Today's Stansberry Investor Hour guest is the man behind a theory that Dan says "scares the crap out of me when I think of foreign markets"...
We're thrilled to have Brent Johnson, the creator of the famous "dollar milkshake theory," on this week's episode.
A seasoned Wall Street veteran with decades of experience in finance and money management, Brent is currently the CEO of Puerto Rico-based Santiago Capital, a wealth management firm focusing on macroeconomic trends.
Brent says most folks who have read or heard about his dollar milkshake theory think it's just about the U.S. dollar going higher. But he says there's more to this narrative... He explains how the Federal Reserve's switch to quantitative tightening is like a straw sucking up liquidity from markets worldwide – strengthening the dollar. And it's a story that he says is playing out right now, with a soaring greenback and other currencies in a tailspin...
After the global financial crisis, governments and monetary authorities around the world were forced to provide incredible amounts of liquidity... They created this big pool of liquidity, and they kept doubling down on it and doubling down on it...
The world mixed this big milkshake of liquidity and capital that needs to go somewhere. But as we get further into this, it's going to cause a global sovereign debt crisis because the debts have just gotten too big. A lot of that capital is going to flow into the U.S. dollar – or U.S. dollar assets – and deprive that liquidity to the rest of the world.
As the dollar gets stronger, that attracts more capital and it also puts more pressure on the rest of the world – which makes the U.S. even look more attractive on a relative basis and perpetuates more capital flows. The U.S. dollar is going to "drink the world's milkshake."
With another clever analogy, Brent also explains just how much power the buck lends to America. There's a "rigged" poker game playing out where the U.S. has the upper hand – and it has the "biggest stack at the table" with its currency. If any of the other countries "wins a big hand and tries to leave," Uncle Sam's "guards" at the door – or the dollar's privilege as the world's reserve currency – are ready to rob them of their profits. However, he says that the greenback could eventually plummet and end up in the same trouble that other currencies are undergoing... ultimately leaving gold as the "last man standing" at the table.
Brent also shares which of his favorite movies served as the inspiration for his theory. And his takeaway for surviving this challenging economic environment should resonate with longtime Investor Hour listeners... It's all about preparing for even the most unthinkable outcomes and building a well-diversified portfolio – or, as Dan always says, "Prepare, don't predict." And this time, Brent's cinematic muse is Lawrence of Arabia...
Be prepared. Nothing is certain. "Nothing is written." Any of these ideas that you have that you think are absolutely foolproof, I would throw them in the trash can. Just open your eyes. Be ready for anything.
CEO and portfolio manager of Santiago Capital
Brent Johnson is the CEO and portfolio manager of Santiago Capital, a wealth management firm based in Puerto Rico which focuses on macroeconomic trends.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today, we'll talk with Brent Johnson. See? I told you last week we were going to get him, and we got him. He'll tell us all about his "dollar milkshake theory" today.
In the mailbag today, gold again and two questions about last week's interview guest Joel Litman. And remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week, my No. 1 takeaway from the latest Federal Reserve meeting. That and more right now on the Stansberry Investor Hour.
A couple of things today... first of all, let's talk about the Federal Reserve meeting. So, what I noticed – there are probably a lot of things to discuss, but I'm just going to give you my No. 1 takeaway. What I noticed was the very first question after Jerome Powell made his remarks in the press conference at 2:30 Eastern on Wednesday, the very first question was about what things – well, I don't remember the first question, but it doesn't matter because it was about how things will look when the Fed stops hiking rates and starts cutting and what that'll be like and what they need to see or something like that.
And I thought that Jerome Powell's answer was really interesting because he said, "Look, my comments from my Jackson Hole speech, that's still the way I'm thinking." It was like he was saying, "Look, get rate cuts, get easy monetary policy, and rate cuts and anything like it out of your head. The beatings will continue until morale improves." He's really, really trying to convince us that they're serious. And I'm telling you, the paradigm here is "high school." It's local peer influence and what's cool, right?
He wants to be cool, and to be cool now, you can't cut rates anymore. You've got to hike them. You've got to fight inflation. That's how you're one of the cool kids at the Federal Reserve, right? They're in Washington, D.C., OK? I mean, you know, there's a whole – politics is local, right? And it's the same with the Federal Reserve. He's got to keep hiking until they beat inflation down to their goal of 2%, CPI inflation of 2%.
Last month it was 8.3%, so they're nowhere near that, and now they hiked another 75 basis points. Remember when 25 basis points was normal, a normal move in either direction? Yeah, those days are gone, aren't they? So, they hiked 75 basis points. And did you notice the market was sinking starting when the press release comes out at like 2:00, I think that is, and then around 2:15, 15 minutes before the press conference, before Powell started talking, then the market started creeping back up.
He started talking, then the market really took off up, and then, wham, it finished down 1.7% for the day. So, for a little bit, the market was calling his bluff and calling his bluff, and he finally beat it back into them. And I think there's going to be a repeated beating it into investors' heads that, yes, I'm serious about this. I'm going to hike rates until we get above the inflation rate. Inflation's 8%, fed funds is now 3.25%.
That's the top end of the interest-rate range. They always do a range. They're targeting the range of interest for the fed funds, which is the overnight rate. It's just a benchmark overnight rate that the Fed targets. So, it's 3% to 3.25%. I just referenced the top of the range. 3.25% is a long way from 8.3%.
It's basically another 500-plus-basis points up, and I promise you stocks won't be going up if they have to do that kind of damage, right? And in Jackson Hole, what he said was there will be pain. U.S. households will experience pain. This is my takeaway. It's not nuanced. People are, like, looking for reasons to get bullish again. There are none. Not from the Fed anyway.
So, I wanted to tell you that. The second thing I wanted to tell you is that like on Friday when FedEx reported and their stock was down 21% at the end of the day, you should pay attention. I've been talking about this for five years. I started in fall of 2017 at the Stansberry Conference, and I said, you know – and my examples then were – it was like Facebook, Nvidia, Amazon, maybe Google – Alphabet, whatever you want to call it – and I said these big-cap stocks, they look like the safe, guaranteed bet to everyone, like the Nifty Fifty back in the '70s.
No. Big-cap stocks can get pummeled... minus 20%-plus in a single day. So, I said that in, I think it was September, October 2017, and the following July, July 26, what happens? Facebook gets bludgeoned 19% in one day. It loses $120 billion of market cap. Then what happened February 3 of this year? Facebook gets bludgeoned 26% in one day, loses $232 billion in market cap... the biggest single-day market cap loss in all recorded history.
See? The point here is this. If you're in small-cap stocks or mining stocks, you know it's risky, right? You know it, and you behave accordingly. If you're buying big blue chips like FedEx and Facebook and all this stuff, and even Apple, whatever, all the big stocks – Apple, Amazon, Alphabet, and even Tesla's one of them now – you think you're safe.
You think that's a place to hide out, and I'm telling you "no," my friend. Not a place to hide out. They're going to get bludgeoned too, and the way this goes in a typical bear market is exactly how it's gone, right? All the garbage, you know, the ARK Innovation ETF and the SPACs and the overvalued cannabis stocks, which are actually decent companies, and all kinds of other – clean energy stocks – all this garbage, most of it unprofitably, peaked in February and March of 2021, right?
Then what peaked in November was like sort of the next level up in quality, like the Nasdaq and the Russell 2000, and then in January 2022, the S&P and the Dow, right? The highest-quality stuff – you know, highest quality by the indexes, by the big indexes. So, that's the way it goes... garbage first, somewhat less garbage second, then not garbage at all third, and right now what I'm seeing is that people still don't believe this stuff can happen. They're still surprised by it.
I mean, the fact that the stock can drop 20% in one day is proof that you can be surprised. I think it's going to keep happening, and I think it's going to happen to Apple. It hasn't happened – like if you look at the top five market cap stocks, what Research Affiliates – remember we had Rob Arnott on the show a while back from Research Affiliates? – they measure the top dogs, and the top dogs are like the biggest market cap stocks, and they change every so often, you know, every five, 10 years they're different.
They don't stay the same, meaning if you think you can buy Apple right now and you're good for a decade, you're probably wrong. You know, sure, Apple's only down 12% year to date. That just means it has more downside than the other big-cap stocks, because Microsoft, Alphabet, Amazon, they're down 28%, 29%, 30% like that. I think Tesla's down 14% year to date. So, you know, Tesla and Apple, I think Tesla probably cracked first because it's a crap business, and Apple cracked last because everybody thinks Apple's the greatest business in the world.
If you don't own an iPhone, you want one, you know? It's the greatest thing. Everybody thinks it's a sure bet, right? It's not. There are no sure bets. And what's worse is like I started out saying, you know you're taking a risky bet when you're in small cap and mining, right? But you think you're safe in Apple, and you're not.
At least you're not as safe as you think you are. That's the problem. Your expectations are too far above reality. Reality is risky. Riskier than you think for the average Apple shareholder, I'm willing to bet today. And that's the problem. The problem is you think you're safer than you are, OK?
So, I just wanted to point out those two things, and they're both kind of bearish in nature, right? The Fed is much more serious about continuing to hike and hike and hike interest rates until the fed-funds rate is above the rate of inflation or until the inflation rate is 2% is what they've said. But historically, we know that when fed funds gets above inflation, then inflation is basically licked, right? And then the second thing is if you think you're going to hide out in Apple, you're probably wrong.
All right. Well, with that sunny and fizzy and fuzzy and fine assessment of the future, let's talk with Brent Johnson about his dollar milkshake theory. Let's do it right now.
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OK, it's time for our interview today... really looking forward to this one. Today's guest is Brent Johnson. Brent is CEO and portfolio manager at Santiago Capital, a wealth management firm based in Puerto Rico, which focuses on macroeconomic trends. Brent, welcome to the show.
Brent Johnson: Thanks for having me. It's nice to talk to you guys. We just had a hurricane over the weekend, so we're all kind of scrambling for power and water and Wi-Fi, so hopefully this holds up.
Dan Ferris: All right. Well, I'm glad to see that you're doing all right.
Brent Johnson: We're very lucky. We got very lucky.
Dan Ferris: Wow, yeah. I wanted to have you on the show because I keep using this term "dollar milkshake theory" as if I know what it means, and I thought, "Well, maybe I should check with the guy who made this thing up and actually sound like I know what I'm talking about." So, that's really the main thing that we want to talk about. That's like the main thing that anybody wants to talk to you about these days.
Brent Johnson: Yeah. It's kind of taken on a life of its own, and I'm not really sure how it happened. I'm sure I had something to do with it, but I think for whatever reason it's just kind of caught the moment and it is kind of becoming part of the lexicon, which I just kind of find both humorous and interesting, but it is kind of what's going on right now so I guess it sort of makes sense.
Dan Ferris: Right. So, first of all, let's be clear. Are you the author of this term and of this theory as far as you know?
Brent Johnson: Yeah. Give me just a minute and I'll explain what it is because I think it will help the listeners who have not already heard about it kind of understand what it is and where it came from and why I came up with it, to begin with. So, my clients are all individuals – very smart, very wealthy, very successful entrepreneurs and executives – but they're not necessarily finance people, right? So, they don't necessarily know all the finance lingo that a typical person on Wall Street would understand.
So, throughout my career, whenever I've had to kind of explain to them what I think is happening and what is going on, I always try to come up with a somewhat simple analogy in layman's terms to explain what I think's going to happen. And if I were to just come in with all the typical finance lingo or something that an economics PhD needed to understand, they would just look at me with glassy eyes. But if I can come up with a simplified analogy that explains it, it usually helps us communicate and kind of get on the same page. And so, I kind of came up with this dollar milkshake theory to come up with a simple way to explain what I think I was going to happen in the years ahead, and it's really a framework for how I see a sovereign debt crisis playing out.
I think a lot of people understand that the dollar milkshake theory means that the dollar goes higher, but that's just really one part of it. That's maybe the catalyst for it. But it's really more encompassing than that. Essentially what I think has happened – and we could go back several, several probably decades, but if we just take it back one decade or 14 years to the global financial crisis – what I think has essentially happened is after the global financial crisis, governments and monetary authorities around the world were forced to provide incredible amounts of liquidity, stimulus, extraordinary monetary support, however you want to describe all of these monetary programs, and they created this big pool of liquidity and they kept doubling down on it and doubling down on it. And especially post-COVID, they did it again.
So, the way I explain it is the world mixed this big milkshake of liquidity and capital that needs to go somewhere, but I think as we get further into this, it's going to cause a global sovereign debt crisis because I think the debts have just gotten too big. And I think what's going to happen is all of that capital, or a lot of that capital, is going to flow into the U.S. dollar and U.S. dollar markets or U.S. dollar assets and deprive that liquidity to the rest of the world. And that in itself can either perpetuate the crisis or enhance the crisis. It becomes a bit of a vicious cycle. Because as the dollar gets stronger I believe it attracts more capital, but as the dollar gets stronger it also puts more pressure on the rest of the world, which makes the U.S. look even more attractive on a relative basis which kind of perpetuates more capital flows.
And so what I think is going to happen is that the U.S. is going to drink the world's milkshake, is where I came up with the term. Now that doesn't mean it's going to be good for the United States. It just might mean that it's better for the U.S. than the rest of the world. I think it's possible that the whole world kind of goes down together in some kind of a crisis. I think it's possible that the whole world goes up together in some kind of an economic boom. I don't think it's possible that the U.S. goes down and the rest of the world goes up.
But I do think it's possible for the U.S. to kind of slog through while the rest of the world has a lot of trouble. So, in most of those scenarios, I prefer to be in the U.S. and U.S.-based assets as opposed to investing abroad or in emerging markets. So, that's kind of the framework and the genesis and the reason for the theory.
Dan Ferris: I see. I thought that the dollar milkshake thing was partially a reference to a scene from the movie There Will Be Blood, no? Did somebody make that up?
Brent Johnson: No, that's actually where I came up with it.
Dan Ferris: That is. OK.
Brent Johnson: I've seen that movie several times. It's one of my favorite movies.
Dan Ferris: Right.
Brent Johnson: For anybody who hasn't seen this movie, there's a scene in the movie where this ruthless oil baron is kind of talking with one of his competitors and the competitor wants to sell his land to this oil baron and the oil baron says, "I don't really need to buy your land. All I have to do is stick a pipe down into the ground and I can suck up all that oil and I can drink your milkshake" is essentially what he's saying, and I thought that was a pretty good way to explain what I thought was going to happen. So, you're correct, that's where it comes from.
Dan Ferris: OK. And it's a brilliant scene. I mean, it's Daniel Day-Lewis is the oil baron. I forget the other guy's name, but he's really good too. And Daniel Day-Lewis is poking the guy and just really goading and it's brutal. It's wonderful.
Brent Johnson: Yeah. It is.
Dan Ferris: And that brutality, I mean, that's part of the analogy, I guess, you know, the U.S. dollar –
Brent Johnson: That's why I think it's so fitting.
Dan Ferris: Yeah.
Brent Johnson: And that's why I think it's so fitting, because the other part of this is I think when a lot of people either hear me talk about it or hear the things I've said about it or read it they'll think that this is what I think should happen, and it's not necessarily what I think should happen. It's just what I think is going to happen, and I think we're kind of at this place where real politics comes into place and it's a game of power and morals don't necessarily have anything to do with it, right?
Dan Ferris: Right.
Brent Johnson: It doesn't mean it's the right thing to do, it's just that I think that's what's going to happen. You know, in all cases my clients didn't hire me to be a moral philosopher.
Dan Ferris: That's right.
Brent Johnson: They hired me to make money for them, right? And so I could be a financial justice warrior and I should hold up my hand and shake my fist and say, "This shouldn't be happening," but they didn't hire me to hold up my fist and say this shouldn't be happening. They hired me to kind of figure out what's happening and try to get them through it, right? And so I kind of have to set my personal feelings and desires aside and just figure out what's going to happen, and this is what I think is going to happen and it's helped us over the last couple years to avoid a lot of the pitfalls that are taking place in the market.
Dan Ferris: So, to me this is interesting because we're at this big point where you can see – or I feel like I could see, in the past couple years, certain inflections like value turning – you know, we had gross stocks that were doing so well and then you get this turned value about every decade or so and maybe this was the turn. It appears so far that that's true, and another turn would be like stocks versus commodities or some people say financial assets versus hard assets. And one of the turns though that you can see sort of on the charts when you do the data the right way is like U.S. versus ex-U.S. versus foreign markets, but this dollar milkshake thing scares the crap out of me when I think about foreign markets.
Brent Johnson: Yeah.
Dan Ferris: I'm not ready to do that trade yet for this reason because I think, well, boy, if they're going to Melt Down – and correct me if I'm wrong here, Brent, but part of the problem is these foreign currencies weaken relative to the dollar and they need dollars to service their dollar-denominated debt, so they wind up inflating their own currencies, it gets harder and harder for them to use those to get more dollars, and it's like you say, it exacerbates, it just gets worse and worse.
Brent Johnson: That's exactly right, and this is probably a good time to touch on a piece that often gets confusing for people, and oftentimes I get labeled as a deflationist because I think the dollar is going higher, and typically, you know, when the denominator of a fraction gets bigger, typically the numerator gets smaller, right? The prices come down. So, deflation is typically what happens with a rising dollar. It doesn't have to, but typically that – so I often get labeled as a deflationist. But the point I want to make is it's fine if people want to label me a deflationist.
That's fine. It's not necessarily accurate, and I'll tell you why, because No. 1, you can have inflation with a rising dollar. If you have any doubts about that, you know, the dollar index is up 25% over the last 10 years, and your cost of living has probably gone up over those 10 years. So right there is proof that the dollar can rise with inflation or it can rise versus foreign currencies. The other side of it is that to your point I believe – because the world still runs on dollars – not you might think it shouldn't and you might not like that it does, but that's reality, right?
Dan Ferris: Right. Yeah.
Brent Johnson: And so as of right now today the rest of the world needs dollars to operate on the global stage. And so to your point, what happens is they end up printing more of their currency than the U.S. is printing of theirs, and so on a relative basis, their currency falls. Now what's really interesting is for Americans, we only think in one currency, and the reason we only think in one currency is we only have to think in one currency. We've grown up that way because we've had the global reserve currency for as long as most people have been alive. But people all over the world outside of the United States are very used to thinking in two currencies, their local currency and in dollars.
So, what happens here is they can end up having very high levels of inflation in their local currency but also have very high levels of deflation in U.S. dollar terms, because as the dollar goes up their input costs, whether it's commodities or energy or just buying dollars to finance their trade, their bottom line is rising. So, in a slowing global growth environment where they have to print their own currency to stimulate the economy and buy dollars, then their growth is slowing, but their input costs are rising so their profits are getting squeezed, right? So, they're getting both inflation and deflation, which I guess you could classify as stagflation. But the point I want to make is I don't really care whether people think we're going to have inflation or deflation. My point is I think you need to be ready for both, which makes it an extremely challenging environment, right?
Dan Ferris: Right.
Brent Johnson: If it was a typical inflationary period, you could just buy real assets or commodities or emerging markets and sit back and relax, right? But we're not in a normal environment, and I kind of feel like this is – unfortunately, post-COVID – so COVID kind of forced the world to kind of work together and everybody did the same thing because it was this globally systemic event. But since then, cooperation has collapsed. There's war in Europe between Russia and Ukraine. Battle lines have been drawn on both sides.
It's kind of the east versus the west. China and the United States are not cooperating like they used to. Global supply chain, there used to be one global supply chain. Now it's being broken down and everybody's trying to restore and create their own supply chain. So, this period of cooperation, you know, we've had these 30 years of globalization where everything kind of came together, and now I kind of feel like we're in this trend where everything's pulling back and it's kind of the big geopolitical gain, and I think all the marbles are on the table and it's kind of a Game of Thrones as opposed to a game of checkers and chess, right?
That's what you're seeing. I think in that environment, the dollar goes higher. Now it doesn't mean it will happen in a straight line, it doesn't mean every day the dollar will be up, and it doesn't mean that there won't be efforts made to bring it down, which may work for a short period of time, but until they kind of redesign the system and the dollar is no longer the underlying collateral off of which the entire system is run, because of all the debt in the world, specifically because of all the U.S. dollar debt in the world, there's this underlying bid for the dollar that just doesn't exist for other currencies. So, if all other currencies are being increased in supply then it just comes down to demand.
And again, like it or not, there's more demand for the U.S. dollar than there is for any other currency out there by a huge multiple, and so I think that's what we're seeing play out now. You can see it in Europe, you can see it in Japan, you can see it in China, you can see it in Turkey, you can see it kind of all over the world, and you're already starting to see some of the smaller economies are starting to blow up, places like El Salvador, Sri Lanka, Turkey's had trouble, Peru has had trouble, Argentina's always in trouble and they're in trouble again, and Italy's in trouble. So, it's becoming kind of a worldwide event here.
I hope I'm not coming across as overly bearish. I try not to be a negative person, but I just kind of feel like this is where we're at and we need to be prepared for it.
Dan Ferris: So, part of the – forgive me, Brent – the schtick of dollar milkshake is like dollar, Dow, gold, right?
Brent Johnson: Yeah.
Dan Ferris: So, I don't really perceive you as bearish in that way. I mean, it sounds bad for the whole world, this thing, but like you say – and I thought of you, and I think I posted this on Twitter, there was this article in the Wall Street Journal that says today, investors are kind of fleeing other markets and buying U.S. equities – I mean, it doesn't feel like it at this moment – but are buying U.S. equities because they're more afraid of what's happening in their country than in ours. And as we speak, I'm looking at a Bloomberg, and the DXY is 111.
Brent Johnson: Yeah, yeah.
Dan Ferris: When you're using this phrase the dollar will rise, it has risen substantially recently. This thing is underway, is it not?
Brent Johnson: That's right. Yeah. And I think part of it – so one thing I think – and again, I'm not trying to give unsolicited advice, but if I had one piece of unsolicited advice to people, I would say that all of these preconceived notions that you think cannot happen, just throw them in the trash.
Dan Ferris: Yeah.
Brent Johnson: If nothing else, use the last 12 months or 24 months to learn the fact that things that cannot happen can happen, right? And what I mean by that is if we go back 12 months or 18 months, the standard response was that the Fed will never stop doing QE, they will never raise rates, and the government will never stop sending checks to people, right?
Dan Ferris: Right.
Brent Johnson: And the dollar's going to get inflated away and just by gold or by real assets because the dollar's going to 70 or 60 or whatever the number is. But since that time, despite all the evidence to the contrary and all the arguments to the contrary, the government did stop sending checks, the Fed did stop doing QE, and the Fed's raised rates like four or five times now and raised them dramatically.
Dan Ferris: Right. Not quarter-point, yeah.
Brent Johnson: And we're still here, right? So, things that you just didn't think possibly could happen a year ago have happened. And the other thing that I think is important to understand because ultimately I do think the dollar will fall and I do think it's important that investors own gold and I think it's important that investors understand why the dollar will fall, but what I think is even more important to understand is that it's not going to do that in a vacuum. All of the other countries of the world are suffering from the same issues that the United States is suffering from. In other words, I think there's a lot of people who understand that the U.S. government has spent more money than they have, they've gotten themselves into an enormous amount of debt, they did it when interest rates were very low, so now when interest rates start to rise the U.S. government is not going to be able to fund that government.
They're going to have trouble selling Treasury bonds to fund the government. And as a result, They're going to have to do an enormous amount of QE and the dollar is going to fall. It's very logical and it's a very good argument, and it will happen probably someday.
Dan Ferris: Right.
Brent Johnson: But the point I want to make is all of those things that people are worried about one day happening to the dollar that will cause it to fall are right now today happening in Europe and happening in Japan and happening all over the world to other countries, and it's happening to them first. And as a result, the U.S. dollar is rising versus those currencies, and people will tell me, "OK, well if all currencies are being debased then it doesn't really matter that the dollar is rising versus other foreign currencies." What matters is its purchasing power. And there is some truth to that.
It's important to understand that. The problem with thinking that you don't need to worry about relative currency values is that when it's the dollar that's rising versus other currencies you do have to worry about it, because again, the whole world runs on dollars. And if you think that we can go into a systemwide sovereign currency crisis and you will not be affected, I would suggest you get rid of that idea in your mind. The whole world will be affected by this. So, when the dollar rises, it does matter, and if you have any doubts on this just go back and look and see what your portfolio did in March of 2020 because everything went down.
Gold went down, gold miners went down, commodities went down, stocks went down, bonds went down, real estate went down, bitcoin went down, and it was because there was this global margin call and people needed dollars. Now again, it's OK if you don't think it should be that way. I'm just telling you that it is that way.
Dan Ferris: Yeah. No, absolutely.
Brent Johnson: And so you don't really have the option of just checking out and not worrying about it. And if you do have that option, then you are one of the very fortunate people in the world that do.
Dan Ferris: No, it's true. I want desperately – I think I may be a gold bug at heart. I want to tell listeners, hey, you know, gold will take care of you, but we learned this actually in the last couple of bear markets. Even if gold rises from the peak of the equity market to the trough, in between it's volatile as hell. People liquidate. You know what happens. They get terrified and they want nothing but cash, and today cash, you know, 80% of the time means dollars, right?
Brent Johnson: Well not only that, but here's the other thing that I would suggest people consider. Even if you're right, that gold is ultimately going to go higher, which I believe it is – I actually am a gold bug at heart.
Dan Ferris: Well, wait a minute, Brent –
Brent Johnson: If it was my choice of how to design the system, that's probably what I would do.
Dan Ferris: Isn't part of dollar milkshake like gold is "last man standing" or no?
Brent Johnson: Yeah.
Dan Ferris: OK, right.
Brent Johnson: Absolutely. This will all end in tears for everybody, and I think gold will be the last man standing. It's just that because of the design of the system, to keep it very simple, the system is rigged in favor of the United States, right?
Dan Ferris: Right.
Brent Johnson: It just is. You know, the U.S. the global hegemon. They set up the system in a way that would favor them, and so it's kind of like being at a poker game and the U.S. has the marked cards and they're the biggest stack at the table, and in the unlikely event that somebody wins a big hand and tries to leave, they've got guards standing outside the door ready to rob them of their profits as soon as they try to leave the game. But ultimately the whole game will blow up, and I think gold will be the last man standing, but it's just important to understand how the game is designed.
Again, remove your morals from this, right? You know, governments don't have morals. They may say they do, but they don't. So, they're not going to do what they should do. They're going to do what they want to do, whether it makes any sense or not. This is actually probably a good time to say I've heard over the last couple of years there's been this, I don't know, idea pops up that the exorbitant privilege that the U.S. has as a result of the global reserve currency is now becoming the exorbitant burden.
It doesn't make sense economically anymore because our debts are so big, and economically it'd be much easier for us if we would relinquish the global reserve currency. The problem with this way of thinking is that global reserve currencies are not about economics and profits. Global reserve currencies are about power and basically nothing else. It's one person or one entity or one country imposing their will on everybody else because they're the biggest, baddest boy on the playground, right? At the base level, that's what it's about.
And if you start trying to make economics decisions based on a power complex rather than – you know, you're going to get it wrong. So, the idea that the U.S. is going to relinquish the global reserve currency because economically it might be a little bit easier for them, I think is just completely the wrong way to think about things. So, I don't think that that's going to happen any time soon. And I think before the United States would relinquish the global reserve currency, I think they would have to be defeated or at least badly injured in some kind of a military conflict. And during that conflict, in the interim of the time that that conflict is taking place, I would expect the dollar to go higher just on the volatility and the uncertainty and the whatever you want to call it.
So, it's a long way of saying I think that the system is ultimately going to have to change, but I think it's the higher dollar that's going to force the change as opposed to a slowly depreciating dollar that falls 3% or 4% every year for the next 10 years. I just don't think that's the way it's going to go.
Dan Ferris: I want to go back to something that you said a moment ago when you said, you know, things that you think can't happen will happen, and I just wanted to point out to our listeners and to you and see what your reaction might be. You sound like a couple of other – you sound like one other guest, Vitaliy Katsenelson, who we had on here, and he said – and it was an offhand comment, and he said, "Just take the last 20 years and invert it. Invert everything from the last 20 years."
And then more recently I heard Nassim Taleb was on CNBC talking and sounded kind of a similar note when he said, you know, all the folks who made money in the last, whatever, 10, 12 years call it, they're going to get wiped out. They don't understand markets. People under 40 don't understand markets. And your understanding sounds like a very long view. I mean, thinking of these charts you see on Twitter now and then of the changing of the guard of reserve currencies every century or so. This is a very long view, so you must have the ultimate diversified portfolio and be ready to slog through this thing for a long time, yeah?
Brent Johnson: Yeah, absolutely. I think in this environment you have to be ready for it to happen tomorrow or next week, but in my belief, this is going to take another five or 10 years at least, and it could take a couple more decades. I think many people have seen these charts of global reserve currencies and they typically last around 100 years, and so then people say, "Well the U.S. has had it for almost 80 years, 100 years, so we're probably due to lose it," but think about... it's a great chart but it's a horrible timing tool.
Dan Ferris: Yeah.
Brent Johnson: Because let's say you're off by eight years, right?
Dan Ferris: Yeah. It's crazy.
Brent Johnson: I mean, your whole life could be destroyed in eight months, let alone eight years, right? So, again, I think it's important to kind of keep that stuff in the back of your mind and understand that it will eventually change, but just because you see a chart of global reserve currencies changing every 100 years and then you see a chart of the amount of dollars that the Fed has printed in the last year, it doesn't mean that you should go out and sell everything you own and buy a gun and buy gold and go hide out on a mountaintop for the next 20 years. You know, it might not work.
Dan Ferris: Right.
Brent Johnson: The timing could be much different. It doesn't mean it's all going to happen tomorrow. It could –
Dan Ferris: Yeah, around here we say "prepare, don't predict."
Brent Johnson: That's right. I think that's a good way to say it, and that's how I've kind of set up our portfolios, to kind of be ready for anything. I certainly have ideas that I think are going to happen. We take a big part of our portfolio that's kind of a big asset allocation, we don't trade it a lot, and then we take a very small percent of our portfolio and we trade it a lot and we try to play some of these big asymmetric events, and if they pay off you make a lot and if they don't pay off you lose a little bit, but overall you just kind of get through it. What I would say to most people is that this is a time to kind of survive and advance, right? Don't necessarily try to be a hero.
Dan Ferris: Yeah.
Brent Johnson: Because the most important thing is just to survive it. Now if you see some opportunities along the way – because there's this saying that chaos is a ladder, right? When everybody else is scared, if you're brave, I get it, and I think you should use those opportunities. But it doesn't mean you have to go all in on every opportunity that you see, right? The most important thing is just to get to the next day, survive in advance, and when you see your opportunities be ready to take them, but you don't necessarily need to fight Samson every day – or not Samson, Goliath.
Dan Ferris: Goliath, yeah. So, in broad strokes, like I don't want to ask you to give away your secret sauce. That's for you and your clients. But can you give us the broad strokes of your portfolio or even put it in a sort of hypothetical way, whatever you're comfortable with?
Brent Johnson: I'll tell you what I use as a general map to explain to clients the way to think about markets and then I'll tell you from there we always customize it to every individual. You know, I've got a few handfuls of clients – I don't have a lot of clients, but everybody's portfolios are customized to them, so I'm not running model portfolios where everybody's doing the same thing. But what I do is I use a certain philosophy or strategy to kind of explain the way to think about markets and then we take it from there. It's a strategy that people have probably heard of before in some sense. It's called the permanent portfolio.
Dan Ferris: Oh, yeah.
Brent Johnson: And it's not that we necessarily employ the permanent portfolio, but it's a good way to think about markets. And the permanent portfolio basically says in very simplified terms if you put 25% of your money in short-term fixed income or cash, 25% in equities, 25% in real estate, and 25% in precious metals or some kind of collectible, real asset, over the last 50 years you would've only lost money five or six times. The most you ever would've lost was 12%, 13%, and you would've kept up with the S&P 500 over that same time period.
Now there were periods of time where you would be dramatically trailing, there would be periods of time where you'd be slightly ahead, but over long periods of time that portfolio does very well because it limits drawdowns, you're never going to have it down 30% or 40% a year – or it just never has, so never say "never" – and by just compounding returns the overall gain turns out to be really good. And in that case, you're prepared for inflation, you're prepared for deflation, you're ready for an economic boom, you're ready for a wipeout, you're ready for a global sovereign debt crisis, you're ready for a fantastic economic cycle. But the point is with that portfolio, you will survive in advance.
So, we use that as kind of just a baseline to explain the way to think about it, but then we also try to figure out where we're at in the cycle of these different four asset classes, we'll go overweight or underweight some of them, and then we take a small percent of our portfolio, and that percentage is a little bit different for everybody else, but anywhere from 5% to 10% of a portfolio, and we'll make big, asymmetric bets on those, and sometimes they pay off and sometimes they don't. But if even one or two of them pay off, the returns are such that it more than makes up for the others that don't and it gives you an opportunity – the other thing that it does is it keeps you from hurting yourself, and what I mean by that is by having kind of a short-term portfolio and a long-term portfolio, there's always an urge to do something.
Dan Ferris: Yeah.
Brent Johnson: So, if you do it in your short-term portfolio it will keep you from screwing up your long-term portfolio. If you scratch that itch in your short-term portfolio, it allows you to kind of be involved in the markets, kind of have some fun, do some trades, have some winners, have some losers, but it keeps you from trading in and out of your long-term portfolio, which really you just want to let run for very long periods of time. So, that's kind of how we think about it. Now I don't mind telling everything I think everybody should own gold and I think everybody should be prepared for a higher dollar.
So, we own gold, and then we have a number of these like asymmetric bets that we think would pay off if the dollar goes higher. The last thing I'll say is I could be wrong. Maybe this dollar has peaked. Maybe it will pull back and the governments and the monetary authorities will get everything under control, and we won't have this crisis. And if that happens, I'll be fine because I know how to survive in advance. But I think for people who think that the crisis can't happen, they could be in for a very rude wakeup call, so I think everybody should be prepared for that.
Dan Ferris: Right. Another guy you are calling to mind for me is Howard Marks, because he's where I learned about risk being defined as like the potential likely range of outcomes, and I've been telling people right now it's a riskier time because the likely range of outcomes is quite a bit wider than what a guy like Grantham would call like normal markets or something.
Brent Johnson: Right.
Dan Ferris: And yeah, I have to tell you, Brent, you sound like – half the time you sound like my brother from another mother. I mean, I'm serious. I've known about permanent portfolios since like, you know, maybe late '80s or '90s. I think Terry Coxon and Harry Brown did it in the '80s maybe.
Brent Johnson: Yeah, yeah.
Dan Ferris: Yeah.
Brent Johnson: The thing is, most people don't know this, but really, really wealthy families that go back generations, you know, 200, 300, 400 years, they do some form of this.
Dan Ferris: Yeah, a third, a third, and a third.
Brent Johnson: Yeah. They own businesses and they own land, they own art, they own precious metals, they own diamonds, and so that's why they stay wealthy... it's because they're ready.
Dan Ferris: Yep. A third, a third, and a third, right? How do all the European old money preserve itself over centuries?
Brent Johnson: Absolutely.
Dan Ferris: A third gold, a third land, a third art, and then of course you have your business and wherever you get your cash flow from.
Brent Johnson: Sure. Yep.
Dan Ferris: How about that?
Brent Johnson: It's so simple people refuse to do it.
Dan Ferris: It is. It's too simple. There's no management, right?
Brent Johnson: That's right.
Dan Ferris: People want that quick – we've gotten like with Robinhood trading apps and even just online accounts, I mean it's the dopamine hit everybody's looking for. It's like a casino now. But I wonder if things could ever get bad enough that we'll never talk about meme stocks again and maybe Robinhood might even fail as things will really change back a little bit.
Brent Johnson: Yep, yep.
Dan Ferris: All right. Well actually we've been talking up a little storm here. I think it's time for my final question, which is the same for every guest, and I really can't wait to hear your answer. So, no matter what the topic, like even sometimes we have nonfinancial guests and yet the final question is identical for every guest, OK? So, that final question is simply if you could leave our listeners today with a single thought, what might that be? You've had some good ones already.
Brent Johnson: Well that's a good question. I think – you know, one of my favorite movies is Lawrence of Arabia, and one of the key scenes in the movie is he has to cross this desert in order to attack Aqaba from the back.
Dan Ferris: Great scene.
Brent Johnson: And they don't have any defenses on the back because nobody thinks it's possible that it can happen, right? But he comes up with this plan that we're going to cross the desert and we're going to attack Aqaba from the back, and it's very successful because nobody thinks it can happen. And then there's this line in the – they were telling him before you can't do it. It's written, it's written, it is written, and then he attacked from the back and won and he said, "Nothing is written."
And I guess this kind of goes back to what I was talking about earlier. All these things that you think can't happen, they can happen. So, you know, be prepared. Nothing is certain, nothing is written. Any of these ideas that you have that you think are absolutely foolproof, I would throw them in the trash can and just kind of open your eyes and be ready for anything.
Dan Ferris: Wow, that's great. You're good with the cool phrases, you know, like prepare in advance, nothing is written. I'm going to college Brent Johnson quotes.
Brent Johnson: Well I love quotes, so whenever I hear a good quote I write it down and I try to refer back to it.
Dan Ferris: Yeah. Great.
Brent Johnson: These are not my – I'm stealing from other people, so I admit it.
Dan Ferris: Of course. Yes. All the best writers steal. Well listen, man, thanks for being here, and I know you will definitely be invited back at some important interval maybe a year from now or something because, I mean, this is a long-term thing, idea that you've got, and I want to see how it develops and how you react to what develops, so you're definitely going to get the invite back. I just want you to know.
Brent Johnson: OK. Well thanks for having me. I appreciate it, and I wish all your listeners the best of luck.
Dan Ferris: All right, Brent. Thanks very much.
Brent Johnson: Thank you.
Dan Ferris: Wow, what a fascinating discussion, and this is the kind of stuff that we sort of rarely talk about around here. We don't normally get into these kinds of deep, global, macro-type discussions. I've tried to include more of them in the past year or so because, of course, there's a lot of deep, big, macro issues in the world today and I think Brent's views on them are really important. I think dollar milkshake is a really important idea, even if it doesn't play out. You heard him. He can be wrong.
I said he sounds like my brother from another mother because I'm always saying I can be wrong, this is the way I think it'll turn out. He has a respect for history. You know, he embraced the prepare, don't predict idea. I really think these are important ideas and I hope you embrace some of them too. I hope you learn to prepare in advance and not get married to one view so much because of the way things are these days. Really good discussion. Can't wait to have him back.
I can't wait to have him back already. OK, let's take a look at the mailbag. Let's do it right now.
One of the most successful entrepreneurs in America over the past 50 years is going public with his fourth and final prediction about a scenario he calls "America's Nightmare Winter." Woo. You've probably never heard of Bill Bonner, but in addition to owning an interest in businesses all over the globe he also owns more than 100,000 acres with massive properties in South America, Central America, and the U.S., plus three large properties in Europe. And I've been to one of them. It's a gorgeous, gorgeous château.
I've known Bill for many, many years. He hired me into this business. And he says we're about to enter a very strange period in America which could result in the most difficult times we've seen in many, many years. He's made three similar predictions in his 50-plus year career, and each time it proved to be exactly right, although he was mocked each and every time. And I remember all of them. This is why I strongly encourage you to read about Bonner's fourth and final prediction totally free today.
It's all spelled out in a free report that we've put together called "America's Nightmare Winter." Get the facts yourself. Go to NightmareWinterScenario.com to get your free copy of this report. Even if he's only partially right, it'll dramatically affect you and your money. So, again, go to NightmareWinterScenario.com for this free report.
In the mailbag each week, you and I have an honest conversation about investing or whatever's on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show.
First up this week is Elsa G. You may remember from last week she had a question. I didn't tell you what it was because I couldn't answer it, but I found the answer so here's the question. Elsa G. says, "If I own a call option, on the date of the spinoff do I get the spinoff stocks? Elsa G. "So, say you own a call option on a stock and then they announce a spinoff... what happens to your option on that day?"
What happens to your option, Elsa G., is you get another class of option. And if your stock is called like ABC, let's just say the ticker is ABC, you'll get this other class of option which is usually called like ABC1, and instead of just your 100 shares of ABC your option also gets you however many shares of the spinoff you're supposed to get per 100 shares of ABC. These things are always done in some proportion, right? The spinoff could be one-to-one, in which case you'll get 100 ABC and 100 spinoff when you exercise this new option, right? So, basically, I think the answer to your question is yes, but you have to exercise and you will get a new class of option. And if you exercise that new class of option, you'll get your ABC 100 shares and you'll get however many spinoff shares you're supposed to get per 100 shares.
And you can find out more about this if you Google "options clearing corporation." I think it's TheOCC.com, and you can learn all about options and stuff there. But great question. Many thanks to our editor-in-chief Matt Weinschenk for pointing me in the right direction to an answer. Great question. Love it, Elsa G. Thank you.
Next is Peter V., and Peter V. says, "Hi, Dan. If gold hasn't gone up with the highest inflation in fourth years –" I think you meant 40 –"when is it ever going to go up? Best regards, Peter V." Don't know, but you better not be caught without it, right? That's what – you know, Brent said it in the interview today and I've said it many times. I don't care, but I sure as hell don't want to be caught not owning gold, right? You know, you need to prepare, not predict.
That's what I've said consistently. That means owning gold. That's my bottom line. But it's a good question. I hope people keep asking it. Go ahead. Keep asking. S
Next, we have Jim H., and Jim H. says, "Are you familiar with Peter Zeihan and his new book The End of the World Is Just the Beginning who argues that deglobalization has already started and cannot be reversed? He makes a pretty good case that what we have now cannot continue. What say you? Joel certainly doesn't think so, but is he looking too short-term? Jim H.". Jim H. is referring to last week's guest Joel Litman, who waxed rather patriotic almost on the Pax Americana.
I don't even necessarily think that I need to disagree with Joel in any meaningful way. I mean, I think reshoring is a real trend, and investor capital fleeing other markets and coming to the U.S., you know, is a real trend. So, a lot of things are changing, and I don't want to be too simple-minded about any of it. You know, we talked with Brent today and he said, "You know, yeah, you can have a stronger dollar and inflation," right?
You just don't know – the world is a complicated place and it doesn't pay to have really static definitions about, you know, it's either deflation or it's inflation, it's globalization or it's this or it's this, it's Pax Americana or it's nothing. Those things don't work. Those absolutes don't work. Reality doesn't behave that way.
That's my answer to that question. And finally this week we have Jeff the Viking. Jeff the Viking says, "Greetings, Dan. Just finished listening to your enjoyable and informative interview with Joel Litman. Kudos for seeking out and allowing opposing narratives to your and my macro thesis in contrast to the echo-chamber vortex we consciously and algorithmically are usually sucked into."
You're welcome, Jeff. We try to do this. We do this on purpose. Jeff continues, "I must point out that Joel's analytical superpower of relentlessly peeling back the façade of creative accounting and spurious metrics suddenly deserted him as we began waving the stars and stripes and launched into his Pax Americana sales pitch as the interview was concluding. The U.S. debt clock website conservatively quantifies the debt death spiral of the U.S. government currency empire in real time and is incredibly alarming for anybody with even a basic grasp of accounting... not to mention either, no mention either was made over half the world's population and two-thirds of its resources currently assembling under the BRICS banner and poised to launch their own currency. Keep up the good work, Jeff the Viking."
BRICS, of course, Brazil, Russia, India, China, the BRIC countries... all of those people having their own currency, I haven't heard about that. That's interesting. Yeah, again, like same answer to the previous question, Joel can be quite a bit right, you can be quite a bit right, others, myself, today's guest Brent Johnson, we can all be quite a bit right at the same time or partially right let's just say. So, that's like – I mean, I want to embrace your question in the way it's intended, or your comments really in the way it's intended, but I can't because the point of a lot of what I've been saying lately for at least several months if not really like a year and a half or so is "prepare, don't predict."
Prepare for a wider range of outcomes than you normally would because you're probably going to get it, right? That permanent portfolio idea that Brent said today, that's preparing, you know? But I'm glad you did this though. I want to see these kinds of questions because I think what I just gave is a better-than-average answer. I hope you'll agree.
So, thank you, Jeff, and thank you everyone else. Great questions. Another great mailbag. And that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode.
Just go to www.InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review.
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