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Government Debt Crisis: Why Inflation Is The Only Way Out · Felix Nikolas Prehn's Podcast

• 0:00
  So that's exactly what we're seeing, right? They're injecting money and because the Fed isn't doing it quickly enough, the the government is doing its its own kind of money printing, which is they're buying back um long data debt, and they're doing that by issuing short data debt, which is just like, you know, you taking money here, you're giving it out here. It's a weird little circle that they're running there, and they're just trying desperately to keep borrowing costs low. Um and it's a I mean, Japan is the best example of this.
• 0:29
  They've done it since the 90s. Japan has a similar debt level. Uh the Japanese government owns half of its own debt, which is like it's a weird way of looking at it. And its institutions, so the pension funds and the banks own the other half. So that's just the way they've done it. They've basically made it a Japan-only bond market that only the Japanese government controls. And that's how they've actually quite successfully brought debt down as a percentage of the economy. But the value of their currencies plummeted and the the the people who paid for it, ordinary people pay for it through a tax that they didn't realize was actually there. And I think that's the playbook. The US is going to go down. It's it's just inevitable. So therefore, don't sit on a lot of cash. It's it's going to lose money. There is there is no other way out. I've yet to meet anybody who gives us a different way out. So that's the thing we got to be prepared for. Most people don't understand it because it sounds boring. It sounds complicated.
• 1:26
  it's like not that obvious and therefore they just ignore it and and and and get hurt.
• 1:36
  >> Hello everyone, my name is Anthony Faties and welcome to another episode of the What the Finance podcast. On this podcast, I have the pleasure of welcoming back Felix Brennan. It's been about four years since we last spoke. So Felix, thanks so much for coming back on the podcast.
• 1:48
  >> It's an absolute pleasure being back here, Anthony. Thank you.
• 1:51
  >> Never all looking forward to the conversation. And uh as I say, it's been a while since we last spoke, but so much has happened. I feel like it's felt like decades when you look at the macro and uh everything that's going on around the world. So it' be really interesting in hearing sort of your high level overview of what you're currently seeing in the economy and markets at the moment.
• 2:07
  >> Well, that's a that's quite a lot to unpack. Um, I mean, I think it's a lot of stuff that people are getting kind of wrong and I was just looking at a lot of data this morning and I think a lot of people look at the kind of economic data and there's a lot of stuff that's pointing in the negative direction like real estate agents are getting laid off which is always an early signal. Housing market is bad. You know, bond yields are high. So, there's a lot of negative news out there. Oil prices are high, inflation's getting higher and so on.
• 2:31
  So, people then go, well, that means the stock market's going to be bad. But actually if you look at the the data historically the two have very little colle you know connection. So you can have an economy that's getting worse and that can be a wonderful thing for shareholders because now interest rates might actually start coming down and and the housing data I think is is a nice indicator for that. You've got money printing at the fastest rate I think in four years if I'm not mistaken on that.
• 2:59
  So what does that mean? Money is getting pumped back into the system and the money is always going to find a returns.
• 3:04
  It's going to be good for assets if you ask me. Very bad for inflation, very bad for cash, um, and for people earning a salary, but the assetri, the shareholders are probably going to have a pretty decent decent future ahead. So, I'm I'm kind of like not that bearish on that. Like, I think a lot of people are just seeing seeing the end of the world everywhere. And yeah, they're definitely risks AI and Japan. And there's a lot of stuff we can maybe unpack, but I I think right now people are so bearish that that's typically a point where things actually begin to improve. There is this uh uh AA I American Association of Individual Investors survey and it's it's really bad and I always like it when it's really bad as a shareholder because everybody's kind of sold. You know what I mean?
• 3:52
  >> Yeah, it makes a lot of sense. I feel like it's sort of been one of those like the most hated rallies because I, you know, bond bond sort of yields are sort of going through the roof. Everyone's really worried as you're saying. I think there was I can't remember it was a couple months ago lots of sort of hedge funds and investors pulled out but then you know markets keep seeming to sort of just go up and up and up. It's one of those things there's it seems like there's lots of sort of ammunition on the sideline where they're going to have to come in soon if these you know prices keep going up and then that's going to have a bit of a blowoff top. I>> I think I think you might well be right on that. And if you look at the if you look at the S&P 500, 82% of it right now is below all-time highs. So the vast majority of stocks haven't done that well, but the top end has done incredibly well. And that tells you tells you a story that the the main economy isn't doing that well, but AI is basically keeping the whole thing afloat and they're borrowing and they're leveraging. And you could say that's incredibly irresponsible and it could, you know, end in a in a bubble bursting. it will at some point but in the immediate future I'm still fairly bullish on it. So I would be cautious on just sitting on the sidelines completely.
• 4:57
  >> Yeah, of course. And that's uh definitely hasn't benefited people over the last you know six years when it seems like economic data has been going more negative and more negative. Um but you mentioned an interesting point there about the you know money supply seems to be growing you know more liquidity in the system and that's a sort of different to what a lot of our other sort of guests have been saying where they actually think M2 is going down.
• 5:16
  So, how do you analyze that and what are you currently watching to see that extra liquidity coming into the client?
• 5:20
  >> I mean, N2 is published by the Fed. It's a public data and it's I think it went up I don't know six, seven% or something last month which is quite quite staggering. I think it might even been 8% actually like like a lot. So, we're not in the sort of crazy world postcoid where they added you know 20 odd percent of new money in a year but it's still pretty staggering. And why are they doing that? Well, it's it's it's bailing out the system, isn't it? There was a bank that just failed again, a small bank in the US. Um, the the government is doing what the Fed used to be doing, like they're actually put putting money into the into the market. So, I think it's a lot to do with keeping bond yields, so the cost of borrowing for the US government essentially down.
• 6:03
  And secondly, they're just yeah, they're stimulating the economy. And and governments have done that now for many decades. And it's look, it's the shest way to be popular. You know, you just give give people the feeling that everything is wonderful. Now, of course, what it does do is it causes inflation.
• 6:21
  Like inflation is a choice, right? We we had basically no inflation before the 1920s. Like the previous 100 years, it was like 0.2% a year or something like that. And now, you know, we're aiming for 2% and it's obviously a lot more than that. So, why are they doing that?
• 6:37
  because it's the one way to deal with the debt pile. We can obviously unpack the whole debt issue there, but it's, you know, how do you deal with massive government debt? Well, you can increase taxes, which means you get voted out of office. You can slash spending, which means you get voted out of office. Or you can do the third thing, which is print more money, cause more inflation, and that way the value of the debt overall goes down because you printed all this extra money now, and you're not printing debt. So that's essentially the way out. It's what America has done after World War II. It's what they did in the 70s. It's what Japan's been doing for the last couple of decades. It's the only way we know how to deal with it.
• 7:14
  And the danger with that is really that people don't see it coming because it's slow. It's gradual. But you lose your money loses value. And I think probably most people are feeling that by now. In the last 20 years, a lot of things have gotten significantly more expensive. And it's just because they've printed more and more and more money.
• 7:34
  >> Yeah. we there's obviously been a disconnect as well between CPI and you know the real depreciation of um sort of of money as well. So I think that's why people are saying hang on a second you know inflation apparently didn't go up between 2010 to 2020 that much but then actually the prices of everything went up a lot more while wages didn't increase much at all. So that's the struggle.
• 7:54
  >> Absolutely. Tremendously. And actually we we do a bit of economic research and um I'm just trying to pull it up actually see what the real data was but um we have an institute called the Prehn Institute and we sort of sponsor research and stuff like that. And and one of the things we just put out is is an index and I call it the hours of work index. And it basically shows you like same basket of stocks, gold and housing.
• 8:18
  How many hours does it take you to buy that basket? And since 2020, it went from it it went up like 50% I think. Um, yeah. So, so basically to buy the same piece of the S&P took 10 hours of work in 2000 and now takes 23 hours of work.
• 8:41
  So, it's just a doubling, right? So that's that's to me an important measure of inflation because asset prices is actually what determines your wealth really. Um so the government tells you okay eggs are going up or petrol or something but really if you want to build wealth it's about how hard is it for you to acquire you know the spy or you know a bar of gold or a coin or you know buy your first home. And if you look at those factors that are not part of CPI, it's it's it's a doubling just since since since since 2020, which is which is pretty crazy.
• 9:15
  >> Yeah. And the gold one is a is a great point I've been seeing. You know, if you look at I don't know what the the sort of comparison would be, but I guess in 2007 200 or probably 2000, you know, the cost of a nice home gold is probably the same as it is today. But if you look at from a dollar perspective, it's completely probably like gone up four or five times. Well, it's actually probably cheaper to buy a home now compared to gold because it's had such a, you know, rung up. So, yeah, I think that's if people only watch this for a few minutes and take away one lesson, it's just like be in assets, not in cash. Like history shows us that cash is definitely going to lose value, especially the US dollar.
• 9:52
  So, this feeling of, oh, I'm safe, I'm sitting on the sidelines, I'm going to wait this out, is probably the worst decision we can make because it's a guaranteed loss. Everything else can still have create a loss, but there is a an option of potential have a potential upside. With cash, you have only potential downside.
• 10:09
  >> Yeah, completely agree. And you know, you mentioned there's sort of economic weakness, I guess, across the world.
• 10:14
  Maybe it hasn't been as much in the US, but that's it seems like mainly been because of AI and sort of the massive hyperscaler investment there. Do you see that as being a sort of major, I guess, cover of the economic weakness in the US? And then how do you see this sort of playing out in the next years? It's hard to predict, but yeah.
• 10:30
  Yeah, I think I think you're spot on, Anthony, that um the the spending of the you know of your metas and Amazon and open AIS and these guys is essentially keeping the economy somewhat afloat and then secondly the massive government borrowing. I mean $2 trillion will help of a deficit to keep the economy afloat because people always think oh it's just spending but actually the money pours into American businesses um and they will then pay their suppliers and their staff and the stocks will go up and so it creates actually you know some some some value not that I'm a fan of the deficit but it does create some value but yeah the AI spending is it is it too much I think almost certainly I think in every single sort of big technological transition we've seen We know we're going to waste a lot of money because we live in a system where companies compete to win, right? So Meta has to spend money, Microsoft has to spend money, Amazon has to spend money, X has to spend money. They all have to spend money because if they don't, they lose. So therefore, they're all building the same thing. So they're almost definitely going to create too much capacity. So they're going to waste money. Now, who's that good for? Well, it's good for the chip suppliers and the copper guys and the memory suppliers and the data center people and the power people. So, it does trickle down somewhat, but there'll still be a lot of wastage. And at some point, we're going to realize we don't need this much. And then we're going to see a big correction. And the correction is going to be so big, not because of the scale of the waste, but because because those companies are the only thing that's holding up the index, the stock market. So, when they take a dip, you know, I said at the beginning, 82% of the market is below all-time highs. 18% is above. So, those 18% are the AI companies. when they take a nose dive, well, suddenly you get a get a great big dip. And it's the system we live. It's it's a it's a it's a feature. It isn't a bug. Like, we always get an overreaction. And you have to also ask yourself, when people start selling these AI stocks at some point on a bad headline, who's going to buy it? I mean, you have to have people out there who are not already heavily exposed to AI.
• 12:32
  And I I I don't know anybody. So the the problem then is that you have to set up a big discount. So you get this pretty rapid drop and I think I think it's going to come. I don't know if it's going to come in six months or 12 months or 18 months or at some point. Nobody knows that. Nobody's got a crystal ball.
• 12:48
  But just history tells us that every time we had incredible technological innovation, we overinvest. We get over excited and then we get this this pullback. You know, look at right the the internet was a pretty good invention. It wasn't like that wasn't giving us any value and we went 78% down on the NASDAQ.
• 13:06
  >> Yeah, it's amazing because these companies, a lot of them, you know, obviously they're borrowing a lot, but they have massive cash flow as well. So, it's not even that they're sort of going to lose money in the future. They'll still be great companies. They'll probably just cut back on capex, their cash flows probably, you know, free cash flow will be a lot better since they're not spending so much on on this investment, but then the whole market will get freaked out as you're saying because it's not not that easy.
• 13:25
  >> Yeah. It's going to be it's going to be a great opportunity for people who have you know capital to invest at that moment because you can then buy these as you say great cash flow businesses Google and Amazon and Microsoft the underlying business is incredibly good.
• 13:38
  Um they will just yeah you said cut back on spending they lay off a lot of people which will suck for the people and they will just run the same thing just leaner with a lot less money. And I also think chip prices are going to come down.
• 13:51
  that's going to hit Nvidia and those guys pretty hard because this they're making like a 70s something percent margin on a on a chip. It's just it's not sustainable. Like in the long run there's going to be a competitor. I mean Google and so on already cropping up.
• 14:05
  Intel is catching up and AMD and everybody because the the margin is just so big the the incentive is there for everybody to try and develop something that's cheaper and that's going to cut.
• 14:15
  >> Yeah, of course. And you mentioned sort of how the you know the concentration in the market 18% of uh sort of the companies sort of creating most of the gains. It does seem like that's not just a stock market thing. It's probably a glo you know world thing. Almost everything that I see you know you could say wealth you could say um you know attention you can say all these things just seems to get more concentrated more concentrated. Um but then it's massive risk as you say you know it's almost as if you're in a massive stadium there's tiny doors. So once you're trying to all the investors try to get out, it's going to be very difficult and there's going to be as you're saying uh lot of lot of blood on the street I think.
• 14:48
  >> Yeah. And that's a nice analogy actually the stadium and and the small door because that's exactly what it looks like when you try to sell and nobody wants to buy it. Um so but I think you know there's there's ways to to do it if someone is just not that active as an investor. Buying the index every month and doing it for 30 years is historically been a very good way to build wealth. Um you just have to realize that the vast majority of you that you own there isn't actually building you any wealth like 80% if it isn't you know the top 18% are um and you just have to accept that is therefore going to give you that hopefully you know historic 10 12% return no promise there but that's what the history has done um but I think the more active investors people buying stocks or buying you know an AI index fund or a chip index fund or robotic index funds and so on they're taking a lot more risk because they still own the index which is typically their pension fund, their 401k or something and then they're piling on top tech stocks, AI stocks that already make up all the gains in their main portfolio, you know, their pension portfolio. So, they're just narrowing down on this risk um at a moment where valuations are the highest they've ever been. Like, we're way beyond 2000. We're way beyond 1929 valuations. And and people are just still going, well, it could go a lot higher. I think could it could go a lot higher. The money printing is going to help for sure. And and AI is a is is a marvelous piece of technology. It's just we don't know if it will be profitable.
• 16:17
  You know, you can have very very good technology, but you don't necessarily make that much money out of it because these LLMs, these AI companies, well, they all do more or less the same thing.
• 16:28
  So if somebody comes along and does it very very cheaply then you know your margins de you know get compressed and therefore where is the return on investment and at that point you know valuations might start to tumble. I mean, look at anthropic. What do they what did they bring in last year in revenue? What is that? 60 70 billion or something. And they have a two trillion valuation. Like, okay, that's a, you know, that's that's a bet on the future being exactly as rosy and wonderful as anthropic would like it to be. And I hope it'll turn out that way. But it's a massive risk. It's a massive risk.
• 17:00
  >> Yeah. I think their losses were sort of similar as well. 40 to 50 billion.
• 17:03
  >> Most of that's a loss. Yeah.
• 17:05
  >> Yeah. [laughter]>> And then you can buy like Amazon, you know, same valuation, but what is it?
• 17:09
  200 billion revenue or whatever it is.
• 17:10
  Don't quote me on that. And obviously very cash flow, you know, very very profitable. So yeah, you have to kind of make those decisions of where you want to put your money.
• 17:19
  >> Yeah. And I think the market understands that, but it's like, well, we've been trying to fight it for so long. Prices keep going up. I'd prefer to be exposed to this. So it's almost like nihilism of like, well, I just have to be in it to outpour the market. So there's this extra Yeah. Extra leverage. And it works.
• 17:35
  >> And I hope Yeah. And I hope that we'll always get bailed out, right? which is the way we've now we've been getting bailed out since 2000 in every single crash. So we just think they're going to cut rates and they're going to spend more money. It's like yeah but some point you know how how many how big a deficit can you actually run? How much money can you actually print um without the system collapsing because at some point it becomes a Ponzi scheme, doesn't it?
• 18:00
  >> Yeah. And that sort of links quite well to where I want to take the conversation which is you know you mentioned sort of early on about that you know debt crisis what we're currently seeing in uh sort of government debts it's it just seems unsustainable you know US are sort of close to 120% debt to GDP you know deficits of five 6% a year u yields sort of blowing out as we mentioned before debasement of the currency so it seems like all these things unsustainable so how are you currently sort of analyzing this debt issue and and and what are you seeing Yeah.
• 18:30
  >> Well, like I mentioned at the beginning, I think that we have in the US we have two parallels after World War II in the 1970s where we had very high debt.
• 18:38
  Obviously, World War II was very expensive. US paid for a lot of it and the 1970s was a lot of the kind of entitlement programs came about and the Vietnam War was also very expensive. So, what did they do? Well, they didn't cut spending and they didn't raise taxes because we live in a system where you have to be popular to be in office. So, you are not popular if you do those two things. So they just let inflation run wild. And so what you do is you keep interest rates artificially low and you let inflation go above interest rates.
• 19:07
  And that means that money loses value.
• 19:10
  The dollar loses value just a couple of percent every year. But if you do that for 10 years, it could wipe it could bring you from 120% debt to say 60% debt of the as a prop proportion of the economy because you've artificially increased the economy through the inflation and the fastest way you achieve inflation is printing money and that's something the government can basically control or the Fed can control. Um but the government appoints the people running the Fed. So that's exactly what we're seeing, right?
• 19:38
  They're injecting money and because the Fed isn't doing it quickly enough, the the government is doing its its own kind of money printing which is they're buying back um long data debt and they're doing that by issuing short data debt which is just like you know you taking money here, you're giving it out here. It's a weird little circle that they're running there and they're just trying desperately to keep borrowing costs low. Um and it's a I mean Japan is the best example of this. They've done it since the 90s. Japan has a similar debt level. Uh the Japanese government owns half of its own debt, which is like it's a weird way of looking at it. And its institutions, so the pension funds and the banks own the other half. So that's just the way they've done it.
• 20:23
  They've basically made it a Japan-only bond market that only the Japanese government controls. And that's how they've actually quite successfully brought debt down as a percentage of the economy. But the value of their currencies plummeted and the the the people paid for it. Ordinary people pay for it through a tax that they didn't realize was actually there. And I think that's the playbook. The US is going to go down. It's it's just inevitable. So therefore, don't sit on a lot of cash.
• 20:52
  It's it's going to lose money. There is there is no other way out. I've yet to meet anybody who gives us a different way out. So that's the thing we got to be prepared for. Most people don't understand it because it sounds boring.
• 21:02
  It sounds complicated. it's like not that obvious and therefore they just ignore it and and and and get hurt.
• 21:09
  >> Yeah, it's a great point. I I do wonder if sort of the Japanese model is possible though cuz you know you can say the last 20 30 years while I've been doing it you know you had the uh you know manufacturing deflation from China sort of spreading around the world you had you know positive uh demographics as well you had increasing globalization so there's all these positive trends that actually meant that global sort of inflation was extremely low you could say most products were deflationary now with the geopolitical risk that we're seeing it seems like that world is over we've had secular shift. So is it even possible potentially for other countries to do that if you know inflation is five 6% if their yields are that high because Japan's were able to do it when yields were much lower.
• 21:51
  >> Yeah, that's true. They did it. I mean they brought interest rates to zero and it cost nothing to borrow and the world borrowed in Japan which is a whole another story. The yen carriage rate and which is unwinding but [clears throat] the US is look the US is basically the global financial market. Uh they kind of control it. So yes I do believe they can do it. I think they can they can do it.
• 22:11
  Um the the test will always be does the bond market revolt as in does the bond market demand higher and higher interest in order to buy the government debt the new debt being issued. But you see what we did even during co or all the time basically is you can get the fed to buy your own debt and that's what Japan did right so they had their central bank buy the debt. So in theory, the government can borrow as much as it wants if the central bank buys the debt off them and then just prints money and gives it back. So it's just fresh money. So there's an unlimited supply of fresh money if you wish, but it's going to cause inflation. So they need to like find this balance where the American public doesn't notice the inflation that much. Um because if they notice it too badly, it becomes unpopular. So I don't know where the exact sweet spot is.
• 23:02
  inflation numbers are also heavily adjusted, whatever that means. So, we don't really quite quite know. But yeah, they just need to keep inflation a couple of percentage points above one or two above the interest rate and then the debt problem basically kind of goes away in a way that people don't notice.
• 23:22
  >> I guess they'd have to get their deficit down a little bit more though because if they had five six% deficit then that's a risk and then you know growth is there.
• 23:29
  Yeah,>> the deficit is definitely Yeah, it is totally unsustainable. Of course, it's unsustainable and eventually I mean you'd think it is a Ponzi scheme in a way, isn't it? Because you're you're borrowing from yourself. Like it's like how long can you do this for? Well, Japan has shown us you can do it for 30 years, but at some point you would think something would break. Um so you would create more and more and more inflation.
• 23:55
  Um I think the hope that people are pinning this on is is AI again that AI will be deflationary a bit like globalization was because if we can get services and manufacturing done much much more cheaply because AI will do it and robots will do it then in theory that's true it could make make stuff cheaper again and therefore like offset some of this inflation at least in the way that the public feels it right so if your if your Amazon delivery gets cheaper because it's drones in the sky delivering it rather than a a van and a driver and paying for petrol and all those things, then you will think, "Oh, my goods are cheaper." And that's what what globalization did for people. It kind of allowed governments to go really nutty with with with with uh debt and spending.
• 24:41
  >> Yeah. I'd be interested to get your opinion on AI. But before we get there, how do you see this? You know, obviously it's going to be um you know, depreciation, devaluation of the dollar.
• 24:50
  You're saying it's going to be inflation. They're going to try and do that to reduce the debt. Do you see this as sort of a whole monetary reset, you know, potentially different currencies coming through, or do you see this more as, as you say, just the same playbook again?
• 25:02
  >> Well, I I think I think the reset term is is is is accurate in many ways. It is a changing of the of the system that we've we've enjoyed for the last 20 years or so. It's been very low interest rates. money has been very cheap and that's sustained the economy and investments and your house prices and and everything else because mortgages were cheap and car loans were cheap and so on and that's definitely changing. Um now the alternatives to the dollar what are they? Well the euro the euro zones a mess. They have the same problems and 27 governments and can't agree on very much. Uh they also have basically no innovation and no tech startups and lagging the whole AI thing terribly.
• 25:40
  wouldn't really pin my hopes on that one except for the arms manufacturers who will probably benefit. That's a bit of a cynical take, but I think it's true. Um, bricks currencies, yes, they will play a part for trade between those countries, but you know, no one's signing a big commercial contract in rubles. You know what I mean? Like the US dollar is still the currency for international trade and international agreements. and we haven't really got an alternative. Um, and even though it is a very imperfect system, people will always go with the least imperfect system and at this point that's the dollar. So yes, the dollar will lose a lot of value. Will it lose importance gradually and a little um it won't collapse overnight in my humble opinion. Um, but there are obviously things chipping away at it and then we have to see how the whole digital dollar stable coin madness plays out and that'll is obviously an American attempt to continue to dominate international trade. Prop the dollar up and the demand for its debt app which is really what stable coins are all about. So, you know, they're doing a lot of things that actually quite clever. It's just they're not always that transparent.
• 26:50
  >> Yeah, it's clever but then also it's leading to these uh, you know, massive societal conflicts. I feel like in in majority of western countries where it's occurring. So that's always the risk you know I think we're seeing in in I live in the UK it's sort of uh you know interest expenses are more than I think it's education defense and uh sort of home office put together or something ridiculous like that. So the currently it is painful and you wonder if they'll actually be able to continue with the process or may or maybe that's the goal.
• 27:17
  Maybe it is divide and conquer uh unfortunately.
• 27:21
  >> Yeah I totally know what you mean. think I think societies are definitely getting getting obviously less equal and and and there's more conflict and you have a lot of like yeah issues in the UK particularly um but actually in a lot of countries most of Europe has experienced similar issues. I think the US probably also has had them a little longer. So what's the rationale for that? I don't know. It is not very logical. It doesn't really make sense. But the problem is for governments to like you say interest is the biggest expense item in the UK.
• 27:49
  for governments to say, "All right, we're going to stop the spending." No one's going to vote for it. That's the problem because there is an easier way out and the other guy is going to say,"Hey, I'm going to give you more money and I'll give you free stuff." And and human nature is we want free stuff. So, it's very hard to see how we get out of this um in a in a kind of rational way where we would just say, "Let's balance the books." Right. I I I just don't see that happening.
• 28:14
  >> Yeah, I agree. Until until you're forced to um I think it's going to be what happens. And then uh you know you mentioned I think a lot of countries are also going away from the dollar. We've seen sort of China, Turkey, other countries moving away from owning sort of US treasuries to owning gold and that's and central banks actually buying it. So that seems like another mechanism that could occur where you know potentially you still have to transact in dollars. I know China's trying to create a you know their own one swift system which is going to sort of bypass the dollars. But let's say there's still these fear currencies where you transact with, but then the actual sort of store of wealth are these precious metals or these real assets. Is is that how you could see a system that sort of revolves around that?
• 28:52
  >> I think the gold story is is ultimately it's a it's the direct result of the the Russia Ukraine war, right? The US and Europe froze Russian assets. So every country in the world has traditionally held foreign reserves, so dollars or euros or sterling in other countries. So they'll have them sitting in a New York bank or in a London bank and that's just allows them to transact internationally and make payments. Um but they've the world has frozen Russians foreign reserves. You might agree with that.
• 29:22
  It's not what it's about. But it means that every country in the world looked at that and said, "Hang on, all those billions of dollars we've got sitting in London and US banks, they could just take them. How about we just buy gold with that and put the gold in the vault in our country in which case you can't get to them unless you actually physically invade us which is a little harder to do. So it's just a they've created this incentive and the incentive is therefore you know buy a lot of gold and you're seeing the central banks around the world do doing that um because it's actually the smart thing to do. I mean, you know, Poland's doing it.
• 29:55
  A lot of the, you know, kind of slightly more switched on governments are doing it, not just, you know, sort of developing nations. And it's just it's the the rational thing to do. You could argue it's a store of wealth if you're expecting inflation.
• 30:09
  Traditionally, hard assets have done well because you can't print them.
• 30:13
  Again, doesn't mean you should run out and put all your money into gold, but yeah, I think that's a good place for it in a in a portfolio.
• 30:19
  >> Yeah, great point. And you know there's already talk about Venezuela's gold which was confiscated in the UK sending that back to them or sending to the US and then we see Netherlands as you say country which is pretty well wellrun actually bringing his gold back from the US. So there really is a push for sovereign I feel like it's sovereignty and it's more a focus on you know you don't actually own it until you can touch it basically seems to be the case and it's unfortunate it's a sort of yeah a lower trust world it seems>> I think the way you know you've been talking about AI and like innovation and everything always overshoots every trend overshoots globalization overshot so now we get the opposite right and and you're going to see that with everything you're going to see you know maybe immigration is overshot in a lot of countries and we're going to see that come back down.
• 31:01
  It's It's always we just do too much and then we pull back too hard and then we do it again and that's just the way the world seems to operate. So when you see something that's, you know, everybody agrees on it and everybody is 100% in it, that's probably the riskiest place to be and and and and vice versa. So I think that's really what I would look at and that's kind of like I had a nice conversation with Jim Rogers the other day and I look up to a lot of those older guys who've done this you know 50 years longer than you and I have been around and and I think that's essentially what they were looking at.
• 31:31
  It's just like when you get agreement on everything you know the risk is there and then look at the things that everybody loathes and and and and look for the opportunity there and I think that's a it's a pretty good way to start your research. Yeah, that that's a really great way to look at it. And how do you see the geopolitical IRS risk you know overshooting? Do you think it's seems to be continued sort of you know disconnect continue divide continue fracturing between say west you know west and bricks even even the west is fracturing as well. So do you see that as a similar trend where it could sort of go further apart and then potentially come back together or how are you analyzing that?
• 32:04
  >> Well I I I I certainly hope so because I you know I'm not keen on uh on World War II. Um, I think I mean the act of stuff in the Middle East, I'm a cynic on that one, too. I think it's it's very profitable for certain, you know, groups and organizations. I don't want to put my tinfoil hat on here, but that's kind of the way I see it. You know, we we get these 20 year wars sort of, you know, Afghanistan, Iraq, and so on, and they've all finished, so now we get the next one. Um, and then you have to also look at simply, you know, who's the beneficiary of oil not flowing out of the Middle East. like a lot of countries benefit from that and a lot of countries get hurt by that. So I think unfortunately a lot of the world is run by very cyn cynical politics. I say that as a cynic myself. Um but I also personally don't see that being like catastrophic from the entire world.
• 32:53
  Obviously it's catastrophic for the people in the area. Um it's just this sort of becomes as what we see as another minor conflict that drags on for a decade and it sucks for the people there but it's just you know we've had those we've seen a lot of those.
• 33:08
  >> Yeah. Who who are the largest oil and you know gas exporters outside the Middle East. It's [laughter] it's the US who started it unfortunately.
• 33:16
  >> Yeah. By far by far far bigger than Saudi Arabia. Yeah. So we're on obviously a very optimistic tone there for the world. But, you know, in all seriousness, look, there's there's tremendous opportunity out there. I think there always is in all situations.
• 33:28
  And when people are feeling the most bearish is actually the moment to to look around and look in the things that people are most bearish about. And I think look for some opportunities. And that's kind of what I try to do. Um, and and just stop watching the news. It's depressing. It's intended that way. And and just focus on, you know, what you actually want to be doing. And and I think we can have a brilliant time and brilliant life and brilliant investment experience no matter what happens out there. But you just need to have a bit of awareness of it and and and generally speaking do the opposite of what everyone else is doing.
• 33:59
  >> Yeah, it's a very important message and and you know we we last spoke four years ago. It was a lot about macro but also about sort of investing and that that's sort of a lot of where you u I guess where your career has been. Are there any specific sectors that you think are currently sort of undervalued or overlooked at the moment that you're sort of watching or is there anything else that you can talk maybe geography?
• 34:16
  I think>> I think there is value in okay we saw a trade at the beginning of the year where basically software companies got hammered like Microsoft fell off the cliff like 30% or something because people said AI is going to replace Microsoft products and it misses the point that yes it's much easier to build software now but it is still really really hard to sell software and Microsoft has hundreds of thousands of customers who pay them on a subscription model every month very very hard to get those especially with enterprises who are, you know, really risk averse. No one's going to go and say, "Yeah, let's just change uh Microsoft Office to something else." And people said, "Well, what if someone offers free Microsoft Word?" Well, somebody already did. It's called Google Docs, right? But hasn't affected Microsoft. So, that was, I think, an opportunity where the market was just being too negative on a tech implementation. And you're seeing it with companies. I think Uber, for example, is is is a good example right now. And I'm not saying buy Uber. I'm not a financial adviser, but Uber is getting hammered because people are saying self-driving will kill Uber. Now, if you think that's through, what's the biggest cost of Uber? It's running having drivers. So, who's got Uber on their phone? Everybody. Who's battled all the regulators around the world for their licenses? Uber. And the guys are very, very aggressive running it. So, all it takes is for Uber to buy the self-driving cars and they've already got the the customers. Whereas if you start with a car, now you have to get the customers. That's the much harder part. So I think that's one of those slightly contrarian things. Right now the CEO just bought 10 million of the dollars of their own shares. Again, it doesn't mean it's going to go up, but yeah, it's things like that that I look at where like I can see a little bit of money flowing into it, not a lot. Um but fundamentally I I see the the battering is probably overdone in my opinion. Of course I could be wrong or not.
• 36:04
  >> And what do you watch for to understand if it is overdone? Because I guess always a challenge. You know, I I agree with what you're saying. It's like where do you catch a knife or where do you sort of then jump in to sort of take the position?
• 36:14
  >> It's it's it's the hardest part. So, I I look for something I call a heartbeat and it's essentially on a stock chart.
• 36:20
  You look for a stock that has basically gone sideways like a heartbeat as long as possible. Like years is wonderful.
• 36:27
  And then you look for it to move out above that trend. It's been in that sideways trend. For me, that's the moment where I get interested. Um, and and I try not to buy something I don't buy something that's just falling because it's cheap because I mean look at PayPal or Plug or you know they can go down 98% and and still still not be cheap. So that's kind of what I look at.
• 36:47
  It's quite it's more technical than anything. Um I I try not to build too much conviction for anything because I think it blurs your your kind of rationality. So, I've got a couple of hard rules on that that I learned from my mentors and I followed up like to the letter and then if it goes down further, I'll just sell it and I'll go do something else. So, I'm not going to cling on and go but I was right. Surely I was right because you know a lot of the time we're not.
• 37:13
  >> Yeah. It seems to be the key message from the Draer Millers and I guess you know Jim Rogers as well. It's like well yeah you have an idea you put money into it. If it doesn't work you try and get out as soon as possible and try not to sell too early. It's always but that's that's the hardest part and that's why they're they're the best in the business.
• 37:26
  >> Yeah. It's very hard to say I'm wrong.
• 37:28
  Very hard. So, what what I do is I I I set up a stop, which means it sells automatically. And that way, I don't have to admit to myself I was wrong.
• 37:35
  I've already told the broker where I'm going to be wrong, and then the broker just does the job for me.
• 37:39
  >> Yeah, that's that's a great way to do it. And then the hard part is putting the stuff in, I think, sometimes, but uh>> yeah, you have to you have to you can never cancel them. That's a little bit of discipline for sure. That Yeah, that's it's easier than doing it in the moment because it's hard to sell something when it's down 10% or 20%.
• 37:53
  It's it's not not a fun thing to do, but if you don't,>> more often than not, it's going to be down 40 50 60 70% and at that point it's really going to hurt you.
• 38:02
  >> Yeah, definitely. And then uh you know, we were talking about AI before and I think it seems like you know, you think it's having a massive impact on the economy. It obviously is. It's the it's I guess sort of the timeline is the challenge like everything. It's like how how long will actually last or h how long will it take to sort of replace not replace everyone but to actually uh sort of have a massive impact on the economy.
• 38:22
  So, so what are your thoughts on AI and uh I know you sort of slightly touched on it but maybe an in-depth analysis on on how you see it.
• 38:30
  >> I think it's a great question Anthony. I think what I would look at always is like how does innovation play out and there's a there's a sort of chart this curve and basically we expect a new technology to have a tremendous impact really really quickly and therefore valuations go through the roof and then we realize this is going to take a little bit longer and then we overreact and it crashes and then the eventual benefit from the technology is way way way way bigger than we could ever have imagined at the beginning. So the long-term impact I think of AI is much larger than we can currently fathom and imagine. But the speed at which we expect it is probably unrealistic.
• 39:07
  So therefore you get a bubble and that's happened every single time we had a technology. I mean you know whether it was car companies the original car companies 90% went out of business. EV companies is the same. Companies 90% went out of business. AI companies will be similar except that this time we have a lot of very large companies with very good cash flow like your Microsofts and Amazons and so on. I'm a little less bullish on the the pure AI companies.
• 39:32
  Um, so I think that's just a pattern and you have to at some point just say okay valuations are at a really rich and maybe I put my money into something else like the the president bought a waste management services company in his last filing and he sold Meta and some other you know tech companies. So you have to decide for yourself what that point is. But I I think that's the the thing to do like don't think you need to be there till the bitter end like the very top of the market because you only know it's the top after the crash. So um that's kind of the way I look at that. So I I try to be less an AI. Um, so when I invest in something new actively, I I look around in industries that have maybe very little, you know, exposure to that because like everybody else, I have a fair bit of it already.
• 40:21
  >> Yeah, great point. So, Felix, thanks so much for your time today. We sort of covered so much about, yeah, the economy macro geopolitics what's happening in in markets. Uh, but my last question is, what is one message you want people to take away from the conversation?
• 40:33
  >> I think be an optimist, but also be a realist. um and and and realize the the patterns of the market uh the and the economy and everything. Uh ignore the news and the noise and just build out your system, do your thing and um enjoy life.
• 40:50
  >> Yeah, it's important message. It's so easy to get sort of bogged down in all the all the horrible news, but then when you think about our dayto-day, it's uh[laughter] it doesn't really affect us that much.
• 40:58
  >> I haven't I haven't had a television in 20 years. I don't watch the news. I don't read the newspapers. I I I I it upsets me. So I don't want to know like there there is sadly no benefit in you knowing about some poor person getting blown up somewhere in the world. It will not make their life or your life any better. So I think the responsibility we have is like make a positive impact. Um and it's very hard to do that when you get bogged down by by you know mainstream news.
• 41:24
  >> Yeah. Super important message. So Felix, thanks again. If anyone wanted to find out more about your work and what you do, where would the best place for that be?
• 41:30
  >> Just look look on YouTube. Um, just type in Felix Prin on YouTube and and you'll find me. Um, and and we put out a couple of videos a week. The goal is just to explain and break down like the more complex macro stuff like we did here today and and um and yeah, you can find me there. And Anthony, thank you so much for what you do. You help a lot of people by explaining what's going on out there and giving people, you know, a platform to share that with. So, keep doing what you're doing.
• 41:55
  >> Appreciate it. Same for you. Thanks again.
• 41:58
  >> Thanks, Anthony.
• 41:59
  >> Hey, everyone. Thank you so much for listening. really appreciate your support and I hope you found amazing value out of this interview. If you really enjoyed it, would appreciate if you liked and subscribe or share. It really helps with the podcast. We're still trying to expand, get to more people to help make sure that everyone understands and decode what's really happening in the world of finance, investing macroeconomics and geopolitics. If you enjoyed this one, then you might enjoy this other interview as well. It's really appreciated and thank