Brent Johnson (02:49):
The powers that be have been able to prop up the markets with QE and bailouts and stimulus plans, but essentially what it is, is that I believe once we enter a sovereign debt crisis when debt finally matters and whether that’s tomorrow, next week, or next year, I don’t know the timing. But when we get into a situation where debt finally matters again, I think that the dollar is going to rise dramatically versus all other fiat currencies. And while it will probably in the very short term, be bad for risk assets such as we saw in March of 2020, I think it will evolve into a situation where global capital flows into the US dollar and therefore, it flows into US markets. And I think it will actually push us markets even higher than we see today.

Brent Johnson (03:36):
Now, it doesn’t mean it’s going to be a straight line, it doesn’t mean it’s going to be easy, but I think that’s where it goes. The milkshake name comes from the fact that since the global financial crisis, central banks and monetary authorities around the world have just flooded the world with liquidity, again, the bailouts, the QE, the monetary stimulus, the government help. And so my contention has been that for a number of reasons, the US dollar will have the straw versus all the other currencies. And for better, for worse, like it or not, the dollar will suck up all that liquidity that’s been provided to the markets.

Brent Johnson (04:14):
And sucking up that liquidity denies the rest of the world liquidity. And so I think our markets will be very liquid and the rest of the world will be very illiquid. And that itself, creates this perpetuating effect that pushes the dollar even higher. And so I think we’ll get into a situation where the dollar goes much higher than anybody thinks possible. Perhaps you’ll have asset prices go much higher than anybody thinks possible just as that flow of capital comes in.

Brent Johnson (04:40):
And so we will have a situation where we may have inflationary pressures and in US dollar terms even though the dollar’s going higher, and I think we will outside the United States, we will have inflationary pressures in local currency terms, but deflationary pressures in US dollar terms, which is the worst of both worlds. And so it really does become this self-perpetuating disaster, for lack of a better word. And I’ve always said, this is not a story that ends well. Even if the US outperforms the rest of the world, it doesn’t mean it will be a great place. Again, it’s all relative. And that’s what I always try to explain. It’s all relative.

Brent Johnson (05:16):
And so the dollar may fall in real terms, but against this fiat peers, I think it will dramatically outperform. And so then a lot of people have said to me, “Well then, who cares? Who cares if the dollar isn’t rising in real terms?” Well, it does matter. If the dollar rises just as an example, 20% versus all other fiat currencies, that will have dramatic effects on global markets. You may think it won’t affect you, but I’m here to tell you that you won’t be able to ignore it. And I think that will lead to more volatility. That’s a long way of explaining it, but that is the Dollar Milkshake Theory.

Trey Lockerbie (05:50):
What I love about this is essentially what you’re saying is that you’re expecting fully a currency crisis, but the narrative you hear more often than not nowadays is that the currency is going to go lower and lower, and lower. And that’s the currency crisis everyone is expecting. Well, you’re saying the complete opposite that the dollar gets stronger and stronger. What’s not clear to me I think that is the Fed’s ability to combat the dollar going higher and higher, which they’ve been doing somewhat to date, maybe not perfectly, but that’s one of their jobs.

Trey Lockerbie (06:21):
So say that starts to happen where the dollar does start to rise, where do you see the Fed being hindered to continue to do what they’ve been doing to stop that from happening?

Brent Johnson (06:31):
Well, I think today is a perfect example of why it’s not so easy to do what they want to do, which is weaken the dollar. And that is that we have inflationary pressures that are the highest they’ve been in 12 months, the highest they’ve been in 12 decades or not 12 decades, 12 years, a couple of decades. And so to weaken the dollar, artificially weaken the dollar here would be to pour gasoline on the inflationary pressures. Well, how do you solve the problem of combating inflationary pressures while also solving the problem of a deflationary force that a rising US dollar has? It’s very, very hard.

Brent Johnson (07:08):
And this is the point that I’ve tried to make to people, probably the reason I’ve pounded the table on it so forcefully is that I just think most people have it wrong. And it’s not that I care whether I’m right or they’re right, or I’m wrong or they’re wrong, it’s just I don’t want people to get killed. And I feel like, in today’s day and age, they think they have an idea, they think they have it all figured out, so they go all-in on it. I don’t think anybody should be all in on anything. When you manage money professionally, a five or 10% position, that’s a big position.

Brent Johnson (07:37):
And yet, I talk to people all the time who have 50, 60, 70% of their money in one asset or one asset class or one idea. And I just think that that’s wrong. And I think there’s this very, very pervasive idea that the Central Banks have everything under control, and if they lose control, it will be the dollar loss to the downside. And I just think that’s wrong. I think if they lose control, the dollar goes much higher. And if that happens, a lot of people who are betting on the dollar going lower could really get hurt. So I don’t necessarily want everybody to run out there and change their portfolio to look like mine or embrace my idea 100%, put all their money into my idea, I just want them to be aware of it, of what could happen, and perhaps take a few steps along the way to protect them against it.

Brent Johnson (08:23):
Because if I’m even a little bit right, it’s going to be really bad. Listen, I may be wrong. And this is the other thing that a lot of people get wrong about my thesis is that I will actually be better off and my clients will be better off if I am wrong. The Dollar Milkshake Theory really talks about the biggest potential risk that I see out there. And as an overall portfolio manager and somebody who is in charge of helping clients to manage their overall wealth, of course, I always want to figure out how we can make money, but a big part of my job is figuring out how we don’t lose it.

Brent Johnson (08:57):
And this is the biggest unappreciated risk that I see. And as a result, I can’t just ignore it. As a fiduciary, I can’t just sit there and pretend I don’t see it. I see it. And so I have in our different portfolios, we have devised some ways that we think will help protect against. But again, the reality is, if I’m wrong, my clients will be fine because we own a lot of assets. I think the other thing is, I think a lot of people think I’m just sitting in cash and not investing anything, but that’s not the case. All my clients, own real estate, a lot of them own gold. We own lots of stocks, energy-related stocks, commodity-related stocks.

Brent Johnson (09:31):
We’re not sitting in a fox hole just waiting for the world to blow up. We’re actually in there investing, but we just recognize that it’s a risky time and we don’t think it’s a time to be all-in on any one thesis.

Trey Lockerbie (09:43):
I’m actually glad you touched on that because I know that you manage a smaller cohort of individuals who are independently wealthy and there’s a different strategy when that’s the case. It’s more about preservation than high growth. But that being said, sometimes when you’re just looking for diversification, the yields you’re looking for, say 5% or something conservative, but with inflation now at 6.2, as you alluded to earlier, today’s announcement, well, how does that change that strategy as far as you try not to lose money, but when those numbers start coming out, how do you reposition for that?

Brent Johnson (10:17):
Well, it’s really hard. I’m not going to lie, it’s really hard. And I get this question a lot, and unfortunately, people always say, “Well, how would you manage my portfolio? How would you do this?” And I always say, “If you’re my client, I’ll tell you exactly what it is, but as a regulated entity who is subject to both NFA regulations and SEC regulations, I’m not allowed to just give advice over the internet and say, “Go, buy this or go sell that.” But what I can say is that I think you should be diversified, I think you should be prepared for everything.

Brent Johnson (10:42):
The way that we have decided to largely solve it, and again, it’s different for every client, none of my clients have the same portfolio. They have similar portfolios, but nobody has the exact same solution. It depends on their age, their demographic, how much liquid capital they have versus maybe they own a business or they own a bunch of lands. But in general, the way that we have decided to try to handle this is we have allocated our portfolio to a number of the assets that I talked about earlier, equities, real estate, gold. A lot of them are invested in private companies or venture capital funds.

Brent Johnson (11:13):
And so that if the world continues to spend and the global economy grows, and if we continue to have a level of inflation that continues to push asset prices up, then we’re going to be pretty good. But we’ve also allocated a small percent of the portfolio, typically about 5% of the portfolio, couple clients a little bit lower, couple clients a little bit bigger, but in general, 5% of their portfolio, to some asymmetric trades that would pay off if the dollar were to rapidly rise.

Brent Johnson (11:40):
And in that situation, we think that if the dollar were to rapidly rise and it was to cause another, let’s call it March 2020, for lack of a better word, and the traditional assets that we’re already invested in getting impaired and they go down 20, 30%, well, your 95% is now worth 70% or whatever it’s But in that scenario, the 5% that we have to these asymmetric hedges have the potential, again, there are no guarantees but have the potential to literally go up to four, five, six, seven times. That’s the type of trades that we’re doing. And if that happens, then you add that 20 to 25% to the 70%, and now you’re at 95%.

Brent Johnson (12:17):
So you maybe you haven’t completely avoided the crisis, but perhaps you’ve made it through it a little bit more intact than your peers, or you feel some pain, but you’re not completely wiped out. And I think that’s the best way to play it. Again, if I knew 100% that the Dollar Milkshake Theory was right, it would be easier to play, but I don’t know that for sure. All I can do is play to probabilities. And I think the probabilities that it happens are higher than the market appreciates. And because I think the probabilities are higher than the market appreciates, I think buying insurance against it is artificially cheap.

Brent Johnson (12:53):
And so that’s how you can get these returns of four, five, 6X. And again, these are potential returns, there’s no guarantees, past performances, there’s no guarantee of future performance, all that kind of stuff. But the point is that over the last month, volatility hit its lowest level over the last couple of years, it was like 14 or 15. Same thing with currency volatility, not just equity volatility, but currency volatility. Volatility across the number of asset classes is as low as it’s been in a couple of years. The time to buy insurance is when it’s cheap, and that’s when you should be adding…

Brent Johnson (13:26):
And so we have had a number of clients who have done very well in their equity portfolios, who’ve done very well in their real estate portfolios, who have done really well in their Bitcoin or gold, and they are reallocating some of their profits that they’ve made over the last 18 months into their hedges. Is that the right decision for everybody? Not necessarily, but the point is that even despite the fact that the hedges have not done well, they’ve not done well at all, which they shouldn’t do. They shouldn’t do well when the overall world is doing well. They’re designed to do well when the overall world does poorly.

Brent Johnson (13:59):
And so we’ve had clients take some of the profits from their traditional portfolios and reallocate it to more of the hedges. It’s just topping up your insurance. It’s like you pay your insurance on your car every year. The premium comes out, you have to pay the premium, maybe your insurance on your house or whatever it is. It’s like that. And I think that’s the right way to do it. I’m not an all-or-nothing guy. I don’t think you should go all-in on one thing, but I do think that you should have the courage of your convictions, but you should also have the hubris to understand you’re wrong, or you could be wrong. And that’s what we do.

Trey Lockerbie (14:30):
Let’s talk about the courage of your conviction a little bit because it was tested back in March as you mentioned, and for a minute there was playing out as predicted, the dollar spiked quite a bit, but then ever since, it’s been waning and waning. Has that fundamentally changed anything about your thesis for you? Did you learn anything from that, you’re now pricing into the future performance of the dollar?

Brent Johnson (14:51):
I don’t know that I learned anything new, but it may be solidified some of the things that you’ve learned in the past. And one is, you just never know. There were people in February, March 2020 who was just absolutely convinced that we were going to go into a deflationary spiral that would match the 1930s. And you know what, that didn’t happen. It didn’t. You can say, “Well, it will, and it’s going to,” but the fact is it hasn’t yet. And to a certain extent, it gave me an appreciation for just how well these monetary authorities and apparatchik, for lack of a better word, can keep the plates spinning. You have to give it to them, It’s pretty amazing that they could…

Brent Johnson (15:30):
Same in Europe, in Japan, same in China, they’ve been able to pull the levers that have kept the wheels turning. And I don’t like it, I don’t necessarily condone it, but I appreciate it. But the interesting thing is that if the Dollar Milkshake Theory never happens, it’s likely that my reputation will take a little bit of a hit, but you know what, I’m okay with that because as long as my clients are a whole and they’re making money, that’s my job. My job is not to pump up my reputation, my job is to protect capital and grow it. I think that being aware of this potential problem will actually help us in the future. But if it doesn’t, again, that’s going to be okay.

Brent Johnson (16:08):
What I really think is interesting is that, and I actually just tweeted this out a little bit ago is that today the dollar is at its 52-week high. It is at the exact same level it was on March 9th, 2020. So a lot of people don’t remember this, but at the end of February of 2020, the dollar was around 97 or 98. And the biggest conviction trade of the year was that the dollar was going to go lower. And in the first two weeks of March, it did. And so everybody says, “See, here it is.” the Fed cut rates in order to combat COVID and the dollar fell to 94 or 94.60, or something like that.

Brent Johnson (16:45):
And everybody says, “See, the dollar’s going to zero.” So the Feds got it under control. And 10 days later, the dollar was at 102 and the world was on its knees begging for dollars, everybody knew to swap lines, everything was getting sold for dollars. And so that’s how quickly it can happen. Now, again, I wish I had the silver bullet or the crystal ball that told me exactly when those days were going to happen, but I just don’t. And so, because I don’t know the date, I have to be ready for it.

Brent Johnson (17:07):
Now, since that day, since March 9th, 2020, the US government has bought $120 billion a month in bonds. So that’s a, what, 1.8 trillion? They’ve done numerous stimulus plans, infrastructure plans, bailouts, PPP loans, etc, etc. And the dollar today, despite all of that, despite all of that firepower that they’ve thrown at it, the dollar today is the exact same place it was on March 9th, 2020. So the point, I guess, I’d like to get across is, for the last year, the most popular meme is Money Printer Go Brrr.

Brent Johnson (17:44):
Listen, assets have gone higher, dollars have gone higher, gold’s gone higher. Bitcoin has gone through the roof, a number of these points have, gas prices have gone higher, natural gas prices have gone higher, but the dollar hasn’t collapsed the way everybody thought it would. Now, people will say it’s collapsed versus assets. And yeah, I’ve never said not to own assets, never once. If you actually listen to what the Milkshake Theory says, it actually says to own assets. It just says to own them in North America and own US assets. And so, to a certain extent, I’m encouraged that I’m not completely wrong because if they’ve printed one and a half, $2 trillion in the last 18 months and the dollars right where it was when they started, how much effect did it really have?

Trey Lockerbie (18:26):
I like it. So speaking of assets, because I’d like to go there. That was one of my questions around, is it already happening? Because real estate in the US is up so great. The question that just arise from me given that statement was, how do you then explain the Bitcoin performance? Because it’s tripled, I think, since the last time you were on the show. And at that point it was still relatively, I think, at near all-time highs. So that’s a global asset. So is that sucking up any of this demand that wasn’t there before?

Brent Johnson (18:58):
Well, it really wasn’t there before. In my mind, there’s no question that Bitcoin has benefited from all the stimulus plans, all the bailouts, all the money printing, however you describe that. And I think it is to a certain extent taken some of the lures away from gold. Gold had a big update today, but it’s no question it’s trailing Bitcoin over the last year. And to your point, isn’t it already happening? And I would say this is happening, fund flows into the United States from outside the United States is through the roof. the US equity prices versus emerging market equity prices are through the roof.

Brent Johnson (19:31):
The dramatic performance, despite everything that’s been thrown at it, treasury yields are below 1.5%. The interesting thing is, I think a lot of people when they think about the Milkshake Theory, just think about the dollar going higher. And from that perspective, it really hasn’t. It hasn’t collapsed, but it hasn’t really gone higher. And so they think just about the deflationary hedges that we have in place. Again, the deflationary hedges are only part of the overall theory. The overall theory says to own assets because the US is going to outperform the rest of the world, and that’s exactly what’s happened over the last 12 months, 18 months.

Brent Johnson (20:09):
So I do think it’s already happening to a certain extent, I think it will continue to happen. And again, I don’t think it’s going to be easy. I’m not going to say that we’re just going to sit here and equities are going to continue to go higher, Bitcoin will continue to go higher, gold will continue to go higher and there won’t be any scary drawdowns along the way, but I just think that’s how it ends up. And so I think not only is it already started, but I think it will continue.

Trey Lockerbie (20:34):
Back in December when you were on the show, you predicted that there would be a lot more money creation through 2021 even more maybe than 2020. Is that what we’ve seen or has there been a surprise either upward or downward from your prediction a year ago?

Brent Johnson (20:49):
I think that’s what we’ve seen. They’ve continued to do QE all throughout the year. Here’s where it gets a little interesting, and I don’t have time to break it all down completely, but we get into the whole, how our bank reserves money thing. And QE provides banks with bank reserves, they don’t actually create money. I’m just going to leave it at that and let people make up their own minds because experts on each side disagree. But what they have not done is what they have not continued to do at the same rate, is put money into people’s accounts, the stimulus plans, the PPP loans.

Brent Johnson (21:22):
And the point I was always trying to make was that financial repression is easy in theory. You print a bunch of money, you hold interest rates low and you get inflation higher, very easy in theory. It’s not so easy in real life. I’m sure the government overall would love to spend more money, would love to give more stimulus plans. There’s probably a ton of senators and congressmen who are pounding their desks, “Why can’t we do this?” But there are a couple of senators who are saying, “No, inflation’s a problem. If we print more money, inflation’s going to be even worse.”

Brent Johnson (21:56):
And those people are pushing back hard enough that the rest of the government’s not able to pass these stimulus plans. They passed huge stimulus plans last year, and everybody said, “Oh, they’re just going to continue to print. They’re going to continue to spend.” Well, I think that they eventually will, but it, again, it’s not so easy. There are political ramifications to doing that. And so now you’ve got some pushback on it, and a lot of times, they need cover. When I say they, the politicians need cover in order to pass these huge spending plans or introduce these big programs.

Brent Johnson (22:30):
And last March, they had a lot of covers. We’ve got a depression on our hands, we’ve got a global pandemic. They basically had the keys to the city, they could do whatever they wanted. Well, that’s not the case right now, everything’s at its high, and inflationary pressures are high. And so the middle class is getting squeezed. And so the senators and the congressmen of some of these states with a lot of blue-collar workers are starting to push back a little bit. And if they don’t keep spending, then the inflationary pressures start to wane and then you could even get some deflationary pressures, and then that would give them the cover to come back in and push it higher.

Brent Johnson (23:06):
So I think that’s what we’re going to have. We’re going to have this push and this pull and this push and this pull. I’ve said a couple of times now that I think you absolutely need to understand the arguments for inflation, you absolutely do. And I think anybody sitting here and saying we haven’t had inflationary effects for the last of 12 to 18 months is just not being intellectually honest. I think we have had it. The question though is whether it continues and whether it continues at the same rate. I am of the belief that it will not continue at the same rate, but it might, I can’t rule it out, but I also completely understand the arguments for how it could reverse.

Brent Johnson (23:41):
And regardless of which side you fall on, I think we’re at a time where you need to understand both sides of the argument, because I don’t think it’s as obvious and as big of a given as many others do.

Trey Lockerbie (23:53):
I think what you’re talking about there is the fact that, as you’ve put it, the banks are more or less policing the system, so to speak, so that is stopping people from getting that newly printed money, if you will, into the hands to spend. But there are some really creative ways, I think, that they’re almost avoiding headlines to some degree by getting really creative to get money in the hands. And what I’m talking about most recently is the fact that through COVID, they extended an EIDL loan to businesses, and it was a COVID EIDL loan. And that was capped at 500,000 for most businesses.

Trey Lockerbie (24:25):
Now, most businesses were capped below that, but that was the cap at the time. They recently just increased it to two million. So now you have a lot of zombie companies that are getting more access to really long-term, really cheap debt, 30-plus year credit lines. To me, from what you’re saying, is an example of maybe ways we didn’t think before how the Fed could continue to keep pushing this down the line. Does this example make you rethink a little bit more about the actual timeline of this happening and just how far they can keep pressing this out?

Brent Johnson (25:00):
Well, I think they will continue to keep pressing it out. I think they will keep coming up with ideas like this. I think that they will do PPP-type loans again where the government guarantees them. And they’ll say, “You know what, you need to fund this green project. And the banks, you have to loan to this group of people. And banks, you have to loan to this sector.” I’m relatively certain that’s going to come along. I’m not certain about it, but I have a high degree of confidence that that will eventually come along. What I don’t have a high agree of confidence is if that will just happen from here or whether we have to experience some more pain that gives them the cover to push those through.

Brent Johnson (25:35):
There’s a guy named Russell Napier, he’s one of my favorite analysts. And I just did an interview with him. I did it a year ago and I just did one recently, and this is his thesis. He thinks that the monetary genie is out of the bottle, Congress has realized that they can control the monetary policy rather than the Fed and the banks and that they will use that newfound power. And I tend to agree with him. Where he and I diverge a little bit is this idea that they’ll just do it automatically. Again, I think there needs to be some pain that allows them to do this.

Brent Johnson (26:04):
And I don’t think it’s as easy to do as perhaps he thinks it is. But conceptually, this is what I think is going to happen. The world is going to continue to create stimulus. The government’s going to continue to spend, they’re going to continue to borrow. But the other thing that we haven’t even talked about yet is that this has not just happened in the United States, the same thing is happening in Japan, it’s happening in Australia, it’s happening in Canada, it’s happening in Europe, it’s happening everywhere. Let’s just say over the last 20 years, the Fed’s balance sheet has gone up like eight or 900%. You know what, so has China’s. Canada’s has gone up 1,000%, Europe’s gone up 1,000%.

Brent Johnson (26:45):
So we’re not doing this in a bubble. So again, the fiat currencies, the dollar, the yen, the Euro, the Yuan, trade relative to each other, they’re not an absolute value. So they could all be versus assets, but one of them is going to outperform all the others. And it just so happens because of the design of the monetary system, if the dollar outperforms all the others, really bad things happen. Again, we don’t have time to go through all the mechanics there, but that’s just the way it works. The world is on a global dollar standard. And as long as it grows, everything’s fine. If it ever stops growing, or God forbid reverses, goes into reverse gear, that’s when you get the dollar military theory.

Brent Johnson (27:27):
And that’s when the dollar starts running away to higher and it creates a suspicious circle. And so to your point, I have no doubt that governments and politicians and monetary, they’re going to continue. They’re very creative people. They’re kind of magicians, really, and who’s more creative than magicians? And so I think that they will continue to do these things. I just am not convinced that they’re not going to have a tough road of it, I think it will be hard. The other thing is that a lot of people may be either, or don’t remember or forget this, but it was about 10 years ago, eight or nine years ago when we had the Arab spring or across Northern Africa and into the Middle East. That was caused by the rising food crisis and rising energy crisis.

Brent Johnson (28:11):
That kind of economic stuff ends up having social ramifications. And you combine it with COVID and the lockdowns of COVID, people are on edge. And you start getting these social reactions to economic issues, and that creates a whole new ball of wax for the politicians that they have to deal with. I know I’m kind of pontificating here a little bit, but I guess my point is, I feel like we have this perfect storm. And this perfect storm, I think a lot of people believe ends up with the dollar going lower, and it’s just my belief that the perfect storm leads to the dollar going higher. And if the dollar goes higher, we’re going to have a real mess. So I just can’t ignore that. Again, I can’t rule that out, and if I’m even a little bit right on it, it has dramatic ramifications for the rest of the world.

Trey Lockerbie (28:57):
Well, the way you say that it can sound sometimes doomy and gloomy, but when I’ve heard you talk about DMT playing out, I’ve also heard you say that it would provide spectacular opportunities, especially the knock-on effect. So could you outline just a couple of those potential opportunities that you think could be available to people if they’re aware of it?

Brent Johnson (29:18):
Sure. Again, it depends on what your scope is from an investment standpoint. But I think that we’re going to have, again, incredible inflationary effects in local currency terms all over the world, and then massive deflationary effects all over the world in dollar terms. If you have an economy like Australia’s or Canada’s, where it is highly dependent upon low-interest rates and to a certain extent dependent upon US dollar funding, and you have a real estate market that has just gone up that makes the US housing market from 2008 look like child’s play. If interest rates in those countries ever start to rise… Well, if into the rise in those countries, which it is, and the way you have to combat inflation is rising interest rates. Well, then those economies become in a lot of trouble.

Brent Johnson (30:11):
So I think that there will be market dislocations in Australia and in Canadian real estate. And so that could create an incredible opportunity for somebody who’s not invested there and who has some drive out to go buy some assets on the cheap. So that’s an example. I don’t think China I in as good of an economic situation as many people think, and I think Hong Kong is not in as good a situation as many people think. And it’s very possible that the Hong Kong dollar peg breaks. Again, I don’t have time to go through the whole mechanics of the Hong Kong dollar peg. But if that happens, that will be a massively deflationary event.

Brent Johnson (30:47):
Because the reason that a currency would get revalued lower… So China is dealing with a massive real estate bubble in China, and they have massive internal deflationary pressures as a result. The reason the pressures are really deflationary is that they have pegged their currency to the US dollar. One way for them to alleviate that pressure would be to remove the peg that would allow them to import inflation, which they need to combat the deflation. But if they import inflation, then they’re deporting deflation. If the Chinese Yuan, or the Hong Kong dollar pegging works break, and that massive deflationary wave rolls out of China to the rest of the world, you are going to see asset prices get dislocated, whether it’s commodities, whether it’s stocked, whether it’s real estate, a number of different things.

Brent Johnson (31:34):
We would likely have another event similar to March 2020, maybe asset prices go down 20, 30% in a relatively short period of time. But again, I think that would be an opportunity to go in and buy those. If you have some dry powder, if you had some hedges, if you had something on the side of your portfolio that was prepared for that type of event, you can use that dry powder to go in and buy some discounted assets. Because I think subsequent to that, we would have another… The thing where we had the massive deflationary event in March 2020 from April onward, we had this massive government stimulus all over the world. That same thing will happen again.

Brent Johnson (32:10):
There’s a lot of people out there who think that the central bank should not have done what they’ve done, they should not continue to do what they’re doing, they should not continue to hold interest rates lower, they should not continue to do QE. And that’s all well inclined to have that position, but you have to play the world as it is. And central bankers, the reason they were created was to step into exactly that type of situation and prevent it from happening. So to think that they’re not going to do it, you’ve got a block there. You’ve got to get past that. They are going to do it. That’s the reason they were created.

Brent Johnson (32:44):
And if for some reason J. Powell got religion and said, “I’m not going to do it,” two days later, he’d be voted out by an act of Congress. They’d put somebody else in his place, and that person would do it. So if we do have any more of these deflationary shocks, there are going to be met with even more stimulus than we had last time, more green projects, more QE, more fiscal spending, more infrastructure. That’s just the nature of the beast. If you’ve got these inflationary and deflationary pressures and it’s all over, you’re social problems. And so whenever there’s a crisis, there’s opportunity. And that’s what I mean by there’s going to be great opportunities.

Brent Johnson (33:24):
And again, because I think that the dollar’s going to go much higher than many think possible, I can envision things happening that just nobody thinks possible. People will laugh at this, but I think the Yen will go to 150 or 200. Nobody thinks that’s going to happen. I think it’s going to happen. Now, if I’m wrong, I’ll be fine. But if I’m right and I have a few living tiny bets that that happens, you can make a killing on that. And again, maybe those asymmetric bets don’t pay off, but it’s such a small part of your portfolio that if it doesn’t pay off, it doesn’t kill you. Let’s take this to Bitcoin as an example.

Brent Johnson (33:56):
How many times have I heard, “Why don’t you just put one or 2% of your portfolio into Bitcoin? What’s the worst that can happen if you lose one or 2%?” I can get behind that idea, but Bitcoin doesn’t have a monopoly on that idea. You can put one or 2% of your portfolio in a number of asymmetric bets, and if they pay off, your one or 2% can become 10% or 15%. Now, again, these things don’t happen that often, that’s not a typical return. You typically don’t get a 10 or 15 or even a 5X return, but every now and then you do. And if you have a small bet on it, that small bet can really help you out.

Brent Johnson (34:31):
Again, it’s an insurance policy. I don’t know anybody that buys an insurance policy and plans on wrecking their car that night, or I don’t know anybody that buys home owner’s insurance and hopes that their house burns down unless you need the insurance money, I guess. But the point is that when insurance pays off, it’s an asymmetric event. It typically doesn’t pay off, but in that one time when it does, you are really, really glad you have it.

Trey Lockerbie (34:56):
I want to touch on what you said earlier about this all coming to a head when debt finally matters because it goes to another point you just made about the whole effort between Central Banks being coordinated. They’re all in this together, so to speak. So if they’re all in this together, I would say that debt finally matters when the US loses its creditworthiness. But when you examine the landscape and you say, “Well, look, the entire world is doing this,” as you said, “And everyone’s lost their creditworthiness.” Where are governments then going to lead to? You mentioned China, so maybe we go there next about their digital currency, is that the solution in their mind as to where to go once everyone’s lost their creditworthiness?

Brent Johnson (35:41):
I think that’s probably right. I think that they realize… The first thing I’ll say is this whole de-dollarization idea. There’s no doubt that the world wants to de-dollarize, it’s just not as easy as many people think it is. And we can get into why that is, but as it relates to China, I think China especially would love to get out from underneath the dollar because they realize to a certain extent, the dollar is a prison. It’s a prison not of your own making. And without a doubt, China has ambitions to become the global hegemon. And even if they don’t outwardly say it, anybody that lives in China has that in the back of their mind that, “This is our time, we’re ascending, the US empire is descending. It’s just a matter of time before we take over and dah, dah, dah.”

Brent Johnson (36:22):
And that’s aspirational, it doesn’t have to be a negative thing. I would say that that’s a common theme over there. And so for them to do that, they’ve got to get out from underneath the US dollar. They just can’t do it with the dollar yoke around their neck. So I think then rolling out the digital yuan is their plan for how to try to do it. And perhaps what they say is they convert the regular yuan into the digital yuan. And then they say anybody that wants to do business in China, you have to own digital yuan. And then with the digital yuan, maybe it’s easier for them to bypass the dollar payment system. Maybe they don’t have to be part of the SWIFT and transfer money, if they want to do business with Russia, it doesn’t have to go through a US bank.

Brent Johnson (37:07):
Well, maybe that’s not a good example, Russia and China do some business directly with each other, but the world as a whole, whenever they do business, they go through a US correspondent bank because of our payment system. There’s no question in my mind that countries around the world, not just China, but these countries around the world are going to continue to try to de-dollarize. I just think it’s too little too late. And here’s the problem that a lot of people, I think miss, maybe they don’t, but it is my impression that they miss is that it’s not as easy to walk away from two things.

Brent Johnson (37:41):
One is all these countries have US dollar reserves. So if you’re walking away from the dollar, that means you’re blowing up some of your reserves. Now, even if you are, let’s use Bitcoin as an example, I know a lot of people that watch your program are heavily into Bitcoin. Let’s pretend that 80% of your net worth is in Bitcoin and 20% in US dollars. Well, even though you like Bitcoin better, and even though you think Bitcoin you own a lot higher, you don’t go home, throw gasoline on your pile of dollars and throw a match on it. You still want that 20%, you don’t want to just go up in flames.

Brent Johnson (38:17):
That’s the same thing with countries’ reserves, they have a lot of money in dollars. And so for them to go to a system that doesn’t use dollars, potentially decreases the value of their reserves. And so it’s a tug of war for them to a certain extent. For them to leave the dollar, they’re going to have to cannibalize some of their assets. So it can be done, but it’s hard. The other thing that I think many people miss is the Eurodollar system itself. And now this is when entities outside the United States borrow in dollars. So if a manufacturer in Brazil wants to issue some bonds in order to buy some machinery, a lot of times they’ll do it in dollars. Or another country will issue bonds, China’s issued a lot of bonds in dollars.

Brent Johnson (39:10):
And the reason they would issue in dollars is two things. One, they get paid in dollars, so now their liabilities and their assets are matched. But secondly, as they get a lower rate. If you issue a bond in dollars, you pay a lower percentage rate. Well, in another case, that’s the case if they issue a bond, but they can also go to a bank and get a loan. Turkey has a lot of dollar loans. And I think a lot of people think, “Well, these will just get defaulted on and that will hurt the US dollar, it will hurt the United States, and then all these other countries will move to a different currency.”

Brent Johnson (39:43):
But what they’re missing is that those dollars aren’t owed to the United States, the dollar debt that Turkey owes, a lot of it’s owed to France or Italy, or Spain, the European banks. In other words, entities outside the United States loan in dollars, that’s the Eurodollar market. And that dollar market is bigger than the US dollar market. So these loans that would get defaulted on don’t hurt the US, it hurts the rest of the world who’s defaulting on their own assets. So again, I’m not saying it can’t be done, it’s just a lot harder to do than many people realize.

Brent Johnson (40:17):
And so if you were loaning somebody money and you found out that their reserves or the money in their bank were quickly falling and that their brokerage account assets were quickly falling, you might change the lending terms a little bit. And so that’s what a number of these countries would be facing. If they started blowing up their dollar reserves, funding for them doesn’t get easier, it gets harder. Anyway, that’s a long ramble, I apologize.

Trey Lockerbie (40:42):
No, that was great. What’s your take on this idea that perhaps instead of the US dollar being dethroned so to speak, it’s more of the underlying world reserve asset, a newer world reserve asset that takes place, instead of the US treasuries being the current default or oil, even in some regards, there’s something else that replaces it. You mentioned Bitcoin doesn’t have a monopoly on that kind of prospect. What’s your other idea that could replace maybe gold or?

Brent Johnson (41:12):
My guess is this is going to end in some reset. Whenever debt matters, again, and the debt just can’t be repaid and it has to be written off, we’ll get some a monetary reset. Now again, whether that’s two years from now or 20, I actually think it will take longer to get there than many people think, but you have to be ready for it at any moment. My guess is that it would be a basket of global currencies, and maybe in that basket, there would be gold and oil. And I personally don’t think Bitcoin would be part of it, but who knows. I think that we’re going towards digital currencies by country.

Brent Johnson (41:44):
Countries, again, whether you like it or not, there are legal tender laws for a reason, because they need you to use their currencies. Governments do not typically react well to private market competitors to their money. Now, they haven’t really bothered Bitcoin too much, to the extent that they have tried to bother it, it hasn’t really mattered. But if it ever were to really seriously challenge them, I think that they would take excessive and perhaps excessively excessive steps against it. My guess is that we would eventually move to some kind of global solution or new system.

Brent Johnson (42:19):
But here’s the other thing, I think it’s important to talk about this here because I think, again, there’s this thesis out there, there’s this idea that China has secretly been stockpiling gold, plus all these other countries, and that they’re going to go back to a gold standard and that’s going to kill the dollar and the US will begin ash heap and they’ll be living in paradise. Again, it just doesn’t typically work that way. And not only that, but the US has more gold than anybody. So if China decided to back their currency with gold, and for China to do that, I think… Actually, somebody’s been asking me to update these numbers, but I think the numbers are around 14 or 15,000 to back their currency, and it’s about the same number for the United States.

Brent Johnson (43:02):
So if China wanted to back their currency with gold, we could just do the same thing, say, “OK, we’ll back ours with gold too.” So it’s not like they can play this part and then we’re just out of luck. And finally, the thing I would say that most people have the biggest problem with me saying is that typically when a monetary regime changes, it’s because the military regime changes. If you look throughout history, typically the global reserve currency is issued by the global hegemon, and that’s because the global hegemon typically enforces its will on the rest of the world, and this is the way you’re going to do it.

Brent Johnson (43:37):
And people will say, “Yes, but the US has been a bully for 80 years and they’ve used up all their good faith and people are sick of it.” I don’t disagree with you, I totally agree with you, but whatever you think of the US, we do have a lot of advantages, we do have a lot of assets. We have a lot of military hardware. And you can say that we haven’t won a war in 50 or 60, 70 years, and I would probably counter it and say, did we really want to win those wars? Or did we just want to go over there and blow a bunch of stuff up and then build a bunch of new tanks and ships and airplanes and keep the machine going?

Brent Johnson (44:11):
The point is power is never just handed over. To think that the US is going to lose the global reserve currency without some military action, I think is naïve. Not impossible, I can’t rule it out, but I just think it’s really naïve. And I think that before we would lose the global reserve currency, I think that we would use every last tool in our arsenal. Unfortunately, that will be military as well. Again, I don’t want this to happen, but that’s just the way I see it playing. And I think that there are more countries who would go along with us than many people would like to believe.

Brent Johnson (44:45):
If it really came down to it, choosing between China and the US, I think most of the world would choose the US.

Trey Lockerbie (44:51):
Well, maybe not coincidentally, our biggest expenditure is essentially on the military. And that speaks to the fact that, and I’ve read Lyn Alden’s work on this about the US needing to continue to supply the world with dollars, much like the Dollar Milkshake Theory than inevitably continues our deficit spending, there’s no way to rebalance. And so in that sense, the only thing we can do is say, “Well, at least we’ll just keep bolstering our military for this event that I think you’re alluding to, inevitably happen.”

Brent Johnson (45:20):
There are two ways to think about money because essentially that’s what this comes down to. It comes down to money, and will people still accept your money? And ultimately, if money loses confidence or people lose confidence in the money, the value is gone. Once it’s gone, it’s gone. It’s really, really hard to get it back. And so there are two different ways to instill that confidence. One is just through a market solution, somebody’s currency people traded and they bartered and then one commodity became the most commonly used through time and ascended to become money. And a lot of people will say, “That’s why gold is money.”

Brent Johnson (45:59):
I don’t have a problem with that view. I actually have deep sympathies for that view. But the other way money comes about is when the sovereign just says, “This is money, and this is what you’re going to use for money. And at the end of the season, or at the end of the year, you’ll need this much of this.” And so that becomes money because everybody needs to pay the sovereign at the end of the year. So it’s like the secondary token that they pass amongst themselves and everybody accepts it because everybody needs it at the end of the year to pay the sovereign, and the way the sovereign enforces that is through violence.

Brent Johnson (46:27):
Again, this gets a little philosophical, but that’s the truth. You go back through history, more often than not gold has not been money, or perhaps gold has always been private market money, but we’ve been off of gold standard more often than we’ve been on a gold standard throughout history, various parts of the world. And again, the way this gets enforced is force. And I would rule out the idea that the US would call all of its allies and say, “Listen, we are going to issue this many treasury bonds this month and you’re going to buy them.” And it sounds silly, but that’s the tribute. You pay tribute to the king.

Brent Johnson (47:07):
And as of right now, the dollar is still the king. I even perhaps I’m sympathetic to the idea that the king has been a despotic ruler and is perhaps due to go, but the king doesn’t see it that way, and the king will use everything in his power to remain there. I think the idea that the US is just on its knees and two steps away from leaving through the back door, I think it’s just completely wrong.

Trey Lockerbie (47:35):
With the great reset that you mentioned is probably inevitable, are Central Banks around afterward?

Brent Johnson (47:43):
That’s a good question, but my short answer is yes. My short answer is yes. It’s interesting that you brought this up because I’ve talked about this with a few people, is that one of the things that you learn from history is that no great power ever lasts. They eventually fall. But what you also learn from history is another great power that rises and takes over. I can’t think of any time in history other than perhaps the pre-revolution United States, or even post, shortly post-revolutionary United States, very rarely have you had a big area of the world who’s really been free to do whatever they wanted.

Brent Johnson (48:16):
Typically somebody is ruling over that area, and sometimes some rulers give more liberties, and some give fewer liberties, and some are nicer, and some are more meaningful, but typically there is a ruler. There is an authoritarian saying, “This is the way we’re going to do things.” And so I think that there will still be Central Banks afterward. They may be acting a little bit different form, they may be overseeing digital currencies rather than paper currencies, but I do still think that Central Banks will be around.

Trey Lockerbie (48:50):
Given your theory, I imagine you keep a close eye on something like the DXY or maybe you have other metrics, but the DXY as you mentioned being where it was pre-COVID, is there a certain number that you start measuring or looking to say, “Okay, now we’re in trouble”? What would that number look like?

Brent Johnson (49:08):
Yeah. Well, we’re getting pretty close to it, honestly. I think between 85 and 95, they really don’t care. I think if the powers would be if Central Banks working together could keep the dollar between 85 and 95 for the next 10 years, I think they’d overall be pretty happy. I think they’d prefer it between 85 and 90, but I think at 92, 93, even right here at 95, I don’t think they’d really care that much, but you get much above here, you get into the 95, 96, 97, now you’re starting to get close to where it really starts to hurt. I think again, even at 95, 96, not that bad, but the point is you’re starting to get close to the point where problems start to happen.

Brent Johnson (49:46):
And probably what’s more important than the actual level of the dollar is the speed at which it’s moving there. Again, we go back to last March, it went from 97 or 98 to 94 in a couple of weeks. That was fine because it relieved a bunch of pressure, but then it went from 94 to 102 in eight or nine days, which caused all kinds of problems. Really the speed of the move that’s as important as anything.

Trey Lockerbie (50:13):
And on that point, as you alluded to earlier, are there just margin calls starting to happen essentially globally?

Brent Johnson (50:21):
Essentially, that’s what happens. The reason margin calls are happening is that money is being destroyed. Get a credit contraction, when money contracts, that means there’s less supply, when money’s loaned into existence, less supply means there’s less likely that loan or that credit extent is going to get serviced, so then it’s going to collapse. So everybody starts scrambling for the collateral that actually exists. Not the loan, but the actual money behind it. And when people are scrambling for the collateral, they take the price they can get not the price that they want. And that that’s essentially March.

Brent Johnson (50:57):
And again, the speed of the move has a lot to do with that. Let’s use an example, of course, oil. Oil is at 80 bucks a day, 81 bucks? There’s probably a lot of assets out there and a lot of loans that have been extended that have either oil, or oil reserves, or productive land, or machinery, or companies that have oil as reserves. A big part of the global monetary supply is backed by oil. And right now, it’s no problem. And if oil falls to 75, it’s probably not a big problem either.

Brent Johnson (51:30):
But if oil goes to 45, and then 35, and then negative for God’s sakes, as it did a year ago because everybody’s just scrambling to get dollars, that’s not only deflationary because of the jobs that are being destroyed in the oil industry, but all of the money that was loaned into existence as a result of high dollar or high oil price reserves, again, you just get this incredible credit contraction. I’ll tell you, there are few things in the world that are more inflationary or deflationary than the price of oil. And you get into a problem there too. If oil gets too high, then you start to get into these… inflation becomes deflationary, and deflation becomes inflationary.

Brent Johnson (52:12):
So you’re in this band right now where it’s okay, but if you get much higher oil prices, bad things are going to start to happen.

Trey Lockerbie (52:18):
I was just talking with Kyle Bass and he’s of the opinion that oil is going a lot higher, and he attributes more to our lack of investment in hydrocarbon. So it sounds like you share that opinion. I’ve heard you talk about a large number of short orders on oil. And so that would suggest that the suppliers are not sharing the same opinion, but maybe speak to that or where you stand on it today.

Brent Johnson (52:39):
That’s good. I actually haven’t looked to see where they’re at in the last month or so. What I’ve said before is I think oil product producers should be making a lot of money here. They should be really happy. I don’t think anybody is really happy other than maybe in the really short term, if oil goes to 120 or 130 and nat gas goes to 10 bucks, truth, we’d probably be happy in the very short term, but in the long term, it’s not good for anybody because just it breaks. Again, it’s like the dollar, 95, 96, nobody really cares. But at 106, a really bad deal.

Brent Johnson (53:11):
On oil, I tend to agree with Kyle, there’s been low investment made into it. And so it’s like the cure for low prices is low prices. Prices are low, nobody invests, then pretty soon you get supplies are low and then you get a demand shock and there’s no supply, boom, prices are higher. And that’s what we’ve seen here. So I tend to be sympathetic for [inaudible 00:53:30] there. although I also believe that it’s not going to be a straight line. Now, it wouldn’t shock me to see something like oil go to 60 and then 120, something like that. Or if you go to 90 and then 50, and then back to one point, I don’t think it’s going to be just an easy run. I think there’s going to be fluctuations in both directions.

Trey Lockerbie (53:49):
Touching lastly on this idea that more money creation is inevitable, but they might need more crises in order to really move the ball further down the field, what’s your take, you just mentioned demand shock or supply shock. The idea where I live right now in LA at our port, there are 80 shipping containers just sitting outside that can’t even get to the port. Is this what you see unfolding through 2022, this narrative of supply shock?

Brent Johnson (54:20):
Well, I think the supply shock, I’m on record of saying a big reason for the rise prices is not just the money printing, it’s not just the bailout, that’s certainly a part of it, but a big part of it is that the government literally shut down the global economy. I still can’t believe the speed and the efficiency with which they just turned the whole world off. And that just has really, really bad ramifications. When we have this just-in-time inventory, when I could order something in San Francisco and order it for, I don’t know, South Africa and it’s there a day later or whatever it was, two days later, that’s pretty incredible.

Brent Johnson (54:59):
It speaks to just how efficient and how well-timed machine the global supply chain was, but they broke it. They threw a bowling ball through the supply chains. And now as they rebuild it, they’re rebuilding two supply chains, China supply chains, and the US-centric, supply chains, because we don’t want to be dependent on them anymore. So that’s going to take time to work. But I do think some of that stuff will get worked through. The fact that we had it as efficient as we had it shows that we have the know-how to do it.

Brent Johnson (55:29):
It will take a while to do it, but I do think that some of the supply chain issues will get worked out that will help with prices. I do think that we’re overdue for kind of pull back and equity run and prices and I think inflation, well, we certainly can’t argue that it’s here. I think if we got some economic slowdown as a result of some of the inflation, then that pressure starts to reduce. And so that could help with some of the prices. So the long story short is I think that some things will get worked out probably in the next six months, but some stuff might take two or three years.

Brent Johnson (56:03):
Ultimately, I think two or three years from now commodity prices are much higher. I think the food price is much, much higher. I am invested in some commodities, I’m invested in some ags, but I’ve been waiting for a pullback before really going in on it any harder than I have. And I think we’ll get it. I think if you’re patient, you eventually get the pullback, but I don’t think that… It sounds like I’m waffling here and I’m really not, I do think that some of the stuff’s going to get worked out, but it’s not going to get worked out overnight, some of it’s going to last a couple of years.

Trey Lockerbie (56:36):
I’m curious what that agriculture bullishness, fertilizer comes to mind, which has just been exploding recently. How do retail investors, or how should they approach some opportunity like that? Is it through ETFs primarily or [crosstalk 00:56:47].

Brent Johnson (56:46):
Yeah. I think that’s fine. There’s like Mosaic, something that we’ve owned for a long time, Pioneer seeds are something we’ve owned for a long time, John Deere, you can look it up. There’s a number of ways to play it. I think there’s an ETF called MO. M-O, that you can buy. Again, I think depending on your level of wealth and sophistication, to a certain extent, I think you just want to keep it easy and keep it liquid to the extent you have a little bit, your net worth and sophistication and have the ability to hold through some draw-downs, maybe there are some private opportunities either real estate, farmland funds or some kind of private direct investments. But I think agriculture is going to be a booming, booming area over the next couple of years.

Trey Lockerbie (57:32):
Brent, this was so much fun, man. I’ve been really looking forward to having you on, and really appreciate your humility. I really respect the way you’ve arrived at your opinions. If folks aren’t familiar, you’ve talked about it on some other episodes, and you seem to embody the idea of strong opinions loosely held, maybe more so than anyone else I’ve spoken to. And that’s what makes this so fun, just continuing to kick this ball back and forth as things continue to unfold as they have.

Brent Johnson (57:57):
Yeah. I’ll just sign off by saying, listen, I’ve been wrong before and I’m going to be wrong a million times again. I can live with seeing this possibility and being wrong and having done something, but I can’t live with seeing this possibility doing anything and then suffering from it. So that’s why I’ve taken the position that I’ve taken.

Trey Lockerbie (58:14):
Yeah. And it makes sense why you’re out here voicing these concerns so loudly, I think you’re doing a great service. So anyway, Brent, really hope we can do it again sometime soon.

Brent Johnson (58:23):
Thanks for having me.

Trey Lockerbie (58:24):
All right, everybody. That one was a lot of fun, I hope you enjoyed it. If you’re loving the show, please don’t forget to follow us on your favorite podcast app and even leave a review, if you don’t mind, it really helps, and we love to hear from you. You can always reach out to me directly as well on Twitter @treylockerbie. And I wanted to call out one feature on TIP that you might not be aware of, which is our list of ETFs for emerging markets. Just Google TIP Finance, you’ll find all the amazing resources we have for you there. And with that, we’ll see you again next time.

Outro (58:52):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.