#979 Brent Johnson On How A Sovereign Crisis Could Happen Soon

Brent Johnson is the Co-Founder of Santiago Capital. In this conversation, we discuss Brent's infamous "Dollar Milkshake Theory", the current macro environment, the collapse of currencies, Fed interests rates, how Brent is managing capital during an uncertain market, and why Brent does not recommend Bitcoin to his clients at this time. ======================= Since 2018 Copper has been at the forefront of institutional digital asset development. From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world. No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co Copper - the unfair advantage. ======================= Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting. Compass was founded with the goal of making it easy for everyone to mine bitcoin. Visit http://compassmining.io to start mining bitcoin today! ======================= Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi in a regulated environment. The Bullish Hybrid Order Book pairs the high-performance of a traditional Central Limit Order Book with automated market making. Powered by deep Bullish Liquidity Pools, backed by the multi-billion dollar Bullish Treasury. So, you can trade with certainty and at scale across variable market conditions. Learn more at Bullish.com or follow @Bullish on Twitter. Because the future belongs to the bullish. *Not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish’s services are available in select locations only and not to U. S persons. Visit https://bullish.com/legal for important information and risk warnings =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Brent Johnson is the founder of Santiago Capital. In this conversation, we talk about his dollar milkshake theory, gold, Bitcoin, monetary policy, the Federal Reserve, interest rates, inflation, and much more. I really enjoyed this conversation with Brent. I hope you guys enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. Today's episode is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset development. From award-winning custody solutions to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services in lockstep with a rapidly changing world.

• 0:47Anthony Pompliano?

  No other infrastructure provider covers as many assets across as many exchanges with the speed and security that Copper can offer. To learn how Copper helps the world's largest institutional investors secure their digital assets, head over to copper.co. Again, Copper, the unfair advantage. Check them out at copper.co today. Next up is Compass Mining. Compass Mining is the world's largest marketplace for mining hardware and hosting. With Compass, everyone can mine Bitcoin. Their team makes it easy to start mining wherever you want, at home or in one of their 23 hosting facilities around the world. Through the Compass Marketplace, retail miners can access mining hardware with similar prices and purchase plans as the world's largest mining companies.

• 1:32Anthony Pompliano?

  Compass miners own their machines, they choose whatever mining pool they want, and they mine directly to their own wallets. Miners who don't want to host their machines can order ASICs directly to their doorstep. Simple and low-cost hosting agreements, coupled with best-in-class customer service, are the reasons why Compass is the simplest and most popular way to mine Bitcoin. Start mining your own Bitcoin today by visiting compassmining.io. Again, compassmining.io. Go check them out and let me know what you think. This episode is brought to you by Bullish. Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi. In a regulated environment, the bullish hybrid order book pairs the high performance

• 2:14Anthony Pompliano?

  of a traditional central limit order book with the automated market making powered by deep bullish liquidity pools backed by the multi-billion dollar bullish treasury. So you can trade with certainty and at scale across variable market conditions. You can learn more at bullish.com or follow bullish on Twitter because the future belongs to the bullish. Now, this is not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish's services are available in select locations only and not to U.S. persons. Visit bullish.com/ legal for important information and risk warnings. Go check them out at bullish.com or follow at bullish on Twitter.

• 2:53Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:16Anthony Pompliano?

  All right. I think we've got Brent here with us now. Brent, how are you?

• 3:20Speaker 02

  I'm good. How are you doing?

• 3:22Anthony Pompliano?

  I'm doing fantastic. I'm very excited to talk to you. I think the first time I talked to you on the podcast was back in 2020 and you had coined the milk, the dollar milkshake theory. And at the time, I remember saying to myself, well, the one thing that I'm for sure is that that's great marketing because I'll never forget that name. And maybe what we could do to kind of start the conversation is just help people understand like the high level, like what is this dollar milkshake theory? And then we can get into kind of what's happened over the last two years.

• 3:48Speaker 02

  Sure. So in very simple terms, and kind of the reason I came up with the whole description of the, of the thesis as the milkshake theory was I wanted to kind of come up with just a really simple way to explain it to people. And essentially what I think has happened since the global financial crisis in 2008, and you could probably actually take it back even further than that, is that the global central banks, monetary authorities, governments, however you want to define, the people that kind of run the world, for lack of a better word, have flooded the market with liquidity, whether through QE or stimulus programs or fiscal spending.

• 4:24Speaker 02

  And, you know, once we kind of got into that, kind of 10 years into that, kind of 2018, 2019, I thought we were set up for a global sovereign currency crisis and sovereign debt crisis. And I thought what would happen was that all of that liquidity that had been, you know, pushed into the global financial system, for lack of a better word, would be sucked up into the United States and into the US dollar. And so I used kind of this analogy from this movie, There Will Be Blood, where this oil baron is, you know, negotiating with the guy that owns the land right next to him, and the guy's trying to sell him his land, and he says, I don't need to buy your land. All I gotta do is stick a straw down into

• 5:07Speaker 02

  the ground, and I can drink your milkshake. And that's kind of what I think is going to happen. It's not so important who produces the QE. What's more important is who captures it. And if you look over the last couple of years, the United States markets and the dollar itself has captured, I would say, the most of the global growth. You know, the dollar has risen versus a number of global currencies despite all the efforts to keep it down. And so that's, that is, in essence, the milkshake theory.

• 5:35Anthony Pompliano?

  So I think this is a really good framework to kind of think about this. There's who creates the QE, and then who captures the QE. And maybe we can talk about creation first. It seems like, once the pandemic occurred, and you and I were talking originally, every central bank in the world basically raced to try to have some sort of control, to inject liquidity into the market. It almost felt like they were racing to see who could devalue their currencies faster at one point. And so, when you think about the creation of QE, maybe give us kind of a post-analysis on what's occurred over the last two years around the world. Has it all been generally at the same rate? Do you think that there's some differences on a geographic basis? Or how do you evaluate, like, the creation of QE, now that we're kind of two years after the pandemic started?

• 6:19Speaker 02

  Well, I guess there's a couple of different ways you could look at it. You can look at the, you know, the, the central bank balance sheet as a percentage of GDP. You can just look at it in total value. You can look at it as a percent, how much, how much has been put on the central bank balance sheet that is a percent of all outstanding treasury issuance or sovereign issuance. And, you know, I think to your point, coming right out of, you know, the COVID response, I think the US was the most aggressive and did the most initially. But I think as we got into it, it became, it became clear that while the US was seemingly the most aggressive, and I would agree that they initially were, that everybody else had to do it as well.

• 7:04Speaker 02

  And the, the big difference, the big difference is that, and well, if you, again, if I take it back, if you look at the, the, the amount of bonds that the US bought as a percentage of all outstanding US treasuries. And then you compare that to other countries, the US is far and away the, the, the least offender, or, or it has done the lowest amount. So again, while the, the US has done an incredible amount, they've done a lot less than the rest of the world, if you measure it that way. The other thing, or you can also do it, look at it as a percent of M2, how much did, did M2 grow? Well, the, the problem with using domestic M2 and then comparing it to other countries' domestic M2

• 7:48Speaker 02

  is that every other country, quote unquote, prints for their own domestic economy. But the US prints for the entire world, because the US is the global reserve currency. And there is a bigger dollar market that exists outside the United States than exists inside the United States. And there is no entity that sits outside the United States that can create dollars or provide dollar liquidity to help that market outside the United States when it needs it. So when the US, and, and this is why, this is why I have said on several occasions, and I kind of said it jokingly, but I'm actually serious, is the more they print, the more the Fed prints,

• 8:29Speaker 02

  the higher the dollar will actually go versus its peers, because it will force every other currency to do the same thing. And that's kind of what we've seen. You know, for, for the first, call it six months to a year after COVID, the dollar fell, it went from like 102 to 90, 89 or 88, or I don't remember exactly where it went to, but it fell 10 or 12%, let's call it. And, you know, a lot of people were saying this is, the dollar's on its deathbed, it's going to 85, it's going to 80, it's going to 75 and My, my point all the time was that unless they completely design, redesign the system, we're going to end up right back where we were on March 20th.

• 9:11Speaker 02

  Because during that year, when the dollar went from 102 to 190 or 89 or whatever it was, the rest of the world did not use that time of dollar weakness to get out from underneath their dollar loans and their, their, their, their need for the dollar. They actually increased their need for the dollar because they issued more new dollars, more, more funding in dollars than they did in any other currency. So they actually became more dependent on the dollar over the last two years than, than, than using it to, to get out from underneath the, the pressure of the dollar. And so that's why we're essentially back to where we are. If you think everybody is going to have to provide supply, and let's just say they provide it in relatively the same rate.

• 9:56Speaker 02

  Now, there's, there's obviously differences, but let's just say that they all do it at the same rate. Then the argument comes down to demand. If supply is the same, then, then it comes down to demand. Everything in economics ultimately comes down to supply and demand. And there is just much greater demand for dollars on a global basis than there is for yen or euro or real or Australian dollars or yuan or, you know, well, whatever currency you want to pick, there is more demand globally for a dollar than there is for any other currency. So if supply is equal, it comes down to demand and there, the man just swamps. You, you, you think that the, the US has provided a lot of stimulus and a lot of new money, but the demand has just swamped it. And, and that's kind of where we're at today.

• 10:39Speaker 02

  The dollar is kind of back to, to the levels it was post COVID or, or I mean, sorry, just right, right at the, the height of COVID.

• 10:46Anthony Pompliano?

  Yeah, this, this is such a fascinating point. Talk to me about when the Fed is actually creating more money, right? And they're injecting all this liquidity. Walk people through the relationship as to why that forces other central banks to do the same thing. Cause I think that's kind of a key piece to this that people may not understand is that the Fed may take an action and then that forces the hand of other central banks. And what I immediately think of is in the reverse situation, the Fed says, hey, we're going to start tightening. We saw the ECB recently kind of capitulate on their negative interest rate strategy. They say, hey, now they're going to start to actually raise and kind of move in lock up with the Fed. So talk about that relationship between the Fed's actions and then other central banks around the world.

• 11:24Speaker 02

  Okay, so it doesn't happen right away and you know, the Fed could start easing. And they could maybe do that for, I don't know, three months, six months, nine months without everybody else having to do it. Or maybe without having to do it at the same rate. But if that happens, then the dollar becomes a lot weaker, right? Well, if the dollar becomes a lot weaker, then their currencies become a lot stronger. The problem is, is that the US is an importing nation and those other countries are exporting nations. And it becomes harder for them, their goods become less competitive as they become more expensive.

• 12:01Speaker 02

  So as their currency appreciates, um, it becomes harder for them to, to compete with another country that maybe their currency is, is strengthening against. Um, so, so that's part of it. And because the whole world is in basically the same situation, because there's not much global growth going on. And because everybody has borrowed more money than they can ever possibly, um, ever possibly repay. They've got funding pressures. And so as their economy's slow, they end up having to do their own form of fiscal stimulus or QE. Or, you know, stimulus, however, however you want to define it, maybe they just cut interest rates, uh, you know.

• 12:43Speaker 02

  Uh, but, but ultimately they end up having to match what the US is doing. Um, a- a- and again, it has, it also has to do with the fact that while the, the, the dollar was weakening. They didn't use that opportunity to pay off their dollar debt, they took out even more dollar debt. Which took, which again, as I said earlier, increased demand for dollars. And so, once everybody else starts printing again to, to try to catch up with the US, you end up right back where you are now. I'm of the belief that we're headed towards this sovereign crisis because I believe that the dollar going higher causes the world problems, whereas the dollar going lower actually perpetuates the system that we currently have.

• 13:25Speaker 02

  Um, and so as, as we move forward in that, I think the rest of the world is going to be forced to, to, to, to print, you know, for lack of a better word, their, their currency more than those. And, and I'll give you, the, the reason this is such a problem. The reason it's such a problem is because now we have, because of everything that happened after covid, now we have inflationary pressures, extraordinary inflationary pressures, which makes it harder for those governments and those monetary authorities to go back to easing. Because if they go back to easing, that increases the inflationary pressures rather than, um, softens them. And so, this is the environment in which hyperinflation can occur.

• 14:07Speaker 02

  Now, I'm gonna stop right there and say that I think hyperinflation term is grossly overused and it's used so often and used so incorrectly, it's kind of lost its meaning. But hyperinflation is completely and utterly different than high inflation. Hyperinflation is when the currency loses all value and it takes, you know, a thousand dollars to buy an egg or something like that. That's hyperinflation. Or it's like when, it's like sixty percent inflation month after month after month. It's not sixteen percent, it's not eleven percent. Again, they're two completely different worlds. But, this is the environment in which hyperinflation can occur. The second thing I'm gonna say is this is not with regards to the dollar.

• 14:52Speaker 02

  Because the US can print its own currency, as we've already discussed, but there is incredible demand for that currency. Not just domestically, but outside the, outside the United States, there's incredible demand for the dollar. Now, you might not like that, but that is a fact of life. And the sooner you accept it, the better off you're gonna be. Now, that is, that's not the same, now here, here's, let me just finish this point and then also, this is not the same for Turkey, this is not the same for Australia, it's not the same for Russia or China, or anywhere else for that matter. You do not need rubles in South America. Now, you might say that now you need them to buy oil, but you don't need them to the same extent that, that, that you need the dollar. You don't need Australian dollars in Singapore.

• 15:38Speaker 02

  You know, you don't need Brazilian real in Canada. But you do need dollars in all of those places. And so what happens is, now that the dollar is higher... And since all of these other countries have dollar funding needs and dollar needs for trading, the invoices that take place in dollars, they have the worst of all worlds because global growth is coming down. So their top line revenue is falling, their funding costs are rising, inflationary pressures are high, and the inputs, energy, food, other important commodities are priced in dollars. So their bottom line is rising, their top line is getting squeezed, and their profits are falling. And when that happens, what do

• 16:19Speaker 02

  they have to resort to to get more dollars? They have to print their own currency to go by the dollars to get these important imports or these important inputs into their businesses. And so if you have a situation where there's incredible demand for dollars outside your country, but no demand for your own currency outside your country, and you have to print in order to get dollars, that is how hyperinflation takes place. So anyway, I think that we're headed there for other countries. I think the US would be the last place if that happens.

• 16:49Anthony Pompliano?

  So my question was going to be around, I agree with you that hyperinflation is a term that gets thrown around and, you know, there's a lot of people who think 10% inflation a year would be hyperinflation. It's not, right? And so it's, one, I think it's a border claw. I don't think you, myself, anyone else is cheering that on. That's a very, very bad situation. And there's a lot of people who get hurt, as we've seen in country after country that's experienced it.

• 17:08Speaker 02

  It's the worst. It's the worst.

• 17:10Anthony Pompliano?

  Is your thought process, and I think I'm hearing you say this, is basically the countries that have the weakest currencies, that's where this occurs first. It almost kind of like eats up the stack of the strength of currencies. And so it starts with the weakest and eventually gets to, I don't know, 50% of currencies? Like, how, I guess pervasive could something like this really become around the world?

• 17:31Speaker 02

  Well, so this, I think it can become very pervasive. And I think that's why we're going to have a crisis is I think it's, I don't think it's just going to happen in one or two places. And because we are no longer kind of moving towards globalization, and we're kind of moving towards de-globalization, and we're moving towards two supply chains, and we're moving towards a scenario where the world is fractured as opposed to working together, I think. It's it's it's more likely to have contagion. Um, where, you know, so for the last two or three years, when when something kind of bubbled up in one country, it just kind of stayed in that one country. Because the world was kind of cooperating, everybody was doing the same thing, everybody was providing stimulus, everybody was doing QE.

• 18:13Speaker 02

  And so it kind of worked together just to kick the can down the road. But because we're no longer working together, because we're no longer cooperating, because we've got this fracturing global economy. I don't think the world is going to be as quick to work together. Uh, and the country, I think there'll be certain countries that work together and they'll work against other countries. So I think the likelihood of contagion happening is much higher. And so I think to your point, it'll start in the weaker countries and then it'll bubble up to the medium countries and then the bigger countries. But I, you know, I'll point out that this is not, uh, just, just, I'll give a couple of examples. It's not, you know, we, we've seen it in Sri Lanka. I mean, they're having incredible problems, you know, we, we've seen it in Turkey. Um, we've seen it in Argentina a number of times before, right?

• 18:58Speaker 02

  But this year, where we are seeing, again, not hyperinflation, but just where this phenomenon is playing out is in the euro and the yen. Um, the yen is down like twenty percent, something like that year to date. Now that's, that's incredible. I mean, it's one of the biggest currencies in the world, maybe the second or third biggest currency in the world. And they're down dramatically because they have so much debt that they cannot possibly let interest rates rise. If interest rates rise, their banks, insurance companies, pension funds that have bought all of these Japanese, either zero yielding or negative yielding treasuries. If interest rates even rise one percent, it bankrupts, you know, the entire Japanese system.

• 19:38Speaker 02

  So they can't let interest rates rise. So they have to go out and buy as many bonds as possible to keep interest rates low. And when they do that, they provide more yen to the market. And so you've got this situation where, you know, there's not a lot of demand for yen outside of Japan. But and they're having to provide an incredible amount of yen inside Japan in order to to combat this rising interest rates. And so you have, uh, the yen has broken this forty year support line. And it's a big deal. It's a very big. Deal because it's now it's having knock on effects for some other Asian currencies. The Hong Kong dollar is now under pressure. Um, their Hong Kong Monetary Authority has had to come out for the first time in several years. And actually buy Hong Kong dollars in order to support the price.

• 20:21Speaker 02

  China has had to institute massive, uh, you know, stimulus in order to combat the deflationary pressures. That they're having inside their, their economy and as a result that you want is now starting to weaken.

• 20:35Speaker 02

  And, and the, the fact that US treasuries now issue now yield as much as a Chinese treasury. Uh, there's not as much flight into China to buy a treasury with a higher yield than the US. And so money is actually leaving China. So again, we've, we've, we've got this perfect setup uh, for this crisis now. Anthony, ma- ma- maybe it'll never come, you know, I, I can be wrong. Of course I can be wrong. May you know, the, the, these, uh, the, these government officials are amazing at being able to kick to the can down the road. I, my point has always been that. If I'm even a little bit right, which I'm not going to be a hundred percent right. It's, it just ain't gonna happen, but if I'm even a little bit right, the consequences are extremely dire. So I don't have the luxury of ignoring it.

• 21:19Speaker 02

  And so far it seems to be playing out as I expect. Now it's taking longer to do it and that's typically how these things go. It's, and I, I think it might take another four, five, six years for it to fully play out. I don't think this necessarily going to be over by August or September. Um, could be, you gotta be ready for it, but, uh, but, but, but, uh, you know, all of these, uh. These things that I've been thinking about are kind of starting to show up and they're showing up in very important places.

• 21:44Anthony Pompliano?

  How exactly would a sovereign crisis play out or like, what does that from like a sequential standpoint? How does that play out and what happens in that scenario?

• 21:55Speaker 02

  Could you repeat that? I just lost you for some reason. I'm not sure what happened. I didn't hear you.

• 21:58Anthony Pompliano?

  How does a sovereign crisis actually play out? Like, like what does that look like and, and what happens from like an order of operations or like a sequence? That if it started to occur, people would experience or see this?

• 22:10Speaker 02

  Well, let's use, uh, let's use Japan. Well, let's see, let's, let's use Turkey as an example. Cause, cause Turkey's a smaller country. It's harder to see this playing out in Japan, even though it already is starting to.

• 22:23Speaker 02

  But Turkey is an economy that has borrowed a lot of money in dollars. So they need a lot of dollars to service the dollar debt that they have. In addition, Turkey imports ninety-eight percent of their energy and a huge percentage of their food. Well, energy is priced in dollars and food imports are priced in dollars. So they have an incredible amount of demand for dollars from Turkey. But again, there's not a lot of demand for Turkish lira in Morocco, right? Or in the United States or in Brazil. So what they have had to do is they've had to print a lot of lira to combat these pressures. The official inflation rate in Turkey is like sixty-five or seventy percent.

• 23:09Speaker 02

  So if the official inflation rate is sixty-five or seventy percent, it's probably double that in real life, right? And so this is how you start to see it playing out. Now, what has happened in Turkey to combat this? Well, they've instituted a number of capital controls. So that's one signal that you would see. The other thing is you would start to see social unrest because it's not fun for people. People typically don't revolt when they're warm and their bellies are full. They typically revolt when they're cold and hungry, right? And so if you look back throughout history, you have very rarely seen a revolution. Certainly not a successful revolution when inflation wasn't a big part of it. I mean, they just kind of go hand in hand.

• 23:54Speaker 02

  So if you start to see a social unrest, you know, Sri Lanka, right? There's massive social unrest because inflation has gotten so high. But you can start to see that. We've seen that several times over the last couple of years in Turkey. We could easily see that happen again. The other thing that you would see is you would start to see the leaders of the company come out and say incredibly ridiculous things that could never actually happen. And so like one thing, Erdogan is the head of Turkey. He's the prime minister, the president of Turkey. And he's also kind of the de facto head of the central bank. Well, when everybody started taking their money out of their dollars, out of the Turkish banking system,

• 24:39Speaker 02

  you know, he basically stopped them from doing that. And then he said, If you keep your money in the bank and if you hold it in liras rather than dollars, I will make up any difference you lose versus the dollar. You have to put it on deposit for three months, six months, nine months. But if you do this, then, but if you hold it in there, then you don't have to worry about foreign currency losses because we'll make it up to you. But let's think about what that means. So now the, someone had, let's pretend somebody had a hundred thousand dollars in dollars in a Turkish bank. And everyone says, well, you can't take it out, but and now you need to convert it to lira. Okay, so now he takes the dollars, gives it to the central bank, and then the central bank gives lira to this, this deposit, this depositor.

• 25:24Speaker 02

  Okay, so now he has lira instead of the depositor has lira. So now let's say the dollar rises 10% versus the, the lira. Okay, so now that, that, that investor, that depositor should actually have 110,000 dollars. So the way Erdogan makes it up to him is he, is he prints another 10,000 dollars of lira and puts it in the account. So basically what he's doing is you're, again, the, you're increasing the supply of lira. Eventually that's going to, so he's kind of working against what he's trying to accomplish. He's trying to keep the, the, the lira strong, but he's actually instituting policies that will make it weak. Eventually, um, you know, and so far the market has believed him and they've done it. They've kept their money in there.

• 26:08Speaker 02

  But eventually, you know, inflation is going to go even higher. He's going to have to print even more lira. And then, you know, at some point, people are going to say, I just don't trust this guy anymore. I don't believe this. And they're, and they're going to go to the bank and they're going to try to pull all their deposits. And there's not going to be enough money for everybody. And so then there'll be others run on the bank and there'll be social, there'll be riots and there'll be, you know, the food prices will be skyrocketing, so they'll be pissed off about that. So that, those are the types of things that you will see. And again, Erdogan will come out and say, this is the work of the evil international speculators or whoever. He'll blame it on somebody else, right? He won't take responsibility for it. So those are the, those are the types of things you need to look for.

• 26:45Anthony Pompliano?

  When you think about the current situation, the Federal Reserve, obviously, switching course from a super loose monetary policy, basically pumped asset prices, threw all this liquidity into the market since, you know, really kind of global financial crisis, but let's say 2020, when they, you know, kind of took it on steroids. Starting in November, they started talking tough. Earlier this year, they start to raise interest rates. The market is pricing in 10 interest rate increases this year, 300 basis point interest rate by the end of the year. Given this kind of, I'll call it a geopolitical and potential sovereign crisis backdrop, can the Fed continue to increase interest rates and conduct quantitative tightening? Or what is your expectation of what the Fed actually will be able to do, given kind

• 27:29Anthony Pompliano?

  of the complexity of the global game?

• 27:31Speaker 02

  Yeah, so I don't think they're going to get 10 hikes in. Now, I always say I never rule anything out. And I'll give you an example. At the end of 2000, you know, after the global financial crisis, they did extremely loose monetary policy for years, right? They raised interest rates one at the end of 2015 and didn't do it again for two years. And then everybody said they're never going to be able to do it again. But then they did it. And everybody said, never going to be able to do it again. And you know what? They did eight more hikes. So I didn't think they'd be able to do it, but they did it. So that's one thing, you know, nothing is certain, no matter. There's so many people that are just absolutely certain that they know how this is all going to play out. And to me, it's one of the most uncertain times in history. So first of all, don't be certain about anything. But that said, I don't expect them to be able to get eight or nine hikes. But I do

• 28:15Speaker 02

  expect them to keep hiking until something really breaks. And when I mean something, I don't mean stocks. I don't think that they care that stocks are down, partly because stocks are still up, what, 60, 70% from where they were at the COVID lows? You know, I think in January 2020, so two and a half years ago, I think stock prices were right around where they're at now. So, you know, stocks went up a lot, they've come back, but they haven't crashed from where they were two years ago. And I think the Fed is okay with asset price inflation coming down, if it also helps them try at least to quash consumer price inflation. I think part of the, you know, part of their main goal- Here is to squash inflationary pressures.

• 28:58Speaker 02

  Um, I think that one of the biggest knocks against the Biden administration is they haven't done enough for the little guy or Main Street to fight these inflationary pressures. And so, you know, there's a, an election coming up in the fall and Biden clearly would like to have a Democratic Congress rather than a Republican Congress to work with. And so I think he needs to be seen to be helping the little guy as opposed to the rich Wall Streeter or the elites, or however you want to define that, right? So I think their number one goal is to get inflation under control, come election time, or at least try. Um, and I think they don't necessarily mind equity prices going lower, but they would mind very much if funding markets seized up.

• 29:36Speaker 02

  So if the credit market started to break, um, if yield spreads started to really widen, if, if companies or, or entities could no longer fund their, their debt service, that would be the time I think that the Fed would come in. And would, uh, would, would, would reverse course, so to speak, but I, I don't think they're going to do that. I think they're going to hold out longer than many people think now. At the end of the day, my job is not to be right. My job is to make money. So, um, if I'm wrong, that's fine. Um, I'll have to pivot and be ready for it. And, you know, I'm kind of prepared for anything. Um, I think that they're going to hike. I think they're going to continue. I think they'll get more off than many people think they will, but ultimately it will break and we'll be back to, um, you know, reversing course.

• 30:21Speaker 02

  But the point I would make is this won't happen in a vacuum. What's not going to happen is that the U S isn't going to reverse course and go into a big recession and things are going to be beautiful in Brazil. And things are going to be beautiful in Canada and things are going to be awesome in Turkey. And things are going to be incredible in Russia. We're not going to have a situation where the U S goes into a massive recession and the rest of the world is okay. Um, again, never say never, but that is about the lowest probability event I can think of.

• 30:47Anthony Pompliano?

  Talk to me about how you're allocating capital today, right? When we talked back in 2020, what's changed in the portfolio and kind of how do you think about positioning yourself for this potential scenario? That I would say that, you know, you're optimistic, uh, it maybe not from like a positive, you want it to happen, but you think it's going to happen. So how are you allocating capital and what's the portfolio look like?

• 31:09Speaker 02

  Well, from a, uh, from a thesis perspective, haven't changed the how I want to, exposures have changed a little bit. We have more cash now than we did then. Um, well, I should say. I can't remember exactly when we spoke Anthony, if we spoke in February of 2020, I'd probably positioned pretty similarly if we spoke in May or June. It was like May or June, I think. Okay, so then I probably, you know, I probably am more hedged now than I was then. So the portfolios that I manage, we manage separately managed accounts and a lot of my clients I've had for 10, 15, some cases 20 years. So we've owned equities for all of that time. And so typically, when we reduce exposure to equities, we don't necessarily sell them. A lot of times we'll hedge

• 31:52Speaker 02

  them. So we've been not fully hedged, but heavily hedged on our equity exposure all year, but we still own equities. You know, we have, a couple of years ago, we dramatically reduced our duration in fixed income. And so now we own short-term fixed income. Now, that hasn't made any money. In fact, it's down a little bit year-to-date, but it hasn't gotten smoked the way, you know, a 10-year bond or a 30-year bond has. So that's kind of a cash substitute. So we have hedged equities, higher levels of cash than we typically do, short-term fixed income. We have allocations to real estate. We have in our stock portfolios, we have a heavy allocation to agriculture and

• 32:31Speaker 02

  energy. So those positions have done well. All clients, we, not all of them have done it, but we heavily recommend that every of our clients hold gold. And again, you know, I'd say the average allocation in our portfolios are anywhere from 5 to 20%. And then we have an allocation to volatility. And the volatility, you know, did not, the volatility allocation over the last two years has not done well at all, because there hasn't been much. But the rest of the portfolio did well. Now, this year-to-date, the volatility portfolio is doing better, because we've got volatility again. And I expect that volatility to continue kind of for the rest of the year and into the next couple of years.

• 33:16Anthony Pompliano?

  Last thing I want to talk about is Bitcoin. And you talked about gold. I know that you've been heavily allocating, and I'll say heavily, just that 5% to 20% range that you just described. What are your thoughts on Bitcoin today? Do you recommend it to clients? Do clients buy it? Do you think it's absolute trash? Like, what's the general thought process?

• 33:34Speaker 02

  Well, I wouldn't say that I recommend it. I think you know that I'm kind of skeptical of it. And, but that said, I have clients who are very interested in it, and I have helped them buy it. And so some of my clients own Bitcoin, and I help them think about it, and you know, how much and where and with who and all of that kind of stuff.

• 33:55Speaker 02

  You know, I've long had a problem with Bitcoin because I've long had a problem with the stablecoin market, right? And, you know, specifically, my issue has been with Tether. Now, we haven't really seen the dramatics play out in the Tether market, but we did see them have played out pretty significantly in some other stablecoins. And so that, if we could kind of get, and I know a lot of people think this is fun, and Brent just needs to get over it, but you know, I feel like the Tether is kind of the Euro-dollar market for the crypto world, and it permeates all the different institutions and entities and exchanges. And until that gets resolved for me, it would be really hard for me to go hard into something like Bitcoin.

• 34:39Speaker 02

  Now, the other thing I'll say is philosophically, I love Bitcoin. And I don't have any problem with investing their own money in Bitcoin, right? As a fiduciary, I can't tell somebody, "Go put 100% of your money into Bitcoin." Even if I did like that, I would never say that because I don't think that's the right thing to do.

• 35:00Speaker 02

  But I think the other thing that I have been worried about with Bitcoin, and I think crypto, however you want to, digital aspect, however you want to define this space, how do you define it, by the way? What's the right way for me to say this? Because a lot of times I'll say crypto, and they'll say, "But Bitcoin isn't crypto." What do I say? How do I refer to the whole industry?

• 35:19Anthony Pompliano?

  Depends on who you ask. I think the way, at least the way I look at it is Bitcoin is very much digital sound money. It's trying to be a currency, whether you think it's a good currency or not. So store of value, minimum exchange, eventually unit of account. There's a lot of other things that aren't trying to be currencies. So they may be trying to be, you know, the equivalent of equities or commodities or whatever. And so I think that's where you hear people say, hey, it's Bitcoin and crypto. It's really just one's trying to, you know, essentially rise and be the global reserve currency with this programmatic monetary policy. And then everything else is taking, you know, commodities or equities, etc., and just trying to put it on to a blockchain.

• 35:53Speaker 02

  Got it. So my, my other worry or criticism, however, whatever the right way to define that is, is that the powers that be will crack down on it. Now, it doesn't mean that they will be successful. I happen to think that they will be more successful than a lot of other people. But I think we're starting to see that, you know, we're, you're starting to see more and more monetary authorities come out and say it needs to be regulated. We need to think about this. The little people have gotten hurt. Now, don't get me wrong. There's other, you know, governmental agencies and entities that are trying to promote Bitcoin. You know, we just had the, you know, this thing down in El Salvador last week with a number of, you know, central bankers

• 36:36Speaker 02

  from some smaller countries meeting with Bukele about how they've instituted their Bitcoin policy. I just, I ultimately think that it's going to be a much harder game for Bitcoin advocates than they think. I think the government has a lot more tricks up their sleeve than they do. I think they'll be more successful regulating it, squashing it, however, again, however you want to define that. That said, you know, I just, I love the idea. I really do. I would love it if we had the ability to choose whichever currency that we wanted to use. I don't think that that's a reality. You know, for much of history, you didn't get to choose what your currency was.

• 37:20Speaker 02

  Typically, the local power, whether it's a president or a prime minister or, you know, warlord, whatever it is, they, the king, they say what money is, and then they enforce it. And, you know, while as much as I might like, you know, the freedom of to choose. Very rarely in history have you had the freedom to choose what your money was. And I just, I think we're actually going towards an area, era of centralization rather than decentralization. I know decentralization is the big, the big push, the big want. And I agree, I would love a decentralized world. I don't think that's going to happen, or at least I don't think it's going to happen yet. So, um, anyway, for all those reasons, I have, I don't recommend Bitcoin.

• 38:04Anthony Pompliano?

  Yeah, I am, I actually think that hearing you kind of talk a little bit more about it and some of the nuance of your thought process is that you and the Bitcoin community actually see eye to eye. Right. I think that the Bitcoin community would actually argue like, hey, the world is going towards centralization. Uh, there are all, all these things that you're describing, like they very much like, yes, agreed, agreed, agreed. And they're just kind of shaking their head, yes. Uh, maybe where there, there is a difference of opinion is more so, what do we do about it? Right. And I think that ultimately there's two things you can do about it. One is you can basically say, hey, I believe the world's going to play out this way. And therefore I'm going to position myself via legacy assets to benefit from it or kind of be protected. And, uh, and I know how to do that. Frankly, I have the expertise and skillset and experience to do it.

• 38:47Anthony Pompliano?

  And I think the Bitcoin answer is like, hey, the average person has no clue what's going on. They're going to get absolutely wrecked here and like a decentralized programmatic monetary policy ends up being the solution. Cause they can use as a savings account. Uh, I don't know, similar to your point, I'm like, I don't know which one ends up being the right answer. But I think that, uh, it's kind of like gold. I always say that, uh, the gold bugs in the Bitcoiners, 95% of the argument, they see eye to eye. And they're like, there's all these problems in the legacy system. This is really bad. Likes people are going to get hurt, et cetera. And then when they get to the end of like, okay, what's the solution? Gold, uh, folks are like, oh, it's physical analog sound money. And the Bitcoiners like, oh, but with this digital version, right? And so like, they're actually both even saying it's sound money is the solution. It's just two different assets.

• 39:29Speaker 02

  Agreed. So, so let me, let me tell you one of the other things that has frustrated, not frustrated, that's not the right way to say it. What? The, the, the, okay. The thing that I think that is most helpful, in my opinion, about Bitcoin and, and the rise of crypto, is that it has helped educate an entirely new generation of people about money, about what it is, how governments influence it, the, the, the pros, the cons, a lot of cons, right? And, and I think that's a very good thing. And the more people, the problem is, is that typically, the people, the sound money people, typically have not had a lot of capital. If you, you know, that's just the reality.

• 40:08Speaker 02

  Typically, the, the, the money changers, the Keynes, Zins, Howard, those are the people that are running things and they have political power because they have monetary power. This is an opportunity where a lot of people who now have sound money, um, ideas have made a killing, have made an incredible amount of money. The amount of wealth that's been created, well, a lot of it's been lost recently, but the amount of money that's been created is incredible. And I, when, when I hear people who have made an incredible amount of money, and they still have all of their money, or 98% of it, and they're encouraging other people to put all of their money into this arena, I would very much like them to sell a little bit, put it off to the side,

• 40:52Speaker 02

  make sure they never have to go work for the man again, right? I mean, once you've had money, and once you've had independence, the last thing you ever want to do is go work for somebody else again. So make sure you don't have to do it. Sell some, put it in dollars, put it in gold, you know?

• 41:08Anthony Pompliano?

  You, you have experience. You, you, you've, uh, you've been doing this longer. You've seen cycles. There, there is, uh, there's an education process. And I think what you're describing is where most Bitcoiners are going to end up. Uh, I've got a friend, Jason Williams, who he says like, hey, you may want a couch, you may want a mattress, you may want some chairs in your home, right? Like, like you need a car, like there's some things that you need, not only in, from an investment standpoint, but also just like enjoy your life as well.

• 41:33Speaker 02

  Yeah, and that's it. If you want to try to change the world, it's totally fine. I respect it. Go for it. You know, if you die storming the castle, at least you lived a good life. I understand it. But but when you say you cannot possibly lose, I'm going to argue with you, right? I'm not going to accept the fact that you cannot possibly lose. No, but nobody is a guarantee to win. It just doesn't work that way. And so I think, you know, I I I have tried to use my my interactions with the Bitcoin community to just bring a little bit of of experience, right? A little bit of sense, a little bit of common sense, just, you know, don't bet at all. And if you do bet at all, that's fine.

• 42:15Speaker 02

  But, you know, be very careful encouraging other people to bet at all, because it might not work out. Anyway, I'll just leave it at that.

• 42:22Anthony Pompliano?

  Brent, anytime you want to come, tell tell a message to the Bitcoin community. You're more than welcome here. I I tend to think that your view on the world is is obviously one nuance, but also two, I have to say that, and I've told people this privately, but but feels important to tell you is, I respect that you've had an opinion, you've been very clear as to here, here's how I think the world's going to play out. And at times, it looks like it's going in the direction you thought. And at times, frankly, it looks like it was trading kind of away. And you're one of the rare people who you just said, look, maybe I'm wrong, maybe I'm not, I don't know. But like, I still think this thing. And, you know, sitting here today looks a little bit different than it did in the middle of, you know, 2020.

• 43:03Anthony Pompliano?

  Right? And so I think that it's pretty commendable how how you've done that. So I just, one, I appreciate it, but also, two, I think that you and the Bitcoin crowd, you agree on more than you disagree on, which is actually pretty cool to see.

• 43:17Speaker 02

  Well, I appreciate you saying that. The thing I'll leave on is, you know, I think over the last couple of years, you know, there's been a number of different issues, whether it's Bitcoin, whether it's COVID, whether it's government, politics, war, religion, there's all these, you know, there's all these different issues that are dividing us. And, man, I'm never going to stop talking to people, even if they completely disagree with me, even if they hate me, even if I think they're idiots, even if they think... Think I'm an idiot? I'm not going to stop talking to them just because I totally disagree with them. And I think that's how really bad things happen. So I would encourage everybody to keep an open mind, talk to everybody, don't shut anybody out. You know, just try to, try to, try to keep it fairly civilized and throw a few punches here and there, but just keep it civilized.

• 44:04Anthony Pompliano?

  I love it. Where can we send people to find you on the internet or find more about Santiago?

• 44:09Speaker 02

  So I have a landing page with really just my contact information at Santiago capital.com. You can reach me via that. You know, I'm pretty active on Twitter. If you type in Santiago capital in the search engine, you'll find it. You know, you can go to YouTube or Google and type in either Santiago capital or dollar milkshake theory. And you'll get more links than you know what to do with.

• 44:31Speaker 02

  So yeah, I think that's probably the best way.

• 44:33Anthony Pompliano?

  My friend, that Twitter bio is amazing. Milkshake man.

• 44:38Anthony Pompliano?

  That is incredible.

• 44:39Speaker 02

  I think so. Somebody, somebody else derogatorily referred to me as that. So I just thought I'd adopt it and make it a positive.

• 44:45Anthony Pompliano?

  That's the best way to handle the trolls is just say, yep, you're right. Thank you. Appreciate it. Move on. All right. Well, thank you so much for doing this and we'll definitely do it again as, as kind of everything continues to play out. But I appreciate your time.

• 44:56Speaker 02

  Sounds great.

• 44:57Anthony Pompliano?

  All right. See you, buddy. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three week intensive training program with over 50 events packed into that three week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.