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Jay, good to see you again.

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So good to see you, Mario.

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We're just talking about the AI bubble

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and the problems that's causing the treasury right now

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and America's inability to pay back its debt,

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the bond yields,

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best and swore with the bond yields household interconnected.

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But before going there,

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because I know you did a deep dive into this not long ago,

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I want to talk about the energy markets as a whole

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because you've got Brent and WTI

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at similar levels to May and June respectively.

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So almost wartime levels.

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And then you've got diesel prices breaking all-time highs,

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commodities in general still skyrocketing.

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So I want to get your thoughts

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on the state of the energy market right now

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because I want to go back

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to what people were saying months ago.

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If the Strait of Hormuz is still closed by June,

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the global markets are going to collapse.

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If they're still closed by September,

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the global economy is going to collapse.

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We're in September now.

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I know the Americans have been able to get a lot of ships out.

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But it seems that now,

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despite the calm,

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like right now the Iranians attack like they did last night,

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a massive attack,

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Trump does not retaliate,

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does not respond.

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Yet the markets don't recover.

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Usually we see the markets recover

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as soon as we see Trump not escalating

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because he had what we call in military terms,

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escalation dominance.

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He was dictating what happens now,

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what happens next.

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And he doesn't have that anymore.

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So I feel like either the markets are pricing in,

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in a prolonged conflict,

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a quagmire or forever war,

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or there's not as many ships going through,

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or there's just not much oil out there anymore.

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Well, it's like the combination of all three.

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And to your point about the cataclysmic effect that everybody expected

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back in the spring,

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when this thing kicked off first week of March,

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you know,

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it was forecasted that by the end of spring,

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if the Strait of Hormuz was still not shipping,

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we'd see massive economies,

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oil importing nations crater.

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And,

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and that didn't happen.

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Right.

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Um,

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people can point to China's halted imports,

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leaving more oil on the open seas,

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us removing sanctions from Russia,

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leaving more oil on the open seas,

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or the us releases from the SPR flooding,

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the market with more oil to buy.

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It just increases the supply and,

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and that keeps prices down.

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Maybe all those things.

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I think at the end of the day,

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like it,

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you know,

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the world is far more resilient to anyone,

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crisis than we immediately believe the same as bubbles can inflate far larger

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than anyone believes,

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right?

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We can see the mechanics in place for a disaster far before that disaster

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strikes.

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Um,

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2008 crisis was evident to 2006,

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but people looked wrong for two years before anything actually happened.

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That's very common with these systemic issues,

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right?

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And so I think with the energy trade,

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it's probably a similar situation.

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Um,

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and Scott Besant and Marco Rubio,

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his comments over the last month about the Strait of Hormuz,

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just becoming an irrelevant body of water in as near as two years,

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uh,

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probably did a little bit to calm markets.

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Although the math doesn't add up,

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there's no scenario where that's reality,

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especially inside that timeline.

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Um,

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and I think people are just a bit apathetic.

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I think oil is priced properly right now around a hundred.

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That's likely where it,

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where it should be.

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Um,

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I trust markets,

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you know,

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I guess what I hear people say,

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oh,

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the market's not responding properly or oil is mispriced.

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It's like,

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no,

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it's priced.

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That's,

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that's the price,

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right?

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That's what people are buying it for and selling it for.

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And so markets don't lie.

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They are the ultimate truth teller.

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They can be coerced and manipulated,

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I suppose,

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by oversupply,

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but that's just supply.

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It's just,

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you know,

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those are just inputs into the market price.

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So,

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um,

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you know,

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when I,

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when I see the recent escalation,

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I just shrugged my shoulders.

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It's more of the same is Iran escalating this.

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That's timely midterms are coming up and they can put president Trump on his

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heels.

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That's probably a good bet.

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The president is currently not responding to that.

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Instead,

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he's busy with a meme warfare with Canada,

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which is maybe more palatable to his base at home.

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Again,

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same play midterms are coming up.

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How could he appease the public?

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And so they're playing their own games with their own intentions.

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Those just happen to be different games right now.

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Yeah.

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Um,

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yeah,

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I'm just trying to see how the,

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the Canada issue,

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um,

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is that going to have much impact on the economy?

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I,

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and then I was told by one of my guests a while ago,

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I've never looked into it.

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Is that Canada's cutting some of the oil exports it had going?

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Going to the U S is that true?

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Yes,

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a little bit.

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Um,

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Canada's exports in general to the U S are at the lowest in my lifetime.

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80% of Canada's exports used to go to the United States.

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It's now down to about 67%.

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Um,

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and these recent,

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uh,

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tariffs on goods,

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honestly,

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they're,

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they're on the margin and I believe they're an absolute sideshow.

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The it's about 5% of the export market.

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That's threatened to be tariffs next.

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That's about $20 million worth.

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Of goods,

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$2 billion worth of goods crosses the Canada U S border every single day.

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So call it 10 days of trade.

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It's good headlines because it rallies people behind their flag,

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whether you're in the United States and you can rally behind the U S flag or the

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same in Canada,

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you're catalyzing the public behind Mark Carney in a way that Canada hasn't been

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United in over a decade.

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Uh,

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but it's from my perspective,

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it's a sideshow.

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And even I saw a clip of Wolf Blitzer last night on Fox news talking about

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not joking the inflated cost of wigs,

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hockey sticks,

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and fake beards that Americans will have to pay in response to these tariffs.

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You're like,

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that's where we're at.

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That's where we're at right now.

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It's that's great.

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What happened with the,

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um,

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let's talk about the yen bailout.

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Um,

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I think the,

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the Japanese,

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uh,

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essential bank is still selling us treasuries and other assets in order to prop up the yen.

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Have you been keeping up with that?

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And how's that looking today?

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Matt,

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did they get out of the,

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uh,

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the trouble they were in a few weeks ago?

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Well,

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they're still in a similar situation in that they're dependent on importing oil at inflated prices.

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And so they need to free up cash either by creating currency,

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which they've been able to do for a very long time because consumption is so low in that country.

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It doesn't trigger immediate inflation,

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but the next lever they'll have to pull on is liquidating those us treasuries.

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And they were the first to leverage that new FEMA mechanism that allows them to use their,

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uh,

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roughly a trillion dollars in treasuries as leverage to borrow preventing any sale of that asset and the suppressed price.

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But they get access to new capital through money creation in the United States.

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So money is still created just us dollars instead of yen that are then converted to us dollars.

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So yeah,

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that story is very much still in play.

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Uh,

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Japan doesn't have an easy way out of that.

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The only thing that's kept Japan from aspiring spiraling quickly is that their consumption is so low.

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Uh,

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there's something like 9 million vacant homes in Japan.

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In the countryside,

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when people age out,

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they just walk out of their homes because there's no buyers for so many of those markets.

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Um,

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this is the country that's furthest down the demographic curve,

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and so there's no younger generation to fill that consumption population and that's why they've been able to create currency so recklessly without inflating the currency because consumption is so low.

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But when you're faced with an inflated input costs like oil inflation happens from the outside,

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not necessarily from,

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inside consumption and spending.

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So,

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um,

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you know,

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we'll watch that story play out.

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I think it's,

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uh,

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they don't have any easy exits there.

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And then you had the,

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um,

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uh,

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best sense in the U.S.

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Try to play around with the curve for the bond yield curve on the long end.

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Try to reduce that ahead of the midterms that failed.

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And one thing I know with my limited,

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you know,

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financial knowledge is that you just don't mess around with the bond market.

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The market forces will always win.

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It's just a massive,

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massive market.

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Um,

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I don't know why Besson who's pretty smart guy.

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I think he worked on the Soros tried to go against that rule of rule.

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He used to,

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to,

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to advocate for.

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So how did that go?

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Did it make much of a difference?

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What does the market think about it?

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And did we see the end of it?

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Was he still trying maybe explain for the audience what he actually tried for anyone that has been keeping up?

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Yeah,

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I think,

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I think,

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you know,

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best in stuck in a place where the appetite for us treasuries is decreasing,

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uh,

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monthly.

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And they need that market to stay super active and appealing to the rest of the world.

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Um,

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us has a couple of tools they can lever to fulfill those bond auctions.

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So when the United States wants to,

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has to borrow more money to fund their two plus trillion dollar deficit every year,

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they issue bonds IOUs that the rest of the world can buy and fund the us government with debt.

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It's the exact same as if you or I were living our life above our means spending more than we earned.

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We could do that as long as the bank kept funding our credit card.

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So as long as we can stay attracted to lenders,

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we can keep living beyond our means.

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That's the game the US government has to play.

274
00:09:15,960 --> 00:09:20,000
And it's been an easy game for them to play because for the last 40 years,

275
00:09:20,000 --> 00:09:22,400
us treasuries have been the safest,

276
00:09:22,400 --> 00:09:22,960
most secure,

277
00:09:22,960 --> 00:09:23,960
most predictable,

278
00:09:23,960 --> 00:09:24,860
uh,

279
00:09:24,860 --> 00:09:26,940
interest paying asset in the world.

280
00:09:26,940 --> 00:09:30,080
And so that's where the whole world has parked their savings.

281
00:09:30,080 --> 00:09:33,720
That's why Japan has such a large treasury holding.

282
00:09:33,740 --> 00:09:34,260
Uh,

283
00:09:34,260 --> 00:09:37,620
same with the UK countries all over the world have parked their savings there.

284
00:09:37,620 --> 00:09:38,920
Uh,

285
00:09:38,920 --> 00:09:39,440
two things.

286
00:09:39,440 --> 00:09:40,400
You're happening right now.

287
00:09:40,420 --> 00:09:41,080
Um,

288
00:09:41,100 --> 00:09:41,660
number one,

289
00:09:41,660 --> 00:09:47,720
inflated energy costs are causing countries to require more cash to pay their energy bill,

290
00:09:47,720 --> 00:09:49,880
specifically energy importing countries.

291
00:09:49,880 --> 00:09:51,180
Japan's a classic example,

292
00:09:51,180 --> 00:09:58,640
but there's about a dozen that fall right in that bucket and they're having to sell or access their savings accounts to pay the higher cost of energy.

293
00:09:58,640 --> 00:10:00,140
The most liquid asset,

294
00:10:00,140 --> 00:10:02,120
most of them own our us treasuries.

295
00:10:02,140 --> 00:10:04,820
So they're selling those to raise cash to buy oil.

296
00:10:05,620 --> 00:10:09,400
Selling pressure on any asset decreases the cost of that asset.

297
00:10:09,400 --> 00:10:10,780
The price of that asset.

298
00:10:10,780 --> 00:10:12,300
And so the,

299
00:10:12,300 --> 00:10:15,280
the way a bond yield is determined is,

300
00:10:15,940 --> 00:10:16,600
uh,

301
00:10:16,600 --> 00:10:17,460
the rate,

302
00:10:17,460 --> 00:10:18,280
let's say like,

303
00:10:18,280 --> 00:10:19,020
um,

304
00:10:19,020 --> 00:10:19,420
I,

305
00:10:19,420 --> 00:10:21,080
I take a thousand dollar bond out.

306
00:10:21,080 --> 00:10:22,760
I'm paid a 5% interest rate.

307
00:10:22,760 --> 00:10:23,980
That's $50 per year.

308
00:10:24,460 --> 00:10:24,780
Uh,

309
00:10:24,780 --> 00:10:25,200
but if,

310
00:10:25,200 --> 00:10:28,360
if bonds are being sold more than they're being bought there,

311
00:10:28,680 --> 00:10:31,640
the price of my bond decreases with the selling pressure.

312
00:10:31,640 --> 00:10:33,880
And so if I want to sell my bond early,

313
00:10:33,880 --> 00:10:34,920
get my cash back,

314
00:10:35,200 --> 00:10:36,780
I may not get a thousand dollars for it.

315
00:10:36,780 --> 00:10:38,020
I may get 950,

316
00:10:38,020 --> 00:10:38,540
900.

317
00:10:38,540 --> 00:10:39,360
I'll get a decrease.

318
00:10:39,360 --> 00:10:41,220
The price on that suppressed asset,

319
00:10:41,580 --> 00:10:43,640
but the $50 payment remains the same.

320
00:10:43,640 --> 00:10:45,180
So the effective yield goes up.

321
00:10:46,020 --> 00:10:47,820
That all happens on the secondary market.

322
00:10:47,820 --> 00:10:49,440
So if you want to buy us treasuries,

323
00:10:49,440 --> 00:10:52,600
you can go to the secondary market today because there's so much selling

324
00:10:52,600 --> 00:10:56,320
pressure and buy that asset cheaper than directly from the United States

325
00:10:56,320 --> 00:10:57,160
treasury market.

326
00:10:57,300 --> 00:10:58,660
So at the next auction,

327
00:10:58,660 --> 00:11:03,020
us treasury has to increase the interest rate to compete with the new effective

328
00:11:03,020 --> 00:11:05,020
yield on the secondary market.

329
00:11:05,680 --> 00:11:06,220
Um,

330
00:11:06,220 --> 00:11:06,680
and,

331
00:11:06,680 --> 00:11:07,400
and that's,

332
00:11:07,400 --> 00:11:09,080
that's tough,

333
00:11:09,080 --> 00:11:09,520
a tough game,

334
00:11:09,520 --> 00:11:12,420
for the U S to play it because they're already paying over a trillion dollars,

335
00:11:12,420 --> 00:11:13,700
um,

336
00:11:13,700 --> 00:11:16,900
in interest on their $40 trillion plus in debt.

337
00:11:16,900 --> 00:11:17,940
Um,

338
00:11:17,940 --> 00:11:21,420
and so what I expect to see moving forward is a couple of things.

339
00:11:21,420 --> 00:11:22,460
Um,

340
00:11:22,460 --> 00:11:25,580
I eventually expect them to begin monetizing their own debt,

341
00:11:25,580 --> 00:11:30,420
which just means printing money to buy their own bonds and fund themselves with money

342
00:11:30,420 --> 00:11:31,380
creation.

343
00:11:31,380 --> 00:11:33,620
As long as they can prevent that they will,

344
00:11:33,620 --> 00:11:36,780
because that's the quickest way to an inflated currency.

345
00:11:36,780 --> 00:11:39,520
It's direct money creation and direct inflation.

346
00:11:39,520 --> 00:11:40,520
Um,

347
00:11:40,520 --> 00:11:42,520
but the borrowing market's getting busier.

348
00:11:42,520 --> 00:11:46,520
And right now we're looking at these AI capex spends,

349
00:11:46,520 --> 00:11:47,520
for example,

350
00:11:47,520 --> 00:11:48,520
last year,

351
00:11:48,520 --> 00:11:52,520
750 billion in promises to build these AI data centers,

352
00:11:52,520 --> 00:11:57,520
750 billion in capex is more than all of those companies that are spending that,

353
00:11:57,520 --> 00:11:58,520
those dollars,

354
00:11:58,520 --> 00:12:00,520
all of their income combined.

355
00:12:00,520 --> 00:12:02,520
I'm talking about the oracles,

356
00:12:02,520 --> 00:12:03,520
the Microsofts,

357
00:12:03,520 --> 00:12:04,520
the Amazons,

358
00:12:04,520 --> 00:12:05,520
the Googles,

359
00:12:05,520 --> 00:12:06,520
that's more money than they earn.

360
00:12:06,520 --> 00:12:08,520
And so they're funding every new shovel in the ground with these,

361
00:12:08,520 --> 00:12:09,520
these,

362
00:12:09,520 --> 00:12:13,520
these AI capex and data center build outs with borrowed money.

363
00:12:13,520 --> 00:12:17,520
So they're also in the borrowing market and they can afford to pay a lot more than the

364
00:12:17,520 --> 00:12:19,520
U S treasury wants to pay.

365
00:12:19,520 --> 00:12:24,520
Google pays about 7% on their debt and they would happily pay more because the return

366
00:12:24,520 --> 00:12:27,520
on a dollar spent on a data center is far more than that.

367
00:12:27,520 --> 00:12:29,520
So they can probably stomach 11%,

368
00:12:29,520 --> 00:12:30,520
12%.

369
00:12:30,520 --> 00:12:33,550
They would probably pay that because the return is there,

370
00:12:33,550 --> 00:12:35,550
but there's only so many lenders.

371
00:12:35,550 --> 00:12:37,550
So if there's more borrowers than lenders,

372
00:12:37,550 --> 00:12:38,550
right?

373
00:12:38,550 --> 00:12:41,550
They're in the hand of the lenders and they will go to the highest return.

374
00:12:41,550 --> 00:12:42,550
So to compete for those dollars,

375
00:12:42,550 --> 00:12:44,550
you have to increase your interest rate as well.

376
00:12:44,550 --> 00:12:48,550
And that's the situation that the lending market finds itself in today.

377
00:12:48,550 --> 00:12:52,960
The AI bubble is its own really interesting situation right now,

378
00:12:52,960 --> 00:12:54,960
but there's enough pressure like that.

379
00:12:54,960 --> 00:12:58,960
There's external pressure from input supply costs in the energy market.

380
00:12:58,960 --> 00:13:02,960
There's a new crowding out of us treasuries from other buyers that are,

381
00:13:02,960 --> 00:13:05,960
I think very quickly going to be deemed a matter of national security.

382
00:13:05,960 --> 00:13:07,960
These AI data center build outs.

383
00:13:07,960 --> 00:13:10,960
And that money is going to have to find their way to those data centers.

384
00:13:10,960 --> 00:13:13,960
And president Trump was on X two weeks ago,

385
00:13:13,960 --> 00:13:17,960
kind of reprimanding his own base saying like data centers or not,

386
00:13:17,960 --> 00:13:18,960
they are coming,

387
00:13:18,960 --> 00:13:19,960
you know,

388
00:13:19,960 --> 00:13:21,960
prepare yourself for moving forward with this,

389
00:13:21,960 --> 00:13:22,960
which is very interesting.

390
00:13:22,960 --> 00:13:28,030
But the lending markets like any other supply and demand market,

391
00:13:28,030 --> 00:13:29,030
right?

392
00:13:29,030 --> 00:13:30,030
The more borrowers there are,

393
00:13:30,030 --> 00:13:31,030
the lenders have the power.

394
00:13:31,030 --> 00:13:32,030
If there's more lenders,

395
00:13:32,030 --> 00:13:33,030
the borrowers have the power,

396
00:13:33,030 --> 00:13:38,920
but right now there's far more borrowers than lenders.

397
00:13:38,920 --> 00:13:42,250
So,

398
00:13:42,250 --> 00:13:44,250
why is anyone buying us treasuries then?

399
00:13:44,250 --> 00:13:46,250
I know it sounds like a very silly question,

400
00:13:46,250 --> 00:13:47,250
but if you're looking at the,

401
00:13:47,250 --> 00:13:48,250
the,

402
00:13:48,250 --> 00:13:49,250
the current situation,

403
00:13:49,250 --> 00:13:50,250
the us is in with $40 trillion debt,

404
00:13:50,250 --> 00:13:53,250
a trillion dollars a year to service that debt alone,

405
00:13:53,250 --> 00:13:54,250
more than the defense budget,

406
00:13:54,250 --> 00:13:55,250
more than,

407
00:13:55,250 --> 00:13:57,250
than healthcare very soon as well.

408
00:13:57,250 --> 00:13:58,250
No,

409
00:13:58,250 --> 00:13:59,250
I think more than social security soon,

410
00:13:59,250 --> 00:14:01,250
it's going to be the most in a few years,

411
00:14:01,250 --> 00:14:04,250
the biggest expense for the us is just to be able to service its debt.

412
00:14:04,250 --> 00:14:08,250
And the only way to get out of this is either the economy grows.

413
00:14:08,250 --> 00:14:10,250
So either the economy grows,

414
00:14:10,250 --> 00:14:11,250
grows a lot faster,

415
00:14:11,250 --> 00:14:12,250
you know,

416
00:14:12,250 --> 00:14:13,250
that's wishful thinking.

417
00:14:13,250 --> 00:14:17,250
Some people saying AI is going to lead to mass productivity and that's going to help deal with the debt.

418
00:14:17,250 --> 00:14:18,250
But that's again,

419
00:14:18,250 --> 00:14:20,250
wishful thinking that only recently came up.

420
00:14:20,250 --> 00:14:28,250
Then you've got the us will cut expenses and stop maybe running a budget surplus.

421
00:14:28,250 --> 00:14:31,250
That's even more extreme wishful thinking with the current political climate.

422
00:14:31,250 --> 00:14:32,250
And number one,

423
00:14:32,250 --> 00:14:33,250
number four is debasement,

424
00:14:33,250 --> 00:14:36,250
just printing money to be able to pay back its debt.

425
00:14:36,250 --> 00:14:37,250
But that would lead to debasement.

426
00:14:37,250 --> 00:14:38,250
If you,

427
00:14:38,250 --> 00:14:39,250
if you look at these four scenarios,

428
00:14:39,250 --> 00:14:40,250
this,

429
00:14:40,250 --> 00:14:42,250
this doesn't seem any way out.

430
00:14:42,250 --> 00:14:44,250
Like the only two ways out for the us government is number one,

431
00:14:44,250 --> 00:14:45,250
your default,

432
00:14:45,250 --> 00:14:46,250
which won't happen.

433
00:14:46,250 --> 00:14:48,250
You can't afford for that to happen.

434
00:14:48,250 --> 00:14:49,250
Number two,

435
00:14:49,250 --> 00:14:50,250
just,

436
00:14:50,250 --> 00:14:51,250
you know,

437
00:14:51,250 --> 00:14:52,250
devalue your currency,

438
00:14:52,250 --> 00:14:54,250
inflate your currency to be able to get out of that current situation.

439
00:14:54,250 --> 00:14:55,250
That spiral that the us is in.

440
00:14:55,250 --> 00:14:56,250
It's not only a spiral,

441
00:14:56,250 --> 00:14:57,250
a spiral that's only getting worse.

442
00:14:57,250 --> 00:15:06,250
You had Trump talk him and Besson talking about one of Besson's objectives is to cut down the debt and complete opposite happened under both.

443
00:15:06,250 --> 00:15:09,250
So with these two scenarios and you look at what other countries are doing,

444
00:15:09,250 --> 00:15:10,250
you know,

445
00:15:10,250 --> 00:15:11,250
Japan had issues selling its treasuries because if they do,

446
00:15:11,250 --> 00:15:12,250
then it leads to other issues.

447
00:15:12,250 --> 00:15:13,250
Everything is so interconnected.

448
00:15:13,250 --> 00:15:14,250
You've got other countries that hold so many us treasuries,

449
00:15:14,250 --> 00:15:15,250
not be treated that well by the us,

450
00:15:15,250 --> 00:15:16,250
by Trump.

451
00:15:16,250 --> 00:15:17,250
You've got China selling treasuries.

452
00:15:17,250 --> 00:15:18,250
You got a Norway sold a bunch.

453
00:15:18,250 --> 00:15:19,250
It is a bit more complicated there,

454
00:15:19,250 --> 00:15:20,250
but they did sell a bunch recently.

455
00:15:20,250 --> 00:15:21,250
The sovereign wealth fund.

456
00:15:21,250 --> 00:15:22,250
So all these countries selling us treasuries,

457
00:15:22,250 --> 00:15:23,250
private buyers has hedge funds,

458
00:15:23,250 --> 00:15:24,250
et cetera,

459
00:15:24,250 --> 00:15:25,250
buying them.

460
00:15:25,250 --> 00:15:26,250
But I don't understand from what I know,

461
00:15:26,250 --> 00:15:27,250
why is anyone even buying treasuries?

462
00:15:27,250 --> 00:15:28,250
I mean,

463
00:15:28,250 --> 00:15:29,250
I don't know.

464
00:15:29,250 --> 00:15:30,250
I don't know.

465
00:15:30,250 --> 00:15:31,250
I don't know.

466
00:15:31,250 --> 00:15:32,250
I don't know.

467
00:15:32,250 --> 00:15:33,250
I don't know.

468
00:15:33,250 --> 00:15:34,250
I don't know.

469
00:15:34,250 --> 00:15:35,250
I don't know.

470
00:15:35,250 --> 00:15:37,150
I don't know.

471
00:15:37,150 --> 00:15:38,150
But I don't understand.

472
00:15:38,150 --> 00:15:39,150
From what I know,

473
00:15:39,150 --> 00:15:41,910
why is anyone even buying treasuries with the current situation where there's

474
00:15:41,910 --> 00:15:43,230
no way out for the us?

475
00:15:43,230 --> 00:15:46,890
Speaker 2 The number one reason is inertia.

476
00:15:46,890 --> 00:15:49,330
This is a pattern that's existed for decades.

477
00:15:49,330 --> 00:15:50,850
And it's a tough one to break.

478
00:15:50,850 --> 00:15:52,290
And you have to look around the world and say,

479
00:15:52,290 --> 00:15:53,290
well,

480
00:15:53,290 --> 00:15:56,540
what are the choices for all the problems the US dollar has.

481
00:15:56,540 --> 00:15:57,540
And for all the problems,

482
00:15:57,540 --> 00:16:00,920
the us economy has for all the problems the treasury market has,

483
00:16:00,920 --> 00:16:02,740
it's still one of the best options out there.

484
00:16:02,740 --> 00:16:05,300
What else are you going to Brazilian bonds or where else are going to go with

485
00:16:05,300 --> 00:16:06,100
Canadian bonds?

486
00:16:06,100 --> 00:16:12,020
not a big enough market right there's not many places you can go uh european bonds sure renminbi

487
00:16:12,580 --> 00:16:17,700
capital controls it's tough that's why we're seeing more central banks buy gold than ever

488
00:16:17,700 --> 00:16:24,820
before right q1 of this year saw 244 tons purchased we've never seen that much gold

489
00:16:24,820 --> 00:16:32,880
purchased in q1 ever ever the last 10 of 11 quarters we saw over 200 tons purchased by

490
00:16:32,880 --> 00:16:40,180
central banks so they're looking for options but today and for the last 50 40 50 years u.s

491
00:16:40,180 --> 00:16:47,780
treasuries have been the undisputed best choice and although the u.s currency is being debased

492
00:16:48,580 --> 00:16:52,820
u.s military strength is deteriorating and global influence is questionable

493
00:16:54,100 --> 00:16:59,460
if you search globally there's not a lot of safer options it's the cleanest dirty shirt

494
00:16:59,460 --> 00:17:03,380
in the hamper like what are you supposed to do you know and so so that's that's

495
00:17:03,460 --> 00:17:07,300
my primary rationale mario is that given the choices available to you

496
00:17:09,060 --> 00:17:13,060
every country is in the same situation from a balance sheet standpoint most they're running

497
00:17:13,060 --> 00:17:18,150
deficits and they have debt many of those countries also have massively inflated costs

498
00:17:18,150 --> 00:17:23,670
due to supply chain bottlenecks if not oil something else directly because of the disruption

499
00:17:23,670 --> 00:17:29,990
to global supply global trade routes so all countries are looking at options to

500
00:17:31,110 --> 00:17:33,350
um to afford the things they need and

501
00:17:33,590 --> 00:17:38,950
will choose a little bit of currency expansion but most don't have the rest of the world that

502
00:17:38,950 --> 00:17:44,310
also demands their currency so the us can afford to debase far more than any other country because

503
00:17:44,310 --> 00:17:50,310
back to supply and demand you can inflate the supply as long as demand meets it and no other

504
00:17:50,310 --> 00:17:55,910
currency has that equilibrium like the us does so they can be more reckless and we focus on it

505
00:17:55,910 --> 00:18:00,630
because it is the tallest poppy and there's a lot going on there that's wrong and this empire yes

506
00:18:00,630 --> 00:18:07,410
like we we've spoken about the bigger story before this movie ends one way every every time

507
00:18:07,410 --> 00:18:13,490
right debasement and eventual um removal of influence but between now and then everyone

508
00:18:13,490 --> 00:18:17,410
else is going to get hurt worse from a currency standpoint right there'll be exceptions but

509
00:18:17,970 --> 00:18:25,010
but what i mean was the goal there's no other big enough market to compete no not even close

510
00:18:25,010 --> 00:18:29,810
not even close not even close a tiny compared to us treasury market

511
00:18:30,690 --> 00:18:36,450
exactly exactly exactly so we're seeing more and more central banks step off the lifeboat uh sorry

512
00:18:36,450 --> 00:18:42,210
on to the lifeboat being gold and there's a handful of reasons that that's a better choice right now

513
00:18:42,210 --> 00:18:48,530
there's no counterparty risk to gold nobody can inflate the supply it grows by about two percent

514
00:18:48,530 --> 00:18:54,290
every year from mines where it comes from but that comes at a cost there's no yield on gold and it

515
00:18:54,290 --> 00:18:59,490
costs money to store and it's a headache to transport like it's not an ideal asset either so

516
00:19:00,690 --> 00:19:05,170
you know this is a very long term process but i think the idea of the price that we're seeing

517
00:19:05,170 --> 00:19:09,890
in the world right now is that we're seeing countries diversify for lack of a better idea

518
00:19:10,530 --> 00:19:14,050
and that even goes a step further we're seeing many countries withdraw their gold

519
00:19:14,050 --> 00:19:19,410
from the united states now last week the netherlands and france both pulled their gold

520
00:19:19,410 --> 00:19:24,290
from the us as well france as well they pulled all of it yeah the netherlands left 18 tons france

521
00:19:24,290 --> 00:19:28,530
france took it all and france took it home right the netherlands park there's in london uh france

522
00:19:28,530 --> 00:19:30,130
their gold's in paris now and

523
00:19:30,690 --> 00:19:36,770
And the reason they do that dates back to pre-World War II era, when Europe was descending

524
00:19:36,770 --> 00:19:39,910
into war, and everybody could see it coming, and eventually this happened.

525
00:19:40,840 --> 00:19:43,460
European countries wanted to get their gold out of their borders.

526
00:19:43,640 --> 00:19:48,780
And so they put it on a country far away, across an ocean, that they couldn't expect

527
00:19:48,780 --> 00:19:51,100
any country to invade sustainably, right?

528
00:19:51,140 --> 00:19:55,080
Like you might in Poland or Germany and European countries that share so many borders.

529
00:19:55,640 --> 00:19:58,380
The US, that's where the term Fortress America came from.

530
00:19:58,600 --> 00:19:59,740
Let's put our gold there.

531
00:19:59,860 --> 00:20:00,620
It's safe.

532
00:20:00,620 --> 00:20:03,520
They're wealthy, they're armed, but most importantly, they're far away, and they're

533
00:20:03,520 --> 00:20:04,620
bordered by two oceans.

534
00:20:04,760 --> 00:20:05,760
It's a very secure country.

535
00:20:06,340 --> 00:20:09,480
And so most of the world's gold has been there since the 30s.

536
00:20:11,160 --> 00:20:15,780
Now, with the Netherlands and France, it's important to ask the question, why are they

537
00:20:15,780 --> 00:20:16,920
pulling their gold home?

538
00:20:17,200 --> 00:20:20,380
Because the world is not more stable today than it was 20 years ago.

539
00:20:20,420 --> 00:20:21,140
It's far less.

540
00:20:21,200 --> 00:20:23,640
So wouldn't you want your gold in Fortress America?

541
00:20:23,720 --> 00:20:24,880
That would be the logical thing.

542
00:20:25,540 --> 00:20:27,100
There's a handful of reasons they didn't.

543
00:20:27,100 --> 00:20:29,520
And both withdrew their gold.

544
00:20:29,800 --> 00:20:30,100
And so...

545
00:20:30,680 --> 00:20:35,180
I don't want to say a conspicuous way, because there's no evidence to support the idea that

546
00:20:35,180 --> 00:20:36,140
maybe the gold isn't there.

547
00:20:36,420 --> 00:20:38,980
But they decided not to transport the physical gold.

548
00:20:39,120 --> 00:20:43,380
What they did is they sold the gold in New York on the gold market and repurchased it

549
00:20:43,380 --> 00:20:44,500
immediately in Europe.

550
00:20:44,620 --> 00:20:46,520
So they didn't actually have to transport any gold.

551
00:20:47,040 --> 00:20:48,800
The reason that matters is twofold.

552
00:20:49,360 --> 00:20:54,840
Number one, Germany repatriated their gold in 2013, and it took them four years to get

553
00:20:54,840 --> 00:20:55,440
that gold home.

554
00:20:56,300 --> 00:20:57,980
That's not an abnormal amount of time.

555
00:20:58,180 --> 00:21:00,660
Gold's a headache to transport, because you don't want to put all of it on one gold.

556
00:21:00,660 --> 00:21:04,780
It's too much wealth in one place, so you always break it into small batches and ship

557
00:21:04,780 --> 00:21:05,200
it like that.

558
00:21:05,300 --> 00:21:06,220
Logistics are complicated.

559
00:21:06,360 --> 00:21:09,020
So it took four years for Germany to get its gold home.

560
00:21:09,340 --> 00:21:14,400
But that was in 2013, when global trade was pretty stable and the world was fairly predictable.

561
00:21:15,000 --> 00:21:18,040
Would you be willing to wait four years today to get your gold back?

562
00:21:18,400 --> 00:21:19,940
What's the world going to look like in four years?

563
00:21:20,460 --> 00:21:22,220
Are your allies still going to be your allies?

564
00:21:22,280 --> 00:21:23,260
It's far less certain.

565
00:21:24,560 --> 00:21:30,240
In addition, what if you ask for that physical gold from the United States and they say no?

566
00:21:30,660 --> 00:21:33,240
And they don't tell you why they say no, but they just say no.

567
00:21:33,600 --> 00:21:36,420
Maybe, I don't know, maybe they don't.

568
00:21:36,540 --> 00:21:37,060
Who knows?

569
00:21:37,340 --> 00:21:41,800
But how politically explosive that question could be if you had to ask it publicly.

570
00:21:41,960 --> 00:21:44,900
And so both the Netherlands and France decided to not even ask it.

571
00:21:45,220 --> 00:21:47,160
They just said, we're just going to sell there, buy here.

572
00:21:47,240 --> 00:21:50,800
We're transporting the contracts, which is how most people own gold anyway.

573
00:21:50,920 --> 00:21:52,580
So they don't actually ever take possession.

574
00:21:52,840 --> 00:21:55,900
They just own a contract on an ounce or more.

575
00:21:56,680 --> 00:22:00,700
Both the Netherlands and France decided not to ask that potentially politically explosive

576
00:22:00,700 --> 00:22:00,800
question.

577
00:22:00,820 --> 00:22:04,560
And just transfer ownership to Europe.

578
00:22:05,520 --> 00:22:10,000
And both came out publicly and said, look, this has no political motives.

579
00:22:11,100 --> 00:22:14,860
The Netherlands said they wanted easier access.

580
00:22:15,420 --> 00:22:20,480
And France said they wanted to modernize their bars because bars that were poured in, say,

581
00:22:20,540 --> 00:22:24,880
the beginning of the last century may not hold up to today's purity standards.

582
00:22:25,260 --> 00:22:27,440
And so they wanted to buy more modern bars in Europe.

583
00:22:27,540 --> 00:22:28,280
That was their rationale.

584
00:22:28,520 --> 00:22:29,460
So they said, look, it's us.

585
00:22:29,500 --> 00:22:30,020
It's not you.

586
00:22:30,020 --> 00:22:30,620
Don't worry.

587
00:22:30,620 --> 00:22:31,120
You're good.

588
00:22:31,620 --> 00:22:33,620
We just want to modernize our stocks.

589
00:22:33,880 --> 00:22:37,980
And Netherlands said, we just want easier access in an unpredictable world.

590
00:22:38,140 --> 00:22:41,760
So again, it's like it's, you know, but it's telling.

591
00:22:41,920 --> 00:22:42,320
It's telling.

592
00:22:42,480 --> 00:22:42,840
It's telling.

593
00:22:43,100 --> 00:22:47,800
And anyway, so we're seeing those two trends stand out to me.

594
00:22:47,840 --> 00:22:49,140
Sorry, just to close the loop on that.

595
00:22:49,180 --> 00:22:50,920
It's not just central banks buying gold.

596
00:22:51,100 --> 00:22:52,460
It's them repatriating it, right?

597
00:22:52,460 --> 00:22:53,240
Which is the ultimate.

598
00:22:53,720 --> 00:22:56,200
It's what you would do if you're not sure what's around the corner.

599
00:22:56,340 --> 00:22:58,740
You'd want to be ready for anything and have that arsenal at home.

600
00:23:02,180 --> 00:23:02,660
Hmm.

601
00:23:02,960 --> 00:23:03,820
Has that happened?

602
00:23:03,940 --> 00:23:10,580
To that extent before, like what Netherlands and France did now, the same way they did

603
00:23:10,580 --> 00:23:11,620
it, the speed of it.

604
00:23:11,620 --> 00:23:15,300
Because I know there's been issues previously of countries taking too long to get their

605
00:23:15,300 --> 00:23:16,220
gold out of the U.S.

606
00:23:16,240 --> 00:23:17,100
That's happened before.

607
00:23:17,480 --> 00:23:18,600
I don't know the exact years.

608
00:23:19,040 --> 00:23:23,720
And there's also been instances where the U.S. just did not send certain countries their

609
00:23:23,720 --> 00:23:24,020
gold.

610
00:23:24,160 --> 00:23:27,580
I know Venezuela, I think, had that problem with the U.S. or the U.K.

611
00:23:27,960 --> 00:23:29,400
So that is a worry as well.

612
00:23:29,400 --> 00:23:33,920
Like if it's their gold, if you're, you know, you're a custodian of our asset, would it be a problem?

613
00:23:33,940 --> 00:23:35,620
Would you expect to get that asset back?

614
00:23:37,360 --> 00:23:40,240
But has there been instances where they took it out the same way as they did now?

615
00:23:41,450 --> 00:23:49,010
You know, the closest analog would be would be Russia, who repatriated their gold through the 2010s.

616
00:23:49,670 --> 00:23:56,890
And everybody watched that happen and then watched what happened to Russia's foreign currency

617
00:23:56,890 --> 00:23:59,810
reserves after their invasion of the Ukraine.

618
00:24:00,050 --> 00:24:02,690
So they had two savings assets.

619
00:24:03,170 --> 00:24:04,170
One was held in somebody else's.

620
00:24:04,170 --> 00:24:05,610
Treasury. One was held in theirs.

621
00:24:06,030 --> 00:24:10,590
The one held in somebody else's treasury was confiscated and frozen and they could no longer access.

622
00:24:11,250 --> 00:24:17,670
And so, yeah, it puts you in that situation where you're storing an asset in a secure market, whether that's the U.S.

623
00:24:17,670 --> 00:24:24,210
Treasury market or the New York vaults, whatever that is, you're protecting it from international volatility and

624
00:24:24,210 --> 00:24:28,830
unpredictability. But that's only that only stands as long as the custodian is trustworthy.

625
00:24:30,510 --> 00:24:33,430
I would expect that the the the Tesla.

626
00:24:33,430 --> 00:24:33,450
Tesla.

627
00:24:33,450 --> 00:24:33,470
Tesla.

628
00:24:33,470 --> 00:24:33,510
Tesla.

629
00:24:33,510 --> 00:24:33,550
Tesla.

630
00:24:33,550 --> 00:24:33,570
Tesla.

631
00:24:33,570 --> 00:24:33,630
Tesla.

632
00:24:33,630 --> 00:24:33,710
Tesla.

633
00:24:33,710 --> 00:24:33,770
Tesla.

634
00:24:33,770 --> 00:24:33,870
Tesla.

635
00:24:33,870 --> 00:24:33,910
Tesla.

636
00:24:33,910 --> 00:24:33,970
Tesla.

637
00:24:33,970 --> 00:24:34,030
Tesla.

638
00:24:34,030 --> 00:24:34,090
Tesla.

639
00:24:34,090 --> 00:24:34,110
Tesla.

640
00:24:34,110 --> 00:24:34,130
Tesla.

641
00:24:34,130 --> 00:24:34,150
Tesla.

642
00:24:34,170 --> 00:24:42,770
So the the rest of 300 billion in Russian foreign currency reserves confiscated in 2022 was was a clue to the world that the custodian was no longer trustworthy.

643
00:24:42,770 --> 00:24:47,150
And so whatever asset you hold, if not within your borders, is it really your asset?

644
00:24:47,150 --> 00:24:49,350
And that's the question that these countries are asking.

645
00:24:49,350 --> 00:24:53,210
And many are answering with their with their repatriation.

646
00:24:55,680 --> 00:24:57,120
So you see me looking down.

647
00:24:57,620 --> 00:24:59,320
There's just some reports of explosions.

648
00:24:59,320 --> 00:25:06,550
I'm making sure that they were just alerts in Israel, which there hasn't been any alerts in Israel.

649
00:25:06,550 --> 00:25:13,350
and since the war since the 40-day war and uh explosions in iran like okay do we do do we have

650
00:25:13,350 --> 00:25:17,890
war while i'm speaking about this but it seems no that seems to be a separate alert in israel

651
00:25:17,890 --> 00:25:22,610
we don't have the details of it and explosions near iran as you were speaking just because of

652
00:25:22,610 --> 00:25:26,310
the ships getting attacked it kind of gives you the state of the state of affairs right now but

653
00:25:26,310 --> 00:25:34,650
i want to ask you again before going back to the ai um ai boom um or bubble just the repatriation

654
00:25:34,650 --> 00:25:42,600
of gold um is that necessarily what are what are other reasons so actually what are the reasons for

655
00:25:42,600 --> 00:25:46,060
that to happen why would you want to hold your own gold because you gave the example of before

656
00:25:46,060 --> 00:25:50,500
world war before the 30s so world war ii before the world before world war ii as countries as

657
00:25:50,500 --> 00:25:56,040
things were heating up politically and fears of a war were rising countries moved their gold into

658
00:25:56,040 --> 00:26:00,600
a safe haven and moved their gold elsewhere now for them to take it out of the u.s do they expect

659
00:26:00,600 --> 00:26:04,340
the u.s to be the source of that instability do they worry that the u.s is not a trustworthy

660
00:26:04,340 --> 00:26:05,140
custodian

661
00:26:05,680 --> 00:26:09,780
do they find it more trustworthy to have it on their own territory is it politically motivated

662
00:26:09,780 --> 00:26:14,520
is it fears economic fears is it political geopolitical fears what do you think stems

663
00:26:14,520 --> 00:26:18,440
what do you think leads them to repatriate their gold and again this is not just last

664
00:26:18,440 --> 00:26:23,770
week that's been happening for for years now yeah yeah i think a couple things i think

665
00:26:23,770 --> 00:26:29,590
if you had your wealth stored at your neighbor's house and you stored it there because they were

666
00:26:29,590 --> 00:26:35,330
wealthy and armed and you knew that was the safest house on your block the rest of the block is chaos

667
00:26:35,330 --> 00:26:35,690
the

668
00:26:35,690 --> 00:26:41,510
that house is safe and years go by and you look at that wealthy neighbor and they start developing

669
00:26:41,510 --> 00:26:46,570
a bit of a drinking problem and then a gambling problem and they acquire a bunch of debts more

670
00:26:46,570 --> 00:26:52,750
than they could sustain and they become dependent on uh financial aid to keep the party going you'd

671
00:26:52,750 --> 00:26:58,470
probably be pretty curious about the safety of your asset inside that household that is entrenched

672
00:26:58,470 --> 00:27:05,050
in debt and has an excessive spending problem how secure is my wealth but they're well armed so you

673
00:27:05,050 --> 00:27:05,670
can't necessarily not be able to keep your money safe but you can't necessarily not be able to keep

674
00:27:05,670 --> 00:27:05,690
your money safe but you can't necessarily not be able to keep your money safe but you can't necessarily

675
00:27:05,690 --> 00:27:09,450
knock the door and demand your stuff back because if they say no there's nothing you can do about it

676
00:27:09,450 --> 00:27:17,600
it's a silly analogy but like i do think that is a simple way of describing complex things and i i

677
00:27:17,600 --> 00:27:24,540
would expect that as the perception but separately i think it's possible that inside the next five

678
00:27:24,540 --> 00:27:32,660
years we do see a correction of the gold price to reflect the actual gold supply and all i mean by

679
00:27:32,660 --> 00:27:35,740
that is that the majority of gold that is owned is not going to be able to be used for the rest of

680
00:27:35,760 --> 00:27:35,780
the next five years the gold that is owned is not going to be used for the rest of the next five years

681
00:27:35,780 --> 00:27:39,600
the gold that is owned is not going to be used for the rest of the next five years the owners of that gold

682
00:27:39,600 --> 00:27:43,520
the owners of that gold the purchasers and traders of that gold never actually take possession of a

683
00:27:43,520 --> 00:27:50,800
single ounce they just buy and sell paper contracts that specify ownership over an ounce

684
00:27:52,080 --> 00:27:56,240
but this isn't policed very effectively and it's incredibly hard to measure

685
00:27:56,800 --> 00:28:01,360
because very few people if any ever take actual possession of a physical ounce

686
00:28:02,080 --> 00:28:06,000
more than one paper contract can be sold for every ounce that it claims

687
00:28:06,240 --> 00:28:11,600
and the evidence of this appears every so often when the market loses confidence

688
00:28:11,600 --> 00:28:17,760
that there's enough ounces to back up the paper contracts most recently this happened in january

689
00:28:17,760 --> 00:28:23,760
with the silver market which is exactly the same and the price of physical silver was 40 percent

690
00:28:23,760 --> 00:28:29,760
higher than the price of a paper contract on a silver ounce interesting so you have to ask the

691
00:28:29,760 --> 00:28:35,520
question why would somebody pay forty percent more for the same asset legally speaking the same asset

692
00:28:35,520 --> 00:28:36,000
well one you could say like they're buying a six-digit amount of matter but actually they're not

693
00:28:36,000 --> 00:28:40,880
you can hold in your hand the other is a promise and that's the difference they do that because

694
00:28:40,880 --> 00:28:47,680
they don't trust the promise anymore now there's high speculation about the what's the ratio of

695
00:28:47,680 --> 00:28:53,200
paper contracts to actual gold that circulate the world is it three to one is it five to one

696
00:28:53,200 --> 00:28:59,360
is it twenty to one we don't know that is why and and china is trying to blow smoke on this

697
00:28:59,360 --> 00:29:04,800
right now because they are the world's largest producer of gold largest importer of gold they

698
00:29:04,800 --> 00:29:08,480
don't export any we don't know how much they have but it's definitely a lot

699
00:29:09,600 --> 00:29:15,760
and just think about that if the price of gold reflects uh the the market for gold which is

700
00:29:15,760 --> 00:29:19,920
people buying and selling these contracts right there's an inflated supply possibly if there's

701
00:29:19,920 --> 00:29:24,640
10 contracts for every ounce if you were to correct that and correct the price to the actual

702
00:29:24,640 --> 00:29:29,760
supply therefore it would in theory 10x what it is today because the actual supply is a tenth of

703
00:29:29,760 --> 00:29:34,560
what we think there is does that make sense yeah so china halted uh physical

704
00:29:34,800 --> 00:29:40,240
sorry they halted paper trading of gold for retail investors this is about one and a half

705
00:29:40,240 --> 00:29:46,880
maybe a month six weeks ago their intention there is to um is to blow open this disparity between

706
00:29:46,880 --> 00:29:52,720
the physical price and the paper price and we'll have to see if it works but as a significant holder

707
00:29:52,720 --> 00:29:57,520
of gold it would be in their best interest if gold was repriced because people lost confidence

708
00:29:57,520 --> 00:30:02,880
in the paper market they would benefit tremendously from that as would anybody holding gold so now

709
00:30:02,880 --> 00:30:04,640
would be a good time to get that gold back

710
00:30:04,800 --> 00:30:09,520
so i'm going to go ahead and get back to the question of what is the ratio of gold

711
00:30:09,520 --> 00:30:14,960
close to home if you have suspicions about that i don't know what the ratio is i don't know if we're

712
00:30:14,960 --> 00:30:19,520
going to get clarity on that but when i see central banks setting records for gold buying

713
00:30:19,520 --> 00:30:25,680
over the last 11 quarters q1 of this being an all-time record when i see central banks

714
00:30:25,680 --> 00:30:31,360
repatriating that goal within their borders you have to ask the question why what are they seeing

715
00:30:31,360 --> 00:30:34,640
what are they worried about what are the conversations they're hearing having that we're

716
00:30:34,800 --> 00:30:40,180
seeing right now i don't know what the future holds but you know there's a gentleman you might

717
00:30:40,180 --> 00:30:44,980
have had on your show luke groman he's a good friend of course a platform and and brilliant

718
00:30:44,980 --> 00:30:49,300
mind on him and he's got this amazing he's got a good quote he says there's very few moments

719
00:30:49,300 --> 00:30:54,660
in history when you actually want to own gold but during those moments it's about the only

720
00:30:54,660 --> 00:31:00,260
thing that you want to own and all he's talking about is those bridge moments in history when

721
00:31:00,260 --> 00:31:04,660
the world is transitioning from one thing to the next and wants to de-risk and they

722
00:31:04,900 --> 00:31:08,340
won't even believe that and they're still thinking that they're going to be able to

723
00:31:08,340 --> 00:31:12,080
live on that a little bit longer and so i think this is a good thing to do but now the first

724
00:31:12,080 --> 00:31:18,080
step is to step on to the lifeboat and when i look at the trends in central bank gold buying

725
00:31:18,880 --> 00:31:23,040
and more importantly repatriation when you look at the gold price and how it's inflated over the

726
00:31:23,040 --> 00:31:28,800
last two years i see that i see the demand is there it's on the margin still the average retail

727
00:31:28,800 --> 00:31:34,320
investor or institution is still not very exposed to the gold market that is what it is but those

728
00:31:34,960 --> 00:31:40,480
2023 really since Russia's assets were confiscated which is very telling very telling if you can't

729
00:31:40,480 --> 00:31:46,480
trust the custodian of your assets you need to do something about that and repatriation does solve

730
00:31:46,480 --> 00:31:53,360
that oh and you've got now um the same thing happening to Iran on a much bigger scale a much

731
00:31:53,360 --> 00:31:59,660
more extreme levels with economic D-Day operation outcast let's see what happens and they've already

732
00:31:59,660 --> 00:32:03,740
sanctioned a few banks that are doing business with Iran uh the last thing I'm going to ask you

733
00:32:03,740 --> 00:32:08,360
and I'll probably jump off just because it seems there's some attack ongoing now in Iran but I

734
00:32:08,360 --> 00:32:13,040
really want to get your thoughts on the the situation the AI the state of AI right now

735
00:32:13,040 --> 00:32:17,180
if you've got all that cap access going out that's already causing bond yields to go up

736
00:32:17,180 --> 00:32:23,420
and competing with the US Treasuries um is that sustainable a lot of these companies are not

737
00:32:23,420 --> 00:32:27,560
profitable they these companies you would never think countries they kind of companies like meta

738
00:32:27,560 --> 00:32:33,680
and Google would be spending more than the money they bring in these are cash cows they've we've

739
00:32:33,680 --> 00:32:38,180
talked about them printing money for so many years now they need money they're raising money it's

740
00:32:38,180 --> 00:32:43,580
just such a bizarre situation to be in but obviously we also know about the potential of AI

741
00:32:43,580 --> 00:32:49,090
so I'd love to get your your thoughts on it all yeah I think when people look at the market right

742
00:32:49,090 --> 00:32:54,430
now and the inflated value of these AI stocks it's really easy to make the assumption that a

743
00:32:54,430 --> 00:33:00,430
correction must be coming and that this is not sustainable uh but high prices on their own don't

744
00:33:00,430 --> 00:33:03,850
mandate a crash or a correction as we talked about at the front end of the

745
00:33:04,030 --> 00:33:08,530
business conversation bubbles can inflate far larger than anybody ever predicts and usually

746
00:33:08,530 --> 00:33:13,750
they do uh usually those that see it first are early enough that they're flat out just wrong

747
00:33:13,750 --> 00:33:19,810
right that's that's the most common what I'm paying attention to with this is the leverage

748
00:33:19,810 --> 00:33:25,090
on top of leverage and this is what's really important because if you look at the AI companies

749
00:33:25,090 --> 00:33:30,610
themselves and we can just focus on open AI and Anthropic because those are the names that most

750
00:33:30,610 --> 00:33:33,970
people know they lose billions of dollars a year hundreds of billions

751
00:33:34,030 --> 00:33:39,370
and they have bills to pay so how do they pay those bills how do they pay for their compute

752
00:33:39,370 --> 00:33:44,350
power that they're ordering from Microsoft and Oracle and Amazon well they they spend other

753
00:33:44,350 --> 00:33:49,510
people's money they go back to the market and they raise more capital to pay their bills that's where

754
00:33:49,510 --> 00:33:55,150
the money comes from that's where it goes um as they burn through cash and need to access more

755
00:33:55,150 --> 00:33:58,930
they can go back to the market and raise more capital as long as they go back to the market

756
00:33:58,930 --> 00:34:03,910
with a higher valuation as long as the market believes your customer base has grown you're

757
00:34:04,030 --> 00:34:07,870
profitable yet but your revenue has grown therefore you are a more valuable company

758
00:34:07,870 --> 00:34:16,580
today than the last time you needed money so we'll finance you again they order compute power uh in

759
00:34:16,580 --> 00:34:22,100
advance they put future orders for compute power uh from the companies that produce it like Oracle

760
00:34:22,100 --> 00:34:27,500
Microsoft Amazon and Google and they may order this months or years in advance and as those bills

761
00:34:27,500 --> 00:34:33,260
come due they pay them with borrowed money the future promises to pay for compute power from

762
00:34:33,260 --> 00:34:35,780
Anthropic and open AI alone to those companies

763
00:34:36,200 --> 00:34:41,840
over two trillion dollars and they're called take or pay contracts which means when the compute

764
00:34:41,840 --> 00:34:46,160
becomes available they can take it but they have to pay either way whether they're ready to accept

765
00:34:46,160 --> 00:34:52,460
or not the money is due that 2.1 trillion is due mainly to those four companies and primarily to

766
00:34:52,460 --> 00:34:59,970
Oracle and Microsoft so that two trillion dollar note payable to those four tech companies is is

767
00:34:59,970 --> 00:35:06,680
colossal those tech companies are the ones who are announcing these skyrocketing capexes every

768
00:35:07,100 --> 00:35:13,340
year and last year was over 750 billion that number has now surpassed all their earnings combined so

769
00:35:13,340 --> 00:35:19,040
they now have to raise debt to fund every new build out every new shovel every new material

770
00:35:19,860 --> 00:35:26,580
so they borrow to facilitate that and they borrow against that note payable if you owe me a million

771
00:35:26,580 --> 00:35:31,980
dollars that's actually an asset on my balance sheet and I can take that to the bank and say hey

772
00:35:31,980 --> 00:35:36,000
I need to borrow 300 grand they say what are your assets I said I have a note payable for a million

773
00:35:36,000 --> 00:35:36,720
bucks from Mario

774
00:35:37,320 --> 00:35:41,640
to be against that they'll look at you and say okay if you don't pay we can come after him right

775
00:35:41,640 --> 00:35:51,650
and that's the sequence of of uh security so these these tech companies now are financing their crazy

776
00:35:51,650 --> 00:35:57,950
uh AI data center build out in capex with borrowed money that is secured by over two trillion dollars

777
00:35:57,950 --> 00:36:04,220
owed by companies that don't actually make any money now all of that is sustainable as long as

778
00:36:04,220 --> 00:36:08,060
those two AI the AI companies primarily open AI and Anthropic

779
00:36:08,120 --> 00:36:14,420
as long as they keep seeing their valuations skyrocket at the speed at which they are and

780
00:36:14,420 --> 00:36:25,000
that's the key um and this is where there's like a direct analog to the 2008 GFC back in 2006 the

781
00:36:25,000 --> 00:36:28,540
majority of Americans that bought homes that couldn't afford them were offered a specific

782
00:36:28,540 --> 00:36:33,100
mortgage called the 2 and 28. that meant that you could get a 30-year mortgage for the first

783
00:36:33,100 --> 00:36:38,920
two years you paid a very very low interest rate and no principal and after that for the next 28 years

784
00:36:39,280 --> 00:36:43,360
you paid a much higher interest rate and you had to contribute to the principal most of these buyers

785
00:36:43,360 --> 00:36:48,040
could never afford that but they were never expected to pay it because house prices were

786
00:36:48,040 --> 00:36:55,000
going up 15 every single year and so they'd enter a 2 and 28 mortgage at the conclusion of their two

787
00:36:55,000 --> 00:36:59,680
year they'd go back to the bank and they'd say I want to refinance my house is far more valuable

788
00:36:59,680 --> 00:37:04,180
today it's gone up 15 every year and the bank would look at it and say yes the assets more

789
00:37:04,180 --> 00:37:09,220
valuable will refinance this home for you get you back into a fresh 2 and 28 and the cycle would

790
00:37:09,280 --> 00:37:14,240
begin they never actually paid the higher rate or the actual principal and that could continue as

791
00:37:14,240 --> 00:37:20,300
long as home prices rised enough that at the end of each two-year term the owner could go back to

792
00:37:20,300 --> 00:37:24,440
the bank and say look at all the excess home equity I've acquired lend to me against that

793
00:37:25,100 --> 00:37:32,780
and by 2006 like 80 of the loans written in 2003 had been refinanced into fresh 2 and 28 so it was

794
00:37:32,780 --> 00:37:38,900
working just fine right so but what happened in 2006 is that home prices didn't crash they were

795
00:37:39,500 --> 00:37:46,340
time highs and still going up just going up slower going up about eight percent instead of 15. so when

796
00:37:46,340 --> 00:37:51,860
the owner went back to the bank two years after purchasing and said I need a fresh loan you look

797
00:37:51,860 --> 00:37:55,880
at the home equity and they'd say there's actually not really enough there for us to loan against

798
00:37:55,880 --> 00:38:00,140
because we're going to underwrite the loan there's going to be about 30 grand in fees there's not

799
00:38:00,140 --> 00:38:04,160
enough new capital available with your new valuation to facilitate that so we can't refinance

800
00:38:04,160 --> 00:38:09,180
you and that began happening in 2006 and that's why thousands of Americans suddenly walked in

801
00:38:09,600 --> 00:38:15,240
into the 28 part of their 2 and 28 and that's why thousands of defaults happened in 2007. then the

802
00:38:15,240 --> 00:38:20,880
market eventually crashed in 2008. so the parallel there is that the system keeps working as long as

803
00:38:20,880 --> 00:38:26,580
the underlying asset that's securing all of this debt doesn't just stay at all-time highs but keeps

804
00:38:26,580 --> 00:38:31,260
accelerating in price that's what these AI companies have to do to keep the rest of this

805
00:38:31,260 --> 00:38:36,300
train going as long as they can keep going back to the market with a massively amplified valuation

806
00:38:36,300 --> 00:38:39,660
they'll get new capital because investors will have confidence that train's going to be able to

807
00:38:39,720 --> 00:38:46,200
keep on going they can keep on ordering compute power in the future big tech companies can borrow

808
00:38:46,200 --> 00:38:53,360
against it and the thing can continue you know use your judgment how long that can maintain

809
00:38:54,080 --> 00:38:59,180
I would argue that we've seen this movie many many times before and that's not a bearish case

810
00:38:59,180 --> 00:39:06,560
for AI by any stretch I intend and plan on using AI next year two years 10 years but in 1999 the

811
00:39:06,560 --> 00:39:09,920
internet didn't crash it was the financial markets on top of it in 2008.

812
00:39:09,980 --> 00:39:14,060
the housing market wasn't destroyed it was just a financial structure built on top of it right the

813
00:39:14,060 --> 00:39:19,460
houses were fine the investors got taken out and that's probably where this will end the only

814
00:39:19,460 --> 00:39:28,750
reason that we wouldn't is because 40% of the S&P 500 now is 10 companies nine of which are AI

815
00:39:28,750 --> 00:39:33,370
dependent the 10th being Berkshire Hathaway it's the one outlier but the other nine AI dependent

816
00:39:33,370 --> 00:39:39,310
that's 40 of the S&P 500 so who depends on the S&P 500 well everybody's retirement plan in the United

817
00:39:39,310 --> 00:39:44,390
right? All the institutions, all the pension funds, right? Global currency is tied up in the

818
00:39:44,390 --> 00:39:51,630
S&P 500. So if that train slows enough that the new capital can't be raised and this thing begins

819
00:39:51,630 --> 00:39:57,990
to deflate, the impact is as systemic as back in 2008 when housing was the backbone of the US

820
00:39:57,990 --> 00:40:01,350
economy, right? That was the headline that everybody believed. And it was true. Look what

821
00:40:01,350 --> 00:40:06,510
happened when it slowed down. It was bad. And so that's a situation that we're in. But because of

822
00:40:06,510 --> 00:40:11,950
that systemic effect, I expect us to see very creative government intervention to ensure

823
00:40:11,950 --> 00:40:16,330
this doesn't slow down. Because this one isn't just a financial market, it's a geopolitical

824
00:40:16,330 --> 00:40:22,850
competition. If the US can't keep builds like this coming and loses the AI race, they lose it to the

825
00:40:22,850 --> 00:40:27,550
chief geopolitical adversary who doesn't have to worry about public sentiment to get things built.

826
00:40:27,550 --> 00:40:33,930
They can move forward at any cost on their own timing. Cheaper labor, less public support needed.

827
00:40:34,830 --> 00:40:36,510
The US can't play that game. And so

828
00:40:36,510 --> 00:40:43,930
the bubble looks unsustainable. The prices look too high. They probably are. That doesn't mean a

829
00:40:43,930 --> 00:40:48,710
crash is imminent. It does mean there's amazing fragility. But I would expect the US government

830
00:40:48,710 --> 00:40:53,550
to be incredibly creative in how they float this market because at present, they can't afford it,

831
00:40:53,550 --> 00:40:56,290
not just to fail. They just can't afford to slow down.

832
00:40:58,360 --> 00:41:02,540
Exactly. You might have the US administration, the US government continue to prop up that bubble

833
00:41:02,540 --> 00:41:06,600
because it's systemically or strategically from a national security perspective.

834
00:41:06,820 --> 00:41:07,520
And it wouldn't be...

835
00:41:07,600 --> 00:41:11,980
Well, it would be out of left field. We're now seeing the resource race over the last couple

836
00:41:11,980 --> 00:41:17,260
of years. This became really real for Western democracies who for the previous 20 years

837
00:41:17,260 --> 00:41:23,920
vilified the extraction industries. Any mining companies, extraction companies were demonized

838
00:41:23,920 --> 00:41:27,220
from the podium. If you wanted to get elected, it's like, we're not building any mines in our

839
00:41:27,220 --> 00:41:31,620
backyard. That was the mandate, right? Then they woke up 20 years later and it's like, holy smokes,

840
00:41:31,860 --> 00:41:36,000
we don't control the supply of anything. And that's a problem. China has tremendous leverage

841
00:41:36,000 --> 00:41:37,580
because we outsourced all of our resources. And that's a problem. And that's a problem. And that's

842
00:41:37,600 --> 00:41:43,000
all of that to other countries. And that's why you're seeing the Department of Defense now become

843
00:41:43,000 --> 00:41:51,340
like an active investor in mining companies. 15% of MP materials, 5% of US antimony, 10% of

844
00:41:51,340 --> 00:41:57,440
lithium Americas. And it goes on like they're actively engaging in state capitalism, the same

845
00:41:57,440 --> 00:42:02,500
as we used to call China's approach, capitalism with Chinese characteristics. The US is doing

846
00:42:02,500 --> 00:42:07,580
their version of that because they've got to play catch up, right? So it wouldn't be a wild move.

847
00:42:07,600 --> 00:42:14,220
To see a similar play into the AI sector in a major way, because it's not just a financial

848
00:42:14,220 --> 00:42:20,680
point of massive systemic fragility. It's not just an innovation race. It's tremendous geopolitical

849
00:42:20,680 --> 00:42:26,360
tension that is at stake. And so I would expect, reasonably so, the US gets very involved,

850
00:42:27,100 --> 00:42:33,510
however they need to be. I agree. Jay, always enjoy our conversations, man. Thanks a lot for

851
00:42:33,510 --> 00:42:37,460
giving us your time. Pleasure's all mine, Mario. Take care, man.

852
00:42:38,140 --> 00:42:42,260
Guys, I recommend you check out Jay's channel. He does deep dives into this. I really enjoy

853
00:42:42,260 --> 00:42:47,140
watching his videos. Really good at explaining those topics. I'm going to be back live in nine

854
00:42:47,140 --> 00:42:50,420
minutes with Lieutenant Colonel Anthony Aguilar to talk about some of the developments that are

855
00:42:50,420 --> 00:42:55,620
happening on the ground now. There's some reports about explosions in southern Iran. Some people

856
00:42:55,620 --> 00:43:00,400
are claiming it's US strikes. I doubt it from what I've seen and no confirmation yet. We'll see.

857
00:43:01,060 --> 00:43:04,220
So we'll be live in less than 10 minutes to talk about this. Bye-bye.