've heard on the show, some of whom were new to me when I heard them. We try to do financial history, but we try to do financial history that is germane and pertinent to where we are today and for the future. So it's a slightly different focus, but it is the past as a guide to the future. And if that isn't the guide to the future, what is? And it is getting more germane by the day, the way things are going. So Russell, more power to you, my friend. Thank you so much for doing this. We will edit this and get it out and share it with the world because the world needs to hear it. So thanks again for giving up the time.

Thank you, exceptional. Thanks so much, Russell. Thank you.

Boy, oh, boy, mate. How much fun was that? That was a lot of fun, man. I enjoyed it. It really was. It's funny, Russell said something to us off-mic there when we'd finished recording as we were saying goodbye. He said, "Oh, yeah, was this the same stuff we've talked about before?" And A, I don't think it was at all; there was plenty of stuff in there that I haven't spoken to Russell about and I've not heard him talk about. But B, it hits differently now, and I think there's an importance to revisiting these ideas now that people have maybe got rattling around in the back of their heads from conversations they've heard from Russell over the years. There's bits of the puzzle flapping around. But now you can't help but be more focused on it and have applications for what he's saying in the real world that will change the way you look at it.

I agree, and the way I would describe what you just said is that we're now living in the world that Russell has been describing for years.

Couldn't have put it better myself, and in fact, didn't, just to prove it. But that's it, right? It's funny when you go back and you look at some of this stuff. And it's funny, I went back and looked at a presentation I gave in 2018 about gold, and someone posted it on Twitter, again, seven years later and said, "This holds up pretty well." And I've been thinking about updating this presentation for a while now. I thought, "Yeah, I should really do something about that and update it." So I went back and watched it again, and I wouldn't have to change a word from where we are now. And that's very interesting. Because it was a big theme about gold and the gold standard and what will happen in the world and might push you towards gold being re-monetized. It's fascinating how these cycles turn and where we find ourselves. And why it's important to have a view for the long term. Like Russell said, some people are gifted traders. And if that's your thing, if that's skill, then make sure you know that that's your skill, and best of luck to you. But for most of us, it's to our benefit to try and understand the long-term secular forces that are driving outcomes in the world, in politics and in markets.

Absolutely. And if you believe you are a good trader and you're actually not, you're going to find out very, very quickly. Because what happens next is not going to be like the buy the dip environment we've seen for so long that in which, through no fault of their own, many people have earned their trading jobs in very different markets to the ones we're going to see now. And I think also Russell made that point when he talked about how there are periods that bond markets go, and they're in bull markets and bear markets, and that's true for all markets. And it's really important to understand that because it's much harder to make money in a bear market than it is to make money in a bull market unless you're a great trader.

Well, and this is the component I think a lot of people don't perhaps understand. People think about making money in all types of market. In a bear market, you just try not to lose it. That's the mindset, and that's the shift you have to make. If you're in a real bear market, your mindset is don't lose it. It's hang onto it. It's not how do I take less risk to make more money? I think Richard Russell, dear departed, Richard Russell said, "In a bear market, everybody loses. Whoever loses the least is the winner." And that's really the mindset. And I think, and not to keep going on and on here, I'll let you end it here, Grant. But I think you and I have talked about this, I've certainly talked about with Russell and other people, which is that investors have gotten very accustomed to post-2008 and especially post-2020 with COVID to buying the dip. And in this concept that markets mean revert and markets quote only go up. And that is going to, I think, be a very difficult framework to disabuse themselves of. And it's going to cost people a lot if they don't have a different framework like the one we're describing and talking about today.

Absolutely. Absolutely.

Well, my friend, listen, we're two episodes in, and so far this has been a blast. We'll see where we go next. You and I have both got our little hit list, but we won't tease the names in case we can't—

It's a good list, though.

Boy, is it a good list. It's a great list. Listen, now thanks to Russell Napier for joining us. He was magnificent, and please do visit libraryofmistakes.com, watch the videos, take the course, listen to Russell whenever you get the chance because he's a sage, sage voice in a world of chaos. And God knows we need as many of those as we can get.

Amen. All right, my friend, well, listen, we'll do this again soon. In the meantime, for everybody listening, thank you so much for joining us. If you want to follow either of us on Twitter, Demetri, where can they find you?

@kofinas with a K. K-O-F as in Frank, I-N-A-S, @kofinas. And also the Hidden Forces Pod, let's make sure that you know to find that. The Hidden Forces Pod is at hiddenforces.io. Hiddenforces.io. And you can follow me @ttmygh on Twitter and Grant-Williams.com.

All right, my friend, onwards we go.

Wonderful. See you soon, Grant.