Get Long China? | Michael Howell and Jimmy Connor

[Music] Michael thank you very much for joining us today the last time we spoke the big news was the FED cutting interest rates but this week it's all about China and the People's Bank of China cutting interest rates and also implementing a massive stimulus package which can be described as historical just in terms of size and breadth and just to recap some of the changes interest rates were reduced to 1.5% interest rates on $5 trillion in mortgages was also lowered required Reserve ratio for banks was lowered with the hopes of freeing up money for Lending

and you have said in the past that the most important Central Bank for understanding what's really happening in the real economy is the People's Bank of China what's your take on all these policy changes we've seen in the last few days well hi James great to be on again um I think the um the main thing is that what you saw out of a lot of commentators was uh uh basically more hysterical reaction rather than a historical reaction to What China's been doing and I think the the reality is that um given the nature of

the whole nature of the Chinese Financial system and the fact that it's it's run by the state and uh we've got State regulation and State control of banks Etc it's extremely difficult to make any sense of uh or projections from these particular announcements I mean they're they're pointing in a Direction that's that's without any question at all the Chinese authorities are trying to ease but by you know shifting interest rates down of you a few tens of basis points that ain't going to do it um you know the whole the the the the necessary fact

in the Chinese Financial system is they need a lot more liquidity the system has been starved of liquidity uh pretty much for the last two to three years which is largely why the Chinese economy has never managed to escape from the covid lockdowns they've been forced to run a tight monetary policy to protect what has been a weak Yuan currency and and um you know these measures are not going to do it uh they're not really going to move the needle unless they start to inject sizable amounts of liquidity into the markets now can we

uh infer that from the statement uh that's come out answer no quite simply not uh we won't know that for several months but what we got to do is to keep monitoring the money markets to see whether the People's Bank of China is injecting sizable amounts of liquidity into the system and we've got to monitor the state owned Banks to see if their lending starts to increase sizeably and those are really the the key gauges to watch it's not about looking at short-term interest rates um you know that's that's not what so that's not how

the Chinese Financial system operates very interesting points The People's Bank of China also pledged $113 billion to provide Equity Market support that equates to about 1.8% of the market cap of the Shanghai compassing index and this is very reminiscent of uh what the FED did know 809 what are your thoughts on these changes well I mean the you know to to come back to the point I mean at the end of the day they're moving in the right direction but you know is this uh the equivalent of a to or uh you know what went

on in 2008 in the US not yet um if you recall back in 2008 we had a simultaneous you know massive fiscal stimulus uh which underwrote the banking system and we also had the Federal Reserve that was that was was very accommodative uh you know we were the Federal Reserve was pushing L much much larger amounts of money into an equivalent siiz Financial system at the time um the PBC is not doing that yet but you know watch this space it may well emerge over over coming days or coming weeks and as I said looking

at this particular package it's it it doesn't have the magnitude uh it may have the direction it doesn't have the magnitude yet really to solve the problem uh you know we we're talking for example uh if you sort of scratch around at the numbers maybe the Chinese have released or injected something like a trillion uh yuan into their financial system to solve this problem we're talking about several trillion Yuan uh probably nearing a trillion US Dollars before we start to uh get any traction in terms of resolving their problems China has a big problem there's

no question about that everybody understands that I think now you've got a structural problem with what I've called red uh red capitalism in other words red capitalism cannot survive without the West accommodating it and the West is now Now sort of closing the doors to some extent to make it a lot more difficult for China to export uh and that clearly is a long-term constraint but they've also got cyclical problems and it's the cyclical problems which these particular issues are trying to address or these policies are trying to address and that really comes back to

the fact that if you look at the Chinese economy and financial system fundamentally the problem is that the real exchange rate in other words the exchange rate adjusted for inflation is way way too high it was exactly the same problem that Japan had at the end of the 80s it was the problem a lot of the Asian economies had uh back in the late 1990s and it's the problem that China's got now and you can resolve that that problem in two ways you can basically let your asset prices and your High Street prices deflate massively

but that that that pushes a huge burden uh on the domestic populace particularly the poor who have to uh you know basically fighting falling incomes um or you allow your exchange rate to devalue and at the moment CH is using uh the Yuan the Chinese currency as a marker of soft power and it doesn't want to lose face by allowing the Yuan to devalue but at the end of the day they either stop producing mass or massively overproducing Goods or they let their currency drop and we're just I suppose debating now which of those two

things will happen and it's more likely in the long term that the exchange rate will have to fall in some way and I know we never really know what's going on in China but because they announced so many changes all at once do you think things are significantly worse there than we're led to believe or what we might think well I think they've got a as I said they've got a problem I mean the the scale of the uh of of uh of the measures that have been announced not sufficient to cure that problem yet

so they haven't you know they're not throwing the kitchen sink at the problem that that's for sure I think what they're trying to do is in sort of typical bureaucrat fashion they're sort of fiddling at several knobs uh without sort of realizing maybe this the the magnitude of what they're they're trying to address but I think ultimately what we need to look for is whether they inject substantial liquidity in markets over the course of the next few months I mean I'm talking here of maybe uh period through end year we'll get a much get better

gauge as to whether China is able and willing to ease its monetary policy and as I come back to the fact I mean the Chinese Financial system is very different from uh the US Financial system or the Western Financial systems in so far as interest rates play a secondary role there they'd like interest rates to make to play a bigger role but they don't the fact is that what you've got is effectively a state allocation of credit system rather like Japan in the 1980s which was then called window guidance uh China is following a very

similar remit and what's happening is that the pboc injects liquidity into the money markets uh the shadow banking system uh which you know Shadow banks are not quite like what we understand in the west Shadow banks are actually uh the traditional High Street banks in in China but there operating uh off balance sheet in many cases they will get extra funding uh from that pool and they will lend and traditionally they've lent on a real estate particularly to the local authorities now that has been looked down badly upon in the last few years and it's

a you know it's a question about what they'll do in the future but that's a very good way of actually Reviving uh the economic system if you let the shadow Bank start to lend again and then you've got the state-owned banks and they will be given directives by The People's Bank in terms of lending more money uh to certain industry groups now what we rather hope is that it doesn't go down the route of solar panels or electric cars because we've already got way too many of those but you kind of see the problem I

mean that that's their structural issues but in terms of addressing uh the cycle the business cycle in China they need to get growth up and the easiest way to do that is to try and inject more credit now you will argue against me and say well okay isn't that creating more debt and it's compounding the problems and I'll come quietly and say well yes probably it is uh but you try telling politicians that because they've got the immediacy of trying to revive the Chinese economy and there isn't there aren't many other ways to do it

so they cut by 20 basis points and to your point that's not much but are you suggesting that even if they cut by 50 or 75 basis points it wouldn't have any bearing on the economy yeah because it's not I mean you know Financial systems uh well particularly in China but even globally now don't really operate around interest rates they operate around the volumes of liquidity and that's really the main thing to watch uh China is a you know is a is a clear case in point because interest rates don't really matter it's much more

about the decisions uh that policy makers make about uh allocating credit to certain industries and that's how the Chinese economy tends to work now let me say that that's actually an important factor if the People's Bank decides to Goose the economy by increasing liquidity significantly to certain industries uh then you will get uh a rise in Chinese business activity that will spill over given the huge size of the Chinese economy uh in terms of the world economy uh China's footprint we know industrial footprint is is vast and that will have a very positive effect on

world commodity prices there's no question about that um but you know what we've got to see is evidence that that's happening first I would suspect it probably will that's my hunch but I'm not convinced because I haven't seen the evidence in front of me yet and that may take some months to come out you touched on the real estate market a couple of times and then read an article recently which stated that 34 of China's top 50 property developers have defaulted on their debts in 2024 and many of China's largest property developers have gone bankrupt

in recent years one of the big ones this year was ever Grand group one of the largest developers in the world and I wonder what the ramifications are to the wealth effect of a collapsing real estate market in China well I mean the plain fact is it it's significant I mean you know um I'm not going to sit here and say that this this is a bullish move it clearly isn't um if you're getting declining asset prices it's clearly very negative it has a bad effect on the economy has a bad effect on wealth levels

uh but that's one of the things after all that I would imagine the Chinese authorities are trying to address you cannot have uh an environment where you've got falling prices and falling particularly falling asset prices it's very negative for the economic backdrop and that's why I say if you've got a situation where China is massively overproducing Goods the only way that you Clear markets is to allow the real exchange rate to devalue significantly and that's either a question of letting the nominal exchange rate fall or it's uh sitting back and watching uh prices in the

High Street or prices in asset markets collaps and up to now the Chinese have held the Yuan up at artificially high levels I would I would argue and they've let prices in the High Street and prices in asset markets collapse and you can't keep doing that because you know there's only so many punches that the domestic populace can take and I think China is now realizing that so at some stage what they've got to do is either cut back production or boost liquidity significantly and be prepared to take the cost in terms of a lower

uh Yuan currency so we really have two issues here I want to get your thoughts on this we got this collapse in the Chinese real estate market which is impacting everyone within the country but then we also have what some are calling cold the Cold War 2.0 and the relationship between the US and China right now now is probably the worst that's been in decades and so this is impacting exports and so what are your thoughts on this and I kind of wonder if if China you mentioned this earlier but is is China becoming another

Japan where their economy is going to be in the doldrums for 20 or 30 years it's entirely possible I mean the the reality of the you know the woring reality is that you know China's just not another Japan but it's basically uh another Japan 10-fold bigger uh and this is this is the issue we got to face so uh this is a problem not just for China it's a problem for the world economy given China's huge uh industrial footprint this is a fact now what I'd also do is sort of wearing my uh maybe earlier

Salon Brothers hat one of the things that Salon Brothers was used to say was in financial markets there are no unrelated events and uh let's just try and join up the dots between what America has done with counting interest rates and uh what China has done with its easing package um one of the things that maybe leads into this is to evidence what happened at the beginning of August with the jump in the Japanese Yen now my leld thesis and it was completely unproven and I would say 100% speculative but nonetheless it seemed to have

some Merit and that was to say that if you look back to when the Yen collapsed about two years ago uh the speed or the alacrity with which the Yen fell against the US dollar was something I've never seen from a major currency uh you know in 30 years of being in financial markets uh markets don't do this to Major currencies only governments do so in my view that Yen uh collapse was a deliberate move uh you know coincidentally perhaps and this may be you know grasping at maybe coincidences or straws uh it happened to

coincide with the uh Russian invasion of Ukraine um so maybe there was something there to try and U you know associate that with what was happening in Japan and China and I think the fall in the uh Yen was all about putting a lot more pressure on the Chinese Yuan trying to force it to devalue and actually putting the CH painting the Chinese into a corner and trying to make them tighten monetary policy and ultimately wreck their economy so I think it was all deliberate now if that's the case dis hold that thought for a

moment uh go back to August of this year and then you see a sudden jump uh in the Japanese yen in value now that was quite a substantial move it came out of well pretty much out of the blue and I suspect what was hen what happened then was there was some tacid agreement between the US China and Japan to basically uh realign Asian currencies at a new trading range and this can be drawn as a parallel to what happened maybe in 1985 for those who remember with the plaza record and what happened in 1985

was the US dollar was very strong if you remember courtesy of a very loose fiscal policy ditto now and a very tight monetary policy ditto now and what America agreed alongside its other allies in in the uh then um G5 countries was to basically allow the dollar to devalue by the US easing monetary policy significantly and that meant that the other countries ultimately could ease their monetary policies in time and that's exactly what happened and that big liquidity injection LED onto uh an asset bubble that blew up through 1986 and 1987 and ultimately ended in

tears uh in the October crash of ' 87 now if you look at what's going on now maybe we're not in size the same magnitude but I would argue it's the same direction I think there's been a currency deal done I think Asian currencies now a lot more stable against the US dollar what we've seen is a US easing and we've seen uh the Chinese come in and basically suggest that they're going to start easing as well over coming months and a bigger size so I think this lines up as an equivalent type of deal

and what I would argue is that uh you know all this talk about Japan tightening is completely Pie in the Sky the Japanese can't tighten I mean let's be realistic they've got a huge huge debt problem if they start to raise interest rates they start to compound the interest bill on Japanese government debt so uh dream on they're not going to Titan uh so what you've got is the prospect of liquidity conditions in the global economy uh moving up still further higher over the next 6 to 12 months and that's what I would imagine will

it end in tiers like 1987 well quite probably we've seen this we've seen the script before but for now liquidity is going up okay so I want to spend a few more minutes on this and because as you mentioned in the US uh expansive monetary policy they have a very aggressive fiscal spending going on right now that's bullish for the economy bullish for the the markets there now we have these policy changes in China these two countries together represent 45% of the world's GDP so are you suggesting that this is going to bode well for

the global economy yeah in the short term I think unquestionably yeah uh I think in the medium term we've still got this long-term bogey of too much debt in the world economy and that is the problem that is creating instability or fragility in the world financial system and it's why we're sort of riddled with frequent crises and Cycles uh it's all about this huge huge and uh too big debt load and the problem is that debt load is getting bigger not smaller because governments uh are now spending a lot of money they're getting into bigger

and bigger fiscal deficit and they're piling up an even bigger um you know mountain of debt and that's the problem and that's why liquidity conditions basically will have to go up in the medium term and that's why everybody's got more more gold it's as simple as that so liquidity is going up what does this mean for inflation well I think that um let me say first of all that liquidity is going up which is a monetary inflation um High Street inflation as people understand it which is basically you know measured by CPI Consumer Price indexes

uh isn't necessarily going up at the same Pace but the fact is that Consumer Price inflation High Street inflation is a cocktail that is made up of several ingredients one of those is monetary inflation in other words the devaluation of the paper dollar so the more that the Federal Reserve devalues the dollar uh you're going to get a spillover potentially into High Street inflation we've actually had monetary inflation of course over the last 10 20 years anyway I mean this is the the nature of things uh you know the financial system with uh big debt

load requires liquidity it requires monetary inflation why hasn't that monetary inflation spilled over into the High Street basically because of two or three things one is cheap Chinese Goods which have been dumped in the west secondly because of techn Technology gains which have reduced prices and thirdly because oil prices are substantially lower than they were in 2008 and all these things all these ingredients have come through to keep High Street prices down now the question to speculate on is that going to happen in the future uh if if you've got monetary inflation compounding at a

rate of maybe 8 to 10% per anom which I think is realistic um you will get much faster High Street inflation unless you get costs uh capped in some way and you know I I'm not that optimistic we will I don't think we're necessarily going to see 8 to 10% High Street inflation but I do believe we're going to see sub substantially more than we've recently had so my figure would be you know start thinking of near a 4% uh CPI inflation not the 2% that the Federal Reserve claims uh they've hit in the US

I must say my personal inflation rate and about yours is a lot higher than 2% so you know they're they're fiddling the figure somewhere oh I agree 100% what whatever they say I just double it okay so if they say it's 2% it's 4% if it's 3% I think it's 6% and maybe it's even higher but uh sure so so let's talk about this inflation rate you're thinking it's more like 4% so as we go into 2025 maybe it's q1 maybe it's Q2 and let's just assume interest or inflation starts picking up again and starts

accelerating do you see the threat of interest rates going up in the US it's it's possible I mean make no mistake about that uh markets mve in Cycles uh we're now in a situation where rates are coming down the super tanker is Shifting Direction but you know we know as sure as eggs or eggs the super tanker will if I'm not mixing my metaphors shift direction again and um that is probably an event which May will occur let's say 12 to 18 months hence that sort of time frame now uh it may be that the

liquidity cycle turns down before interest rates go up so uh we you know we shouldn't be waiting for a tight monetary policy or a tightening monetary policy to you know spook us out of markets I think one's got to be cognizant of the fact that liquidity is an independent cycle to a large extent and it tends to move in advance of interest rates now I would suspect that the liquidity cycle is likely to Peak in late 2025 and come down and I would argue uh in a moment why that is but that liquidity cycle has

been basically moving up since October of 2022 and that has really been the main stay of the bull market in Risk assets and we've been risk on through that period we continue to be but we're cognizant of the fact that you know we're getting late in the game we've already had two years of pretty decent gains in Risk assets uh we've got maybe another 12 months to go but it's going to be harder to make money out of financial assets through that period let's be clear you need to diversify and you need to think about

other things maybe gold or maybe Commodities or maybe commodity related equities or this sort of thing now why should the liquidity cycle turn down in late 2025 and I would say there are broadly speaking uh you know two or three reasons why that may be the case uh one of course may be higher interest rates from central banks but uh it's the other two which are more important one of those is a strengthening real economy so if the world economy picks up uh we've got to realize that money can't be in two places at once

if it's in the real economy in fueling spending and increased production it is not U moving around in financial markets and equally if it's in financial markets it's not in the real economy so uh financial markets will be crowded out by a stronger world real economy which is likely I think by the back end of next year but it's the other reason the third reason which is really the Paramount one to think about and that comes back to the fact that the whole nature of financial markets has changed in the last few decades no longer

are financial markets uh uh mechanisms for raising New Capital uh for new uh for new investment in plant and equipment or whatever uh the sort of textbook model that drives the uh the business cycle as uh you know as academics tell us uh and it's not interest rates that attenuates that particular process we're in a world where there's a huge amount of debt and capital markets play the role of debt refinancing mechanisms not new capital racing mechanisms in other words with 30 $150 trillion of debt worldwide with an average maturity of 5 years that debt

has to be paid back pretty frequently and on average it means $70 trillion has to be repaid or rolled over uh every year uh Now spoiler alert debt is never paid back it's just built up it piles up and so you've got a refinance debt uh basically of a huge amount uh annually now that um 70 trillion is clearly not evenly distributed some years you might get 30 some years you might might get 70 some years you might get $110 trillion of refinancing and one of the things that people have noted uh as I'm sure

you're you're you're aware of is this thing uh which is basically um called which is about the the sort of the the debt um the sort of debt debt wall or whatever is or the maturity wall which is basically talking about how um corporations when interest rates were very low did a lot of their refinancing and they basically pushed debt out into 2026 or 2027 and that's when the bulk of it will start to to mature and they've got to face the problem of having not to had to refinance very much over the last two

years there's a huge amount of debt that needs to be refinanced basically two years out now that will start coming into the system uh or demanding uh Finance sometime around late 2025 and the fact is that if you're going to refinance debt of that magnitude you need balance sheet capacity to do that balance sheet capacity in the financial sector is called liquidity and therefore we need lots of liquidity to do that refinancing so what you've got as a situation which is basically getting dangerous number one interest rates may be going up for inflation fighting reasons

or whatever because of the cycle number two the world real economy could be faster by back end of next year and number three you've got this huge uh you know maturity wall in the debt markets to refinance which will be absorbing liquidity so the fact of the matter is is that debt tends to grow exponentially but liquidity is cyclical and you can see from that uh you know from that Confluence of different factors that that's why you get financial crises every financial crisis in the last two or three decades has first and foremost been a

debt refinancing crisis think of the Asian crisis in 97 think of 2008 think of the US repo crisis in 2019 all these were instances of debt refinancing and rollover problems and we'll get another one sure as eggs or eggs but it may uh you know 12 18 months away and I'm sorry what was the global debt levels uh 350 trillion 350 trillion so that's government debt that's corporate debt that's everything correct okay and so just to bring this closer to home now the federal debt let's look at the US okay its debt now stands at

35 trillion dollar it's growing by1 trillion dollar every 100 days the interest expense is a trillion dollars and as you mentioned that's going to go up in in the coming years when they have to refinance at 3 four 5% whatever the number is so are you suggesting that the FED is aware of this and therefore regardless of where inflation is they're going to start cutting interest rates or be more aggressive cutting interest rates coming 2025 well I'd be surprised that they're not aware of it because I know a lot of other people are the gold

market certainly is aware of it because the gold price is going up and I think if you come back to your metric on on US debt US debt has increased by Eightfold in size since year 2000 I mean that's an astonishing uh growth rate for debt public debt okay there's there are very few assets that have gone up eight times since 2000 one of those is the price of gold so gold is matching pretty much exactly the uh sort of fiscal laxity of the American economy so the more that politicians Kick the Can down the

road the more you are sure or certain that the old price is going to go up and uh you know I would imagine that uh you've got this debt burden growing as I said at a rate of amount maybe 8 to 10% per anom which basically would suggest to me that it's going to double uh certainly within every 10 years I mean that's what the math says so if you've got a doubling of that debt uh of that debt pile uh in the next 10 years you can be pretty sure that the gold price will

double uh because goal is is the most wonderful long-term U monetary hedge that's what history has always shown now your question which is a great question is is the Federal Reserve and the treasury aware of this well I would argue they are because they're very cognizant of the need for liquidity in markets uh one of the things that got very little commentary uh was the change made I think it was August 13th uh by the Federal Reserve on bank stress test rules now that may be getting into the weeds of this whole thing but it's

very important because basically the banks uh have been building up huge Reserves at the treasury sorry at the in the in Federal Reserve basically to protect themselves because they need to satisfy stress tests their regulator uh every month and basically this money held at the FED is a pretty decent liquid asset Reserve they can they can post uh the Federal Reserve said that actually in future going forward uh they can actually use uh prospective discount window borrowing um also borrowings from federal home loan Banks or the standing repo facility uh as uh as part of

their stress test which means that those Reserves reses or a large part of those reserves maybe uh we think maybe as much as half a trillion uh can find their way back into other instruments uh for example treasuries so what you've got here is the ability to release liquidity a lot more liquidity into uh the system because Banks demand for reserves is actually going to be less so in other words the money markets have actually got more liquidity than maybe we previously thought um the second thing that's going on is if the Federal Reserve is

kind of doing what I've described as uh not uqe um the US Treasury is doing what I describe as not yield curve control yield curve control uh it's unconventional but it's happening and if you look at what Janet has done at the treasury uh since the end of 2022 she's managed to reduce the average uh tenner of the calendar in other words the uh issuance calendar the average tenor of bonds uh offered by 1.2 years which in fixed income speak is actually quite a big drop in the average maturity of bonds so they're not funding

at the long end they're funding at the short end and what's more Bill Finance uh has increased to 22% of total debt outstanding now these are these are big big numbers and you know I think it was Stanley drer Miller uh many months ago which said who said uh you know very perceptively a lot of these figures are not the statistics you would expect coming out of the US they're the statistics you would expect coming out of Argentina well actually no Argentina is doing a pretty good job at controlling its monetary excesses and the US

is actually going down the old Argentinian path and the fact is that if you are funding at the short end of the market in other words funding through 2E 3E 5ye bonds uh no longer 10 or 20 or 30 year um you are principally selling bonds to credit providers because they like that sort of stuff and it's a wonderful match for uh their balance sheets which are basically getting uh fueled or pumped up by more and more government spending so they tend to be the buyers of these bills and these short-dated bonds not the long-term

fund funds if the long-term funds bought government debt that would be pure funding it would come out of savings if the banks buy the debt which is what they've been doing what you're getting is monetization and monetization is dangerous because it's monetary inflation Milton Friedman for example you know the sort of DNE of monetarism uh sadly not around anymore but he'd be telling you is grave looking at these numbers something like three4 of the increase in US M2 money supply this year has come through monetization of the federal deficit that mean this these are crazy

numbers it's bound to end badly with higher inflation maybe it already is maybe we're seeing the inflation and we it's not being recorded uh and that's really the question to pose the gold market thinks we're getting inflation for sure Bitcoin thinks we're getting inflation so okay so you talked about gold and Bitcoin and this is how you're suggesting that we protect ourselves in this current environment Gold's up 25% on the year bitcoin's up about 50% on the year and um Bitcoin looks like it's stalled out here uh it had a big move back in q1

I guess just on the back of the ETF um coming to the market but what are your thoughts on bitcoin here is it going to get going again are we going to are we close to I think it's around 65,000 bucks so we're not too far from its all-time high do you think it's going to rip going into year end well wealth warning here I'm not an expert on bigcoin so I'm not going to say very much this intelligent all I would say is that uh the experience that one's had in The Last 5 Years

is that Bitcoin performs rather like digital gold and to give you some parameters to gauge that off for every 10% increase in global liquidity you tend to find a 15% increase in the price of gold bullion um historically I'm saying in the Last 5 Years uh Bitcoin has actually produced a multiply about 4.5 times in other words a 10% increase in liquidity means a 45% increase in the price of Bitcoin so that explains the Bitcoin outperformance will that 45 % you know pertain into the into the future unlikely uh because some of that has been

sort of take up effect of a new of a new instrument so people have been moving into Bitcoin uh exaggerating its sensitivity but I think one can infer in the long term that Bitcoin will at least keep Pace with the price of gold may be outperforming uh and that's how I would tend to believe uh these things are I mean clearly accidents can happen people may lose confidence in Bitcoin something legislation May transpire which makes it more difficult but at the end of the day uh it's performing like digital gold and I think one's got

to accept that and I'm sorry what is the leg time associated with the multiplier effect uh well I mean it's um it tends to be for Bitcoin has actually been uh it's sort of concertina shorter and shorter all the time and the latest calculations or our calculations would say about 6 weeks now that's in normal uh asset Market reactions actually remarkably short time uh the fixed income markets normally respond to liquidity after about 6 months I mean that's been our our normal Benchmark but in actual fact Bitcoin seems to be a lot lot more sensitive

and I want to get your thoughts on why Bitcoin has outperformed gold so much here in recent years I mean this year alone like I said it's up 50% versus gold which is up 25% last year Bitcoin was up 150% why is gold not significantly higher given everything you just said well I think that um I think gold is the is the Benchmark to think about and I I would um you know I'd Venture that gold is likely to move you know substantially higher but you've got to remember that we're talking about uh a rate

of growth of um of liquidity that is already have the magnitude of about 10% per anom so you know we're not talking about 30 40 50% gains in global liquidity we're talking about a very a pretty steady Pace here about 10% uh increases now the fact is that 10% is not 5% so 10% is Meaningful and if you've got a multiplier of 1.5 on your gold bullion price that means you're getting 15% compound out of gold year after year now that's a pretty decent return When you when you're talking about interest rates at something like

4% or maybe you if you at a stretch 5% you start thinking about corporate debt so broadly speaking um you know what I would say is that that that's not a bad return now it may be that Bitcoin surpasses that and it has done recently but I think you've got to argue one has to argue that part of that is the takeup effect and you know I I had an interesting discussion with some academics online yesterday where we were talking about the ingredients or the components of Bitcoin return and you know what we were already

talking about was two elements or two moving Parts an intensive margin and an extensive margin the extensive margin is basically more and more people holding small amounts of Bitcoin maybe you know a lot of people holding a 100 bucks uh in Bitcoin or whatever but that number growing from you know 10,000 to 100,000 to a million to 10 million or whatever and that's the extensive margin but you've also got to factor in the Intensive margin which is saying that that $100 could be $200 or if if it's an institution it could go to a million

or 10 million or uh whatever 50 million bucks uh in Bitcoin and I think you've got these two moving parts to think about so I would argue the Intensive margin is something which is sort of playing on on the background and moving rather like an s uh an scurve in other words the takeup effect rather like you know people using the internet or people using mobile phones more and more people are going to hold a little bit of Bitcoin and that's going to grow the the Intensive margin is basically saying are institutions using that as

a hedge and I think they are but it's a little bit like thinking about uh you know what's happening with the gold market um what are Institute what percentage of institutional portfolios are invested in gold at the moment now there are various studies done and the answers come back at maybe 1 or 2% of total assets are held in gold which seems a reasonable stab at the number but if you go back to the 1970s which I just just about remember uh in the 1970s portfolios were vested probably um 10% sometimes 15% in Gold so

it was much much bigger amounts so I think that what you've got here is uh uh the the ability for both in Bitcoin the Intensive margin to increase and in the case of gold and Bitcoin the exensive margin to increase as inflation wires start to pick up so you're bullish on bitcoin you're bullish on gold what about the S&P it's up 20% give or take on the year and uh it's trading out 5700 do you see that continuing to move higher as we go into year end and into 2025 yeah broadly I think that uh

there's there's no case for saying the market could come back significantly and me barwing shocks uh those could be geopolitical shocks or whatever I mean who knows what happens ahead of the election who knows what happens in Ukraine or Israel I mean these are clearly issues which may spook the market near term but I think in the longer term one's got to say that you know it's a bit like driving you know driving a car if you got a lot of gas in the tank you can keep driving and that gas is liquidity and if

the central banks and uh banks are starting to pour more and more liquidity into the system you can keep driving that uh that car for a long time yet so I still think it goes up uh you know my my warning is that maybe by the end of 2025 uh you were going to see a peak in that liquidity cycle for the reasons that I cited uh what's more one's got to recognize that we've already done a lot of miles uh so far over the last two years in terms of uh you know asset market

gains or risk asset market gains so it's not uh you know it's not a slam dunk here but uh the fact is that you've got to think about the medium-term and in the medium term we are getting a lot of monetary inflation politicians are going to kick the can down the road and increasingly fund at the short end of the market and you know as I've said before I mean you know someone is fiddling the cards here and it's uh you know the fed and the treasury and we've got to start investing against them and

start thinking more and more about diversifying out of monetary uh you know out of or into assets which are dedicated monetary inflation Hedges things like gold uh really stand out over the medium- term uh you know Prime residential real estate is always a good uh asset to own uh you know I did a call on a an Australian program uh today uh about these very same things and the commentator made the point that actually in Australia uh Prime residential real estate is absolutely going through the roof because people are sensing there's monetary inflation there and

um you know these are the sort of things you start thinking about residential Prime residential real estate the gold prices at an all-time high you're looking at Bitcoin which is close to that uh all these monetary inflation Hedges are doing pretty well um and that's what you got to start thinking about uh stick with equities uh good quality equities will do well in a moderate inflation what tends to wreck the equity Market is either a deflation or a very high inflationary period And I don't really uh Envision either of those two in the near future

Michael I always like discussing possible Black Swan events all right and you have said in the past that all financial disasters are brought on by the inability to refinance debt and when you look out maybe a year from now two years from now does this become that Black Swan event where we get a serious collaps in financial markets because of this inability to service and refinance debt well let's never say never because I think that if you look back from experience uh every financial crisis that I can recall has been a debt refinancing crisis and

um you know we we haven't we haven't cured the cycle yet there called there's still a cycle and as I alluded to if you look at the path of debt it's exponential and if you look at the path of liquidity it's cyclical so inevitably there's going to be a disaster when uh there's a shortfall between liquidity and the needs of debt refinancing one hopes that the policy makers have understand that Michael what about China as a potential Black Swan event maybe things are significantly worse there than we're aware of you think China is currently imploding

I don't think China's imploding but I I mean you know the the the sort of reality is that you know the Chinese Financial system is pretty basic and and very straightforward it's nothing like as complex as the Western Financial system so I think if you're looking at a financial unraveling it's more likely to come in the from the West rather than in China but that doesn't mean to say that China doesn't have problems China's problems are much more industrial and they're much more about you know developing the financial system more and actually getting off the

dollar hook that's what they need to do and as I wrote in a book um called Capital Wars a few years ago the great problem China has is getting off the dollar hook and that's not an easy task um so you know China's struggling on and a lot of the travails of China that we've seen over the last few years have really been about this whole problem the fact is that her industrial economy is massive overdeveloped relative to her financial sector in the case of the West it's kind of the other way around is that

the financial economy is is vastly greater than the industrial economy and if you look at the financial economy in the west the real question to ask is will there be another crash uh like 20089 or um U maybe even like the Asian crisis in 2000 sorry 199 uh 6 97 those crises will recur because they're debt refinancing crisis well Michael that was a fascinating discussion I want to thank you very much for spending time with us today if somebody would like to follow you online and learn more about your research where can they go uh

best way is substack uh our substack is called Capital Wars uh that's named after a book I wrote about five years ago uh with the same title about global liquidity uh the institutional service is available uh on wwwc crossbo capital.com uh and there's Twitter with the handle at crossb cab that's great once again Michael thank you been a great pleasure James thank you