Transcription
I do not think it unlikely that some sort of financial crisis will kick off later this year or next that will be perceived in retrospect as comparable to 2008.
Next year's harvest, the global harvest if you want to aggregate it, will be a disaster even if the war ends tomorrow. And I'm surprised nobody's talking about that. It is a bit like the Titanic hitting the iceberg. The ship's going to sink. We don't know exactly how quickly it's going to sink, but enormous damage has been done. We're watching a bit of a cover story. The real impact on the real economy does not yet show up.
You're saying these supply chain disruptions have not manifested themselves yet, not even close. The damage is coming much further down the line and prices are a tool of misdirection.
The problem is you can't model it. The modern financial industry is dominated by these quants with their models where everything has to be a numerical input. You put in your numerical inputs, but garbage in, garbage out. When you start guessing, you're invariably going to be wrong. And perhaps so wrong it is going to blow up hedge funds. Gold's easily going to be on its way to $6,000, $7,000, $8,000 by the end of 2027. I suspect we'll be at $40,000 within 5 years' time. That's not me being bold.
So, what's the signal? What's the panic signal? When is it no longer a question of managing perception, but the reality hits you smack in the face?
This is the real story with Michelle Makori.
Hello, I'm Michelle Makori. Thank you for joining us. Everyone is watching prices, and my next guest says that that is exactly the problem. He believes that markets are miscalculating the risks because they're focused on commodity prices instead of inventories. He argues that beneath the surface, critical energy and industrial stockpiles are being drawn down, distorting the price signals that investors rely on. Now, the real story, he says, is the depletion of those inventories with far-reaching implications for inflation, economic growth, financial markets, and precious metals. Joining me now is John Butler. John is a veteran financial market historian and author with decades of experience across global banks, hedge funds, and fintech, including senior roles at Deutsche Bank and Lehman Brothers. He's the author of "The Golden Revolution: How to Prepare for the Coming Global Gold Standard," and also publishes the M4 Report, where he analyzes markets through economic history, Austrian economics, geopolitics, and game theory. And today, he advises a select group of private clients and institutions on macro risk, monetary regimes, and wealth preservation. John, good to see you. Welcome back to the show.
Oh, my pleasure, Michelle. Always lovely to be here.
All right, John. A lot to discuss, but let's start off with your big idea here. And you say that investors are looking at the wrong metric. That markets seem to be focused on prices, but you say the real story is what's happening with inventories. So, break that down for us. Take your time. Explain what you mean.
Right. Well, in this particular case, the point that I would like to emphasize is that when people look at the effects that the war in the Gulf, which might be expanding now, is going to have on the global economy, it's probably ultimately more a function of inventories than what you already see in prices. And that's because we're going through this unusual period where there are stocks being drawn down, official stocks, things like the Strategic Petroleum Reserve in the United States, but there are others. And those stocks are being drawn down. And because those stocks are being drawn down, the spot price for oil, for downstream products, be they crack spread products, be they petrochemicals, be they fertilizer or other essentials that are very, very closely downstream to crude oil itself, they're not yet showing up as a result of this willingness that not only the US, not only but other countries have to release some of these stocks. And so the inventories are declining very rapidly, and that's disguising, to a great extent, what the theoretical free market impact on price would be. So, watch this space, right? We're we're we're watching a bit of a charade right now. We're watching a bit of sort of a a cover story right now. The real impact on the real economy of what's really going on does not yet show up. And in a weird way, now this is a bit of a stretch, but I'll offer it. In a weird way, it's a little bit similar to what happened in 2006 and 2007 when the housing market in the US began to seize up, but no one noticed it because the inventory of housing was growing very rapidly. But the investment banks who were securitizing the securitization of whichever sales were going through were making so much money in fees, they did whatever they could to keep the game going. And so it's kind of the same thing in reverse. That is, you had all of this excess inventory being disguised in 2006 and 2007 through clever securitization. Now it's a decline in inventory being disguised through other measures. And and we all know what happened in 2008. Now imagine, imagine something like that happening here, but in a weird way, the other way around, where all of a sudden the price of oil, the price of fertilizer, the price of petrochemicals, the price of distillates and other essentials suddenly explodes higher when it becomes clear that something's got to give.
So, we know that the Strait of Hormuz is a critical point for the supply chain of everything from oil to natural gas to fertilizer, but talk us through in greater detail the commodities and the inventories that you're specifically concerned about and the price being misleading in those commodities.
Well, the thing is this is that we we're we're taught in the West, um, and and possibly elsewhere in the world, we're taught that the Gulf is a big place for oil extraction, but not for further economic value added. And that's just wrong. And that's wrong for a number of reasons. The simplest general explanation being that these countries have become extremely wealthy since the Second World War and they have tried to use their reinvested wealth wisely, you could say, to extract more of the value-added chain from that raw crude oil coming out of the ground. And so they built refineries, they've built petrochemical plants, they have built fertilizer plants, they have built other, uh, downstream facilities that use the availability of this oil, this this ubiquitous, uh, cheap to them availability to try and add as much economic value as possible and capture that before it flows out of Hormuz. And yet, guess what? Um, that business model is kind of being called into question here. So, we're we're we're not just talking about the upstream raw crude anymore. That was the case, you know, 100 years ago, right? That was the case. It's not the case anymore. And so nowadays, investors need to realize that there's much more that's being affected here. Essential items that flow into all, literally flow into all kinds of essential value-added activities that have been compromised as a result of this.
Okay. Uh, and and I do know that, you know, the Strait is not only critical for oil and gas. Uh, before the conflict, as we know, roughly one-third of the world's traded urea, which is the most widely used nitrogen fertilizer, and nearly half of all seaborn sulfur passed through the single choke point. Sulfur is also essential for producing phosphate fertilizers. And since that effective closure of the Strait at the end of February, even though there have been shipments that have gone through here, and, uh, I believe an estimated 3.9 million metric tons of Middle Eastern urea exports have been suspended. Even now, fertilizer shipments remain severely constrained, with security risks, shipping backlogs, damaged infrastructure, and then, of course, difficulty obtaining insurance companies to continue to underwrite things. So that's, uh, preventing anything resembling any kind of normal flow of supply. What happens here then? You know, when when does this start to show up in your opinion, assuming that things, there's some conversation about potentially reopening things now, a ceasefire again by the time we run this interview, probably in 24 hours or less? Who knows? Things can change. But is the damage done? If if things get back on track, can things be reversed? In your opinion, has the damage already been done with regards to critical stockpiles of things like oil and, as I've just mentioned, fertilizer, and what are the consequences of that?
Well, certainly with respect to the outlook for the next year or two, it really is a bit like the Titanic hitting the iceberg. That is, the ship's going to sink. We don't know exactly how quickly it's going to sink, and we don't know exactly how many people are going to find a lifeboat. But the reality is is that enormous damage has been done already, irreparable. Enormous damage has been done to the items you mentioned being able to flow around the world and provide their essential functions with respect to growing food, keeping the lights on, you know, basic, basic stuff that we that we mostly take for granted. And and that's the part that surprises me. Uh, vis-à-vis the hype you're still seeing in, you know, these high-flying sectors of the stock market like AI or alternative technologies for energy, net zero, whatever it is. The reality is that the the damage that's been done is already done for a prolonged period of time, and I don't see financial markets reflecting that. And and again, part of that perception is due to perception management, right? If you're releasing available stocks and excess supplies of of of crude and distillates, of fertilizer and other essential, uh, chemicals downstream from raw crude itself, then fine, if you're just looking at prices, you you might conclude, oh gee, it's not that bad. But it's not just about prices. It's about inventories and stocks for all of the things that you mentioned. And that's where we're going. At some point, at some point, the severe and ultimately inviolable supply constraints will become clear to the players involved and ultimately to the households involved. And at that point, right, things will get severe.
All right. So you're saying it almost doesn't matter even what happens from here onwards because, in your view, the majority of the damage has already been done. And I get that everyone expected the disruption from Hormuz, in a way, to show up immediately. We did have a a jump in prices, but oil mitigated, fertilizer mitigated downwards. So, so when it didn't, many assumed that the risk had been overstated. When does the market wake up, John? What is the catalyst that forces investors to recognize what you're seeing?
Well, one thing that I'm surprised more people aren't talking about is the seasonal aspect of this. So, let's, uh, this is particularly true regarding the fertilizer part. Now, um, a a little geography for you here. Roughly 70% of the world's land mass is in the Northern Hemisphere. And so the growth season for staple crops, um, is largely taking place in the Northern Hemisphere. Don't get me wrong, I mean, Africa could be a breadbasket, but there are certain issues there that make it difficult. But, but anyway, 70%. Okay. A lot of that takes place on a specific seasonal schedule and needs specific seasonal fertilizer application. And if that is not available in the right quantities, in the right places, at the right time, crop yields are going to be significantly lower than they would, than they would otherwise be. So, we're talking about the world's breadbaskets, uh, and and and some of them were already compromised before this, by the way, such as Ukraine. So, we're talking about the world's breadbaskets becoming materially more unproductive as a result of this stuff not being available. But the thing is, some people thought, well, gee, that'll have an immediate impact. And no, it didn't. So, what's the big deal? It doesn't work that way. The growing season is largely through the winter, especially when it comes to wheat and barley. And so the real danger is as we go into next year when there's not enough fertilizer available to allow marginal land, that is land that needs that extra little bit of juice to produce the crops that it would normally produce. And so it's next year's crop harvest that's the real risk here. Next year is when what's unfolding this year becomes the agricultural disaster next year. And so far, we're not making much progress in resolving that. And to be honest, you're reaching a point where the the it's just not realistic you're going to get enough fertilizer stock processed out of the Gulf into the global economy, into fertile regions, in time to save next year's crop. Next year's harvest, the global harvest if you want to aggregate it, will be a disaster. Even if the war ends tomorrow. Even if the war ends tomorrow. And I'm surprised nobody's talking about that.
John, is there some data that tracks fertilizer inventories? I mean, we know where we stand more or less with oil when we see the declining Strategic Petroleum Reserve. Is there some data that tracks fertilizer? Is this more of an inference based on production supply? What makes you so worried about the fertilizer stockpile here?
Well, it's a good question, Michelle. And the fact is, there is not a fertilizer contract, right? There is not a single fertilizer index. There is not a single fertilizer exchange. They're all over the place. There are different grades of fertilizer. Uh, they they move from place to place in different volumes for different reasons. And I am not an expert in this, by the way. I will absolutely sign off on that one. No, no, no. But anecdotally, we know that due to the fact that the Gulf economies chose over the past few decades to create big fertilizer plants right next to their existing refineries as a simple way to capture a little bit more of the global, uh, economic value chain. We know that's all been shut down. We we know it's been shut down. It's been shut down both operationally, that is, these plants can't even run currently, and it's been shut down in a in a volume transportation sense because ships can't can't really move through Hormuz right now. I mean, in small numbers occasionally, but for the most part, it's done. So, you can back into this. You can't you can't grab, you know, hard data, but you can back into it. You simply know there's been a qualitative negative supply shock for fertilizer into the global economy that only really got going a couple months ago, but which didn't compromise this year's harvest, but will compromise next year's harvest. And that's what people aren't focusing on.
And and you know, it is interesting, John, because to your point, the price has been misleading. It has been, uh, a misdirection here because the prices of urea, used for fertilizer, but not a track off fertilizer necessarily. Uh, they went from approximately $400 per metric ton before the war to more than $850 in April. So we had an increase of more than 80%, but now prices have subsequently retreated to around $450 per metric ton in July. So, to your point, those stockpiles are being released. It's distorting the price action and creating noise. It's disrupting the signal there. To your point, a very misleading signal. I I will point out, though, that, uh, the Food and Agriculture Organization is starting to raise the alarm on this, warning that the effects could carry into the second half of 2026 and through the 2027 harvest cycle. Exactly what you're saying, because these higher fertilizer prices did hit farmers initially. Uh, farmers then respond by reducing how much fertilizer they apply. That then changes the crops that they plant, or they take marginal land out of production. And the consequences, to your point, only become visible later when those decisions result in smaller harvests and tie to food supplies. Um, so again, the Food and Agriculture Organization is warning that these effects will probably start to be seen in the 2027 harvest cycle. And where is this reflected in the markets at all? I mean, are we seeing some pop in, uh, agricultural ETFs? Are we seeing some kind of, uh, acknowledgement of this reality anywhere in the markets?
Not really. And and and this is this is a this is one of those things that is a bit of a curiosity of the modern world. The the the modern world of course is one that, um, rightly and wonderfully, is permeated by modern technology, and very few of us have direct contact with where basic staples come from. Right? I mean, ask a typical person you pass in the street, you know, where does your food come from? You know, where does your clothing come from? Where does your shelter go with the shelter? I guess if you live somewhere, you have some sense of where that comes from. But, but this is what, what I'm getting at is that most people, if you don't live in a country that is intensive in very basic, and I'm, I'm speaking about very basic industries, they honestly don't know where the food comes from. They honestly don't know. And therefore, they fail to appreciate just how disruptive this war might be by, uh, disturbing, and in a big way, arguably the single biggest supply shock in, in, you know, their lifetime, anyone alive today, of of this essential, this essential medium, whichever grade of fertilizer it is. They they fail to appreciate just what impact that's going to have on the dinner table.
And go on.
No, no, no, no. It's okay. I mean, I, I, look, I, I'm not, I, look, I, I'm not calling anyone ignorant. I'm, I'm not calling anyone, uh, you know, who, uh, insouciant, although some of our leaders are. But, but the, the fact is, is that people just are not as in touch with nature and where things actually come from as they used to be because they're spending too much time on their phone. Now, that's a glib way to put it, and yet I think it says a lot.
I just want to take a quick moment to thank you all for watching. If you enjoy these conversations, please subscribe to the channel and share our content. Full episodes are also posted on Apple and Spotify podcasts. Every subscription, every like, and every share helps us reach more people, and I'm very grateful for your support. So, thank you. I'd also like to thank my partners at Miles Franklin. For nearly four decades, they've been one of the most respected and trusted names in precious metals. So, if you're looking to diversify your portfolio and protect your purchasing power, they have an experienced team that can help you understand your options and make informed decisions based on your financial goals. You can reach them at info@milesfranklin.com. And now, let's get back to my conversation with John Butler. Um, I hear that point, John. We'll pick it up from here. I hear that point, John. You know, it is interesting, though, that you have the Invesco DB Agriculture Fund, the ticker DBA, that's up 8% year to date, below the S&P 500, which is up 9% year to date. So, it is up, but not as up as you would expect it to be, uh, considering everything else. Uh, let's talk about other ways that this fertilizer can get through. And again, I know you're not an agricultural expert, and I know this ultimately means inflation, which ultimately leans to your expertise, which is monetary and which is gold, but is the United States better insulated than other countries here? I mean, I believe that America has substantial domestic nitrogen and phosphate production. Most of its potash comes, uh, by rail from Canada. Uh, you know, the US imports roughly half the urea it consumes. So, American farmers may still be able to obtain some fertilizer here, but again, prices will be set by disrupted global markets. So, everything has that carry-on effect in the global market. Now, how, how does this impact the United States? How much damage has been locked into the United States? Which areas are more inclined to be hit by this?
Well, look, the United States has has literally everything going for it when it comes to something like this. And and I mean, I'm, I'm, you know, I'm American by birth. I, I grew up in the United States. I, I left the United States many, many years ago, but, uh, I'm, I'm well aware of the fundamental economic advantages, uh, that the United States has, many of which are due to basic geography. The United States has two coastlines on two oceans. It has the Great Lakes system, which has a combined coastline which is actually comparable to the Atlantic and the Pacific, and which offers unbelievable advantages for basic transport of God knows what. It has the Mississippi watershed, uh, Mississippi-Missouri watershed basin, which is the largest arable land watershed basin in the world. Okay. The, and it's navigable. The, the US has a lot going for it. Okay. And you mentioned potash. Yes, it has that too. Uh, up in, whatever it is, Wisconsin, Michigan, uh, Minnesota, uh, it has everything, but it doesn't have everything that is needed, as you say, vis-à-vis the rest of the world at the marginal price to keep growing its economy if Hormuz is shut. It just doesn't. So, the, the US has tremendous advantages, but it still will suffer in a very real, tangible way if Hormuz is shut. And that includes what we've been discussing about the the possible knock-on downstream impact on all kinds of things. So, so yes, I mean, don't write the US off, and that's not what I'm suggesting here. Um, I'm suggesting this is a global event, but I am also suggesting the US will suffer, uh, in line with, uh, the global economy as a result of what's been happening.
John, when we say suffer and when we say food shortage, what does that actually mean? Like, paint me a picture here.
Well, it means less in the US again because the US is relatively self-sufficient. But of course, there is a global market for foodstuffs. And if if things get dicey around the world, that will at the margin push up prices for even basic foodstuffs in the US. And yes, you could say, okay, fine, the government will try to counteract that by throwing some money at the problem. Governments frequently do that sort of thing. But then of course, that means the the government in the US government, which is already running a historically large deficit, one that is adding to the national debt at at a rate that's pretty outrageous, really, in a historical comparison, that's only going to go up. So, US finances will deteriorate even faster as a result of trying to compensate, and that will, as a result, lead to even less confidence in the long-term purchasing power of the US dollar. And that, of course, will lead to, uh, global investors, not just, uh, outside the US, but US investors themselves, thinking, wow, we've got to hedge now and buy more precious metals. That's the thing that all roads lead to that. Okay. Everything we're talking about about the disruptions in the Gulf, the the uncertainty it creates, the downstream effects that this has on the global economy, which are obviously stagflationary. I, I don't think that's controversial. They are all supportive of precious metals prices, big time, even if the US is relatively less affected directly by what's going on. Let's get back to the supply chain issue here, and I know this is not your field of expertise, but aren't there ways to reroute this? Like, if this is on your radar, I would like to think that it is on other people's radars. As we discussed, the Food and Agricultural Organization starting to mention this as an issue, granted your point that much of the damage has already been done, but can this fertilizer be rerouted around the Strait of Hormuz? Is there, uh, a way to truck it across land? I, I, I mean, again, I'm not a global supply chain expert here, but and I understand that a single bulk carrier can transport about 40,000 to 60,000 metric tons of fertilizer, and replacing that is, I believe, the equivalent of something like 2,000 large trucks or something. Again, not my field of expertise, but the data that I've looked up makes it seem like you're going to require a heck of a lot of trucks or railways to make up for this. But is anybody working on this? Is some other supply route infrastructure being, uh, thought of, utilized, implemented in any way that you're aware of right now?
Around the margins, yes. But we're talking about a bit of dust in the balance, right? The, the fact is, is that the world was running on a system of really extreme, you could call it just-in-time inventory management for all of these basic products. Even after, even after some of the disputes around Ukraine and, uh, trade wars with China began to kick off, a lot of that lingered. A lot of this idea that, well, if it's not specifically a sanctioned product, you know, we can still move it around as we moved it around prior. That is simply not the case. Now, we we're going beyond governments, including of course the United States, but others, trying to get the upper hand in various disputes around the world with various legal, you know, whatever it is, this and that, to actual proper physical constraints, actual hard stops. And there is not a simple workaround for those. There just isn't. And so again, it, it's really hard to get numbers around things where there's no official data available. We simply know that it's a negative supply shock. We simply know that when it comes to fertilizer or other essentials, less is moving, a shorter distance, at higher cost, over longer time. All of that we know. And and you, and and so it's negative, negative, negative, negative. That, that, that is, you know, indisputable. And the problem is you can't model it. And and this is where the financial markets are really going to tie themselves up into knots because, as we know, the modern financial industry is dominated by these quants with their models where everything has to be a numerical input. And you put in your your numerical inputs, but, you know, garbage in, garbage out. And when you start guessing, you you're you're invariably going to be wrong. And perhaps so wrong it is going to blow up hedge funds. It's going to blow up, you know, other sources of of of finance in the system. And and that's where we're heading. I, I, I hate to say this, but, but, you know, there are people who are paid to try to make sense of this, who will who will think they can make sense of it using their highly specified model, which is no longer specified to this new world that we've entered. And they're going to blow up, and then they're going to need to be bailed out. And, you know, who knows what happens, uh, downstream from there. But this, this is sort of where we're going, and and and I don't feel anyone, including me. I, I admit it. I admit the unknown unknowns here, right? Um, no one knows how to model this. No one knows how to predict it. I can only think qualitatively when it comes to this stuff, and it's bad, is all I can say.
Well, I mean, I agree with you, but I would like to think that on some level, other people are factoring this as an investment risk and perhaps are not able to do so with precision and accuracy because of these unknowns. But, you know, I'd like to think that there's some reflection of this risk in more models than we're currently seeing, although current, uh, equity prices would lead us to think otherwise. Um, but if these risks are as significant as you believe, it goes well beyond investors and markets here. Why aren't governments responding more aggressively to this, John? Let's assume that the government is on our side here. And for governments, I can imagine that food, that's a big assumption.
Well, I, well, look, let's, but I would, let's take the less naive approach. And for governments, food disruptions, uh, lead to unrest. And history has shown us that an unhappy population that doesn't have food doesn't really like the people governing them so much. So, let's assume that, even not because of the greater good, uh, but that governments are trying to figure this out already. Why aren't governments responding here or or taking any action or talking about this or or rationing or stockpiling or or something?
Well, certainly there are actions being taken around the margins, but the fact is is that no, no, I mean, governments by definition do not want to panic their citizens. So they're not, they're not going to be completely honest about something that really could cause severe hardship. So, so that's not going to happen, no matter what. And and it doesn't matter whether a government is fascist or socialist or democratic. There's no way in hell they're going to proactively go out and tell the general public, uh, all hell's about to break loose. Uh, but don't worry, you know, we'll sort it out. The world doesn't work that way. So, so there, there's a lot of of distortion, suppression going on here. I, I, I don't think that's controversial. You don't have to be, um, you don't have to be a conspiracy theorist to think that governments try to manage narratives when they're particularly unpleasant, but this one is. And and and and so actions are being taken. I'm sure they're being taken, but they're being taken in ways that are not, uh, fully disclosed in terms of, wow, we're really worried that, you know, we're not going to get through next year's harvest season without severe food shortages, so we're going to, um, violate sanctions with Russia and pre-buy some of their wheat, uh, product, uh, next year, because Russia, um, is, is, is a huge wheat producer, uh, far and beyond what it needs for its own population. But if Russia is the enemy, then of course you're not going to disclose that. You find a way to do it, you know, covertly, and and get the wheat in. Stuff like that probably going on, right? Uh, I wouldn't surprise me at all.
So, John, what's, what's the signal? What's the panic signal? When does the reality hit individuals? When does it hit markets? When is it no longer a question of managing perception, but the reality hits you smack in the face?
Well, I mean, obviously, look, I mean, if, if, if the major stock market indices start to crash, I mean, that, that, that is a panic signal. If bond yields start to spike, that, that is a panic, uh, signal. And and and precious metals prices, which everyone thought would just keep going up when the war broke out, I think will also be a signal. And the reason why they they didn't just continue rising after war broke out was because of the classic buy the rumor, sell the fact market dynamic. The fact is that they had sucked in all the short-term momentum players because of their huge rally prior to war breaking out. And so when war did break out, a lot of those momentum players thought, well, what a great trade. We'll take, we'll take half off now. Thank you very much. And that's fine. I mean, that, I, I get that. I mean, I, I've traded that way myself in my career. So, uh, but the long-term outlook here, uh, for, uh, anything of real value, anything that governments don't print, anything that doesn't require a counterparty, anything that does not have, you know, some some risky, God knows what on the other side, will go up in value as a result of this. But so it, it, it's very difficult to say exactly what it will be. But there are many ways that that this could catalyze, as it were. Uh, one of them being, uh, for example, what's happening with AI and private credit and the cross-financing, which is kind of being exposed now as a bit of a, a bit of a strange, uh, leveraged game that many people didn't appreciate for what it was. If, if the shine comes off AI, the potential to fall is, is getting to the point of Icarus and Daedalus at this point. So, you know, watch out.
Okay. So, I hear you. You're saying these, uh, supply chain disruptions have not manifested themselves yet. Not even close. The damage is coming much further down the line. And that price is a tool of misdirection here. And when it's going to hit, it's going to hit hard. That means inflation ultimately, which brings you back to hard assets like gold, if I may summarize that. Are there other ways that you are looking to position yourself for this setup in terms of, uh, commodity ETFs? Any particular, uh, equities that you're buying that could benefit from this crisis or protect you?
Look, ever since, ever since the global financial crisis of 2008, which, uh, was even bigger than I would have thought it was going to be, I, I was warning people at Lehman Brothers when I resigned, uh, in early 2007 that the firm was in serious danger. And they all laughed at me, and, you know, whatever. I mean, you know, it is what it is.
We know how that one turned out, right? So,
We, we do. We do. We do. And I'm actually still friends with a number of them. Um, there is a handful of them, including some who have since passed, have given me credit for having warned the C-suite where that was going. Um, but, you know, things played out the way they did. I, I did what I could to save the firm, but it, it is what it is. And after that, of course, I was, I was thoroughly, yeah, thoroughly, I'd had it with the industry, and I, and I, and I resigned and left the industry and found ways to work independently. I didn't want to be part of the problem anymore, as it were.
When did you resign from Lehman?
In, well, I, I, I resigned from Lehman and went to Deutsche Bank because I thought they were the safer, more diversified institution that did not have quite the level of exposure to the to the US mortgage market. And that was all true, and and Deutsche Bank survives, and Lehman doesn't. So, I kind of pat myself on the back for that decision. But nevertheless, I'm at Deutsche Bank, and I see everything breaking down. I see the the bank runs beginning in the UK, physically, literally across the road. I can look out my office window and see the bank lines outside of Northern Rock, and I, I, I, I just lose it. I have to say, Michelle, I, I really, really lose it. I, I, I, I walk into my boss's office one morning and I say, "I can't do this anymore. We're bringing down the entire economy. I don't want to be associated with it. I resign." And that was August 2008, uh, roughly six weeks before things kicked off with Lehman. And and when things do kick off with Lehman and Lehman blows up, I do everything I can to find my former colleagues jobs. I actually find quite a few jobs for my former colleagues, uh, many of whom have done very well for themselves. Great guys and and ladies. Um, and and, you know, good on them for having recovered from that. So, yeah, I've, I've done, I've done what I could do around the margins in my career. Uh, which has been, this is not supposed to be about me. Sorry, I, I didn't mean to bring up this, um, this tangent.
Well, it's relevant because you said you warned the people at Lehman Brothers. You took necessary action for self-preservation. You saw that the US housing market was, uh, on on the brink of collapse, and you're having some similar warnings now in terms of,
In, in the original question was, how, how does one position oneself?
Yeah, I, I mean, I'm not invested in the same way now, so, but what I will say is this is that, um, beginning in the early 2000s, I felt something was wrong with the way the financial system worked, and I began saving in hard assets. By the mid-2000s, that was overwhelmingly precious metals. When the crisis hit in 2008, even though gold got whacked initially, I was very comfortable knowing that unlike everything else that I was involved with, um, you know, gold, you can't default on gold. You can't devalue gold. You can't dilute gold. I, I knew that gold was going to survive, whereas, you know, people I, people I knew personally were horrified that everything they owned was going to blow up. And in some cases, that was the case. And again, I, I went out of my way to assist people to recover from that. Some of whom have done very well, and good on them. Um, but, but yes, I, I'm getting the same sort of sense now that that that we're really in for a big correction in valuations, a big reassessment of what you can expect from certain investments. And, you know, history is very clear on this point. You know, when when people get uncertain, when people get afraid, they demand, they demand lower valuations for financial assets, in some cases, very much lower valuations for financial assets. And, and yet the major stock market indices are trading at P/Es of over 20, which is historically, you know, over one standard deviation above the average. That's outrageous. It just, it, it, it's going to end in tears. [Laughter] Is all I have to say. Um, and you want to be in real assets. You want to be in precious metals. You want to be properly diversified, right? And you want to get out of the silver bullet, you know, big tech that claims to solve all of our problems when some of us, including me, thinks it simply makes all of our problems worse. [Laughter]
Well, I, I know that's a conversation for another time, and I said I would have you back on that because we are in agreement on some of that. But John, let's focus on private credit because last time, well, not last time, uh, the first time we spoke, you warned about private credit beginning to show signs of strain. You called it a snake in the grass. I believe that was almost a year ago now. And you were correct with that call because since then, we have seen investors attempt to pull billions of dollars from some of the industry's largest and safest funds. The, the most dramatic case was Blue Owl Capital. The fund permanently ended its quarterly tender process. It had allowed investors to request withdrawals, that replaced it with a plan to return capital gradually and proportionately to shareholders. Uh, Blue Owl's larger of funds have remained open, but with withdrawal requests have far exceeded what investors were allowed to redeem. Um, so we have had a lot of withdrawals. In fact, the first half of 2026, there was a liquidity crunch hitting the private credit market. Uh, investors trying to withdraw billions, and, uh, there has been some stabilization, but, uh, billions remain trapped, and, uh, you know, the gated funds. In, uh, the first half of 2026, investors requested to pull over $20 billion from these funds, and because these funds invest in illiquid loans, but offer semi-liquid terms, usually allowing only 5% of the fund to be withdrawn per quarter, they hit their contractual limits and block the access, uh, request. So, but we did see, uh, a string of, uh, from Ares to, uh, BlackRock, to Blue Owl, we did start to see problems within the private credit sector, as you said, we would. So far, it seems to be relatively contained. There hasn't been contagion there. What are your thoughts right now on private credit as a risk? Is it as bad as you thought it was initially? Is it not as bad? Is it worse? What's your take?
Well, it's bad, but it's not on the same scale as subprime was in 2006 and '07. Remember, subprime was contained until it wasn't. But subprime was bigger. US subprime was a huge, huge market, even bigger than private credit is today. Now, that said, private credit's big enough. And when you add that in with everything else we've been talking about as yet another factor that will compromise liquidity, not allow investors to withdraw capital, and so on and so forth, it does become a collective or part of a collective systemic risk which you could argue, again, based on what we've been talking about, add it all up, is at least as big as what happened in 2008. I do not think it unlikely that some sort of financial crisis will kick off later this year or next, that will be perceived in retrospect. It won't look the same way as we enter it and go through it, but will be perceived in retrospect as comparable to 2008. I, I honestly think we're getting to that point now. That, that's what I believe we're going to be looking at. It's going to look very different. It's going to unfold very differently. Um, you're already seeing policymakers taking actions that they think are the lessons of 2008 and are the solutions to what comes next. But fighting the last war is something that generals from time immemorial, um, have tried to do and failed to succeed at for obvious reasons. And I, and I think that may be where we're going. So, the, the, the basic advice that I mentioned a moment ago, hard assets, true diversification, the idea that owning both stocks and bonds diversifies your portfolio is nonsense. Pretty much everyone recognizes that now. I, I've been saying that for years, and and now pretty much everyone says 60/40 is dead. 60/40 was dead in 2007, but no one seemed to have figured that out.
So, how does this, how does this look like 2008? You said fighting the last war, but you're saying lessons have been learned. It won't be as bad. Why does it look like 2008 then to you?
Well, it, it looks like 2008 because the system will still seize up. It will just seize up in a different way. That is, it won't seize up by major investment banks failing because they've been largely socialized now anyway. That is, the vast bulk of finance that flows around the world flows through government-owned entities now, right? The these independent, right, high-risk investment banks like Bear Stearns or Lehman Brothers, they're all gone, right? It's a public utility, right? Finance has become a public utility. And so it, it doesn't just blow up. It doesn't just go bankrupt. I mean, City, City Bank, everyone knows City Bank is effectively owned by the US government, and it's a huge financial institution. Um, JP Morgan may still be nominally private, but I mean, give me a break. I mean, everyone knows that the moment JP Morgan sneezes, the US government's going to send in, you know, the whoever needs to be sent in to sort the place out. Uh, so, so the world works very differently today, as it were, right? Banks don't fail anymore. They're not allowed to. So, it's not going to play out in the same way. But of course, um, you know, there, there's no free lunch. The fact is, if, if there is now a public utility global financial structure, it still needs to be recapitalized. You still need to print money to recapitalize it. That will still increase the money supply. That will still, uh, result in stagflation if that's the response to a supply shock such as what's happening out of the Gulf. And of course, that will support real assets, uh, including precious metals. Uh, it just will happen without the same degree of distress and bankruptcy. That's all.
Is there anything that derails this? Is there anything that reverses course? Is there anything that can make your thesis not play out as you envision?
Well, [snorts] yes, this is absolutely true. And in fact, I used to require my team. I, I ran a team, a global team of of roughly 25, uh, analysts for about 15 years, uh, all over the world. Great guys and and ladies. And and I always said, look, whenever you want to make an investment recommendation, it needs to be specific, and that specificity needs to include time horizon and target return and risk on that target return. And so it was a very disciplined group, and they are fantastic. Some of them have gone on, by the way, to like, big, big jobs at big, big banks. One of them runs one of the top, uh, jobs at HSBC. One of them runs the top jobs at one of the biggest German banks. And I'm very proud of those people. I trained them, and I, and they've been very nice to me, um, and compliment, you know, thanking me for their success, and they deserve it. They deserve it. The deal is that when it, when it comes to this sort of thing, you need to, you, you need to have some perspective. And and I, I, I think that the, the, there's this loss of perspective that we've been through, right? Uh, people that don't understand history, you know, that haven't been there. And, and I don't, it doesn't allow me to predict anything. I, I, I guess that's where I end up, right? I mean, there are, there are plenty of good people out there. I've worked with lots of good people in my career. Sorry if I'm going off-piece here. Um, I've worked with lots of good people in my career, and I do sort of have hope for the future that that there are people out there who can sort of sort this out, but they're not the ones currently in control. That doesn't answer your question. I'm sorry.
So, does something derail this? Does something, I mean,
I see you say there are good people, some of which have benefited, uh, from your training and mentorship, but is that enough? I mean, is there something that happens that you know does not see this, um, huge inflation, which I understand will happen when this, right, supply shortage manifests itself, uh, sometime in in in 2027? Can something, as I say, either prolong this, derail this, uh, thwart the the inflationary situation somehow, or are you convinced that it's too far gone? It's too late now, right?
Look, yeah, sorry, sorry for evading your question a bit. Uh, but I, I, um, anyway, yes, there is, um, people can take a look in the mirror, and people in power can take a look in the mirror, and they can realize that they're the problem. And they can realize that, you know what, um, this sort of control freak, we've got to control and manipulate everything attitude has become the problem, not the solution. And it's time to let people start making their own decisions. Uh, you know, allocating capital the way they think they should. Central banks should stop trying to manipulate economies and allow, uh, private sector actors to set interest rates where they think they should be set. Allow stock markets to behave the way private sector actors think they should behave. Allow people to buy and sell what they think they want to sell and what they think they want to consume, at whatever price they want to sell and consume.
Um, choice. Cho cho ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch ch is a is a is is a simple word. It's five letters long. Um, sorry, six letters long. Um, and it would be interesting to allow people to start making choices again. Uh, I, I actually have a lot of faith in humanity and and I think if we actually started to allow people to choose what they wanted to do again, things might actually work out okay. Of course, people make mistakes, but if they're responsible for their own choices, including the ones that go wrong, they tend to learn from their mistakes. We're not living in a world where people learn from their mistakes currently. And in fact, you could argue that's been going on for decades.
So, um, the silver lining is that someone or a handful of people in positions of power, uh, you know, have an epiphany, wake up one morning, go on television or radio or whatever it is they do to communicate nowadays, and say, "You know what? I'm sick and tired of being a control freak who thinks that I'm the puppet master and can manipulate everything to everyone's benefit, including my own, of course. Um, you know what? Over to you. Uh, I, I've decided to let the people decide for a change. Uh, I've, you, you can choose what to buy, what to sell, at what price. That includes interest rates, that includes exchange rates, that includes stock market prices, that includes commodity prices, that includes everything else. We're just done manipulating everything and bailing firms out that blow up and, uh, other, you know, god knows what arbitrary actions that we take, most of which are never properly disclosed. Um, you know, enough. We're, we're, we're done. Um, over to you."
Yes, it could happen. And if that were to happen, then of course precious metals prices would decline because you would no longer need a hedge. You, you would be allowed to actually buy and sell and trade real assets at real prices without thinking that they're just going to keep inflating, inflating, inflating, inflating every time they make a mistake. Um, but that's not the world we live in. That is not the world we live in. Uh, again, I'm not so sure that that would yield a positive outcome initially. It will probably be very messy and very ugly if things were to run their natural course and there wouldn't be that intervention, but the endgame, the ultimate result would probably be for the best. But that is not the world we live in.
So let's wrap up with how you do see things happening and and give me a forecast on what you think inflation looks like by, we'll say, second half of 2027, when this, uh, fertilizer shortage comes into play again. I, and we'll stick to the US because I can't expect you to give me an inflation forecast for the rest of the world, and I understand that this is, uh, a data set that gets manipulated at the best of times by government. But what do you realistically think inflation does in the United States by the second half of 2027 if this supply chain bottleneck that we discussed at the beginning of the interview does manifest itself, and as you pointed out, the damage already been done. What does that mean for inflation? What does that mean for gold prices?
Right. Well, apologies for the rant, but you did sort of encourage me. So, I, I love to hear your rant. [snorts] Uh, anyway, let, let's get rational again and and reasonable. Look, um, we have this combination currently of the authorities wanting inflation to run hot because, of course, that erodes the debt burden, which is the highest it's ever been, uh, in the United States, and it's the highest it's ever been in many other countries too, including that in which, uh, I reside here in the UK. So they want inflation to be high, and now, of course, they have a mechanism whereby it will be high. So the idea it's not going to be high is pretty unrealistic, right? If, if, if the natural force of of of prices is up and authorities want that to be the case, then you know that's what you're going to get.
To me, the idea, why you say you want authorities, authorities want inflation to be high? To erode debt, right? They want to erode national debt. Uh, it's a simple way to erode national debt to allow inflation to run hot because, but isn't servicing the national debt more expensive when inflation and, well, that's why you lean on the central bank to keep interest rates low, right? This is what Milton Friedman taught us. So as as a young man, you know, Milton Friedman makes his impression on the academic world, uh, rightly so, and makes the case that central banks should be independent, uh, because he, he claims that will help to keep inflation low and stable. And yet, as an old man, he says, actually, you know what, every time a central bank gets into a crisis with a government, they always lose. The government always wins, and they always allow inflation to run hot. So the very same guy, you know, that that won the Nobel Prize for saying inflation should be low and stable is the same guy that says, "Hey, you know what? When the government wants inflation to run hot, the central bank will allow inflation to run hot." Nobody talks about that second message anymore. And yet that was the last big message he sent before he retired. He, he said that on talk shows. He said that in the public sphere, big time, but then that was, you know, 40 years ago, and memories are short. Um, I'm old enough to remember it.
Anyway, um, so, so they want inflation to run hot. They won't say that, but they want inflation to run hot because that erodes their debt and it makes it easier for them to confiscate private wealth. They, they won't call it confiscation. They'll call it, I don't know, welfare state, social engineering, uh, you know, whatever they want to call it, but that's what it is. And and and so when when the underlying pressure from, you know, what's happening in the Gulf and elsewhere is pushing that way anyway, and they actually kind of want it anyway, you know, that's what you're going to get. That's what you're going to get. Uh, so, so it, it's baked in the cake, right? Whether it's 5% or 10% or 15. And of course, they might change the way they calculate it, uh, again, right? It's already running at 10% based on the way it was calculated in the 1980s before Clinton changed it. Um, I mean, whatever, right? Inflation's going to run hot, and and that's just the way it is. I, I don't see any way again without a complete reversal of the current policy set, that's what's going to happen. Um, I, I, I, to me, it's just that that's just the way it is. Sorry.
Do, do you see double-digit inflation in in real terms and or in nominal terms?
Well, again, if you, if you, if you measure, if you measure inflation the way it was measured before Clinton, uh, and the Bosan Commission revised it in the US, um, it's currently in the high single digits, um, not the low single digits, and it'll certainly, as a result of what's building right currently that we've been talking about, will be in the double digits again. Uh, again, this, you got to go back to the the Boston Commission was a big deal. I mean, it was very controversial in Congress, by the way. Nobody remembers this stuff. It kind of shocks me. Nobody has any historical perspective anymore, but they, they reduced inflation by multiple percentage points, uh, as a result of coming up with these new methods for trying to keep Social Security and Medicaid benefits under control because, of course, they were linked to the inflation index. And so they, they, they really jumped through a lot of hoops, uh, to find ways to reduce, uh, the official inflation statistics, uh, in order to improve public finances, which worked for a time. But of course, you know, the, you can't fool the whole world, uh, or you can't fool all the people all the time. And it's kind of uncanny how that change in methodology and the targeting of inflation by the Fed and the reduction of real interest rates to under 2% in the early 2000s corresponds to the initiation of one of the largest precious metals bull markets in history. That is not a coincidence, right? That is not a coincidence. And we're still, we're still going through that. And we have a Fed chair right now who has appointed task forces to look at, amongst other things, inflation, and could also come up with some new way to calculate inflation that could allow for more leeway, uh, to do what needs to be done and manage perceptions there. We'll see what we can, uh, get from from Kevin Warsh and his ideas and how inflation should be calculated. I know we're out of time.
John, final thought as we wrap up here, and of course, I do need to get a general gold price forecast, and I'll give you a generous timeline. You can give me second half of 2027, if you like.
Well, for, just, just quickly regarding the Fed, I, I, I will say ever so briefly, Kevin Worsh is the first Fed chairman since Alan Greenspan to have been openly critical of Fed policy before assuming office. It's been a long time since an incoming Fed chairman was openly critical of Fed policy before coming into the institution. So, who knows what he's going to do. Um, but then Greenspan wanted to go back on the gold standard before becoming Fed chairman, and yet never did. So, go figure.
You, Oh, no. I see. I, I have to pick up on that. I can't let that one go. Even though I promised I'd let you go at a reasonable time, John, but you're, you're saying, okay, don't expect the unexpected from Walsh. And yes, he's been perceived by the market as as a hawk, and he has been critical of the Fed. And to be fair, there's a lot of the things that he's been critical of that deserve and warrant criticism, like data collection, like some of this guidance, like the excessive, uh, intervention in the markets by the Fed, and the way that communications by the Fed move the market rather than, you know, the other way around. So, he has made a very, uh, he's made a number of very valid points about the Fed. You mentioned Greenspan and the gold standard. Is there any way you think what kind of surprises do you think we could expect from Worsh then?
Well, I don't think Worsh is going to make an effort to put the US back on the gold standard. I don't think he's, you know, of that inclination at all. Uh, but that, but again, Greenspan, you know, was on the record, uh, into the early 80s advocating for a return to the gold standard. And yet, you know, once he became Fed chairman, he never really mentioned it ever again. And and and despite his great intentions, Greenspan also created the Fed put whether he wanted to or not. He was the first Fed chair to really, uh, look, um, if you've ever played the card game Hearts, there, there is a, a, a, a strategy which is a backhanded strategy called "shoot the moon," where you basically trap all the other players by allowing them to play the hand that they think is their strongest hand. And there's a, there's a theory I have, and I'm not the only one who has this, by the way, that Greenspan wanted the system to blow itself up and actually engineered 2008 without his fingerprints on the gun. I, I'll just leave that there. He's dead now, and he's not going to be around to come after me for defamation. So, um, anyway, I, I doubt Warsh is of the same, uh, the same cloth in that regard, but who knows? Who, who knows what's going to happen. He has been critical of the Fed. He's been specifically critical that Fed policy exacerbates economic inequality, which we know is a big issue nowadays. Worsh is the only one associated with the Fed who's been vocal about that. And now he's chairman. Who knows what that means? I don't know what that means. Uh, but those who predicted that Fed policy, uh, post 2008 would exacerbate inequality, and I'm in that group, but there are many of us, um, you know, wonder what that means, uh, because he, he saw that too, so he's not a dumb guy. But, um, but yeah, as for the gold price forecast, assuming Warsh gets consumed by the beast the same way Greenspan was, and the Fed just keeps, you know, printing money every time there's a hiccup in the economy and the financial system, gold's easily going to be, you know, on its way to six, seven, $8,000, uh, by the end of 2007. I mean, that's the, that's the trajectory we're on. Um, I suspect we'll be at 40,000 within five years' time. Uh, again, that's just extrapolating what's been happening anyway. That's not me being bold. That's a mere extrapolation. If things go wrong, uh, then then that's a conservative, uh, forecast.
Okay, conservatively, uh, gold at $40,000 in five years' time, and an easy six and a half to seven by the second half of 2027. And again, that's not, it's not necessarily a good thing when gold hits those prices.
No, that, that's the thing. It's largely inflation. It's not completely inflation because the demand function for gold is shifting. So, there's real demand for gold above and beyond inflation. That's part of that. But I'd say at least half of that is simply inflation. At least half of that is just the price level going up. But the demand function does shift. And because gold supply is fixed, when the demand function shifts, the price goes up in real terms, not just inflation-adjusted terms. And that's a point I make in my books and my, my other, you know, essays and research and whatnot. And and I, and that's important. It's important to understand that it's not just inflation, although that's part of it.
Right. And again, it does, it does mean that things have not gone so well in the world if we're looking at, uh, $40,000 gold. Uh, and food shortages are certainly not anything we're looking forward to, even if it means that, uh, the gold that you're stacking hits, uh, new levels. John, I appreciate you sharing your time with us. I know we're out of time now. Uh, your book is an excellent read. I have read it. I have enjoyed it. We've spoken about it in previous interviews. Uh, please tell our viewers where they can learn more about you. I know that the empora report is on Substack, but go ahead. [snorts]
Substack is probably the best place to to to, uh, get familiar with my work. I do retain a, a Twitter handle, Butler Gold Revo, named after my book, The Golden Revolution Revisited, uh, which you can find on Amazon and and which, yeah, is a bit long-winded, but, you know, if you need something to help put you to sleep at night, I strongly recommend it.
I do not recommend it for that. So, I will disagree with you on that point. John, always a pleasure. John Butler, thank you very much. Appreciate it.
No, thank you, Michelle.
Thank you. And as always, a big thank you to you for watching. Make sure to hit the subscribe button if you haven't already. Keep in mind, we also have a free weekly newsletter with exclusive insights and specials and other content that you won't find on YouTube, Spotify, or Apple. The link is in the description below, and it's also on the website mfranklin.com. As always, leave us your comments. Feel free to praise, whine, or just opine. I genuinely enjoy reading them. And many of your questions and suggestions do end up inspiring future interviews, questions, and topics. And I read the comments, so I know that some of you love and appreciate our longer, in-depth conversations, while others prefer something a little shorter. So, if you're short on time, try listening at a 1.25 speed or faster. It's a great way to get through more of the conversation without missing the substance. My sweet spot personally is watching content at around 1.75. But, however you choose to watch or listen, I appreciate you spending your time with us. Thank you so much for me, Michelle [music] McCrory, and the rest of the team. We'll see you next time. This is the real story with Michelle McCori. [music]