Brent Johnson joins the Gold Exchange Podcast to talk gold, the dollar, and Triffin’s dilemma. He shares why he joined Monetary Metals’ Advisory Board, what drives dollar dominance, and the appeal of a Permanent Portfolio.
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Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein of Monetary Metals. I’m joined by my good friend, CEO of Santiago Capital, Brent Johnson. Brent, welcome back to the show.
Brent Johnson:
Thanks for having me. Good to be here.
Monetary Metals:
Brent, I feel like every time I go on the social medias, I’m seeing all things dollar milkshake. Oh, this guy has no idea what he’s talking about. The dollar is going down. Actually, the new trade that everyone’s piling into is anti-dollar. Trump has basically destroyed the US economy. He’s destroyed all the trust and credibility, what we had left. And now the new hip trade is saying that the dollar is going to go down against these foreign currencies. Brent Johnson, the milkshake is over. As the inventor of the Dollar Milkshake Theory, what say you?
Brent Johnson:
Well, I think It’s always fun when I get these responses that it’s over, you were wrong, it can’t possibly last. And I should have started a catalog of all these five six years ago, because I get these every year, like literally every year, the same email, the same argument. It’s not to say, listen, can the dollar go down? The dollar can absolutely go down. My argument has always been that we’re not going to have wholesale de-dollarization with the dollar going down. You’re going to need the dollar to go higher for there to be full scale de-dollarization, and much pain will be involved in that process. But it’s always funny to hear the new latest reason why this time really is it, and maybe I’ll get a few more this year. I keep looking for the new reason, but it’s always the same thing. They’re going to print money, it’s going to go away, can’t possibly last. But here we are.
Monetary Metals:
And I want you to specifically address, there was this talk about, Oh, the BRICS, this is all these different countries that they are going to unite together. They’re going to make a new common currency. And this currency, whether it’s backed by gold or oil or some new form of unredeemable currency. This will actually start to displace the dollar, whether it’s for global trade, whether it’s for settlement, whether it’s for reserves. So where does the new tariff talk and this anti-globalization, this trade war world that we’re in now, where does that put the BRICS countries? And if they had an alliance, where’s their alliance stand now?
Brent Johnson:
Well, I’ve always thought that the alliance was more of a pipe dream than an actual alliance. And it’s not to say that there wasn’t great desire to make that pipe dream come true. But to me, it was never much more than that other than a great desire. And if you think about it, the BRICS as a concept have been around for about 16, 17 years now. And every year, they have a big conference, and they make these big proclamations, and we are going to work together to develop one day a plan that could possibly… And it’s always like, in the future, in the future, in the future. And they basically rerelease the same press release every for 15 years. And they change the order of the words a little bit, but it always basically says the same thing. But there just hasn’t been that much actual real-world implementation that has moved the needle at all. And again, it’s not to say that de-dollarization couldn’t happen. It’s just that it can’t happen without a lot of pain. I have yet to meet a politician that likes to experience a lot of pain. But I think that’s really what it would take to de-dollarize.
And one of the analogies that I like to use, and the reason I like to use this is because I think there’s a misunderstanding of how the dollar became so entrenched. I think there’s a belief that after World War II, the US forced the dollar on the rest of the world. And that may be true to a certain extent. It was definitely the US who said, We are the new global hegemon, and we will work together to establish a system that cooperation and efficiency, and they set up this, basically, a rules-based order coming out of World War II, of which Bretton Woods was a big part of it. And the Bretton Woods said the dollar would be tied to gold, and then all the other currencies would be tied to the dollar. So in that Since the US did mandate the US dollar as the global reserve currency, the US didn’t send its military around the world firing at people who didn’t use the dollar. They didn’t make India trade with South Africa in dollars. That largely happened as a result of private business owners seeking the most efficient, cheap, fast, however you want to describe that, way of doing business with somebody on another side of the world.
And it just so happened. And a big part of the reason was because of the US dollar or oil being priced in US dollars. Everybody needed energy. So since everybody’s needed energy, everybody everybody needed dollars. It became the de facto language that businesses spoke to each other. So if you think of the dollar as the language of business, that is the most common language that everybody speaks, then you start to understand how the dollar became so entrenched. And so when you think about the BRICS getting together and saying, you know what, we are going to issue this new currency, and all of our citizens and businesses are going to adopt this new currency, and they’re to reject the dollar. That would be a little bit like me showing up in Thailand, getting on a bus, and telling everybody to start speaking Swedish. I can tell them that. And yeah, if I’m bigger and stronger and I had a gun, I can take a few out and put some pressure on people, and maybe out loud, they don’t speak in Thai. But amongst themselves, they’re going to be whispering, and they’re going to be doing… They’re still going to speak Thai.
They’re not going to start speaking Swedish, because that’s not the language they to each other, right? And that’s the way global business is. The dollar is just the medium of exchange. It’s just the most efficient way to do things. Now, it doesn’t mean that it’s perfect. It doesn’t mean that there’s not some severe flaws, and it doesn’t mean that something else couldn’t be used in its place, whether it’s gold, whether it’s some a basket of currencies, whether it’s a basket of commodities. Could something else work? Something else could absolutely work. Could something else work better? Potentially. But the transition from going what we have now to whatever that new system is would be rough. It would be just like telling those kids to speak in Swedish. Could it happen? It can absolutely happen, but it’s going to take a little while, right? And there’s going to be a lot of nashing of teeth and pain and suffering involved in making that transition. And so what I think about the… And that’s if people want to make the transition, right? And so I just don’t… When I see these politicians up on stage at the BRICS conferences making these big proclamations, I often wonder, where’s Lakshmi Mittal, who’s the biggest steel magnet, right?
Where’s Paulo Lemon, who’s the biggest business guy in Brazil? Where’s one of the Russian oligarchs saying, Yeah, I’m looking forward to transacting in rubels rather than dollars. You never see the private business owners up there because it’s not in their best interest to do it. So again, I’m not saying that it can’t happen, but a lot of these big proclamations that you hear about the BRICS, that’s what they are. They’re proclamations. They’re not actual real-world solutions.
Monetary Metals:
I saw a post a while back, which always stuck in my mind, and maybe it came from you, or at least I connected it in my brain to you. It was a guy, he was protesting in a foreign country, and his protest sign, was in a foreign language. A reporter was giving him advice saying, Hey, listen, if you want your protest to reach global media, you should put it in English, even if that’s not the language of the country that you’re in, because global media is reported on in English. People who care in the United States, they’re not going to go out of their way to read Thai or Russian or any other language. They’re going to try to read English. If you have a protest, maybe think about putting your protest signs in English. I think the dollar is in many ways a similar story, which is that you have all these issues in your country with your currency, and it’s much easier to just use the dollar because that is a global language that everyone understands. You don’t need to say, Hey, learn Swedish, or, Hey, learn Thai, because basically everyone learns English in some way if they want to transact globally or in a real business setting.
Yeah, you might have a small country that just uses their own currency, or you might have a small shop, but if you’re going to go global, you’re probably transacting in dollars. So now I want to ask you about something called Triffin’s Dilemma. We’ve talked about it before. This is where the idea is if you have a global reserve currency that other countries use as their currency, as well as a domestic currency that is one and the same, sometimes you might run into a dilemma where, hey, the things that I need to do for my own country in my own currency, like raise rates or lower rates or try to tamp down inflation, whether that will work or not, the things that I got to try to do in my country for the domestic currency actually conflict with what the rest of the world wants to do with the reserve currency. So how do you see this Triffin’s dilemma playing out currently? Do you think it’s still valid? And what are other countries experiencing? What do they want for the world reserve currency? And what are they currently getting from someone like the Fed or Jerome Powell?
Brent Johnson:
So it’s a great question. And to me, this is the heart of everything, and it’s the heart of my whole thesis. And it’s my belief, and I know there’s people who disagree with me on this, but it’s my belief that when we were on the bread and wood system, where the US dollar was tied to gold, and then foreign currencies were tied to the dollar, and foreign countries could turn in their dollars in exchange for gold, that was Triffin’s dilemma hurting the United States, or that was a case where the dilemma, it was a dilemma for the United States. Because the rest of the world had a put option, called a dollar, that they could put back to America, and in exchange, America had to give them gold. And it came to a head in 1971. And this Triffin’s dilemma is why the United States left the gold standard. Because in the ’60s and early ’70s, and especially what… Well, it started in probably the late ’50s and then into the ’60s. And then what Nixon wanted to do even more into the ’70s as far as spending on domestic social programs, funding foreign wars, running budget deficits.
That dilemma hampered the ability for US politicians to do that without the rest of the world exercising that put option. And so that was a dilemma for the United States. And because France, France was really the head of it, they basically took all their gold back, and they sent a French destroyer to New York City to pick it up. And then there were rumors that London or England and Germany might do the same. And that’s when Nixon said no more. And the reason he said no more was the Treasury Secretary basically told him he should delink it from gold, because if you delink it from gold, you take away that put option from the rest of the world. And so they did that. And that caused all kinds of chaos. So I think that was 1970, August. I think it was August of ’71. I always forget if it’s ’71 or ’72. I think it was August of ’71. And for the next nine months, you literally had floating exchange rates, which you would never had fully fiat floating exchange rates up until that point. Somewhere had always been tied to some form of gold or something, or at least for the last couple of hundred years.
And so that caused a lot of consternation, misunderstanding, frustration on behalf of the international community. And I think there was a, if I remember this right, there was an IMF meeting or a World Bank meeting in Rome shortly after, six months after this happened. And that’s where the Treasury Secretary said, Listen, the dollar is our currency, but it’s your problem. In other words, yeah, this is perhaps a problem for you guys. You guys have all these dollars. We’re printing more of them. Tough luck. That’s basically what he said, right? And that was a gamble for him to do that, because if they had all ganged up and said, Well, we’re not, then it could be a problem. The reason he was able to do that was despite the problems that US had, they still had more power than anybody else. And so this is where it becomes a relative game. And then, about six months after that, or Was it ’72 or ’73? Somewhere in there. I always forget the exact dates. That’s when the next Treasury Secretary, Simon, flew to Saudi Arabia and convinced Saudi Arabia to do the oil for dollars deal. And by convincing Saudi Arabia to exclusively price oil in dollars, now the whole world needed dollars to buy energy, to to run their economies.
And that process, so from 1971 to ’73, it was very turbulent, and a lot of upheaval. But that turbulence, in my opinion, completely… The The results of that turbulence completely flipped Triffin’s dilemma. And it went from being a dilemma for the United States to being a dilemma for the rest of the world. Now, the rest of the world still needed dollars because they needed to buy energy, but they no longer had that put option. And the United States now had a huge buyer, huge buyer of its treasuries, so it could spend what it wanted to spend. And because everybody needed dollars to operate on the global stage to buy energy, that turbocharged this Euro-dollar market, where everybody would trade with each other using dollars. And again, this wasn’t… The President of France didn’t say, You have to do business in dollars with Brazil. And it wasn’t Japan, the Japanese Premier, saying, You have to do business in dollars with us. The businesses, the private businesses did this because it was the most efficient and mostly widely used and deepest market. And so if you look from the early 1970s till now, over that 50-year period, the dollar just became more and more and more entrenched.
And now, the problem is, is if the rest of the world wants to leave the dollar, they first have to satisfy all the US debt that they have. And the rest of the has as much US dollar debt as the United States does. And so if you’re going to move on to something else, you first have to pay off your debt. And if you don’t pay off your debt, then your creditworthiness drops. And if you don’t pay off the debt in a debt-based monetary system, you get a credit contraction. And that credit contraction causes all kinds of problems. So the fact that the world let the US move off the gold standard, and had they acted at that time, they might have had a chance. But the fact that they didn’t, the subsequent five decades, they built this Euro-dollar prison, is what I call it. They willingly built it. They did it themselves. Nobody forced them to do it, but now it’s there. And to try to leave it, I mean, those walls are pretty high, they’re pretty thick. And so it would be very hard to leave that. Nothing’s impossible, but There’s going to be pain involved in getting out.
So I hope that answers the question. I know it’s a long answer, but that’s how I see the transition of Triffin’s dilemma going from a domestic dilemma to an international dilemma.
Monetary Metals:
That’s a great way to put it. One way I think about it is if you’ve ever used a Chinese finger trap, you know this instinctually or you know the feeling, which is that pressing your fingers closer together is actually easy. It’s the easiest possible thing to do. It actually becomes simple. It becomes looser So the more you press in. But when you say, you know what? I think it’s time to press out, you’ll notice that it suddenly squeezing really tight around your finger. There’s no way to pull your finger out. And the deeper in you are, the worse it is. If you had just put your fingers in and decided, actually, this seems like a bad idea, Maybe you could have pulled your fingers out. But now when you’re in so deep, it’s impossible because the squeeze gets so tight from your own finger trying to pull out. And so in a way, the rest of the world is in this Chinese finger trap that they’ve created for themselves by pushing closer and closer together by using dollars.
Brent Johnson:
It’s a perfect example because, yeah, you can get out of that trap, but you’re going to lose a finger doing it. And I guess that’s my point. Can the world leave the dollar? Yeah, but they’re going to lose some fingers in the process.
Monetary Metals:
Now, I want to ask for investors who are hearing this. They’re saying, Okay, I think I understand there was a time where the US dollar was backed or attached to gold in some way, but that created problems because when the US basically wanted to print more currency than it had gold, other countries, foreign countries, decided, We prefer to have gold rather than these paper claims. So we’ll exchange them. And once France started doing that, other countries decided, hey, maybe we should get it on this game, too. The US decided, We’d prefer not to play this game at all. We’re going to flip the rules. And so instead of it being our problem to redeem gold to you, we’re going to just delink the dollar to gold in any way whatsoever. And the reason that you’re not going to betray us and start a new currency is because the demand for energy is going to be denominated and priced in dollars, meaning there will still be demand for dollars, we’ll grow our network effect, and by the time you want to trade or do a different currency, it’ll be too late. The network effect will be too strong.
You’ll be trapped in the system of your own making. So for investors hearing this, they might think, Well, there’s no way that the dollar can ever be dethroned. And over time, this means that the US will use this privilege to print more currency, maybe debase the dollar compared to other goods and services. What as an investor can I do to say, Hey, I have this wealth that I’ve built up over time. The person who’s printing the currency really doesn’t have much of a check against them in terms of gold or foreign countries starting their own currency. What is I as an investor? What should I be thinking about when in terms of devaluation of the currency of the assets that I’m holding?
Brent Johnson:
I think there’s a couple of things that’s important to understand. First of all, once you understand that over time, fiat currency loses value, which most people who are investors do understand that, right? That is actually one One of the whole reasons why you invest in the first place. One of the incentives to invest is if you just stick your money under the mattress, it’s not going to grow, and it’s probably going to lose purchasing power. One of the ways you combat that is you have to buy something that will hold its value at a minimum and preferably rise in value as the years and decades come. And so I am of the belief that if… The way I think about is if you zoom out and you look over the last 100 years at a number of different asset prices, whether it’s commodities, whether it’s stocks, whether it’s real estate, precious metals, diamonds, whatever, pick your asset. They tend to go up into the right. The reason they have tended to go up into the right is there’s a couple of reasons. Number one is the stocks probably go up into the right because as you move forward in time and technology advances, humans become more productive with that increased productivity, they can run their businesses more efficiently, and you can grow.
As a result, stocks go up into the right. Real estate goes up into the right, or maybe some commodities that don’t have an unlimited supply go up into the right because more people get borne. As more people get borne, that’s more demand for that finite basket of goods. Assets go up into the right. The third reason assets go up into the right is fiat currency loses value over long periods of time. So you got three reasons right there that assets tend to go up into the right. But the other thing is, if you zoom out and you look, you will also notice that there are long periods of time, sometimes 10 or 15 years, where asset prices go sideways. They don’t go up and to the right. And then you will also see there are often some very sharp… They don’t typically last too long, but there’s some sharp draw downs. The way I think about it is, number one, you have to own assets, because if you don’t own assets, you’re going to lose purchasing power over time. While I think it’s great that I I think since I’ve been in business in the last 10 or 15 years, certainly since the global financial crisis, I feel like the average person has become more knowledgeable about this, especially because of all the extraordinary monetary policies, the politicization of the Fed, and the getting more involved in the markets.
It’s just become more known that fiat currency loses value, and there’s going to be inflation. And I feel like because they get that knowledge, then they think they have perfect knowledge. And as a result, they go out and they put 100 % of their portfolio into Bitcoin or gold, or a basket of commodities or real estate. Pick your asset, right? Or maybe they go all in on equities, because assets are always going to go up into the right. The government’s always going to print money. Okay, it’s good to know that, but it’s not good if that’s all you know. And the reason is because of those periods of time where asset prices just go flat or those big drawdowns. The best way to make money over long periods of time is to compound it. You don’t have to make that much every year, but if you just compound it like 3, 4, 5% a year, there will come a point where the curve just turns up and it really rockets higher. That’s the exponential function. But the problem, what derails that, is if you also experience large draw downs along the way. If you can be in a basket of assets, and you can compound those returns over time, and avoid the 20, 30, 40 % drawdowns, you are going to be pretty well off 10, 20, 30 years down the road.
And the reason, you have to be prepared. Even though you understand that fiat currency loses value over time, and even though governments are there to bail out the markets and central banks have the central bank put, all that stuff, a lot of people will get knocked out in those drawdowns. If they’re all in on something, and then you get a 50% drawdown, you probably have to sell some of it, I don’t know, to meet a margin call, to pay your rent, to fund your lifestyle, whatever it is. And then all All of a sudden, because you’re all in, you become a distressed seller rather than a distressed buyer. And the reason that we get those drawdowns every now and then is because we have a debt-based monetary system that must grow. And if it doesn’t grow, You get that credit contraction, and when you get the credit contraction, then you’re susceptible to these hard drawdowns. As an investor, I think you have to think of two. You have to be invested, but then you also have to always maintain some downside protection, whether Whether it’s cash on the sidelines, whether it’s an option overlay where you hedge the portfolio, whether it’s an asymmetric tail risk hedge that pays off in some a disaster, whether it’s uncorrelated asset that goes up when the other one goes down.
You have to have something that keeps you from becoming a distress seller in those drawdowns, because those drawdowns will come, and they will come when you’re not ready for them. That’s the nature of a drawdown. If you knew it was going to come, you wouldn’t suffer from it, right? So that’s what I think is important for investors to understand. It’s important to understand fiat currency loses value over time. It’s also important to understand that it’s not a straight line, and it’s not consistent. And there will be short periods of time where fiat currency rises in value versus asset prices.
Monetary Metals:
Yeah, and the way I think about that is step one in your knowledge journey would be, okay, I’m realizing that actually the assets I own, they might not be appreciating because of productivity. They might be depreciating because of a depreciating currency that they’re denominated in. And I should be aware of over time, currencies tend to depreciate relative to asset prices. Then my second step in my knowledge is that, well, okay, clearly I should probably want to own some assets so that I’m not just sitting on a depreciating currency. And I need to try to compound because compounding that exponential growth is a lot better than just straight linear growth. But then the third caveat is to think about the draw downs that could stop my compounding effect. Because if I have 4% compounding every year, that might be better than 25% one year, but50% the next year and 14% the next year. Having a smoother return with more time for compounding will actually grow your wealth quicker than Really great returns in one year, but terrible drawdowns in another. Tell us a bit about this permanent portfolio idea. People can think about how this works, because when someone hears this, they go, Well, I know I should prepare my portfolio for drawdowns, but what does that mean in terms of constructing a portfolio?
Because if I have equities, maybe I hedge my equities, but if I have gold, maybe I hedge my gold. How can people think in terms of the different types of asset classes and how to hedge the draw down for each asset?
Brent Johnson:
I think The first thing before you do anything, you need to understand what you’re good at, what you’re not good at, what your capabilities are, and what your capabilities are not. If you are not a financial professional, and you don’t even know what a stock option is or how a put option works, you should not be trying to hedge your portfolio on your own. You should find somebody else to do this for you who is familiar with how you’re doing that. But I literally just last week on my show, I do a weekly show on YouTube, and I spoke about this exact concept, and I showed the permanent portfolio, and I showed how it compared to a basket of equities. Essentially, I didn’t come up with the permanent portfolio. It was popularized back in the ’70s by a guy, I think, named Harry Brown. But it really goes back centuries. If you look at the really old families in Europe that have passed wealth down from generation to generation to generation, or even Asia, they have some combination of this permanent portfolio, and essentially says, put 25 % of your networth in short term, either cash or some a fixed income instrument, very liquid fixed income instrument.
Put 25 % of your money in either the stock market or some a company, an equity, an equity-focused venture. Put 25 % of your money into real estate, and put 25 % of your money into gold, and maybe a smattering of commodities. And if you just did that from I did this from… When did I do it? I did it from like 1965 to 2020. It was over a 50-year period. And if you did that over that 50-year period, it compounded at 8. 9 % a year. Not bad. Not incredible, but bad. But the really nice thing about it is it only lost money six times, six times over 50 years. And the biggest drawdown was 12 % which was in 2008, and the other drawdowns were like 4 or 5 %. So not that bad, right? And if you look at the chart, if you look at the graph, it actually resembles that very slow and steady, and then it starts it starts to curve up. It starts to resemble that exponential function, not because it’s an amazingly high return, but because it’s consistent, right? And then you compare it if you did the same portfolio, or if you took the same time period and you took a basket that was 60 % US equities and 40 % international equities, you get a return that was like 9.
1 % a year. So slightly better. And over a 50-year time period, yeah, you make a little bit more money. But you lost money not six times, 12 or 13 times. So 25 % of the time, you lost money. And there were years where you were down 30 %, 35 %, 22 %. So you’re on a yo-yo, right? And so the point that I try to make with that is, nobody ever does it. Nobody ever actually does the permanent portfolio. They should, but they won’t, just because it sounds too simple, it sounds too elementary. They think that they can do better, right? But the point is, if you look at those two charts, they end up almost in the exact same place. But one of them was a very smooth write. You never had to really worry too much about it. And the other one was like a roller coaster. If you don’t have the time or the expertise or the interest in trying to hedge your portfolio or playing the tactical swings of the different asset classes, then build yourself a very robust asset allocation similar to the permanent portfolio that has such good diversification, you won’t experience a 20, 30, 40 % drawdown.
So that’s the first step that you can do. And I always tell people, especially when I go to conferences and when I meet retail investors, the biggest mistake I always see people making is over concentration in one asset. Now, you might say, well, Brent, you just told us to put 25 % in one asset class. But it’s different between putting money in one asset class and in one stock or one thing. When I say put 25 % of your net worth in real estate, I’m not necessarily putting it in one piece of land. I’m not telling you to buy one stock. Gold is a little different because gold is just gold, right? It’s homogenous, and it doesn’t change. It’s fungible. So that’s a little different. But the point is, you want to build yourself. And with this specific asset allocation, it is such that the correlations are very uncorrelated. And so while you could lose money, like in 2000, you could be down 12, 15 % a year, you’re probably not going to be down 40 or 50 %. So that’s the first thing you can do. The second thing you can do then is if you do have some interest, and you do have some knowledge of how financial markets work, and you can figure out whether things are overbought or oversold, or extremely expensive on a valuation basis, or extremely inexpensive, then maybe you can over-allocate to equities, or real estate, or whatever it is.
And then if you’re really good at it, and you can trade the swings, and you can hedge your portfolio. So we do So all of our clients have long term assets that we… Like we’ve owned the same stocks for 10 or 15 years, and we’re not going to sell them because we have huge gains in them, but we’ll hedge them. We will absolutely hedge them from time to time. And so we have a combination of short term tactical hedges, and then we also have tail risk hedges. And the way I think about this is, to me, it’s insurance. If I spend a half a % or a % a year on insurance, and it doesn’t pay off, it’s annoying. Well, actually, I shouldn’t say that. It’s not annoying. Is it a drag on the portfolio? Yes, it’s a drag on the portfolio. But when it pays off, it more than pays off, and it probably pays off every three or four years. And when it does, it makes up for that previous drag. So you have to be patient. You have to look at the big picture. You have to zoom out and not look at your put options that are degrading in value.
But you just have to understand that’s part of the bigger thing, and you want to focus on the top line. So that’s how we think about it. And the last thing I’d say is it depends on where you’re at in life. If you’re 22 and it’s your first job, and you’ve got 50 years ahead of you before you’re going to retire, you can be a little bit more aggressive. You don’t have to just try to get 4 or 5 % a year. But if you’ve worked your whole life, you’ve built up a nice nest egg, you’re getting towards retirement, you’re just going into retirement, especially in a world like we have right now that has so many different potential risks, the last thing you want to do is experience a 20 or 30 % drawdown because you don’t have 10 years to make it back. That’s the other thing is with the drawdowns. You have to understand the math involved in drawdowns. If you lose 5 %, you only need 6 % to get back to even. But if you lose 25 %, now you need over 30 to get back to even. If you lose 40 %, you need a 70 % return to get back to even.
It’s just not that easy to get a 70 % return. It’s not impossible, but it’s not easy, right? And so that’s, again, especially if you’re in retirement or moving towards retirement, the last thing you want to do is suffer a 20 or 30 % drawdown.
Monetary Metals:
Brent, as we come towards the end of the interview, I think it is only fair that we talk about gold, which is, of course, our favorite asset class on the podcast. And for those who have not seen the press release Brent has joined the Monetary Metals Advisory Board, and we are so excited to have him. Brent, first of all, let’s talk about you and your relationship with gold, and then, of course, how you heard about Monetary Metals, Keith Wiener, and why you decided to join the team.
Brent Johnson:
Sure. Well, probably my first exposure to gold is probably silver, to be honest, because when I was… How old was I? I was eight or nine years old was when the big silver and gold boom was in the late ’70s, early ’80s. And I can remember we had a safe in our basement. I can remember my dad opening up the safe, and in the safe, there were some silver bars. And I remember him telling me, It’s a good investment. And it was for a while, and then it wasn’t for a long time. But I always… And then another thing was, he was a metal detector. He had a metal detector, and he would go out and he would find coins and jewelry and stuff. And so I was always interested. Just from that, I was interested in it. But I never really got too into it until I started working in the business. And then, probably like a lot of people, when I went through college and even business school, I memorized what I needed to memorize to pass the test. But I probably didn’t understand things as well as I should have. Not really understand them, right?
And I got really, really fortunate because I started in this business in the summer of ’99, and for the next four or five years, six years, we had the dot com bust, and then we had 9/11. So it was actually a really tough time in markets. And so it really wasn’t until 2003 or 2004, where things started to turn up, and then they turned up fairly fast into about 2007, right? So the first two or three years, I was like, well, this isn’t an easy job, but I was still probably parading what other people told me, my bosses or the chief investment officer And then in 2004, 2006, it was fun. And so you didn’t really have… Things were going well. So you didn’t have to think that much. You just rode the wave, right? But I remember that’s when I was actually starting to make a little bit of money myself. I I did a good job. I worked for Credit Suisse. I was in San Francisco, and I was making decent money for somebody who was 30 years old. I remember it was still really hard to buy a house, but everybody was buying houses.
I remember it just didn’t make sense. This was like 2006, 2007 time frame. Now, I wasn’t smart enough to be one of those people who shorted subprime and shorted the housing market and made billions of dollars. I was just smart enough to know that something wasn’t right. And about that I had a very fortuitous meeting where I met some people who got me thinking differently, and I went down a whole rabbit hole of, how do things really work? Rather than just memorizing what other people told me, how do things really work? And that’s when I came across the Austrian School, and I was really encouraged by it because it was a different way of thinking. I had never come across it before. I felt it was very fundamentally based, and it gave me a solid understanding of how things work in the monetary system and free markets. And I thought that was really interesting. And so that led me to believe that we were going to have… Again, I didn’t predict a global financial crisis. I just thought it was going to be tough. And then when the global financial crisis did happen, I understood why it was happening.
Whereas a lot of my colleagues were just fishing about their deer in the headlights, what the hell is going on? But that whole process is what led me to owning gold in client Our portfolio. So we started buying gold for clients, probably 2006 or 2007. I remember when it went down in the early part of the global financial crisis, I think it went down to like $600. I think it had been at like $800. I think it went down around $600. We bought a lot more. And then it recovered. So even though it had fallen like everything else in the financial crisis, it recovered before everything else. So it actually made its bottom in the fall of 2008, and it was on its way up in the spring of 2009, when the equity market didn’t finally make its bottom until March of 2009. So that was actually a good experience for me to see that gold will fall in a liquidity crisis, but it actually probably recovers quicker than everything else as well. And so since then, I’ve always felt like gold should be the cornerstone of a portfolio. I’m not somebody who thinks you should have all your money in gold.
I’m not somebody who thinks we’re going back to a gold standard. I don’t think the US is going to fail, and the dollar is going to zero. But fiat currency does lose value, right? And I think for a number of reasons, and for over just about any period of time of 20 years or more, gold has done really, really well. You can go back 5,000 years, and gold has been around. So to me, it’s just something of permanence that you can own, that you know it’s not going to zero. And for that reason, to me, it makes a great foundation. Now, the reason I specifically joined you guys was because I met Keith. I’m trying to remember. I want to say 10 years ago, I came across his name and followed him for… And I think maybe we probably either met or started talking in maybe 2018, 2019 time period. And then we just really stayed in touch over the last four or five years, and we’d talk two, three, four times a year. And I always felt that he was one of the more rational people in the gold world. I mean, I have a lot of friends in the gold world, and I think that…
I should say this. The people that I know in the gold world, most of them are some of the hardest working, most well intentioned people I’ve ever come across, and I think what they’re doing is important. That said, there’s also a lot of, in my opinion, crazy people in the gold world. And when I say crazy, I don’t necessarily mean they’re crazy, but I feel like they are not in touch with how the world really works. They’re very in touch with how the world that they want to see or how they want the world to work, but I just don’t think it works that way. And as a result, I don’t think the dollar is going to end tomorrow. I don’t think the United States is going to go away. I don’t think we’re going back to a gold standard. But that doesn’t mean that gold isn’t going a lot higher. And it doesn’t mean that as free market participants, we can’t advocate for a better way. And I think that if we get another crisis, and the whole system comes into question, I think the price of gold will put itself forward as a potential substitute for political mandarins, and this is a free market alternative.
And while I don’t necessarily think the world will adopt that free market alternative, I do think it has the potential to, and even if it doesn’t, I still think it has the potential to do really good work. And that’s where you guys come in, because most Most of the people in the gold world that I have come across, they’re planning on the big event where gold reprices higher, and they’re basically holding gold to profit from that transition. And that’s fine. There’s nothing wrong with that. It’s an important thing. I have my own clients’ money and my own money doing that. But to me, that is not attempting to bring money back, gold, back into the monetary system in some a useful, efficient, productive way. That’s just moving gold from one vault to another. Monetary metals, I believe. So not only do I believe Keith is one of the most smart and rational people in the gold world, I also think he’s actually trying to put gold back to work. So I think a lot of people will talk about how they would like to go back to a gold standard or get gold back into the monetary system, but then they’re just sitting on gold, and I don’t think that puts gold back into the monetary system.
But what I think you guys are doing, and what Keith has seen as a vision, is how do we put gold back to work? How do we make it productive? One of the biggest arguments against owning gold is there’s no yield. It just sits there. Well, this is a way you can actually own gold and get a yield on it, right? You can make it productive. So not only can you own an important asset, you can get paid to own an important asset, and you can help develop a system that could potentially offer a better way, or at least an alternative way of doing business, as opposed to the traditional traditional fiat banking system that we currently have. So it’s for all those reasons. When Keith asked me to join, I thought about it, and I said, Well, I just think there’s a lot of similarities. There’s a lot of shared visions And the last thing I’ll say, part of the reason that I said yes was because Keith and I don’t always agree on everything. And I actually like that… But Keith is one of the few people that I can argue with a little bit, and it It never devolves into some a personal vendetta, and we can laugh about it.
And I end up… He sees my point of view, I see his point of view. Sometimes we agree, sometimes we agree to disagree, but it’s a nice relationship to have.
Monetary Metals:
Yeah, Brian, we’ve enjoyed over the years learning from you, and hopefully you learned a little bit from us. I do think part of the vision of Monetary Metals and the products that we offer, which pay a yield on gold, was that, hey, you might imagine a world where there’s no monopoly on, let’s say, the taxi system. If you lived in New York City, you might think, Oh, it is so unfair. I’m actually going to write a whole book or a whole treatise or a whole theory on how we could have a system where there were no monopolies and there was no taxi monopoly, where people had to have a medallion and it cost so much money and the government pushed out a free market in ride-sharing services. Well, it would be great to write that pamphlet, and I’ve probably read it. But what was way more important, not only for the people who wanted to see that vision implemented in the real world, but for actual consumers, was to create an app like Uber or create an app like Lyft, where it was in people’s rational self-interest and in their wallet’s interest to use maybe Lyft versus a taxi.
But that also created the world that they wanted to see at the same time. So I know you maybe, I don’t know if you came up with the term, but social justice warrior has been in the news, obviously, in the past, and you might have coined a financial justice warrior. And I think we are, in some ways, financial justice warriors. We’re trying to do it the right way, which is that, hey, we have this vision where we want to see gold used more as a monetary asset, not just as part of your portfolio, but maybe it can be used in financing and offer a yield to clients. And part of doing that is offering these products. So maybe we can end here on the financial justice warrior and the difference between, hey, I have a vision of how I want to see the world versus how it actually is, and I need to protect client money or protect my own wealth, and how to think about the conflict or maybe non-conflict between the two of those visions.
Brent Johnson:
Yeah. So first thing I have to say, that is not my term. I believe I heard it from my friend Chase Taylor, but I’m pretty sure he’s the one that said it. And when he said it, I I remember thinking, I got to steal that because that’s perfect, right? And the reason I said it, because I used to be one. Coming out of 2008 and ’09, I was very angry. I didn’t think it was fair what was happening. I didn’t think it should be that way. And it took me a couple of years to realize that I was trying to impose my moral belief system on my client’s portfolios. As a fiduciary of other people’s money, that’s not what I should do. I should figure out what’s actually going to happen in the world and place capital in such a way that benefits to get the clients from it. But that doesn’t mean that I cannot be involved also in projects where you’re actively trying to change a system, or influence a system, or implement another option. I shouldn’t be doing that with my client’s overall portfolio, but there’s nothing to say that I can’t help somebody else, whose vision and mission is to change the world, or is to change an industry, or is to change the way something is done.
And so I think the way you set it up is good, Again, I have great respect for a number of my friends in the gold world who offer either vaulting services or they manage gold portfolios. I think that has a place. But I just think that that’s fundamentally different than trying to change the way gold is used in the monetary system. And I think while I have not chosen as my primary career to do that, it doesn’t mean that I don’t have great respect for you guys who have chosen to do that. And if I can help you be successful in that, then I’m happy to try to help and do that.
Monetary Metals:
Brent, as we come towards the end of the interview, I want to give you the chance to do a rapid fire round with me. I get to ask you questions all over the map. You can answer as short as you want as long as you want. So let’s begin. First of all, people might know about these currencies that we’ve been discussing. There’s the Japanese Yen, there’s the Ruble, there’s the Dollar. And today we’ve discussed some of the dynamics between those currencies. So I want you to give me just your prediction or some of your thoughts on how these currencies are going to fare, who you think will fare the best going forward, just in the short term, and then who might fare the worst in the short term. Because people hear about the Dollar and they know about the Dollar. But what about currencies like the Ruble, which may have had an outstanding or the Yen, which might have a horrible year, what should people be thinking in terms of top-performing or maybe worst-performing currencies? And how does that impact a regular investor’s portfolio, maybe in the United States? Should they care that the Japanese Yen is falling against the dollar?
And if so, why?
Brent Johnson:
So first of all, they should absolutely care. And the reason is, is because every financial crisis that we have had in the last 50 or 60 years either was caused by or had a key characteristic of one currency moving dramatically versus another. That is often what causes dislocations, which is then what causes credit contractions. And because it’s such a globalization centralized world now, when there’s a credit contraction in Asia, or Europe, or the United States, it ends up affecting other parts of the world. And so that is why people, even if fiat versus fiat, or even if all fiat currency loses value, crises, which could affect your income, which could affect your job, which could affect your portfolio, are often caused by the relative levels of fiat currency. Now, what I would say is, what happens over the next 6 to 12 months, I don’t know. I think the dollar… The fact that the sentiment is so low on the dollar, and that people are this bearish on the dollar, and it’s still at 100 or at 99, whatever, whatever, where it is, right? That doesn’t bode well, because if sentiment even picks up a little bit, it could go to $105 really quickly.
And so it’s important to understand how I think about this. To me, if the dollar falls, that’s not a problem. If the dollar falls, that’s probably good for risk assets. That’s probably good for asset prices. In the last 50 years, there hasn’t been too many crises, at least not for a very long period of time, where the dollar was falling. Over the last For 50 years, during every time there’s been a crisis, the dollar rose. So if the dollar falls, the portfolios that we own should do well. Now, what we worry about and what we hedge against, and what I always talk about with the dollar milkshake theory and fiat versus fiat, is the thing that you have to be worried about is an unexpected and very fast move higher in the dollar, not lower in the dollar. Because when the dollar moves higher, that’s when bad things happen. And if you have any questions this, just go look at 2022, when the dollar went from 98 to 112 over a nine-month period. And when that happened, England had to bail out their sovereign bond market. Ecb had to set up a facility to bail out Italy.
Japan had to bail out both their Yen and their JGB market. China’s real estate collapse accelerated, and that was largely due to the dollar getting stronger. So that’s what I mean by the dollar going higher. That’s what I worry about, and that’s what I hedge against. If the dollar goes lower, I can live with that.
Monetary Metals:
I want to ask you now about currency pegs. So some people who might live in, let’s say, the Middle East or in Hong Kong, they might have a currency that is literally pegged to the dollar. It’s not that they trade pretty closely, it’s that it’s actually engineered to be the same value in a band throughout all time. What should people think about these pegs? How might those pegs breaking affect them And is there something investors should think about in terms of hedging that outcome, or is this permanent portfolio that we’ve discussed, or maybe gold, part of that hedging strategy?
Brent Johnson:
Well, I think the concepts of the permanent portfolio and gold are certainly part of that hedging strategy. Then as you get a little bit more sophisticated, maybe you can do some tactical trades. And then if you have the capability, the networth, the know-how, or the contacts, you can also do some of these more exotic tail-risk hedges. And we have the ability to do some of these exotic tail-risk hedges. That’s when I look at currency pegs. The point is, the reason currencies are pegged is to provide stability. If the stability was natural, They wouldn’t have to peg the currency in the first place. Currency pegs are, by definition, artificial, and things can stay that way for a very, very long time. What we are using Using the Hong Kong dollar peg as a tail risk hedge. And what I mean by that is, because the Hong Kong dollar is pegged to the US dollar, and it has remained in a very tight band for 30 or almost 35 years now, nobody sees any risk in it. And because there’s no risk in it, you can buy put options against it for next to nothing. Or I mean, it’s always cost something, but for a very small amount, you can get a lot of exposure.
Now, if the peg lasts and it doesn’t break, then those tail risk hedges, those very cheap tail risk hedges, expire worthless. But they expire worthless at a very steady and very predictable rate. You know exactly how much you can lose, which isn’t that much, and you can just keep rolling that over and over and over. But if someday, for whatever reason, maybe it’s because Trump and Z just can’t don’t get along anymore, and because Hong Kong is now part of China due to the pressures that result as a result of China and the United States decoupling, funds don’t flow into China or Hong Kong anymore. And in fact, they start flowing out. And when that happens, the Hong Kong Monetary Authority, for whatever reason, can no longer maintain the peg. Boom. All of a sudden, your very, very cheap insurance pays off thousands of percents in a return. It’s the most asymmetric way to hedge a portfolio, I believe. And so that’s how we think about it. And for those thinking, well, if they’ve got it under control, they’ve got it under control. But this is the whole point. They do have it under control, and they’ve had it under control for 30 years.
And that’s why it’s so cheap, because nobody thinks it can happen. But what I would say is that while they have it under control, and why the Hong Kong Monetary Authority is certainly not a bunch of dummies, the The Swiss National Bank is not a bunch of dummies either. The Swiss have one of the most stable and demanded currencies that there is. And they, back in the early 2010s, had a peg to the Euro, and they absolutely insisted that they were going to keep it. Now, they were actually keeping their currency artificially weak. But it’s the same dynamics. And they said, We are committed to this. And then one morning, they woke up and they said, You know what? We’re not doing it anymore. And the currency They moved 30% in like an hour. Entire hedge funds and institutions blew up. Some traders who had the put options made fortunes. But the point is, it’s not something that you can do after the fact. You have to buy the insurance before it starts raining. To me, this is the very definition of a tail risk hedge. Tail risk hedge, by definition, shouldn’t happen. That’s why it’s a tail risk.
That’s why nobody expects it. If everybody expected it to happen, it would be very expensive, and it wouldn’t be a tail risk. It would be a known risk. This is like those known unknowns that Donald Drumsfeld used to talk about, right? If you look, you can realize this is an artificially stable Currency. If you believe that the world is going to continue cooperating at the same level and at the same way and in the same dynamic that they have for the last 30 years, for the next 30 years, then maybe the peg will last for the next 30 years. But if If you happen to think that things are changing a little bit, and perhaps the dynamic between the United States and China won’t remain the same way it has, and perhaps there may be some volatility associated with that relationship, this is the cheapest way I can think of to hedge a negative outcome of the relationship between China and the United States. If I’m wrong, it cost me next to nothing. But if I’m right, I make a fortune. That’s how I think about this.
Monetary Metals:
Brent, now I want to ask you, final rapid fire question, what’s a question I should be asking all future guests of the Gold Exchange podcast?
Brent Johnson:
That’s a good one. You should ask them what their favorite book is. You should ask them what their favorite movie is. And then you should ask them what event or who changed the trajectory of their career.
Monetary Metals:
I’m going to turn it around and ask you, Brent, your own question, but let me guess first. It’s The Part of the Deal, The Prestige, and The birth of your Children, but I’ll let you answer for real.
Brent Johnson:
No, it’s close. It’s my favorite book. It’s a combination of The Alchemist and The Old Man and the Sea. The lead character in Both of those books is named Santiago, so that gives you a little insight into Santiago. My favorite movie, The Prestige, I think, is right up there. But my favorite movie is actually Lawrence of Arabia. I always say Star Wars, but everybody’s favorite movie is Star Wars. So next to that, I’ll say Lawrence of Arabia. And then I alluded to this earlier in the conversation. I had a very fortuitous meeting in 2006 or 2007, I can’t remember the exact year, prior to the global financial crisis. And I don’t It’s time to go into all the details of it now, but it really changed the way I thought about things, and it led me to on my own, search of knowledge and understanding. And if I were to stand back and think about the top five the most influential people or times in my life, that would definitely be one of them. Certainly from a career perspective, that was a very, very influential and important time.
Monetary Metals:
Well, Brent, hopefully our podcast today will be a top five influential moment for some of our viewers. Anyone interested can go to monetary-metals. Com to learn more about our gold yield products. Brent, where can people find more of you, your milkshake thesis, and of course, Santiago Capital?
Brent Johnson:
Well, so there’s a couple of different places you can do it. I’m very active on Twitter, as you know. You can search for Santiago Capital or Santiago AU fund is the handle. If you want to follow our work closely, probably the best place to go is our sub stack, and there’s two different levels of research that you can sign up for. That’s santiagocapital. Substack. Com. Then we do a weekly show on YouTube. It’s called Milkshakes, Markets and Madness. It’s a combination of current events, what I see going on in the markets, and every now and then I’ll cover a topic that I think is educational or important. A lot of different ways to interact with us and be happy to do it if anybody wants to check it out.
Monetary Metals:
Brent, so excited to have you on the Monetary Metals Advisory Board. I’m sure we’ll be seeing a lot more of you in the future. Thanks so much for joining.
Brent Johnson:
Thank you.
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