Joe Brown (03:01):

And everybody really underestimated the extent to which the Federal Reserve does not have to care about the stock market falling. There are some things that they do care about, which we can get into, but the stock market falling by itself, 401(k)s of individuals being in trouble, brokerage accounts of individuals being in trouble, is not important to them in light of their dual mandate from Congress, which is full employment on one side, inflation on the other. And given the way they’re currently measuring the jobs market, they’re, right now, in full force, [inaudible 00:03:35] inflation mode from their point of view. So I think the resolve of the Federal Reserve to fight inflation is something that the majority of people really underestimated at the beginning of this year.

Clay Finck (03:46):

Last time we spoke, we actually talked a lot about inflation, we talked about the Fed, and even the effects of price controls potentially being put in place. With the gas and the grocery bills substantially increasing in price, and we’re seeing personal savings rates hit historical lows on top of this tightening cycle, how in the world can this all resolve itself? If gas and grocery prices are continuing to increase and people literally just can’t afford it, how will the market react if a large percent of the population is in just this almost crisis, financial crisis of their own?

Joe Brown (04:23):

It’s a great question because there’s a lot of pain right now. And the answer is, without any intervention, we will experience a lot of pain. You get the recession, potentially depression, you get the crash, you get the demand destruction, you get the defaults, you get the deleveraging, everything comes crashing down, you get a wave of unemployment. All the bad stuff that policy makers usually want to avoid. The reality is that stuff is the cure because that is pent up in the system already. That risk, that malinvestment, that misallocation of resources has happened. If we go back to end of 2019, September of 2019, when the Federal Reserve started intervening again, and they started intervening through the repo market, because the repo rate exploded, there was not enough cash in the system. At that point, that was a signal, there was a crash that needed to happen, a recession that needed to happen.

Joe Brown (05:16):

And a couple months later, they got really lucky because they got an excuse to print a bunch of money in order to bail out the financial system. And that, we are now seeing the effects of that, we are seeing all the inflation that happens as a result of expanding the monetary supply, and we are seeing now the deflation start to emerge back into the economy that was supposed to happen a long time ago, that they just delayed. And so they kicked a can down the road from that crash, that recession that was supposed to happen, made it all worse, made those problems a lot worse, and now we’re starting to see that unfold onto the economy again. The right response would be to do nothing and let it happen because the recession is the cure for the malinvestment. Everything will be very painful, but for a short period of time, ownership of assets get transferred to the people who are more conservative, more financially responsible.

Joe Brown (06:07):

Defaults happen, deleveraging happens, bankruptcies happen, and it’s very painful short term, but then we are much stronger to be able to rebuild from. My fear is that they don’t allow everything to resolve itself naturally, that they step in again at a point of maximum pain, and try and bail everything out again. And at that point, you then have to worry about the collapse of the currency because we’ve got so much leverage built up that you’re going to have a deleveraging either way. It’s either going to be a deflationary side or a deleveraging on the inflationary, hyperinflationary side.

Clay Finck (06:39):

I’d like to talk more about that deleveraging piece. But I recall last time we spoke, we talked a little bit about employment and how that affects the economy. And the unemployment rate massively spiked in March 2020, and ever since, it’s come down and I’m surprised to see how low it actually is today. Do you think we’re going to see a near-term spike in that unemployment rate? I see headlines of many large corporations having layoffs. I’m curious if that’s something you’ve kept your eye on recently.

Joe Brown (07:10):

Yes, absolutely. In fact, this is one of those areas where I mentioned the way that they are measuring employment is incorrect in my opinion, because the Federal Reserve is so backwards looking on their data that they don’t see, at least at the time of this recording, they don’t see yet what is happening in live time. But they’ve been saying, “Hey, the jobs market is really strong.” And they’re not saying that because unemployment is incredibly low, they’re saying that because there are a lot of job openings. And so given the amount of job openings, they’re saying, “Hey, there are way more job openings than there are people taking those jobs. Until that changes, we’re going to view the jobs market as if it is as strong as it can be.” Because from a monetary policy standpoint, they’re saying, “No matter what we do with monetary policy, we can’t make people take jobs if there are a lot of job openings, that’s as much as we can do.”

Joe Brown (08:01):

So they’re saying, “Okay, well, the jobs piece is strong then, but inflation is starting to get out of control, so we’re going to fight that inflation.” The problem is very backwards looking like I’ve said many times, and they’re looking at this data that is stale and old and rapidly changing. A couple months ago, we started to see hiring slowing down, and then we started to see hiring freezes, and now we’ve started to see layoffs start. And you start to see them in the smaller businesses. First, you start to see them in tech, now we’ve seen them all over crypto, pretty much every major crypto company, you’ve got BlockFi, you’ve got Coinbase. You’ve got a bunch of different cryptocurrency companies and exchanges just starting layoffs. And so you start to see it roll out through the economy in different areas first. But the fact of the matter is, this unemployment is going to get varied acute very quickly. And so at that point, then the Fed’s going to have, take a look at this and say, “Okay, well, we were fighting inflation because we were saying the jobs market was strong, strictly from job openings.”

Joe Brown (09:01):

They’re going to realize at some point, probably too late, those job openings are gone. Now there’s unemployment spiking again. Now that they have those two mandates, which one are you going to favor? Are you going to say, “Hey, we’re going to try and fix the jobs market again at the expense of inflation”? Or are we going to continue to fight inflation and bring jobs down in to realities? They understand these are goals that are at odds with each other. In fact, many Federal Reserve officials have stated publicly, we have too high inflation because the jobs market is too strong. We have too much employment. We need unemployment, we need people to suffer, we need people to have less money because then they’ll spend less money and that will solve inflation.

Clay Finck (09:38):

Man, what a conundrum. One area I’m definitely no expert in is the currency in foreign exchange markets. All over Twitter, I see charts about the DXY, the JPY, all these currencies, and what’s happening in that market. The DXY bottomed around April 2021 around 90, and it’s gone up ever since. And since it around 105 today, what sort of impact does a strong dollar have on the global economy?

Joe Brown (10:09):

It has a very big impact because essentially, from the most basic way to look at this, is that the dollar is the currency that is used for international trade. And when the dollar goes up, you have to ask, “Okay, how are you measuring that?” Because if you’re keeping dollars in your bank account right now as savings, you’re looking at groceries and gas and rent and everything getting more expensive every month. So you’re looking at it from a personal standpoint and saying, “The dollar’s not getting stronger here, the dollar’s getting weaker here. And it takes more dollars just to make ends meet every single month.” But when, economically speaking, many people say, “Hey, the dollar’s getting stronger.” What they’re looking at is the DXY, the Dollar Index, which is the dollar versus a basket of other currencies. And so when the dollar gets stronger, compared to other currencies, really all you’re saying is the dollar is more expensive.

Joe Brown (10:59):

It takes all these other countries a lot more of their own money to get dollars. And the reason why that’s potentially harmful is because you need dollars to do international trade, because it’s the international trade currency. As dollars get harder to get for a lot of these other countries, especially emerging markets, developing markets, poorer countries, it gets harder and harder and harder to get the things that they need. And that is something that could result in unexpected crashes emerging, and with how interconnected the global financial system is, especially with how highly leveraged balance sheets are in banks in Europe, something like that could spark a domino effect, where you get a bankruptcy over here, a default over there, an unexpected default on sovereign debt from a small country could bleed over onto balance sheets and cause an unwind of some of these relative value trades, and could spark a very quick unwind of these trades that could cause a domino effect collapse of financial institutions in Europe.

Clay Finck (12:02):

Yeah. So hearing that, in my mind I say, “The Fed cannot let the dollar get too strong.” So there’s this competitive debasement of currencies. And you look at what’s happening in Japan. They are implementing yield curve control, which essentially means lots of money printing to buy up the bonds that nobody else wants to buy. And that money printing occurring is going to make the dollar stronger relative to the yen. And the same sort of things can be happening in other places of the world. The US cannot let the dollar get too strong. And I don’t know if you want to expand on that, how that might play out, how strong the US can actually let the dollar get.

Joe Brown (12:41):

It’s always a balancing act. And usually, when we’ve gotten this far, it’s like they’re walking on a tight rope with a deflationary death spiral on one side and a hyperinflationary collapse of the currency on the other side. That’s kind of the tight rope that they’re walking on right now. Specifically though, about the situation going on in Japan, this is one that has taken some people by surprise because historically, every time we get to a situation similar to this, although not as extreme, Japan comes in and they buy up a lot of US government debt. They’re the second largest holder of treasuries, and they’re typically the ones buying a lot of US government debt. But the problem that they’re facing right now is they’re trying to implement yield curve control. Bond prices and interest rates are inversely correlated. If I owe you $101 because I borrowed $100, that’s a 1% interest rate. But if you then sell that debt to somebody else for let’s say $90, well, I still owe them $101, but they bought it for $90, so their interest rate is now 11%.

Joe Brown (13:44):

So the price of debt and the interest rate on debt are negatively correlated. So when you look at something like sovereign bonds, like the 10-year government bond in Japan, the Bank of Japan wants the interest rate on that to be 0.25%. Nobody in Japan wants to own that debt, so they’re selling it. Well, that’s selling pressure that should put the price down and the interest rate up, but the Bank of Japan doesn’t want that to happen. And so they have to buy all that debt that’s getting sold in order to keep that price up, which keeps the interest rate down. As they have to buy more and more of this debt, they have to print more and more yen in order to do that. Well, if you look at the chart of the yen versus something like the US dollar, the yen is just collapsing.

Joe Brown (14:23):

It’s because they’re printing so much in order to buy this thing that it’s devaluing their currency very rapidly. And so how that bleeds over to what’s happening in the States. They’re not a buyer of yes, treasuries anymore. They’re dealing with their own yield curve control right now. They absolutely can’t afford to print even more yen to buy dollars in order to buy treasuries, that would just make their problem much worse. As of now, they might actually be selling US treasuries in order to help their own situation, which is why that bleeds over into interest rates in the US rising rapidly. Because number one, we lost a big buyer to Japan, and number two, they might actually be selling and they’ve got a lot to sell. It is all interconnected, and that’s one example of how monetary policy that cannot persist forever can bleed over into other markets in unexpected ways.

Clay Finck (15:14):

And as those Treasury rates rise, we see pressure on things like equities in the US. When you look at the equity prices since 2008, we’re kind of hitting that point where the Fed turns around, they look at what happened in 2018, or in the COVID scare in March 2020. We’re around that point where the S&P is down 20%, now it’s down 30%, it’s kind of like, okay, it’s decision time for the Fed. I’m curious what your thoughts are on how much more pain is to come and when they might pivot and choose the inflationary route, rather than letting the economy pull back a little bit.

Joe Brown (15:50):

This is probably an area where I differ my opinion, it differs from a lot of people again, and I think it’s very possible we have a lot more pain ahead of us. And the reason why is because every time the Federal Reserve has pivoted in the past, to a more easy monetary policy, the official inflation numbers have not been where they’re at today. And that is arguably their number one thing because even over employment, if the dollar hyperinflates and collapses, the United States loses everything. All the power that the United States has globally rests on the dollar being the global reserve currency. If the Federal Reserve loses control of the value of the dollar, and it goes into an inflationary spiral that they can’t stop, that’s the end game. That’s the number one thing that they are concerned about right now, is making sure that prices don’t get out of control. And they don’t want to tip over, they’re on the tight rope, and so they don’t want to tip over into that deflationary side. But right now, I think they are very concerned about this.

Joe Brown (16:51):

And so you might ask, “Okay, well, how high can they raise rates? How much of their balance sheet can they sell before everything gets too painful, before the government defaults?” And the answer is they could do a lot. Let’s deal with the government defaulting. Number one, when interest rates go up today, it does absolutely nothing to the debt service cost of the United States government. Only when they have to roll over the debt that matures does that start to raise the cost of servicing their debt. And so it does nothing to all the debt they already own. If interest rates go to 10% today, it’ll take a couple of years before the government can’t pay their bills anymore. Because all that new debt that they’ll have to take on to pay off the old debt will slowly accumulate in how high those interest payments are. What happens at that point? Let’s say we get to the point where the government is not able to bring in enough from taxes or new borrowing in order to pay off their bills because their interest costs have gotten too high.

Joe Brown (17:44):

At that point, the only thing the Federal Reserve needs to do is start buying treasuries again. They can keep raising interest rates as high as they want, and as long as they monetize all the necessary debt from the government, meaning they’re the ones that are lending net new debt to the government, that new debt is interest free for the government. Because all of the treasuries that the Federal Reserve owns, all that interest that the government is paying to the Fed, it goes right back to the Treasury. That’s how the Federal Reserve is structured. After their expenses, their profits are swept back to the Treasury. If tomorrow the Federal Reserve said, “Hey, we’re going to buy the entire national debt, $31 trillion right now, we’re going to buy it all,” that means tomorrow the government debt interest is zero, effectively. That’s all the Federal Reserve has to do is they have to start QE up again, but only for treasuries in order to make sure the government doesn’t default.

Joe Brown (18:31):

At the same time, they can be raising interest rates and causing pain for literally everybody else, letting the defaults happen, letting the deflation happen, letting the bankruptcies happen, and letting the deleveraging happen everywhere, except for the US government. Now, you might be asking, “Okay, well that would start to cause a collapse of the US economy to a point where all the people who are in power would be having so much pain themselves that they would make sure that something stops.” And that’s true, so that is the next point. You might have a bailout for large corporations. So we saw in 2020, they started buying corporate debt. You might see that again in order to make sure that a default of corporate debt doesn’t trickle over into the rest of the economy, doesn’t cause a massive wave of unemployment. It won’t be for the small businesses, the mid-size businesses, mom-and-pop, entrepreneurs, individuals, anything like that, but the large corporations, just to make sure that there are at least some jobs available for some people, for most people.

Joe Brown (19:24):

And to the extent that they decide to buy government debt and corporate debt, they can continue ramping up and ratcheting up the pain for everybody, causing this deflationary deleveraging to happen for everybody, and maintain the ability for the government and corporations to survive. And so I think in light of that, it’s very possible that the Federal Reserve keeps this going for longer than people think they will, and we have a lot of pain ahead of us.

Clay Finck (19:49):

My word to the listeners would be brace yourselves because this can go a lot longer than some people might expect, according to Mr. Joe Brown. And you talk about how we might not see this quick recovery, like what we all saw in March 2020. And you mentioned earlier how the trade has been look at what the Fed’s doing. When they’re easing, be long financial assets, be long maybe risk assets and play that trade. But when they’re tightening, be more defensive in your strategy. So I’m curious, do you have larger cash position today given that they tighten? And then you’re just waiting for them to pivot and go back to quantitative easing? Or how can cash maybe play a role in our portfolios during this tightening cycle where the prices of many assets are going down?

Joe Brown (20:38):

Essentially, what you have is two choices. You’ve got inflation happening or deflation happening. Inflation, prices go up, deflation, prices go down. When you have inflation, the dollar becomes worth less, so that’s a situation where cash is trash. So if you look at the dollar versus goods and services, recently, cash is trash. You’d much rather fill up your freezer with meat than keep your freezer full of stacks of cash, right? You’re going to do much better on a real return basis doing that. It’s the same thing with gasoline and rent and cars and everything. When you look at assets though, asset prices have been coming down and so you do better to hold cash. And so those are examples of when you have prices coming down, cash is king. Price is going up, cash is trash. And so to the extent that we’re looking ahead and we expect deflation, cash would be the best thing to hold.

Joe Brown (21:28):

When you expect inflation, cash should be the last thing to hold. And so cash has this, it’s not flat in terms of its return, it’ll either do well or do poorly, depending on what happens in the economy. Something like gold, long term, doesn’t really do either one of those. You tend to maintain your purchasing power, on average, over long periods of time, whether you get inflation or deflation. The purchasing power of gold will largely adjust for what most prices do over time. You’re going to have that be more of a savings vehicle. But yes, 100%, over the last year, my approach to investing has shifted from every time there was a dip in these assets that I thought, “Hey, these are good, long-term plays,” I’d be buying the dip pretty much every time.

Joe Brown (22:14):

Recently, over the past couple of months, I’m letting my cash position build up a lot more than I ever used to because we’re entering into this time where it’s like, “Hey, the Federal Reserve has stuck to what they said that they were going to do.” When they started getting pinned for insider trading, and they all started selling their stocks, and then they said, “Hey, we’re going to start tightening,” that’s a big signal that, hey, things are about to start to get ugly here. To the extent that you expect that to happen in the future, cash is going to perform a lot better for you because it gives you dry powder to go back in when things turn around. And I could be wrong about the timing on this.

Joe Brown (22:50):

It could be tomorrow that Chase says, “We’re bankrupt. We need a bailout.” I don’t think that’s going to happen, but it could. And in that case, if they start up QE again, and they lower interest rates, everything flips. And then it’s like, okay, you don’t want cash now. This is the reversal, this is the sign that something is happening. I think there will be some other warning signs that things are turning around in terms of monetary policy first. The reverse repo market, I think will be the first warning sign. But essentially yes, as you expect, deflation and cash is the place to be.

Clay Finck (23:23):

Man, it’s such an interesting dynamic looking at cash. I mentioned financial assets, referring to, say, just the S&P 500. During a QE time period, that’s going up, and then you look at commodities, nothing’s really happening with commodities. And then once the inflation comes around, oil goes through the roof, but the S&P 500 actually is not inflating, it’s actually deflating. So it’s really interesting and almost confusing for a lot of people, this inflation, deflation, it’s like, “Okay, what are you actually referring to when you’re saying these terms?” You know what I mean?

Joe Brown (23:54):

Absolutely. And I’m glad you bring up commodities because it highlights the fact that there’s always a buy. Regardless of what’s happening everywhere, there’s always something you can short, there’s always something you can buy. And commodities is a great example. In fact, behind me on the chart is DBC, that’s an ETF that tracks a basket of commodities. And it has performed absolutely stellar recently because it always comes down to supply and demand, 100% of the time. And even if you have demand decreasing because, let’s say, people just don’t have enough money for something, if the supply is moving down way faster, it’s going to counteract the demand and prices are going to go up. And so it always comes down to a dynamic between supply and demand. And that’s what we’re probably going to be seeing for a very long time with commodities, due to the last decade plus of underinvestment in the space.

Clay Finck (24:51):

Now, that you mentioned commodities, in your videos, you’ve mentioned that we could be potentially entering what you call it, a supercycle for commodities. Walk us through your thought process on this one.

Joe Brown (25:05):

I’m not going to take credit for the title there, there are lots of people saying supercycle right now for commodities. And really it comes back to the supply and the demand thing. When you go back a couple of decades, you start to see prices increasing in commodities. You fast forward, once prices start increasing in the commodities, eventually it gets to the point where that space starts attracting a lot of investment, a lot of capital because investors, they’re always seeking the highest return possible. And so once it looks like, okay, this is a sustainable move in commodities, we’re going to start investing in the space, we’re going to start mining, we’re going to start refining, and it starts to attract a lot of money, at that point then, all the companies they start to perform really well. And then you get to a point where they’re performing too well, and they start to waste their money, and they start to attract too much capital. You start to see a bubble form, and then you have a collapse.

Joe Brown (25:58):

You have too much, an overinvestment in the space, you have too much production, now you have way more than you need, and so that supply and demand dynamic, again, too much supply compared to the demand, wasting of money, and then everything starts to crash. And all of the companies that were wasting their money, they go bankrupt, they go under. And so investors say, “I am done with this. I’m never investing in this space again because you can’t make money in it long term.” So we’ve got these long cycles where that happens over and over again. And the reason is not actually completely free market dynamics. This isn’t just something that would happen naturally. A lot of it has to do with monetary policy, if you track how these things happen with easing and tightening. And then a lot of it has to do with the regulatory environment, how different laws and different laws changing over time, impact how companies can deploy capital, how expensive or cheap it is to invest in certain areas of energy or commodities.

Joe Brown (26:51):

And so you’ve got all these other things playing into this cycle. But right now, we’re sitting at a time where you look back at the past decade, there’s been absolutely $0 invested into the space. The commodities have now started to go up in price, but nobody’s invested in the space. The supply is not increasing yet, and it’s still not. Even though the past year, two years have been great for the prices of commodities, you still don’t have this bubble forming in these companies, to the point where any companies that exist today are extremely financially responsible, they’ve got no debt, they’ve got tons of cash on their balance sheet, and they’re saying, “Hey, this is one of the greatest money-making opportunities in many people’s lifetimes.” And nobody wants to invest in them, even though the prices have started to get to the point where they’re like, “Hey, we’re sitting really pretty here. It’s only a matter of time before a lot of money turns and looks and says, ‘Oh yeah, that’s actually a cash machine. Very little risk, the supply and demand.'”

Joe Brown (27:48):

And it’s like there’ll be a fire hose, a fire hydrant of money starting to rush in to this space. And there’s not a lot of places for it to go. And so you’re going to see this flood, without all these areas for it to go, there’s a limited number of companies that still survive to this day, that even the bad companies really are going to, it’s like a rising tide will lift all boats. And so I’m very bullish on commodities over the next decade.

Clay Finck (28:13):

Yeah, that is a theme I keep hearing, that the overall space has been underinvested in and then what’s happening in Russian and Ukraine just seems to be a catalyst to make this supercycle even more intense. Back to the Fed, I’m younger and just trying to learn as much as I can about investing, and I’ve been pondering the fact that the Fed has been just very transparent about the moves they’re going to make. Look back to June 2020, you got Powell stating that we’re not even thinking about thinking about raising rates, and lately, they’ve been very transparent about the rate hikes and wanting to fight inflation. And I’m curious, given that with the cash you’re building up, are you just waiting for that pivot to ploy some of that capital, or how do you think about, you’re very bullish on commodities, so how are you balancing what the Fed’s doing with the asset classes you’re bullish on?

Joe Brown (29:06):

It’s not that I’m not buying, it’s just that I’m buying a lot less than I used to be buying, and my cash is building up a lot faster. And so yes, the things that I’m buying right now are the things that are, in the commodity space, especially gold and silver miners. There are stocks that I think that regardless of what happens with monetary policy, they’re such deep discount stocks right now, such value, that it doesn’t matter what happens. Eventually, any capital out there that’s looking for a return is going to start flooding into this space. In terms of everything else, the S&P 500 and tech stocks, and some of the more cyclical stuff, it’s like, “Hey, yeah, that, we’re going to have to hold off a little bit until we see some sort of a turnaround signal from the Federal Reserve,” because the value’s just not there. Yeah, we’re down 20%. A lot of stocks in the S&P 500 are still way overvalued.

Joe Brown (29:58):

And I know, especially with tech stocks, like in the NASDAQ, many of them, many of them are down 80%, 85%, 90% from their high, just within the last year or two. And so a lot of them have lost most. But still, when you look at, “What are these companies actually doing? What are they producing?” A lot of that value that was being priced in a year ago and two years ago was the potential for future growth, very little revenue, very little cash flow, very little profit, in order to back that up. We’ve seen kind of a shift where instead of looking for massive potential in the future, given the money printing, now everybody’s looking for, “Hey, what’s guaranteed right now?” Because the easy money isn’t going to keep on coming in right now and pumping up these fake stocks with fake profits and fake revenues and fake websites, we’ve got to look for the real stuff. And that’s usually, you get back to, when I say real, real physical stuff that people actually need, no matter what happens economically, the most basic needs that people need to survive.

Clay Finck (30:55):

You mentioned real things that people actually need, and obviously screams commodities. But I’m curious, how does gold and gold miners potentially play into this? Is the Fed pivoting potentially a catalyst for gold, or what’s going to cause an appreciation in gold overall?

Joe Brown (31:14):

My opinion on gold, which you can go back and you can look at these dates here, gold anticipates the effects of monetary policy. And so when we looked at what gold did, right when 2020 started, in March of 2020, it started skyrocketing. It went straight up. And the reason was people knew eventually it would result in inflation, all the money printing, all that easy monetary policy would result in inflation. The price of gold compensated for that. It went up 40%. Now, after that, the gold started to move a little bit down and sideways. So as of right now, it’s sitting in between $1,800 and $1,850. Really, it’s moved sideways for over a year. It’s been a little bit volatile, but done pretty much nothing. And that’s because, from that point on, the market was starting to price in the potential of deflation because the printing had stopped, the massive deficit spending had stopped, the massive credit expansion had stopped, the printing had stopped.

Joe Brown (32:13):

And so the market started to adjust that movement in gold and say, “Oh, it’s kind of gone up a little bit too much here because now the Federal Reserve is signaling policy in the future that might lead to deflation.” And so it’s pretty much done nothing. Now, doing nothing in this environment is actually very good because compared to stocks, you’d rather be in gold because if you’ve been in gold this whole time, you’re up and down zero. If you’ve been in S&P 500 or Russell 2000, you’re down 20 to 30%. And especially if you’ve just picked stocks from those indexes, you’re probably down a lot more than that because the averages are only down 20%, but many of the individual stocks are down way more than that. Now, what’s happening with gold is you’re starting to see it start to price in the chance of the future inflationary policy. If we see a pivot from the Fed, if we see the Fed come out and say, “Hey, there’s too many problems right now, we’re going to hold off on raising interest rates for now,” man, gold’s going to go up.

Joe Brown (33:11):

If you see them come out and say, “Hey, we’re going to lower the interest rate on the reverse repo facility in order to send some cash out into the system from there,” you’re going to see gold go up. If they do anything that says, “We’re going to stop extracting money out of the economy, and start pushing money back into the economy,” gold will immediately respond upwards because it’s pricing in the future impact of that monetary policy, in that case would be inflation. We’re probably not going to see any major movement in gold until we see a signal that the Federal Reserve is reversing its current policy.

Clay Finck (33:50):

In addition to commodities and gold, you also have either gold miners or gold royalties actually as a part of your portfolio. How do you view these and why they’re also a piece of your investment strategy?

Joe Brown (34:06):

I think gold miners and that space is like the cream of the crop in commodities right now, because we talk about underinvestment in the space, we talk about the value that’s there. A lot of these companies, they’ve got proved announces in the ground that are well below what they should be. Again, many of them debt free, many of them full of cash. And it’s just a matter of waiting. And many of these companies, especially the ones that are producing, they’re profitable if gold comes down to $1,500, $1,300, some of them even coming down to $1,100 and that’s even with the inflation and the energy cost going up. Because a lot of these companies, they don’t have to get generators out there to run the drills, they’re not relying on these volatile energy prices. Many of them are hooked up to the grid, and we’ve got a lot of long-shot opportunities out there where it’s like, “Hey, they’re extremely undervalued. And as long as they can just survive, they’re going to be worth many times what they’re worth today.”

Joe Brown (35:02):

So those are kind of lottery ticket, long-shot ones that the value is there, but it’s just a matter of capital and enough wealth realize it before they can’t survive any longer. There are other companies that are a lot more safe, like royalties. I love royalties right now because they’re inflation-proof. And a lot of people don’t understand the business model of royalties, which is basically they get a cut of everything that a mine produces. And so you think, okay, well, that’s great. But if the gold price doesn’t go up, or if inflation takes off, then that royalty company’s not getting as much of a cut anymore. And it’s like, no, most of these royalties are set up in a way where they make money off the revenue, not the profit. And so if a mine produces $100, then the royalty company will get, let’s say, $5 of that or $10 of that, regardless of what the profit margin is for that mine.

Joe Brown (35:55):

When you look at these royalty companies, anytime the price of gold moves up, number one, the mines, they start to sell for more. So the revenue goes up, even if the profit doesn’t go up. So the revenue goes up, that’s good for royalties. The other thing is, a lot of these mining companies, they say, “Okay, right now at the current price of gold, we can get all the gold that’s right here because there’s of all of the stuff we pull out of the ground, all the rocks and all the other minerals and ore, 5% of that is gold. Because of the cost of taking all the other stuff out, the amount of gold that’s left over, we can get the gold from right here.” They know right over here, there’s still gold, it’s just, let’s say, only 1% gold. You’re saying that’s not profitable right now. But if the price of gold goes up to $1,900.

Joe Brown (36:38):

Now, not only did their revenue increase because the price of gold is higher, but now they’ve got a lot more gold that they can pull out of the ground because suddenly it’s profitable to get to drill and mine where there was a smaller concentration of that gold in the ground. And so royalty companies, in my opinion, are some of the best positioned companies to take advantage of this because, again, in an inflationary environment where you have the cost of energy and the cost of production and the cost of some of these things going up very quickly, if you own a miner that’s producing, maybe that counteracts their profits, you want exposure to the revenue, which many of these royalty companies have exposure to just the revenue.

Clay Finck (37:17):

Are they set up in this way because they just own the rights to the deposits and the land and where the gold is located, and they’re just contracting out the miners actually going out and getting it for them? Is that the reason why these royalties even exist?

Joe Brown (37:32):

Yes. And some of them have existed for a long time, and so they go out and to get rights, they are able to purchase them from companies that have not managed their resources well, and then some of them are set up initially to say, “Hey, we’ll invest, we’ll structure it this way so that you get the capital that you need,” so they’ll give the company, a chunk of change so that the company can go in and do what they need to do. And a lot of this has happened within 10 years ago, even. So a lot of these things are not happening today. But a lot of these companies have made these deals where they give up a portion of what they’re making, because they got the amount of cash that they needed in order to survive.

Joe Brown (38:09):

There are a variety of reasons and ways that these royalty companies will go out and get these deals, but they’re available and they’re everywhere, and they hold their secrets a little bit to their chest on how they get these deals because they don’t want other royalty companies to be able to do the same thing. But in any case, they’re doing it. Again, it’s a matter of time before everybody realizes, “Hey, there’s a lot of cash coming out of this space. And I want to chunk of it myself.”

Clay Finck (38:32):

You know, one headline I saw this week was Uganda discovering some massive gold reserves. Is that something you know anything about?

Joe Brown (38:41):

There’s zero detail on it right now. It was announced by the President. And it was just there was nothing to back it up. He basically just said, “Hey, we’ve got,” I think, “31 million ounces of gold, and we’re going to take a mandatory,” I think, “15% ownership stake in any company that comes in mines. And so we’re going to produce this many hundreds of millions of dollars in revenue from this.” And I haven’t seen anything that, I guess, proves that. I mean, that’s such a large, it could actually double the total supply of gold if it’s true. And so it’s such a large find with no evidence so far to back it up that I’m very skeptical of it, but we’ll wait and see. If it’s true, that’s big, and could be negative for the price of gold.

Clay Finck (39:23):

Yeah. One of my go-to things is just, okay, let’s look at the market price, because the market is the collective knowledge of the whole world. And if the market’s not even moving on news like this, it’s probably not true. But really, who knows.

Joe Brown (39:35):

There’s probably a big find and there’s probably a large margin of error and the President just wanted some good news for himself. And so he said, “We’re going to take the highest estimate possible and just say that’s what’s happening.” And you’re right, the market has not responded at all to it. And I’ve seen no major respectable opinions on it validating that’s probably true.

Clay Finck (39:56):

Well, Joe, thank you so much for joining me today. It’s always a pleasure having you on, I always learn so much. Before we close out the episode, could you let the audience know where they can get connected with you?

Joe Brown (40:08):

Yeah. Well, thank you for having me on and I’m mostly on Twitter and YouTube, Heresy Financial, both of those places, on YouTube and Twitter. On YouTube, I post every day, Twitter, I’m tweeting pretty much every day as well. And so you can find me there.

Clay Finck (40:23):

I’ve really been enjoying your content, super impressed with how much you’re able to put out on YouTube. I’ve been really liking it, so keep up the good work.

Joe Brown (40:30):

Thank you, Clay.

Clay Finck (40:31):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well. And if you haven’t already done. So be sure to check out our website, theinvestorspodcast.com. There, you will find all of our episodes, some educational resources, as well as our TIP Finance tool that Robert and I use to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (41:08):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, We Study Billionaires and the financial markets. 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.