Transcription
As you know, interest rates are not particularly low at the present time. They're particularly low if you look at the last 20 years. But if you look at longer-term trends in interest rates, in particular in the 70s when the rate of inflation was what it was recently, in the 70s we were already on the 10 years treasury over 6%. So the current rate of interest rate is not particularly high. Historically seen and in my view to push interest rates down at the present time as Mr. Trump and Mr. Bess would desire to do would imply essentially an artificially low rate of interest that may trigger again inflationary pressures.
The inflationary pressures are not over. They're still there and the impact of the tariffs on prices are still there and so the bond market actually has reacted quite in an interesting way when the announcement came that the package was signed and came through the bond market sold off. So my view is that Trump, he would like to have lower rates because obviously the interest expense that the government is paying on the debt is the fastest growing budgetary item and over time in my view with the deficits such as we have it's likely that the interest payments on the debt will eat all the tax revenues and that is then a situation which will be very difficult to prevent hyperinflation because you have to monetize that debt. It is already happening at the present time. So my view is that the intention by Trump and Bessant to lower interest rate is backfiring very badly.
In democracies the tendency for hyperinflation will be very high because the system is built on roads and you have to please people. So the way to please people to vote for you is to promise them all sorts of goodies, all sorts of benefits, subsidies, paying less for services and so forth and so on. And these measures all create essentially a deficit, both parties. So the incentive is actually in democracies to have budgetary deficits that increase the government debt and by definition this will then lead to higher inflation because someone has to pay for something. Inflation is actually the symptom of a tax. This is what you and I and everybody pays because not enough tax revenues are collected directly. With the direct collection of tax is unpopular. If I go to the people and I tell them, look, we have this deficit. What we've got to do is either cut spending, you will get less social security, you will get less benefits, you will get less subsidies, and then then you think you're going to vote for me. No. And if I go to you and say, "Look, we've lived beyond our means. We have to increase the taxation on you." People will not vote for you either. So, you promise them all sorts of goods. You can't pay for it. You have deficits, fiscal deficits, and that is then leading to higher inflation rates. And that is a tax you pay indirectly. Nobody realizes it, but it's a tax in the sense that prices go up more than incomes. This is your tax.
I mean, you studied inflation over history in different periods. As you know, one of the most well-documented periods of history is the 1918-1922 hyperinflation in Germany. And you have the book by Constanto Preiano Duroni, the economics of inflation. And he describes the impact of inflation on everything, on foreign exchange, on the dollar, on the German market, and on assets like stocks, real estate, and so forth and so on. So during monetary inflation, prices go up, but the problem, and that was already observed in the 17th century by Copernicus, the prices don't go up, you know, evenly. The prices go in this corner of the room up strongly and maybe 10 years later in another corner of the room and so forth. So it creates a huge wealth disparity, inequality, and it's very difficult for ordinary people to navigate this kind of movements. But in general, asset holders benefit. Now, as you know, poor people in the Western world, most of them have no assets. They have liabilities. So they're very badly hurt. We've seen this in the last 20 years. The wealth inequality in democracies has gone up everywhere. The rich people, they own stocks, they own precious metals, they own real estate, they own art, they own collectibles, and so forth. All these assets have gone up a lot. But rich people don't consume as much of their income as poor people. In other words, if they go to the grocery shop, they don't care if the price of butter goes up, say, by 20%, because they don't eat 20% more butter than some poor guy or double the quantity as some poor guy. So they don't care about the price of groceries and so forth. But poor people and lower middle class, they do care. And that's why you began the presentation by talking about the real estate market. This is now an example of the devastating impact of inflation on people because the real estate prices are going up, but the demand is going down very strongly because of affordability issues. People would like to buy a house. It's not that their taste has changed or anything, but they can't afford it. So we have a very strange economy where the economy of the typical household is suffering. There's no question about this that the typical household in America, in Britain, is less well-off. The standards of living of the typical household have gone down in the last 20 years. There's no question about this. We have wealth nowadays that is unbelievable. I mean, you look at Musk and Bezos and all these characters. Their wealth is surprisingly large. But they are not the ones that will consume a lot. They are the ones that own the assets and by owning the assets, they can multiply the assets. So they own more and more, whereas the poor people, they pay the interest on their debts and so forth, and they're struggling more and more. That's why during hyperinflation periods, it's wrong to think that the economy is strong. No, it becomes very weak because of the lack of affordability. And in this period, the only way to essentially survive financially is to own assets that cannot be multiplied a lot. I mean, say you could own some real estate. It will protect you to some extent. But you have to be careful to own the real estate in a country that inflates less than the other one because you pointed out just now that the dollar has been weak. The dollar weakness is a symptom of inflation. The market realizes the US is inflating. So the dollar value will go down. The purchasing power of the dollar will go down. So let's shift money outside of the US dollar.
Now the question is, into what? Young people are shifting into Bitcoins and other cryptos and so forth. And more, let's say, mature people, they own precious metals. Precious metals have gone up a lot. Gold has gone up a lot. Platinum hasn't gone up a lot yet, but is now catching up. And silver has gone up, but not that much. So, we can measure relative to gold, how are the other precious metals? I would say silver and platinum are relatively attractive at the present time. But you understand to navigate through monetary inflationary periods, the best is to avoid the currency because the currency going down a lot will lead to social consequences that are unpleasant, including expropriation as an example. And I would not be surprised, say, in the US, that at some point, especially if Trump remains president, there are foreign exchange controls to the extent that you and I who have dollar assets can't take them home, can't sell them.
I think it's a gigantic lie. It's not going to work. It's physically not possible to reshore. And if they reshore some industries, it would be negative for the US. I mean, economic development is a dynamic process. You don't want to produce shoes and Nike sneakers in Shern Reed, where you're staying at the present time in Switzerland, where they have hourly wages of something like 30 Swiss Franks an hour. You should be grateful that there are countries like China, Vietnam, and so forth that produce these shoes at very low prices. If you impose tariffs on these shoes, who pays for the tariffs? The people that consume them in America. The consumer is a tax. A tariff is a tax. There's no question about this. And the countries that had protectionism, eventually, you look at Argentina. Argentina was a country with a lot of protectionism. It impoverishes the country, doesn't make them dynamic. So I think this onshoring BS is a complete nonsense. It's not going to work. And I think Trump, and I have to say, I would have voted for him and I would still vote for him today when I look at Kamala Harris and Biden and these people on Newsen in California. But essentially, he is someone who is ignorant and an interventionist who doesn't know what he's doing. In economics, the best is not to intervene, to have a free market, and we all know that. But if you intervene, you should know very well what the consequences are, and he doesn't know it. And Bessant, he doesn't know it either. The fact that he was working for a hedge fund doesn't qualify him to be the Treasury Secretary.
The world is very complex. And if you would ask me about what will be the result of the hostilities in the Middle East, including the Gaza war, I don't know. You know, it can go in many different ways. So I think as an investor, you're better positioned assuming that you don't know than assuming that you know something that is then proves to be false. And there are too many uncertainties. The problem is that in times of great uncertainty, usually assets are cheap, but this time around they're expensive, except there are some sectors in the market that are relatively depressed. European stocks, emerging markets, in particular Latin America. Latin America is aside from Argentina, which has gone up a lot, but in general Latin America, everything considered, the geopolitical situation and so forth, where war would be fought physically, is in my opinion reasonably attractive. And I think, and this I've written now for the last six months, gold had moved up a lot, but platinum had not moved at all, and now it's broken out. I think that platinum could go ballistic because if someone thinks it's through, and I have to say that platinum on numerous occasions was more expensive than gold. So now it was at less than $1,000. Gold was at $3,000. It's never been this cheap. It was at the lowest level in 122 years compared to gold. I think we may go up again and exceed the price of gold. So here you have an asset that has a large upside potential with a limited downside risk, whereby limited is 30%. [Music]